Where will all the new money come from?
Image via Wikipedia
Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.
The first graphic highlights one important issue. We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve. If we cast our minds back to 2 August 2012 two key facts emerge:
- This was the D-Day of the US Debt Ceiling vote
- The US still had a Triple A credit rating
The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.
However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.
The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over. The second is the Italian Bond Maturity curve. You will notice just how similar the USA and Italy Debt Maturity profiles are.
From this comparison, the critical question currently for us is:
Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months? QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free. It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.
theMarketSoul ©2012
Related articles
- Raymond James Weekly Bond Market Commentary (learnbonds.com)
- The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
- S&P on Italy: Borrowing is Going to Be Tough for a While (blogs.wsj.com)
- Not Making Sense Of The Economy (lezgetreal.com)
- The Italian Yield Curve Vs The Euro Basis Swap (zerohedge.com)
- Bond Report: Treasurys stay down after 10-year auction (marketwatch.com)
- Bill Gross Exposes “The New Paranormal” In Which “The Financial Markets And Global Economies Are At Great Risk” (zerohedge.com)
- Are western central banks having an existential crisis? (ftalphaville.ft.com)
- Vickers: Italy’s Debt Looks More Sustainable (businessweek.com)
- PIMCO’s Bill Gross’ New Bet On Treasuries: Roll Down The Yield Curve (forbes.com)
Frameworks, frameworks, frameworks…
Today (26 October 2011) is an important watershed date (or not) for Europe.
Will our leaders and the politicians be able to agree an all encompassing Framework to rescue the Euro, or will we need to think about a more modular approach for the future?
We believe that it might be in the Euro’s short-term best interest to look for a more flexible, yet fragmented modular approach. However, the capital markets might not appreciate the continuous uncertainty and political wrangling whilst we keep on looking for a ‘best fit’ modular solution and what that might entail…
theMarketSoul (c)2011
Related articles
- New EU Legal Privacy Framework: We’re Not Kidding (yro.slashdot.org)
- SECP introduces regulatory framework (nation.com.pk)
- Open Modular Controller Framework (makezine.com)
- From fragment to framework: a live EU initiative (ipkitten.blogspot.com)
- Europeana Licensing Framework published (creativecommons.org)
A cynical swipe at the ‘Consumer end’ of the money (value) chain
Today’s short opinion piece revolves around the recent rail fare increases announced in the UK.
It strikes us as a very cynical way of rewarding behaviour and policies implemented by previous governments and parliaments to now go and increase the ‘tax’ on rail commuters when the switching policy from road to rail has meant that more rail passenger miles are being racked up versus road miles and supposedly turning off the tax flows into the Treasury from fuel duties, because more rail journeys are being undertaken.
Yet again the pendulum has swung the other way and at the consumer end of the bargain, we are being sent a confusing message us to which behaviours the government wants to encourage us to take.
Less government, less interference, less confusion. Let the (a well governed) market help efficiently incentivise people to do the right thing at the right time for the right price.
For more information about the Economics of Taxation just click the link in this sentence
The Economics of Social breakdown
How do we define the state of our nation at the moment?
For a little while now we have been experiencing an ‘unease’ with the communication revolution and the disparate nature of communication tools at our disposal. On the surface it would appear that what is happening is that rather than bind together a society it is having exactly the opposite effect.
The recent riots in the UK is just a small manifestation of this general unease.
From a purely economic and dispassionate analysis of the situation, we would offer the following opinion:
We don’t have a ‘broken society‘, as is such an often uttered phrase, but rather a complete misunderstanding of the disconnect between our ‘old / slow business models’ and the pace at which technology moves and changes the rules of engagement.
The pace of change in organisational design, planning and execution models lags multiple-fold behind the pace of technological advancement. It almost has an exponential relationship and due to this factor, we have not yet come to grips with applying new technology to ‘old world’ thinking, with its checks and balances and control mechanisms.
The disconnect between the pace of the communication revolution and the nature of diminishing returns has led to a massive gap in appreciating the fact the occasionally we have to pause and reflect on where we are and where we want to be.
Both the continuing economic crisis, pace of change, realisation that the future does not hold the same promise and prosperity as the recent past; are all infliction points that have amplified and spilled over into anger and the violence of the past few days.
So what we have is a ‘broken understanding’ of how different factors of production, such as land, labour, capital, enterprise and innovation has drifted further apart and caused unnecessary and unsustainable concentrations of accumulated power and risk amongst differing population groupings in the UK and elsewhere.
Remember, all five of these factors of production listed above need to work in harmony, in order to add, create and manage value and output that are useful and life sustaining necessities for all citizens.
Let’s address the gap between political and civil society to ensure sustainable progress and development for all.
theMarketSoul © 2011
Related articles
- X Factor culture fuelled the UK riots, says Iain Duncan Smith (guardian.co.uk)
- ‘Go sustainable, be responsible! European civil society on the road to Rio+20′ (3eintelligence.wordpress.com)
- Global Civil Society Under Attack (prweb.com)
- Communication Breakdown (relationshipremedy.com)
- Business insurance news: Malicious spam ‘could cause computer breakdown’ (premierlinedirect.co.uk)
US Treasuries – An FX or a market call?
So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor’s finally took the ‘big step’ on Friday 5 August, after the major markets closed.
Image via Wikipedia
So what next?
In our article ‘US Treasuries – Are the markets really that bothered?‘ published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.
Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:
Is this an FX or market call?
What we meanby this question is:
Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?
All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.
Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.
How the US Treasury and administration now react will be crucial.
Who are we going to trust to make this big call?
Image via Wikipedia
theMarketSoul © 2011
Pleae refer to our disclaimer page
Related articles
- Macro Ideas – Is dollar-yen headed to 80-82? Guest Post by Matein Khalid (greatlakesforex.wordpress.com)
- Proformative Hosts FX Risk Management Events featuring Western Union, FiREapps and Treasury Strategies (prweb.com)
- Forex Trading 2012 – Highly Intelligent Robot Announced with FX Managed Accounts (prweb.com)
- Goldman Lists What To Expect In FX For The Remainder Of The Year (zerohedge.com)
- InvestTechFX offers FX Traders Competitive Spreads in Response to China’s Increased Stake in Europe (prweb.com)
Economics of Taxation
There are in essence only two ways of taxing citizens:
- A Tax on Stock (Wealth)
- A Tax on Flows (Income or consumption)
taxes (Photo credit: 401K)
Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.
Now step back second and consider the tax take flows from these two options:
With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing their net tax take? Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.
Image via Wikipedia
Another salvo was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle. Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.
Tax (Photo credit: 401K)
theMarketSoul ©2011
Related articles
A sigh of relief?
Some say that in life timing is everything…
And so too it is with economics. We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.
Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.
In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14th Amendment.
And this is where the timing conversation picks up its thread again. The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending. Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt. In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries. If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.
If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.
But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.
theMarketSoul ©2011
The US Treasury Yield Curves – Are the markets really that bothered?
Image via Wikipedia
As a general introduction today we will look at two US Treasury Yield curves. The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.
In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate. The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011. There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.
The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011. As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.
Yield Curve 2
In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site)
It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.
theMarketSoul ©2011
Source Material: US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx
Related articles
- The U.S. Treasury Wants You to Buy This (fool.com)
- The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
- Bill Gross Explains Why “We Are Witnessing The Death Of Abundance” And Why Gold Is Becoming The Default “Store Of Value” (zerohedge.com)
- Guest Post: Treasury Bears And Extinction Events (zerohedge.com)
- Another Debt Ceiling Debacle Before The Election? (outsidethebeltway.com)
- Bond Report: Treasurys stay down after 10-year auction (marketwatch.com)
- Daily Reads: Operation Twist Is Twisted, Gross A Treasury Bull? (learnbonds.com)
- PIMCO’s Bill Gross’ New Bet On Treasuries: Roll Down The Yield Curve (forbes.com)
A Storm in a ‘Tea’ cup
Never resist the temptation to start a discussion with a pun.
In our previous article we highlighted the ‘battle royal’ on Capitol Hill to get a proposal agreed to address the possibility of a US Treasury default, whether actual or technical on or after 2 August 2011.
So the Republicans could not muster together enough support on Thursday to ensure safe passage of the bill to the Senate, where it looks likely to be overturned or severely amended in any case.
There is obviously a lot of back room dealing going on over this and analysts in Europe (taking their beading eyes off the Greek and now Italian and Spanish dominoes) have started to pay attention to the goings on across the pond. We heard one commentator mention the fact that the USA’ reputation has already been affected by this, irrespective of the fact that a default occurs or not.
So there you go. The fringe minority floating in the ‘Tea’ cup with a lack of the ability to look over the brim of that particular cup, might in fact achieve their overall objective of raising their own profiles, albeit at the expense of the nation’s reputation and standing as a pillar of the international capital market.
Look, we are not choosing sides here, because at the heart of the matter is the fundamental principles of civil society versus the public sphere debate raging and continuing to rage in the USA.
In our next article we will highlight some of the basic differences in opinion and views on the size and influence of government in the USA versus Europe, via the Rahn curve analysis.
Until then, it is tick, tock; tick, tock whilst we await the vote and subsequent consequences and fall-out from the US debt ceiling debate.
theMarketSoul ©2011
united states currency seal - IMG_7366_web (Photo credit: kevindean)
Related articles
- RAHN: Obama has no Plan B – Washington Times (gds44.wordpress.com)
- In Blast From The Past, Debt Ceiling Could Be Investors’ Biggest Worry (blogs.wsj.com)
- Senate rejects attempt to prevent debt ceiling hike (cnn.com)
- Another Debt Ceiling Debacle Before The Election? (outsidethebeltway.com)
Hold your nerve!
It is a confidence thing.
We are so very, very close to seeing and experiencing another colossal collapse in confidence in the world’s financial system.
This time it is driven by the ‘US Debt Ceiling impasse’. A steady flight to gold has been taking place over the past few months and even though most informed commentators believe the US Treasury ‘default scenario’ is not likely to physically occur, the mere threat of a default has not yet managed to ‘focus the minds’ of the US congress house of representatives locked in an ideological battle over fundamental economic policy and direction.
Image via Wikipedia
At stake here is a scenario that will make the 2008 financial crisis wane into insignificance, should the threat of a US Treasuries default actually play out.
Yet, very few mainstream headlines outside of the United States have been published about this potential catastrophic event. And we are only a few days away from the edge of disaster (Default D-Day is chalked up for Tuesday 2 August 2011) and the Washington Post has a default clock ticking down on this deadline web site.
If a default actually occurs, confidence in the international capital and currency markets will have been breached and no serious commentator has yet fully quantified or effectively mapped out the potential consequences of this potentially disastrous collapse in capital market confidence.
