I blame John Maynard Keynes (JMK)

Ever since the Great Depression and JMK’s ‘The General Theory of Employment, Interest and Money (1936)‘, have we had more intense government interference and hence taxation in most advanced economies.  Thank you JMK.

But seriously, how much is too much?  There must be value in controlling fiscal policy, monetary policy and (social) employment policy, but is this being done in an integrated fashion and with ‘value maximising’ principles?

We at theMarketSoul Limited believe this not to be the case.

We prefer to take a leaf out of Joseph Schumpeter’s book and view the economic cycle as either short (1 – 2 years), medium (around a decade) and long-term (many decades).

The trouble with any form of economic analysis is that taking any temperature readings during any specific cycle is just that – A temperature reading.  Meaningless without being set in its proper context. We generally have a major problem in identifying where we are in any given long-term cycle.

It is only with hindsight and the historical perspective that we can truly determine where we were and where we thought we were heading.

It is our belief that we are (still) in the midst of a major paradigm shift, triggered by the innovation wave of the ICT revolution over the last 20 years.

We still have not fully grasped the consequences and full extent of this ‘drift’ to a new equilibrium.

As one of the unintended consequences we are currently facing up to a sovereign Debt balloon and are desperately trying to determine when we will encounter ‘Peak Debt’.

One of the popular libertarian ideals is to cut government’s stake as a percentage of total output of GDP.  We endorse this view, but it appears that at the end of the day (because we have forgotten what Laissez faire looks like); we’ll still need someone to keep the lights on, adjust the interest rates and collect our taxes.  All this in the name of job creation

theMarketSoul ©2011

The Credit Quake of 2008 – 2009 (Revisited)

We were reminded today of a blog post we made on 21 October 2009 we made regarding the Credit Crisis of 2008 – 2009, at the time.

Some of the lessons learnt and discussed there are still relevant today, especially our comment regarding the fact that the Credit Quake would have ‘after shocks’ for a few years to come:

“…we are still in the midst of a major equilibrium adjustment and the ‘step down’ or up from the previous level will continue to be uncomfortable for many years to come.”

Please follow this link for the full article detail:

http://themarketsoul.blogspot.com/2009/10/comments-from-lay-economist-on-credit.html

theMarketSoul ©2011

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.

English: Logo for FX
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?

English: A logo of the Standard & Poor's AA- r...
Image via Wikipedia

theMarketSoul © 2011

Pleae refer to our disclaimer page

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

The US Treasury Yield Curves – Are the markets really that bothered?


 

Department of Treasury Seal (2895964373)
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.

Yield Curve 1

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

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
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
    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...
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.

End to End or Integrated systems and thinking processes

Silos.

We hear this management buzz word quite often touted in office settings, and conferences in the media, etc.

We argue today that silos are cultural norms.  They are national cultural models possibly endemic of certain national cultures.  We certainly have no empirical evidence for this, so this is pure opinion and conjecture on the part of theMarketSoul contributors.

In our previous article titled Increased Friction Costs we briefly touched on the issue of processes being back to front in Britain.  Processes are very much driven by the national ‘Carrot & Stick’ approach, rather than an enablement, ‘build and they will come’ approach where solutions are found and embedded then suitable and profitable markets are found for those solutions.

Now we can argue that in a very narrowly defined risk management culture and faced with the reality of reduced opportunity to obtain and procure financing to ‘build solutions on speculation’, we just cannot afford to change our exiting disastrous management and control processes.

But this is exactly where we have to stop the train as quickly as possible and change direction to ‘climb the hill ahead’ so that we can experience the potential and opportunity to ‘see the view from another mountain top vantage spot’…

We are in a tight spot.  That is a fact.  However, we are being held to ransom at the moment by a ‘political’ system and governing party trying to string out the last days of their tenure in power.  [This article was initially written before the General Election in Britain].

There is hope, there is a sliver of light and opportunity on the horizon.  However, we will need to learn to deal with some pain, as we readjust the ‘crowding out’ of growth by the public sector and debt burden.  However, we need to recognise that we will have to apply a bit more ‘market discipline’ to finding, scoping, building and implementing solutions to our problems.

Small and localism are in fact parts of (but not the entire) solution, where small providers (entrepreneurs) are incentivised and tasked with coming together to experiment and create solutions, that hopefully mitigates the risk of large scale failure, but at the same time find scalable solutions that can rapidly be deployed to solve some of the challenges we currently face.

In IT deployment and development projects they call this kind of rapid, ‘low hanging fruits’ approach to development work Agile Development or AD for short.  Maybe this together with the professional service chains and clustering we will touch on in subsequent articles is the way forward.

theMarketSoul © 2010