The Return of Risk?
Department of Treasury Seal (Photo credit: woodleywonderworks)
We take a brief look at two interesting Treasury Yield curves today.
The first Yield Curve takes a snapshot view of the yield curves at the end of Q1 2011 and Q1 2012.
What is very noticeable is the fact that the overall yields for the end of Q1 2012 is significantly lower than a year ago. Taking a look at the at the 5 year T-Note yields as an example, the spread between the end of March 2011 (5Yr T-Notes at 2.24% ) and the end of March 2012 (5Yr T-Notes at 1.04%) was 1.20% down. The question is what factors drove down the ‘risk-free’ rate on US Treasuries?
However, turning our attention to the second graph below, indicates a slightly different perspective; and hence the title of this post. Has and is risk returning to the capital and stock markets to levels we previously experienced?
Not quite, is the short answer, because the spread between 31 December 2011 (0.83%) versus the 1.04% rate at the end of March 2012, only indicates an uptick of 21 basis points in the yield rate. The significance is not the percentage spread, but rather the direction of movement and we will continue our analysis at the end of Q2 2012 to establish whether the direction in Q1 2012 will be maintained into Q2 and beyond.
The final question to ponder is this:
Are we finally seeing the corner turned, or are there still significant risks in the global economy and sovereign debt markets to cause a few further after shocks in the months to come?
theMarketSoul ©2012
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- Where will all the new money come from? (themarketsoul.com)
- The BIG Sovereign Debt Structure cliff – Part 1 (themarketsoul.com)
- The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
- The Real Yield Curve and a Double-Dip Recession (yelnick.typepad.com)
- Pricing of liquidity (jrvarma.wordpress.com)
- Rates are rising! Oh wait, scratch that. (theglobeandmail.com)
- Treasurys bounce back as European debt falters (sfgate.com)
- Analysts see more gradual rise in U.S. Treasury yields (theglobeandmail.com)
- Is the bond market tightening for the Fed? (superbullinvestor.com)
- Surging U.S. Treasury yields set to take a breather (theglobeandmail.com)
Panic in the Cars of Britain?
With apologies to The Smiths; the original version of the song Panic’s lyrics reads something like this:
“Panic on the streets of London / Panic on the streets of Birmingham / I wonder to myself / Could life ever be sane again?”
Panic (The Smiths song) (Photo credit: Wikipedia)
Or is this the beginning of what we will call ‘Austerity Anarchy’?
As a case study in behavioural economics goes, the last week in March 2012, in the UK must go down as a classic…
United Kingdom (Photo credit: stumayhew)
What sparked the ‘run on petrol and filling stations’ is not the aim of our analysis, but rather the deeper underlying cultural psychosis affecting Austerity Britain. However, the austerity is not driven by the current revenue expenditure austerity, but rather the culture of Investment Austerity over many decades that has created a supply chain time bomb in the UK.
There is generally a severe lack of investment in any form of storage capacity. Not as a risk management concept, but rather as a pure short sighted cost management issue.
Yes, land capacity is limited on a small (in places patchily overcrowded; especially down in the South East of England) island and the cost of owning a vast storage network must seem prohibitive; yet having so little risk management or rather ‘buffer’ and shock absorption capacity available must be the vast hidden opportunity cost ‘time bomb’ waiting to derail a sustained or sustainable short run upturn in the economy?
Hidden or in the economists parlance ‘Opportunity Cost’ is generally not an item on any policy maker’s agenda, yet in it lies the ‘unintended consequences’ element that so seldom gets factored into the equation. Yet opportunity cost highlights the risk element we have to factor in. And in this sense we use the word RISK in its proper intended format, namely a quantifiable probabilistic evaluation of the downside of a transaction. Yes, threats are more closely aligned to ‘unintended consequences’ and are the issues we can only subjectively be aware of, but cannot quantify with any degree of accuracy.