The only significant contribution we can make at this publication is to cross our fingers, hold as much in cash and liquid (non US dollar) assets and hope that some real focus and a meeting of minds occurs before Tuesday 2 August 2011 on Capitol Hill.
theMarketSoul ©2011
Related articles
- The US Debt Ceiling Theater Is Back : Think The Issue Is On Autopilot? Think Again (zerohedge.com)
- A World Flying Blind (ritholtz.com)
- Here Comes The Treasury Floater (zerohedge.com)
- Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation (fabiusmaximus.wordpress.com)
- The Terminal Beginning Of The Western Financial World (seeker401.wordpress.com)
The Elusive “G” Factor – Part 1
[Economics in a Nutshell]
An Introduction
There is a conundrum here somewhere! As a libertarian leaning Think Tank organization and publication, we instinctively know that more government interference in the economy and bigger government per se is not a good thing. And so is sovereign debt and the servicing of that debt. Both are drains on the economy and economic potential of any sovereign nation, yet both are necessary evils too.
But where lies the ‘sweet spot’ between the size of government, fiscal policy, sovereign debt (if necessary)? The magic formula or ratio between the public and private sectors and their respective shares of the economic output pie?
These are questions the political and business leaders are struggling to understand and define in Europe and the USA at this point in time in order slowly and arduously drag their economies back to a ‘normal growth cycle’.
Economy (Photo credit: Donald Macleod)
Part of the challenge we believe is the massive imbalance created by the shifting nature and sources of production, combined with the rapid uptake of technology and the disruptive influences of technology. Our planning cycles and hence levels of understanding and ability to adjust the factors of productions to keep up with these disruptive forces are being severely challenged. Or maybe our grasp of the theory underpinning our economic models just aren’t up to coping with the rapid nature of change and forces of change in the global economy.
As has been argued in previous articles, by its very nature the instruments we utilise to adjust economic activity and output in specific geographical locations, namely fiscal (tax) and monetary policy, are very blunt instruments and not as effective and able to cope with the speed of change in given economies. But are their any other mechanisms we can utilise to adjust unfavourable behaviours and activities in order to get back to equilibrium?
A further factor we believe is a lack of understanding of where exactly we are in the global economic adjustment life-cycle. There is no real comprehensive understanding and agreement at best of these influences. True mechanisms like the G8 now G20 have been created to address more global challenges, but there is hardly ever consensus and a collective will to act in unison to address the bottlenecks and imbalances in global economic activities.
With this introductory article we have laid out some of the areas to explore and bring back into the ‘light of scrutiny’ as part of a deeper understanding of the nature of our global economic state and status.
theMarketSoul © 2011
Economy (Photo credit: John H McCarthy)
Related articles
- IMF warns Europe downturn could cut China growth (ibnlive.in.com)
- THIS Is The #1 Reason To Be Bullish On The Global Economy (businessinsider.com)
- U.S. debt exceeds annual economic output (cbc.ca)
- IMF warns Europe downturn could cut China growth (seattlepi.com)
- Text of ECB Draghi’s Introductory Press Conference Statement (forexlive.com)
- What is all the drama in Greece about? (chrisnothling.com)
Risk-Based Change Management
Introduction
Cost cutting has been a priority in the private sector, ever since the financial credit quake started in 2008, yet the words currently are ‘austerity measures’ and budget cuts in the public sector.
Most of the cost cutting in organisations has been along the tactical and operational lines and we believe that in the ‘age of austerity’ we are within, revisiting cost cutting from a more strategic perspective would add significant value to both the private and public sector organisation alike.
A Zero Based Approach
Within most organisations budgeting and budget setting is an incremental affair. It is very much focused on a business as usual mentality and the status quo is rarely questioned or scrutinised with any level of depth and rigour, as long as the financial plan delivers the numbers senior managers anticipate and the investor community expects.
Yet this is exactly the kind of ‘tyranny of the status quo’ that has destroyed a significant proportion of value in organisations over the past two years.
A zero based approach addresses some of the short comings associated with incremental budgeting and financial planning. It is by no means a perfect replacement for incremental budgeting, it cannot address all the strategic issues and it is fraught with its own pitfalls, yet we assert that a focus on some recent lessons learnt in organisations that have implemented cost cutting via a zero based approach can add value to our clients budgeting and financial planning systems.
Zero-based budgeting can be summarised as the process of preparing financial plans from a change perspective, normally building the financial plan from scratch (the zero base), viewing the process as if the organisation has not delivered the particular service of product in focus before.
Some of the lessons learnt are briefly listed below:
- Many versus few – Instructions and the interpretation thereof by individual users
- Focus on the Full Time Equivalents (FTEs) and people cost early in the process
- Check Payroll Data integrity
- Understand thoroughly the organisational restructuring issues (get Human Resources understanding the financial budgeting language early in the process)
- Ensure a distinction between building a Business Case versus Budgeting
- Confidentiality (how, who, what and staff and managerial morale implications)
- Education process and ensuring skills, knowledge and information convergence to ensure the budget is delivered as a value added ‘conversation’
- Appreciation of management style versus timetable for budget delivery
- Over communicate (more information is better than more or inadequate assumptions)
- Concentrate on the budget story (strategy and changes) and ‘hang’ the budget numbers on the end of the storyline (Making the budgeting process less ‘threatening’ to budget owners)
These lessons can be separated into two distinctive themes, namely the Human Capital dimension and the Systems issues.
Themes to be aware of
As far as the Human Capital dimension is concerned the major lesson is to ensure that both the budget holders and prepares are fully cognisant and understand the language of both budgeting and what the inherent risks and concerns around a zero-based approach is.
