FEI Conference and RSD Solutions

 

Stephen McPhie (l) and Rick Nason (r) and the RSD booth.

 

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

From June 8 - 10, the three partners of RSD Solutions were in Ottawa for the FEI Canada annual conference. Part conference, part trade show, RSD Solutions was one of the exhibitors. As an exhibitor, we had the opportunity of speaking with most of the delegates over the 3 days and hearing their concerns, issues and ideas on finance and risk management. We had many great conversations including a breakfast chat with Doug Porter, senior economist of BMO, a state of US risk management chat with Marie Hollein, CEO of the US side of FEI and several CFO's from Canadian firms small and large.

One of the observations from the conference delegates - and we heard a first hand account from one executive, was the growing desire of senior executives to understand risk and then (possibly?) introduce enterprise risk management processes. Sadly it seems that the fall guy/girl empowered with this job is the CFO who has seen, through scope creep, their management of financial risk evolve into enterprise risk. I say sadly because few seem to have volunteered for the "new" role. Pity.  

Overall, a great conference for people in the financial corporate world to network, share ideas and learn a few in a very casual and friendly setting. Next year the conference moves to St. John's and no doubt RSD will be there.

 

 

Implications of Increased Risk in the Foreign Exchange Markets

By Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Currency markets are showing increased signs of investor caution as various measures of risk aversion are rising.  This more cautious investor stance is based on concerns about the sustainability of US and global growth, inflation surprises in emerging markets (China), and general unease about debt levels and new asset bubbles.  Already, global Purchasing Managers Indices suggest that global growth concerns have extended across most countries.

The rise of risk aversion and investor uncertainty could persist for an extended period.  The traditional response of investors was to move into more liquid currencies based on the view that central banks would ease policy to keep the recovery intact.  However, it is possible in this new environment that central banks may become more cautious about providing support.  This can be found in recent policy statements of central banks:  the Fed has shown no signs of implementing QE3, the ECB still plan to raise rate at a slower pace, Canada and Australia continue to show a slight tightening bias and inflation remains a focus in China.   

The soft patch is driven by policymakers emphasizing post crisis adjustments and attempt to reduce the debt overhang.  As a result, G-20 central banks will be less reluctant to support a growth slowdown and investors focus on government debt.  The central bank of China and some emerging markets will continue to tighten monetary policy due to inflation fears reducing global liquidity.   In an environment of upside inflation risk and central bank caution, this could leave some of the commodity and liquidity-driven currencies more vulnerable.

 

Risk Politics

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

As a professor and lecturer on risk and enterprise risk management I see and take the time to study a lot of different risk frameworks.  However there is one risk element that I rarely ever see mentioned.  That risk is political risk – and I do not mean elected officials risk, but instead the mundane but ever present day to day water cooler office politics risk.

 

An organization is a collection of people that interacts with other organizations which are also a collection of people.  (I am assuming that your company or organization is not 100% machines and that all of your customers are also not 100% machines.)  Whenever you have people interacting with people – either internally or externally – you will have politics.  Whenever you have politics you have political risk.  Where does that show up on your ERM system? 

 

A perhaps even bigger form of political risk is the games played by senior management as they jockey for position.  Does your ERM system capture that inherent risk?

 

What risk mitigants does your firm have in place to identify, measure and manage political risk?  Is it getting better or worse at your organization?  Do you know?

 

Oh – and by the way – there is also the risk of elected officials doing something silly that effects your plans and forecasts as well.

 

 

The Potential Downside Risks from the Chinese Economy

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The IMF, in their latest assessment of the Chinese economy, views it as one of the global bright spots for economic growth.  Economic growth is projected to exceed 9% in 2011 driven by strong domestic and external demand.  The actions taken by policymakers are expected to dissipate many of the recent drivers of inflation and progressively slow the surge in property prices.  The key challenge for China is to continue the transformation of its economic model to one more closely linked to domestic consumption and less reliant on exports and investment.

A question should be asked, what are the risks to the global economy if China is not able to make that transformation (not the view of most analysts)?  If China cannot make the transition and growth prospects were revised downward there could be dire consequences for major trading partners such as Australia, Africa, Brazil, Japan and the US.  It would deflate any reflation trade and push the global economy into a period of stagnation.

The lack of transparency among Chinese banks and companies could potentially amplify the problems.  The financial numbers from Chinese banks lack full disclosure as most institutions act on behalf of the government rather than their investors.  The numbers of Chinese corporations listed on American stock exchanges do not have clear transparency.  The large surplus position of China with its major trading partners represents a large transfer of wealth (capital).  The lack of an efficient pricing mechanism can lead to a misallocation of scarce capital on a global basis.

The view of most analysts and policymakers is that China remains the one bright spot in the global economy.  However, have corporations or investors considered the potential risks if the China bears are right?       

Frogs

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

We all know (hopefully simply because we heard about it and did not decide to test it for ourselves) that a frog placed in a pot of cool water will eventually boil to death if the heat on the pot is turned up slowly.  In other words, the fact that the pot is heating up sneaks up on the frog and it essentially fails to sense that something is wrong.  Kind of like how risk sometimes sneaks up on us as well, isn’t it?

Evolution or Revolution

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

At the time of this writing there are revolutions going on around the world.  The “Arab Spring” is in full bloom.  There are still some revolutions to be settled one way or the other, but it is clear that things are likely to change dramatically in the Middle East (and elsewhere) over the next five years.

 

Revolutions are upsets.  They are a destruction of the status quo.  They are dramatic action for situations where only dramatic action will suffice.   They are never easy, and even with the best of revolutions there is always the question of “So now what do we do?”

 

Contrast a revolution with an evolution.  Evolutions are slow, glacial, and generally not sensed when they are occurring.  Evolutions sometimes take generations before effects are noticeable. 

 

Evolutions and revolutions are at opposite ends of the same scale.  One is fast, immediate and very disruptive, but quick and effective.  The other is slow, hardly noticeable and may take generations to be effective. 

 

The other major difference between evolution and revolution is the generation of ideas.  Evolution thrives on existing ideas and only gently adjusting them.  Revolution is all about bold new ideas and creating new paradigms. 

 

If we accept the premise that risk management should not stay static, what is the most appropriate form for change?  Is it slow and steady evolution, or fast but disruptive revolution?  There are pros and cons for both, and if you take the time to think about it seriously, the answer for your organization just must surprise you.