Risk Management road sign (Photo credit: Wikipedia)
Hence, ‘Austerity Anarchy’ is what we believe an angst and siege mentally is, when decision-making (or rather calculus driven decision-making) gets ‘suspended’ and the irrationality of “mankind’s mind” and the mainstream misinformation distribution takes over, creating PANIC in Little Britain and the commentators at theMarketSoul ©1999 – 2012 ask themselves:
“I wonder to myself; could life ever be sane again?” – with thanks to The Smiths
theMarketSoul ©2012
Related articles
- Don’t Panic! Don’t Panic! (1stepup2stepsback.wordpress.com)
- Fuel Frenzy: Petrol pump panic grips UK drivers (1oneday.wordpress.com)
- Petrol panic buying… Complete morons (nickspearing.wordpress.com)
- United Kingdom petrol panic over? (davidwestern.wordpress.com)
- Running on Empty: Petrol Panic in UK (markamerica.com)
- Gas stations close in UK after fuel panic-buying (seattletimes.nwsource.com)
- English police ask gas stations to close amid panic-buying (ctv.ca)
- | UK Panicking over petrol: The silliest country in the world! (truthaholics.wordpress.com)
- Anger erupts as drivers queue for hours in sweltering heat… and the strike hasn’t even begun yet! (dailymail.co.uk)
- Government under fire over panic buying of petrol (guardian.co.uk)
A new Commercial Reality under Austerity
How to compete fairly and openly. [Part of our ‘The Trouble with Innovation series 1,2,3,4,5 – Part 6]Doing business anywhere, anytime is never easy!
That is a stark commercial reality, that most business people will accept as a given. But how? now? does is work in a climate of AUSTERITY???
(Apologies for the blatant confusion and poetic licence taken in the previous sentence).
Public and private sectors mostly have an uneasy symbiotic relationship with each other. If the public sector cannot deliver a solution, they have to procure it from a private provider and a private provider (generally, but not always) rub their hands with glee, as it is relatively speaking ‘easy money’ provided you meet and exceed certain framework thresholds.
All nice and cosy, when we are in a growth cycle of the economy; yet ever so tricky when those Framework Procurement Agreements come up for tender during the down slope side of the cycle…
Image via Wikipedia
It is odd how the ‘staccato’ relationship between private and public sectors work at different periods during the business cycle. And this is exactly where the public sector, with an astute “commercial hat” on, can take advantage of it’s perceived negotiating strength during the down cycle agreement drafting / tendering process.
Yet, do they take advantage of this?
Our view is that any Public Sector Procurement Framework Agreement with private sector providers will always be a FLOOR, thereby setting the minimum expectations and requirements, without ever really driving proper continuous INNOVATION and COMPETITIVE DYNAMICS to ensure players with ‘skin in the game’ continue to understand and manage their businesses with the proper risk attitude (never mind risk appetite). Rather than act as a (“floor price”) barrier to entry, they should act as ceiling, or rather more ‘bluish sky’ REACH or STRETCH agreements, setting the rules of the game, but not acting as the default pricing mechanism , meaning that the private sector provider must continue to be innovative, rather than wait and ‘cream-off’ the best bits whilst seeing out the agreement time period until the next time anyone bothers to ‘tamper with the height’ of the limbo bar…
Our summary take away from this article:
The Public Sector Procurement Framework Agreement therefore should act as an incentive to compete and have fair access, but never as the default pricing mechanism.
Community and Public Sector Union Pledge Signing 20th August 2010 (Photo credit: Senator Kate Lundy)
theMarketSoul ©2012
Related articles
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- Government outsourced more than 1,100 jobs to private sector in 2011 (guardian.co.uk)
- Unemployment likely to worsen as private sector resorts to redundancies (guardian.co.uk)
- UK | Public sector workers ‘would sacrifice pensions for private sector security’ (skillsinfo.wordpress.com)
- IMF’s Lagarde: Equilibrium between private and public sector in Greek debt negotiation is a “concerning question” (forexlive.com)
- Pension gap increases between private and public sector (moneyexpert.com)
Our Lessons from 2011
We decided to summarise our learning from 2011 into two brief thoughts:
Image via Wikipedia
- The pains and strains of the economic sovereign debt melt-down in 2011, should stand us in good stead to deal with even more debt and sovereign strain in 2012, as More and Bigger Europe continue to miss the point; this being that more bureaucracy and more government and regulation will not get the INNOVATION engine started again to Recapitalise Europe!