Key issues and risk are around work stream teams from different disciplines (HR, Finance, Operations, IT and marketing) not always having a common language and frame of references for similar linguistic terms and phrases. Ensure that potential for misunderstanding the objectives and delivery mechanisms are addressed early in the Zero Based Budgeting approach.
Foster a culture of empathy within the management ranks and never underestimate the emotional impact that getting rid of people can have on both the managers having to make the tough calls and both the staff being called upon to leave and the staff morale of the people earmarked to remain behind and deliver the business as usual processes.
As far as the Systems issues are concerned, ensure that enough time and preparation goes into the planning and delivery of the Zero Based Budgeting mechanisms and tools, as you will be running a process that has not been utilised and thoroughly tried and tested under operational conditions before. There are risks in the following areas to be aware of:
- Data integrity
- Spreadsheet modelling and calculation errors
- Documentation and the support services (handling budget holder queries and concerns)
- Skills and knowledge of the budget holders and preparers might be limited
Conclusion
As was suggested in the Lessons Learnt listing above, over communicate with managers, budget holders and preparers and staff. Ensuring that adequate information is made available in comprehensible and non-technical language is the key to success. Too often we have seen ‘lazy’ and shortcut assumptions being made, when a little bit of extra effort, ‘digging’ and asking the right people with the operational knowledge the right questions would ensure a more robust and rigorous budget.
Finally, ensure that both the process and outcomes are well documented and articulated as they serve as your shield and defence when the reality does not turn out as the best laid financial plan might have anticipated.
We view Zero Based Budgeting as a risk-based change management tool that assists and informs the senior managers in any organisation of the opportunities and risks inherent in designing and building innovative change processes to help add value to the organisation’s overall performance.
At theMarketSoul ©1999 – 2011 we have practitioners available who can assist you on a consultancy basis to operationalise the full 360 degree Financial Management practices most organisations require in order to ensure that they remain competitive, profitable and continue to create value.
Continuing conversations in Friction Costs: Increased Friction Costs II
A few weeks ago we published what seems like our most popular blog article to date, namely Increased Friction Costs.
As it has been our most read article, we thought we might continue to build on the theme of Economic Friction Cost.
Image via Wikipedia
Williamson (1993) published some work on Transaction Cost Economics (TCE) in a book entitled The Economic Institutions of Capitalism’. TCE is an equilibrium theory and looked more closely at the firm level or micro-level analysis and at behavioural aspects of ‘rational choices’. Up until that point most economists had only considered production cost as part of profit maximisation assumptions, and not at transaction costs within the firm.
Transaction Cost Economics focuses predominantly on the governance of ongoing contractual relations (Williamson, 2007).
Image via Wikipedia
But what exactly, in practical terms are Friction Costs?
As stated in our previous article there is a large element of hidden costs implicit in Friction Costs. Friction Costs can be highlighted by analysing the end to end or life cycle costs of any product or service. A general rule of thumb that is applied to life-cycle costing is to take the visible ‘advertised’ cost and double it up. That exercise generally gets you very close to the full life-cycle cost of any product of service. This rule of thumb works with large capital projects, as well as estimating the full employment costs of hiring people.
But friction costs go further than this. You might call it the fourth dimension of costs as it incorporates time value and opportunity cost elements.
Time value has two specific meanings for us here:
- Time value due to down time, loss of productivity, etc. This is more accurately referred to a value of time
- Time value in terms of the diminishing purchasing power of money, due to factors like inflation and opportunity costs when money is not put to beneficial uses. This is the general use of the term Time Value of Money and ustilises Present Value techniques via a discount rate to work out the equivalent value of money in today’s purchasing power terms, whether we look into the past or into the future.
Thus, the two areas we have to focus on during the expansion of the Friction Cost exploration in the next article will be time value and opportunity cost elements, as part of our enquiry into delving into a better understanding of Friction Costs.
theMarketSoul ©2010
Related articles
- On Friction and Sharing (downes.ca)
- Friction Forms Frustration (preconflictcontrol.wordpress.com)
- Curation Saturation, and Why We Might Need Information Friction After All (brasstackthinking.com)
Risk Management Ideas
Risk has as one of its essential elements TRUST as a foundation.
Trust on the other hand has many other factors that interplay and interact on it.
Markets are created when there are needs that are not immediately met from you local environment and therefore scarcity exists. Market participants step in to fill this ‘needs’ void.
Image via Wikipedia
As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.
Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth. Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.
Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management. (For more information or to contact us, please click on the Contact us link or read the article entitled “The Intersection – Where Risk, Value & Reward“ link by clicking on the embedded link.
Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation a midst the regulatory compliance constraints added to your management agenda.
TheMarketSoul ©2010
Related articles
- Do banks and colleges understand risk management? (normanmarks.wordpress.com)
- Integrate risk management with the rhythm of the business (normanmarks.wordpress.com)
- Risk Management: adding to uncertainty! (fitforrandomness.wordpress.com)
- Why is residual risk so important? (iso27001standard.com)
An Aggregated Challenge
Conspiracy theories!
Today we express an opinion on the phenomenon of ‘governmental’ economic landscape shaping.
Interference whether actively pursued or via involuntary actions promotes our heightened sense of concern by the effects that the aggregation of supply and therefore the encouragement, either directly or indirectly of oligopolistic and monopolistic market structures, is having on the global competitive landscape.
