Investment Risk Redefined in Light of World Chaos and the Need for Local Resilience

By Jerry Allen, MFT, MPH

© Copyright 2011 Jerry Allen, MFT, MPH, all rights reserved

Many of us as investors have been schooled in the value of diversified investments, drawn from across the world investment universe, with as many uncorrelated risk profiles as possible. It was thought unsafe to invest locally because it was not diverse enough. This has been a winning strategy over the last thirty years for many investors. However in 2008 we saw the supposedly most diversified, broadly invested portfolios move to a correlation of one. That means that virtually every investment type nose-dived in unison. That was quite a shock and forced a fundamental rethinking of the concept of systemic risk. Since that time, the appearance of peak oil and other resource depletion examples, the rise of environmental crises, and the advent of economies teetering on the brink of insolvency, under a growing mountain of unsustainable debt, have led to awareness that all our old assumptions require re-examination.

The picture now emerging into clarity is that contrary to what we previously thought, the highly complex, global, just-in-time economy, is both interdependent and highly vulnerable--vulnerable in the sense that a catastrophe, such as a tsunami and a nuclear meltdown in Japan, a war in Libya, or a debt crisis in Europe or the US, can jeopardize the whole of economic activity all around the world. It is also vulnerable because this complex world economy cannot function without cheap energy and there is no way to “stimulate” our way out of this economic predicament. Massive debt spending cannot erase the effect of runaway energy and other resource prices.

Troubling questions emerge. What will happen to local food supplies when the food growing and distribution system in major production areas fails due to fuel shortages, collapse of supply lines, or a banking system crisis? What will happen when the major world economies can grow no more, while the debt burden remains? A little thought will call to mind many recent examples of these vulnerability relationships. This vulnerability undermines the old axiom that a broadly diversified world portfolio achieves investment safety and low risk. If our predictions of risk are based on the past thirty years of cheap energy and relative economic stability, we place our solvency in great jeopardy.

It is absolutely crucial that each region prepare to feed its people and provide as many local jobs as possible—to essentially re-localize our economy. Such a local economy is not as vulnerable to the price of fuel to air freight food from Chile or ship it from the Midwest of America. Local food producers can feed a local population even in hard times. This was proven in England during WWII. The owner of Oliver’s Markets in Sonoma County recently commissioned an academic study that found that the job multiplier of buying food and other products locally-Sonoma County-made is 140%. By switching a major portion of buying to local food and products, we can literally cause a wave of local job creation. We also have a much greater opportunity to express our values by buying local sustainably-produced foods and products. Such a locally oriented economy is less vulnerable to the collapse of complex global economies. Hence, local risk reduction.

An analysis of the quantity of total money leaving Sonoma County each month, flowing to the big money banks and global corporations shows the following: according to census data, Sonoma County credit card debt was $ 1.5 billion in 2009, with $214 million in interest payments, mostly to big eastern banks. The all inclusive data that includes mortgage interest, credit card payments, spending on non-local products, food and fuel, is not yet available. Sonoma County families and businesses have assets of $53 billion, while only $20 billion of that is invested in Sonoma County. That means $33 billion of those assets are invested in big banks or investment firms outside of Sonoma County. The combination of this exit of capital and exit of money in the form of payments, has dealt the local economy a massive body blow. Let’s stop this in its tracks, and reduce risk at the same time.

How do local investments fit into this concept of risk reduction? Several ways: first, when local investors place investments in local Sonoma County agriculture and businesses, we address a crucial local need—to greatly increase food and other security through local production of food and other products, lowering the risk of population starvation. Second, by using sound investment structures and local loan underwriting processes, with local accountability and transparency, confidence among potential investors is built up that the local investments are sound, well-placed, and have the best possible chance of being repaid. This can happen by utilizing local credit unions and banks that have a commitment to invest locally. Their great advantage is local knowledge, leading to more informed underwriting of loans. Local business development teams stand ready to ally with local lenders, such as the local banks and credit unions, to bring forward entrepreneurs and encourage business development in key local industries such as food. Research from the micro-lending field has shown that the recipients of small business loans, who participate in local accountability support groups, have an extremely high track record of repaying loans. This yields risk reduction.

This brings us back to the original issue—redefining investment risk. Which is more risky, to invest locally in food production and other industries, that can provide food security to our communities; with accountability structures and strong underwriting to assure that local investments have risks reasonably controlled? Or continue to send our money to the big banks and investment houses on Wall Street, with no transparency, little accountability, no focus on rejuvenating our local economy, and at the same time great dependency on the complex global systems of trade that are vulnerable to collapse if one major player goes into the ditch? When framed this way, local investments, well placed and underwritten, provide not only a less risky investment, but one that can pay huge dividends to local community vitality and resilience. In Sonoma County, teams of business development agencies, local credit unions and banks, sustainability consultants and community leaders are right now developing these investment vehicles in exactly this direction. For more information contact jerryallen at .

Jerry Allen, MFT, MPH is a licensed marriage and family therapist with a master’s degree in public health education, and a certificate from UC Berkeley in financial and investment planning. He has spent the past 22 years in public child protective services helping families undergoing abuse, stress, violence and addiction. He holds three black belts in Aikido, and has a lifelong interest in the peaceful resolution of stress and conflict and the development of healthy families and communities. For the past seven years he has served as a trustee and fiduciary of a large regional pension plan. Jerryallen at