Image via Wikipedia
- Translational differences will matter. The CLOUD is a huge business and business model transformation opportunity. IT ‘Geekery’ and language could scupper this potential opportunity and we need to develop more ‘CLOUD TRANSLATION’ services so that a broader community and eco-system can get involved in an aspect of “INNOVATION ignition” in 2012.
Image by Bill Strong via Flickr
All the best and good luck in 2012.
theMarketSoul ©2011
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- Ruminations on Greece’s Sovereign Debt Crisis (zerohedge.com)
- Aaron Hing: In a debt-swamped world investment caution is key (nzherald.co.nz)
Core Values
As we wind down 2011 we have entered the ‘reflective season’, where due to the structure of the Gregorian calendar and the very long(est) night of the year (in the Northern Hemisphere), we naturally enter a more introspective mood.
Image via Wikipedia
Therefore, as we become more contemplative during this time, let’s reflect on our Core Values, both personal and organisational, and identify the gaps or misalignment between these two key areas of our daily existence.
Then start listing or rather prioritise these gaps and only focus on the one of two of the most feasibly achievable misaligned Core Values and develop a plan or incorporate it into your New Year’s resolutions.
If the gap requires coaching or input from people or personal development providers, do something as soon as possible to diarise or follow-up.
Image by m-c via Flickr
Look at utilising some common reminder tools we have available; pen and paper, notes or your mobile device, calendar reminders, or even new Cloud services and Apps, etc. in order to assist your “Oh Yes!” reminder moments later, should now not be the right or appropriate time or place to do something about the Core Value alignment activities you need to take.
Image by rorowe8 via Flickr
…Turning 2012 into Positive Opportunity…
theMarketSoul ©2011
…and here is some good news…
Adding further value to our conversation on The Market eQuation we introduce the concept of the:
RISKed RETURN on MARKET (RdROM) today on 11.11.11.
RISKed RETURN on MARKET adds a counter balance to the Efficient Market Hypothesis and Rational Market Theory, Black Scholes and CAPM, amongst others.
More detail to follow in due course…
theMarketSoul ©2011
The Big Design: Moral Hazard, and the EU
Irrespective of how the twists and turns of the Greek political system plays out over the next few days and weeks, we believe that the Big EU (Eurozone more specifically) players and their leaders only have themselves to blame for Greece‘s seemingly petulant behaviour.
If at the fundamental level we cannot understand that ANY form of bail-out will always support and lead to Moral Hazard, then we have learnt nothing from the past and the more recent debt and financial crisis of the 2008.
Previously we mentioned the ‘Credit Quake’ with lots of after tremors (attributed to Dennis Cox of Risk Reward), will last for a number of years and this is exactly what we have playing out as daily deadlines in front of our eyes at the moment.
However, to return to the point at hand: The age of economic dilemma of Moral Hazard has reared its monstrous head again and is in danger of ‘nabbing us in the butt’ (yet again), because the leaders of the EU (more specifically the Eurozone 17) do not want to understand that all their actions in supporting Greece is only leading to a more dangerous form of Moral Hazard and flies in the face of the Austrian School‘s ideas of ‘Creative Destruction‘.
Without effective mechanisms in place to deal with European regions at different cycles of development (not even to mention the basic lack of sound fiscal management), is to ask for problems (on a continuous basis).
Until a sound framework of either full fiscal and monetary union with appropriate checks and balances are rolled out in Europe, with a single capital market instrument (Gilt / Bond or EuroBond) and mechanisms for dealing with localised ‘failures’ of the market to clear itself effectively (never mind efficiently); we will continue to wretch and lurch about with market confidence eroded and leaders running around like headless chickens trying and implementing inappropriate tools for the job a sound framework is supposed to deal with.