It has occurred in the financial services sector and it happening in the oil industry too.
Image via Wikipedia
Even though the barriers to entry are relatively high, having fewer competitors on the scene cannot be a good thing.
The trends we are spotting in the competitive landscape are as follows:
Imperfect competitive firms (many market participants with differentiated products & services) are being deluged with over burdensome bureaucratic regulatory requirements, shifting some of these additional transaction costs onto the ultimate (final) consumers, whilst in strategically important industrial complexes, such as energy supply, the aggregation effect is indirectly encouraged to ensure that national strategic and security interests are promoted.
Funny old thing, economic theory then…
theMarketSoul ©2010
Related articles
- Aggregate function (luiscarlosmr.wordpress.com)
- The Design and Use of Political Economy Indicators: Challenges of Definition, Aggregation, and Application (pro2sell.com)
- Macroeconomics: Somehow the Bullshit Artists Have Won–A Question for Gavyn Davies Department (delong.typepad.com)
- Open Economy and Aggregate Supply (socyberty.com)
- Guest Post: Integration (alternateeconomy.wordpress.com)
The Hungry Spirit
Today’s post is a very short and concise post, yet these are some inspirational quotes and extracts from two chapter’s of Charles Handy’s 1997 book entitled: “The Hungry Spirit“:
A Life of our own
Capitalism, efficiency and markets have their flaws, but also their uses. They are neither the complete answer to our dilemmas nor the only cause of the. They provide some of the context of our lives but not the purpose. For that we need a philosophy not an economic system.
A better capitalism
Left to themselves, things do not necessarily work out for the best. Laissez faire is value free. No one is responsible for anyone else. That is improper selfishness and can self-destruct. We need something better. Capitalism as an idea includes social capital as well as economic capitalism. One without the other will not work for long.
theMarketSoul © 2010
Related articles
- Will Capitalism Soon Be Over? (freedomfighterusa.wordpress.com)
- Adam Smith’s Psychology (psychologytoday.com)
- The Emergence of Social Capitalism: Adaptation or Threat? (forbes.com)
- A Short, Wordy Rant on the Negative Consequences of Theism and Capitalism (spwg22.wordpress.com)
- Capitalism Has Failed – And That Is Why It Is So Great: From Mother Africa Sweet Words For Free Enterprise (nakedchiefs.com)
The Morass of Mediocrity
We link today’s article to one of our main themes on our home page, namely the ‘Battle against the Status Quo’, or as per the title of this posting, ‘The Morass of Mediocrity’.
Image via Wikipedia
The underlying intent and theme is that of competition and competitive behaviours and the difference between rules based and principles based standards.
It is our opinion that a rules based culture encourages more insular and introspective behaviours, where the rush is for the middle ground of mediocrity, rather than as the opposite principles based culture would be the encouragement for the search for innovation and competitiveness at the margins and extremes of the ‘functional envelope’. By this we mean the parameters and frameworks set-out in the principles based environment, to ensure that a well-defined playing field (not necessarily level), is established and market participants understand their boundaries and culture norms they have to adhere by as part of the participation process.
Yet, apparently, a more principles based regulatory framework is exactly what is being blamed for the Credit Quake of 2008 – 2010.
And if we analyse the circumstances that led to the regulatory failure and debt driven imbalance we currently experience, we would discover that it is because we operate in a hybrid world with symbiotic elements in the relationships between the private, public and third sectors.
Some of these factors include, but are not limited to:
- Market structure – free market versus socialist structures
- Regulatory framework – the disjointed regulatory frameworks and mixed agendas and the sense of urgency in the global regulatory framework
- Cultural setting – Anglo-Saxon, European, Middle Eastern, Far East, etc.
- Reliance on macro-economic tools including monetary and fiscal policies
- Skewed nature of national performance measurement
- Balance between equilibrium and disequilibrium clearance mechanisms in the economy
- Erosion of moral hazard and other distorting signals
Régulation de la machine à vapeur Merlin (Photo credit: zigazou76)
However, as a mainly libertarian focussed publication, it would be remiss of us not to endorse the principles of minimal interference (small government in other words), yet we also realise that this has to be tempered with personal responsibility. However, because the symbiotic (hybrid) relationships have become so skewed and dysfunctional over the last few decades, was it any surprise that the uncertainty this created led to opportunist behaviours? Because a ‘moral compass’ is a very relative term, is it no surprise that depending on your own individual position and point of view, that the direction it indicates will be different from others?
The G20 are meeting again this weekend and the global regulatory framework will again be in more detailed focus, yet other priorities are again distracting the main thrust and issues on the agenda.
Therefore to conclude this brief interlude into the ‘morass of mediocrity’, the real question is:
If we all run and work hard for the centre ground, who will remain at the margins, pushing the envelope and ensuring that we break the tyranny of the status quo by exploring new unchartered territories and responsible risk taking behaviours?
theMarketSoul ©2010
Related articles
- No Mediocrity in Nature (innerwealth.me)
- Don’t Trust the Statist Anglo-Saxon Socialist Predator Capitalists (andrewhammel.typepad.com)
- Power in Mediocrity (ringingtrue.net)
- A Sociopath’s Guide to Creating a Corporate Dictatorship In 10 Easy Steps (lennemi.wordpress.com)
- “A Partisan Morass”: Crippling The Right To Organize (mykeystrokes.com)
- Dominance Games / Politics: Are you lovely (dominancegamespolitics.com)
Commentary on newly proposed UK Financial Regulation
The news headline: Osborne gives Bank of England top regulatory role
Our response:
Firstly, we are relieved to see no sweeping statements such as abolishing ‘boom and bust’, which by inference must mean that the ‘normal’ business cycles will from now on resume business as usual, albeit with slightly more volatile amplitudes?
