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 market 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 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

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

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

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.

 

English: The model shows institutions and mark...
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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).

 

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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:

 

 

  1. Time value due to down time, loss of productivity, etc. This is more accurately referred to a value of time
  2. 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


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 SECLondon Stock ExchangeNYSENASDAQ, 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…

 

theMarketSoul ©2010