It is not more regulation we want. It is simply BETTER regulation. It is that simple.
theMarketSoul ©2011
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- The Global Moral Hazard Dawns: Merkel Says “It Must Be Prevented That Others Come Seeking A Haircut” As Ireland Cuts GDP Forecast (zerohedge.com)
- Eurozone: Why does the crisis linger, deepen and spread? (wallstreetpit.com)
Synthesizers wanted…to cross the crises divide…
Image via Wikipedia
Today we are reposting a blog article originally posted in April 2010.
We believe the sentiments are still valid and should resonate across the various crises we are experiencing currently. Please click on the link below:
http://themarketsoul.com/2010/04/25/221/
theMarketSoul © 2011
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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
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- Europeana Licensing Framework published (creativecommons.org)
In the Cloud, Structure is everything!
We have been having several conversations with colleagues and practitioners in both the Enterprise Strategy and Architecture space around both Cloud Computing and the Integrated Service IT delivery space.
Our brief conclusion is that Organisational Structure is everything.
We believe that you cannot effectively move IT Service delivery into the ‘Cloud’ and / or integrate some of the hybrid Cloud solutions and other architecture requirements, without fundamentally adjusting / realigning your organisational structure to fit the new model or modus operandi.
Therefore, the first item on the IT Change Management agenda should be a fundamental rethink and adjustment of Structure.
What usually happens is that once IT Services gets delivered into divisionalised organisations, the service quality and cost gets fragmented and ‘scope drag’ and loss of focus and control occurs.
This makes us conclude that maybe the same approach utilised in Natural Gas extraction, namely ‘Fraking’ should be utilised in IT Service delivery, in the absence of Organisational Structure change:
Go in deep and then cut across the silos in order to get to the core solution (service) delivery, because in the absence of structural service alignment, the only other option is to be as scientific and innovative as you possibly can.
theMarketSoul ©2011
Corporate Culture
This question posed in a discussion forum made us pause and think:
“Bosses think their firms are caring and “values-driven.” Their minions disagree. I think it’s hard from top-down, policy-driven firms to switch to values-driven because even the values are enforced top-down and bosses who have never listened carefully to their employees don’t suddenly start to do so – thus, they never know if their values have caught on or not. What do you think?”
Firstly we need to define Values – We will use it in this post in its economic sense, such as Economic Value Added, meaning that both value creation, return and risk evaluation is as such is ‘built into the value based system’.
Most corporate managers / leaders would probably understand values in terms of two different contexts:
- Values as guiding principles, morals, a ‘code to live by’, etc., shaping behaviours and norms
- Value in terms of the standard Du Pont analysis – Return on Investment (ROI) calculation methodology.
The third (and probably not last) way of viewing the values question is the economic value added approach, capturing:
- Economic Profit (including risk)
- Guiding principles and behaviours – the bottom up doing the right thing all the time view
Turning to values as a guiding principle, these are the ‘feel-good’ words and phrases we stick on corporate office walls, the intra- and internet “connecting” people inside and outside the organisation to the “emotional-side” and binding them together.
This is the way we believe the Value question has been posed.
Here we have the problem of the ‘generals in the tents’ versus the ‘generals in the trenches’ scenario.
The generals in the tents believe what their eyes and ears are telling tell. “People look and sound happy, so they MUST be happy”.
The generals in the trenches believe what they ‘feel’ and experience everyday in their leadership roles amongst the ‘troops’ and employees they serve with are the real true values of the organisation.
This is where a disconnect manifests itself. The two types do not see eye to eye or understand each other. Charts, reports, statements, observations, facts separate the general in the tents from the raw emotions, feelings, qualitative experiences and ‘Values’ of the general in the trenches.
When they meet to talk, the language and behaviours each other uses and displays are different. They don’t understand each other and each side leaves the conversation with a sense of an ‘unaccomplished mission’ and frustration.
To conclude and draw this ‘Values’ post together:
Right from the off, there is potentially a misunderstanding as to what is exactly meant by Values. The corporate leadership may think, warm ‘fuzziness’ or hard numbers and return on investment, yet the employees and middle management layer think, “squeeze some more, but keep on smiling, here they go talking about values again and all I want is some certainty and job security…”
Finally, there has to be the recognition that culture and culture creation in organisations is not easy. (We are not even talking cultural change here yet).