The statement regarding more tools is interesting, because as far as we are aware there are two, maybe three specific tools available in the toolbox at the moment. Fiscal policy and monetary policy and the third one possibly being risk management. Therefore, as with the debate currently evolving between Efficient Market Hypothesis and the behaviourally focussed irrationality school of (economic) thought, that there is no unifying theory yet offered to explain market events, we are still searching for the ‘unifying toolbox’ or rather the Swiss army knife of financial stability and regulation?
Image via Wikipedia
So we can read into the statement that we will add more tools, rather than take tools out of the box never to be returned, such as the retention of Sterling and thus monetary policy.
Therefore, the one important tool at the moment that requires sharpening is the regulatory framework and structures that support both regulation, monitoring, enforcement and dare we say it ‘rehabilitation’, because just like of criminal justice system, even though we have both the laws and enforcement framework, we will always have the offenders and ultimately it is the ‘how to rehabilitate and re-integrate’ them issue that we have to deal with. If moral hazard has now been replaced by having to swallow ‘TARP’-entine (poetic licence evoked) and senior investment grade civil servants (RBS and the half of Lloyds they own), then the compensation schemes being touted and created via banking levies, is the wrong approach and signal to send to the market participants.
The G20 seems to be driving the urgency of the regulatory reform agenda, timeframe and tripartite of Financial Regulatory Standards, capital adequacy and strengthening Corporate Governance regimes as outlined by the Bank for International Settlements. However, some framework agreements have been in place for some time, such as the Norwalk Agreement between the IASB & FASB. Thus, it is not a case of the lack of effort and focus, but rather a lack of urgency and clear objectives in creating a global regulatory and governance framework.
As the BP debacle has illustrated, it does take some time to formulate a coherent response and action plan and if the Global Regulatory Framework is not given sufficient debate, design and implementation time (due to political expediencies), all we will do is sow the seeds of the next crisis, which, as stated before is definitely on the billing in a country near you very soon.
Related articles
- Bank of England should be left alone to police banks, says Governor Sir Mervyn King (telegraph.co.uk)
- FASB in “religious war” to bring in fair value (accountancyage.com)
- Group of Thirty (G30) Calls for Urgent Action to Strengthen System-Wide Financial Regulation and Supervision (prweb.com)
- Irresponsible bankers will smile at the global regulatory reform chaos (appgifs.org.uk)
- Britain overhauls financial regulations (business.financialpost.com)
- Why There’s No One in Jail Over Royal Bank of Scotland (forbes.com)
- Bank of Canada urged to take ‘clear leadership role’ in regulatory oversight (theglobeandmail.com)
- Why is the Bank for International Settlements interested in Karl Marx? (Part three) (pogoprinciple.wordpress.com)
- “Break Up the Banks? Here’s an Alternative” (economistsview.typepad.com)
- City fears Bill will not protect UK from rivals (independent.co.uk)
The Cost of a ‘Licence to Operate’
Reputation Risk and damage mitigation must be some of the watch words and the top priorities at BP at the moment. So how are they faring in the management this agenda item?
What ‘price’ or cost must we attach to a ‘licence to operate’?
Image via Wikipedia
It is interesting to observe behaviours of Chief Executives under the probing scrutiny of a congressional committee’s line of questioning and investigation.
Are we busy reshaping the competitive landscape and entrenching further oligopolistic market skewing structures? And this running in parallel with Financial Regulatory reforms encouraging more of an ‘imperfect competitive’ and fragmented (read more costly) landscape.
It is interesting how the issues and debates are being shaped by political expediency, rather than the true and honest ‘economic landscape re-alignment’ agenda we all deserve. And yet again timetables are being set to accommodate political schedules, rather than the issues and factors that we really need to address in order to encourage enlightened and informed re-balancing and redress within the economic frameworks we operate under. So the people who ultimately ‘pay the bill’ are having the fundamental issues clouded and waters muddied, with needless ill-informed debates and noise around reforms that are ill-conceived and containing basic design flaws.
We felt that there was hope back in late January 2010, when the Volcker Rule [video reference]was first muted, but as is now apparent, the agenda has been filled with noisy distractions and unfortunate detours that will ultimately deliver half-baked reforms and regulations that will sow the seeds of the next cyclical bubble of euphoria and the subsequent eye watering ‘pop’ once we come down with the inevitable painful bump. Timing is of the essence, yet the timeframes are uncertain and so they shall remain.
Image via Wikipedia
The next few days and weeks will be crucial ones that will reveal what exactly the true (life-cycle) cost of a ‘Licence to Operate’ is and what price we have to attach to monitoring and managing a global reputation risk framework and infrastructure.
Related articles
- Paul Volcker: Here Are 5 Ways To Know Prop Trading When You See It (businessinsider.com)
- Jim Flaherty steps up to object to U.S. banking rule (business.financialpost.com)
Sustainability I
The focus on sustainability and sustainable practices is a self defeating objective. Sustainability means that business leaders take their eye off the equity holder’s value creation ideal, as it flies in the face of self-interest as promoted by Adam Smith some 234 years ago (The Wealth of Nations , 1776).
