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

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.

English: Risk management sub processes
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


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’.

 

Helmet from the Sutton Hoo ship-burial 1, England.
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:

  1. Market structure – free market versus socialist structures
  2. Regulatory framework – the disjointed regulatory frameworks and mixed agendas and the sense of urgency in the global regulatory framework
  3. Cultural setting – Anglo-Saxon, European, Middle Eastern, Far East, etc.
  4. Reliance on macro-economic tools including monetary and fiscal policies
  5. Skewed nature of national performance measurement
  6. Balance between equilibrium and disequilibrium clearance mechanisms in the economy
  7. Erosion of moral hazard and other distorting signals

 

Régulation de la machine à vapeur Merlin
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


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’?

BP Logo
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.

English: Paul Volcker, former head of the Fede...
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.

theMarketSoul ©2010


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?

theMarketSoul © 2010