If it was, then it would obviously not be a problem. There are many more factors and dynamics at play, so hopefully your question sets off an interesting discussion.
theMarketSoul ©2011
The Seven Deadly Sins of the Market
As if last week’s (week ending 23 September 2011) turbulence on the world’s stock markets wasn’t enough of an emotional rollercoaster for millions of mark participant’s, we will offer only one bit of reflection this morning on the market conditions.
Remember, the markets live, breath and die by the age old human conditions (seven deadly sins) of:
- Greed / Avarice (Avaritia)
- Envy (invidia)
- Gluttony (gula)
- Sloth (acedia)
- Wrath (ira)
- Pride (superbia)
- Lust (luxuria
Therefore, the markets are Harsh, as we have written about before, however markets are still the most open, free and fair way to allocate resources, as we are reaching out to establish with our ‘The Market eQuation’, investigation.
All this activity we hope and trust will lead to a new understanding of the market which we will call:
Unbounded Market Rationality
theMarketSoul ©2011
The Ice Age is Cometh
Originally published 4 October 2009:
Information Asymmetry is what drives the market. We alluded to this in an earlier blog posting (see Market Responsibility, Saturday, 18 October 2008). Yet we still hear the socialist agenda mention regularly that if it wasn’t for the recent government interventions to ‘save the market’, the market would have collapsed. We are sorry, but we just don’t buy this. Yes it is true that individual institutions in the market would have failed, but as a mechanism, the market would have wobbled and other participants would have picked up the distressed bits and pieces and carried on.
True, there was a crisis of liquidity in the system, with severe knock on effects, but as a mechanism for allocating resources, effort and reward, we still believe the market would have survived, with or without the ‘nuclear’ option intervention we saw. The moral of this tale is that unfortunately the socialist elite now believe and make the rest of the market believe that they hold the moral high ground and can dictate the agenda for the next several years. Oh well and so the pendulum swings…
Which was entirely a side track to the real intention behind this posting.
‘The Ice Age is Cometh’ was an article headline in the Radio Times edition of 16 – 22 November 1974. A friend of ours came out with the rank smelling edition of the Radio Times of late 1974, that he discovered stuffed in the chimney breast of his new home. Stuffed in that chimney-breast to obviously keep the cold draughts out, as according to the subtitle the next 1,000 years could be very, very cold, with an advance of the polar ice caps and glaciers. Did we blink or something? We will challenge the BBC to dig out the programme aired in the week of 16 – 22 November 1974 on BBC 2, so that we can be reminded how quickly the agenda and the focus can shift, if we take our eye off the ball and let information asymmetry spin the agenda out of our control.
And we suppose we cannot deny the evidence currently in front of our eyes. Polar ice caps are retreating, which is true if you focus purely on an evidence based approach to trying to understand the wider system. But do make your observations and emotive arguments from within the system, or do you need to step outside that system in order to be more objective. And what about intuition? On a purely intuitive level we believe the earth of GAIA is a self correcting system but we do not have enough evidence to conclusively prove this assertion.
So, in the meantime, we swing one generation to the next, waiting for the ‘Information Assymetrists’ (yes our new made up word de jour) to set the agenda and the morals of the market.
As a soul in this market arena we just keep on being amazed, day in and day out. Please just give us the ability to take the long view…
theMarketSoul ©2009
The Market Equation
Image via CrunchBase
Please note: This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA. If you would like to speak to the author about any aspect of this work, or in order to contribute towards developing the framework and ideas further, please click on the Contact Us link. (We acknowledge and reward valued contributions).
The Market eQuation (MeQ):
Today we are commencing our investigation and outreach to discover what we will call the Market Equation.
Basically the idea is to come up with a mathematical equation and rating or ranking system to assess the state and status of various markets.
Whether this will lead to a theory of Markets that can compete with some of the other theories in existence is open to debate.
The basic premise is this:
There should be a methodology to access the Openness and Fairness of any given market versus other comparable markets. This specific ratio or result should therefore determine the individual participant’s level of engagement and commitment to that specific market. The result should also be able to be repeatable over time in order to elicit trends and movements of particular markets relative to each other.