Image via Wikipedia
Self-interest and the pursuit therefore is being clouded by a multitude of other non value adding factors that is diluting the message and contributing to more uncertainty and risk and therefore capital flight and volatility in the financial and capital markets as we have experienced over the last 2 years.
This process and Zeitgeist will not disappear or be properly understood, unless we develop a deeper understanding and familiarity with uncertainty as a driver of the innovative spirit of human endeavour.
Risk management per se is not the answer and panacea it is held out to be, and if it promotes a more risk-averse society, then we are heading for the middle ground of mediocrity, tyranny and decline in social values and structures that have taken many hundreds of years to create.
Being part of the system with a myopic view, rather than standing outside the system with a holistic and reflective frame of mind is causing more damage than good.
Yet how are we to live and deal with the cognitive dissonance that these two views by the very nature induce?
Let’s open up to good honest debate, search and reflection, rather than to dogma and a narrow focus on defending vested interests and old world models.
We are in the midst of a major cultural, economic and world order paradigm shift and the outcome is uncertain, potentially destabilising, but we must embrace this exploration of uncertainty and chaos the will inevitably ensue.
theMarketSoul ©2010
Related articles
- Adam Smith’s Psychology (psychologytoday.com)
- EU Commission to adopt “new” Strategy for sustainable Bioeconomy (3eintelligence.wordpress.com)
- Adam Smith – the old Lefty (notnumber.wordpress.com)
- Adam Smith’s Ideas on Labour and Value (Part II) (quackonomics.wordpress.com)
- Sustainability? (madisondesignconstruction.com)
- Adam Smith got it all terribly wrong? (worldmediatrend.wordpress.com)
- 7 Overarching Objectives of Sustainability (linkingsustainability.com)
- What kind of web content will make my business more sustainable? (marketing.yell.com)
Short-sighted: Actor behaviour in the market for competitiveness
Competition is a good thing. Of that we are sure.
It is one of the key ingredients of a dynamic market process, yet is competition and the potential negative consequences of short-sightedness a means or an end in itself?
Today we argue that the unfettered aspiration of competing for competition’s sake and the shedding of what is seen as non-core processes and competencies in organisation, will eventually lead to sub-optimal performance and is an unsustainable practice.
In the unrelenting search for shareholder value creation, which is the fiduciary and main responsibility of the board of any shareholder / equity owned organisation, we believe that sub-optimal decisions are being taken, both because of target operating model enhancements and short-term return of investment (ROI)
One of the underlying objectives of International Harmonisation of Financial Regulatory Standards (as currently promoted by the IASB & FASB) is the desire for greater transparency and ultimately more regular and frequent reporting cycles. The view is that the greater the frequency in reporting, the less information asymmetry will be in the market, thereby eliminating insider trading and other undesirable ‘sharp’ market practices that regulatory bodies such as the SEC, London Stock Exchange, NYSE, NASDAQ, DAX, etc., are trying to stamp out.
But if we extend this logic, or rather shorten the current reporting cycles from the regular quarterly updates to say monthly, weekly , daily or even hourly updates, the already short-sighted mentality will become even more sharply focussed. And this begs the question: “How will CEOs and other business leaders have to ‘defend’ their decisions on a minute by minute basis under this unrelenting 24 hour news and sensationalism culture”; thus leading to an even more intense short term focus on their part. Certainly, this must be the worst of all downward spirals and tyranny of information overload?
But, by logical extension, this is exactly where we are heading in a decade or two’s time.
So, if the focus is then on more short-term results and ‘core processes’ where does this leave the current wave of outsourcing, off-shoring or near-shoring of non-core processes?
We contend that the already well established trend of ‘letting go’ of all non-core processes and competencies has a negative effect on the longer-term sustainability of the organisation.
Succession planning could already be outsourced and thus not on the board’s agenda, as recruitment consultancies now fulfil the non-core ‘attraction of suitable candidates’ services, with the traditional Human Resources fulfilling a more Risk mitigation / management functions of ensuring compliance with Health & Safety Executive , employment law, equality laws, etc.
Another unintended consequence is the fact that because organisations more and more frequently utilise professional specialists to deliver projects and programmes, the esprit d corps is disappearing from organisational life. It is difficult for managers to gain this motivational force of esprit de corps when they are managing ‘virtual teams’ and a cadre of temporary service providers through dysfunctional processes of ‘on-boarding’, induction, project management, quality control, motivational traps, engagement, focus, etc.
Therefore, to conclude this opening article in a new series around the ‘new labour market models [1] [2] [3]’, currently being practiced in the western free market democracies, let us ask the key question that is one of the foundations of the factors of production in achieving economic advancement:
“How do we recognise, incubate, nurture, develop and sustain talent and talent management in our organisation, when this critical activity is handed over to outside consultants who have a different business model and agenda to our corporate ambitions?”
We know that there are some ‘labour supply aggregators’ or forward thinking recruitment consultancies that realise that their own models of engagement has to change, in order for them to move into the value creation and value addition space, but there are still far too many ‘factories’ with conveyor belt mentalities out there. Not to let the corporate ‘talent managers’ off the hook, because if you don’t have people and processes in place to manage the talent anymore, you only have yourself to blame when the ‘transparency machine’ of financial regulatory reform forces you down the channel of short-term decline…
Related articles
- Why Talent Management Tech is Super Hot and Bound to Get Hotter (readwriteweb.com)
- TEDS Celebrates 20th Anniversary (prweb.com)
- Be social: Recruiting using social media (marketing.yell.com)
Does Law inform or enforce culture?
If ‘the Law’ is the codification of cultural norms and practices, does the Law then not inform culture?
Policy, social malice and engineering of social outcomes bend these laws into legislative blunt instruments designed to enforce cultural behavioural changes on a grand scale, trouncing the common law of good judgment, neighbourly relations and common sense and thus freedom in their wake?
Within the above question and assertion lies the ‘malice of the free market’; where misguided and misinformed regulation channels behaviour and economic interactions in directions and with outcomes not anticipated or foreseen. Thus unleashing the ‘law of unintended consequences’.
Take as an example the economic condition referred to as Moral Hazard.
A definition is:
Moral Hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.
Moral Hazard therefore flies in the face of the principles of personal responsibility and thus accountability for our actions to a wider stakeholder community.
Is Moral Hazard perhaps promoted and therefore amplified by the fact that business leaders are not more formally educated in their fiduciary responsibilities?
Is this a function of weak or inefficient corporate governance structures and frameworks, or merely an oversight that is readily addressed by ‘occupational licensure’ or the professionalization of directors by only allowing formally qualified persons to serve on certain corporate boards?
Would this formalisation process of understanding fiduciary responsibility hinder the spirit of free enterprise and risk-taking or enhance the governance and risk aptitudes in a controlled and more channelled and focussed practice? Would it have as a positive consequence an amplifier effect for raising the corporate governance and Enterprise-wide Risk Management practices?
Related articles
- The Big Design: Moral Hazard, and the EU (themarketsoul.com)
- Individually smart, collectively dumb! (business2buddha.wordpress.com)
- How Moral Hazard Learned to Stop Worrying and Hate Santorum (esquire.com)
- A Question is Bothering Me… (fsaraceno.wordpress.com)
The Sustainability Gene
The CBI published a report entitled “The shape of business – the next ten years” in late 2009.
The authors identified 5 key drivers affecting the business environment, namely:
1. Changing finance and capital conditions,
2. The decline of trust in business and markets,
3. A less benign macroeconomic environment,
4. Social and demographic change where the recession will have a major influence,
5. Sustainability and resource issue.
We pick up our cue from the fifth driver being Sustainability for today’s post.
Our comment serves more as an aide-mémoire to return to in more detail in future articles. This post also does not serve as a commentary on the CBI’s report, but rather as a general opinion on the nature of sustainability and human a nature and is therefore pure conjecture.
We believe that sustainability as understood to mean the impact we have on the planet and the resources we consume, is not a natural human phenomenon, in the face of self-interest (as per the economic definition of the term) and competition for scarce resources.
In other words sustainability flies in the face of human kind‘s natural tendencies to compete for resources, either by war and confiscation, or by trade and exchange for those scarce resources.
We therefore contend that as human actors interacting with and through the free market mechanism, we do not naturally possess a ‘sustainability gene’, but instead have to develop a new model and framework for ensuring that this objective is effectively pursued and becomes part of the underlying psyche of being in business and discharging our fiduciary responsibilities.
Linking to our previous post ‘The Markets do not need certainty’, we contend that it is structure that helps shape markets and creates the conditions conducive to the effective operation of those markets. Other factors will ultimately affect the efficiency of the markets and some of these factors include Innovation and such like.
In conclusion, let us wrap up with a few quotes on sustainability:
- You can never have an impact on society if you have not changed yourself. Nelson Mandela
- The very process of the restoring the land to health is the process through which we become attuned to Nature and, through Nature, with ourselves. Chris Maser
- We can learn whatever we need in nature because we are part of nature. Human beings are part of Creation. We live by the same laws as all of nature. Anne Wilson Schaef
And in the final quote above we possibly see a glimmer of hope for a possible answer to our ‘Sustainability Gene’ deficiency. Somehow Adam Smith’s ‘self interest’ and the modern free(ish) market system require an injection of nature law and justice.
Whatever that shall be.
Related articles
- Sustainability? Ask the CFO, says KPMG (nigelcameron.wordpress.com)
- What Is America’s “Worldview?” (papundits.wordpress.com)
- Growth Vs Protection! What is your Perception…? (consciousnesssintegration.com)
- Adam Smith’s Psychology (psychologytoday.com)
- Biodiversity is Important! (environmentechnology.wordpress.com)
- Will is Power… from the Selfish Gene to the Transcendence of the Human Being (claudiafeitosasantana.wordpress.com)
The US Treasury Yield Curves #2 – Do you factor inflation into the deal?
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”
They win both ways!
theMarketSoul ©2011
Source Material: US Treasury web site:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
Related articles
Share this:
July 31, 2011 | Categories: 2011, Analysis, Business, Economics, economy, Free Market, Ideas, Inspiration, Market Economy, Monetarism, Monetary Economics, Opinion, Political Economy, Politics, Reflections, Risk, Risk Management, Sustainability, Taxation, theMarketSoul ©2011, Value | Tags: 2011, Analysis, Bill Gross, Blogging, Budgetary Control, Budgets, Commentary, Debt Ceiling, Economics, Economy, Federal Reserve System, Finance, Financial Regulation, Free Market, Government, Ideas, Information Assymetry, Inspiration, Market commentary, Monetarism, Monetary Economics, Opinion, PIMCO, Political Economy, Politics, Risk Management, Sustainability, T-Bills, Taxation, theMarketSoul, Thoughts, United States Department of the Treasury, United States Treasury security, US Debt, US T-Bills, us treasuries, US Treasury Yield Curves, value, Yield curve, Yield Curves | 1 Comment »