The basic equation can be expressed as MA2R4K2E3T3 = OF outcome (Open & Fair).
Therefore:
OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3
And derives from the Market Equation Table listed below:
The Market Equation Table
| O | Open | |||||
| F | Fair | |||||
| M | Multiple | |||||
| A | Accessible | Adjoining | ||||
| R | Random | Rapid | Regular | Repeated | Regulated | Risk |
| K | Complex | Connected | Competitive | |||
| E | Effective | Efficient | Equilibrium | |||
| T | Technology | Time | Trade |
Key:
| Subjective measure |
| Objective (External) measure |
MA2R4K2E3T3 = OF outcome
Therefore: OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3
Our astute readers might already seen through this equation?
By dropping the M (which will always be 1) the letters that remain result in the word raket. RA(C)KET?
With the additional C, being the complex bit, ultimately the Market Equation becomes a COMPLEX RACKET.
theMarketSoul ©2011
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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)
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 #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:
Related articles
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- Raymond James Weekly Bond Market Commentary (learnbonds.com)
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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
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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)
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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
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Random Collisions of Chance
Chance and spontaneity are two interesting phenomenon required for innovation and creativity.
We were reminded of this in an interview recorded of a LinkedIn executive recently*. He stated that chance encounters are “where we make some of our most significant connections“, be it your life partner, business associates, etc. and that speeding up those chance encounters was one of the fundamental principles and aims of social networking.
That idea struck a chord with us. Like our free market principle of ‘Spontaneous Order’, random collisions and network creation, leading to opportunity exploitation and ultimately wealth and welfare maximisation is intuitively an attractive proposition.
So, we have the mechanisms in place, with online tools and social networking sites, but how much of this activity is outward focussed revenue and income generating? What is meant by this is that the revenues are not focussed on increasing advertising and network operator revenues, but individual participant to participant’s opportunity flows.
And beyond building an online presence with followers and individuals being influencers and thought or trend leaders in their domains, how many of us focus on being revenue leaders and wealth and welfare ‘maximisers’ in this space?
Do you have personal metrics of success, which help inform and modify and moderate your personal behaviours to ensure that you maximise your ‘Return on Ether-time’? [ROET]
Maybe it is well worth a thought because in the neo-classical world of market participation, if you aren’t in the market and making a living (or a half descent living) from it, you might get marginalised and lose out on the wave that hit us when Web 2.0 arrived.
* We are searching for a link / reference to this interview. Once we have found it, we will update this post
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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.
Budgeting (Photo credit: RambergMediaImages)
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
Journal of Human Capital (Photo credit: Wikipedia)
- 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
A diagram showing the flow of knowledge in the Financial Planning Profession (Photo credit: Wikipedia)
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.
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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
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Do we value everything and understand nothing?
On reflection, the ‘mechanism’ established to rescue or save the Euro is indicative of the fact that we still understand very little and can control and short-circuit systems to some extent, yet we think we value everything.
Inflation, and dare we state it openly, serious inflation of double-digit proportions must now surely be back on the cards?
We realise that we are not the only and first publication to come up with this analysis.
Bloomberg reported on 30 September 2011 that European Inflation had unexpectedly jumped to 3%, up from 2.5% in August. Yet, this is still a long way off a double digit scenario, however, the factors mentioned in the Bloomberg report included, the Greek Default (possibility) and the ECB actions still possible in terms of containing European wide inflation.
Although most economists predict that inflation will start to wane next year, we believe that actions like the Greek Debt haircut and the increase in the EFSF’s bailout fund to €1tr sends signals to the market that the value of money is now seriously ‘delinked’ from operational reality.
We will not comment here in depth on monetary policy, as it is currently applied, however, we are beginning to get the impression that inflation as ‘the silent and stealth’ taxation it really is, is now firmly (yet behind closed committee room doors) on the agenda to help “manage” the size of the European Debt mountain.
It is worth keeping an eye on the real drivers of inflation and then there is some value in keeping an open mind.
theMarketSoul ©2011
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