“…, This century is different”: A quote right on cue

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Predicting the future is fun for you are never wrong until it happens:  one of my past times is looking back at future predictions and comparing them to the current reality.  Great insight can be gained from this – usually it is that trends don’t continue indefinitely because some other reality appears like higher energy prices or some form of political (in) stability.  My favourite forecaster of the social and economic reality of the 21^st century is William Draves (left in above photo) and his book “Nine Shift” which looks at the nine shifts in human behavior that will come about this century.  His book is interesting for it not only makes the predictions but also provides the time line for them to occur.  Published in 2004 this little read book is spot on on innumerable levels.

 

The above quote is from a recent Bloomberg article on US employment - the realization about this century being different is right on cue with Mr. Draves's forecast.  In his book, Draves believed it would be around 2012 that the world would begin to realize that we are living in a very different economic and social environment – and this for a trend that started at the birth of World Wide Web. 

 

Does this story sound familiar to your business – are you in a state of denial that we are now living within a new paradigm and that 20^th century business practices and risk management techniques will get you through the new (?) century?  Definitely food for thought and I would recommend to you to have a read of Mr. Draves’s book to perhaps learn about the “Shifts” that are taking place or check out his website for current confirmations. 

 

(A special thank you to Jeff Roach (http://jeffroach.ca) (of Sociallogical (http://sociallogical.com) for introducing me to Nine Shift)

 

For more on William Draves, follow the link:  http://www.nineshift.com/

 

For more on what is different, click on the link to the Vivien Lou Chen’s article in Bloomberg: http://tinyurl.com/3dbyp2k

 

Experience Precedes

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

What do the books “The Inner Game of Tennis” (by Timothy Gallway) and “Managers Not MBAs” (by Henry Mintzberg) have in common?  The answer is that both argue in their own way that “Experience precedes technical knowledge”.

 

“Experience precedes technical knowledge” is a direct quote from the Inner Game – the best selling tennis book that was originally published in the 1970’s.  The argument is basically that you do not know much about playing tennis until you have picked up a racquet and hit some tennis balls.  Technical expertise is meaningless unless you have experience.  Mintzberg argues much the same thing when he essentially argues that MBA programs have limited effectiveness due to the limited experience of the students in business school.

 

This brings us to risk management.  The demands of quantitative regulation (regulation by means of quantitative measures) and the prominence of quantitative techniques for best practice in risk management has led to an emphasis on technical knowledge over experience.  In my opinion this puts the cart before the horse, and is as useful as hiring a PhD in tennis as your tennis coach, even though the person has never picked up a tennis racquet.

Watches

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I have noticed with interest the rise in popularity of luxury watches.  The exorbitant prices (sometimes into six figures) charged for these watches are justified in large part by their ”complications”.  The thinking goes that the more “complicated” a watch is in its manufacture, the more that collectors are willing to pay.  On one level this makes a lot of sense.  A more complicated watch should in theory perform better, and the craftsman who took the extra time and effort to create the complicated watch should be compensated for their skill and their efforts.

 

Paying a $100,000 or more for a watch however begs the question of what exactly a watch is supposed to do.  A watch of course is supposed to tell time.  Does a $100,000 watch tell time better than a $50 Timex (a watch that “takes a licking and keeps on ticking”)?  The answer of course is no – a Timex tells time just as accurately and with much less required maintenance than a “complicated” watch costing more than a 1,000 times more.

 

Now I do not intend to start blogging on horology, so you may be wondering what this has to do with risk management.  Simple.  The more firms that I work with, the more I have come to realize that firms are putting their faith into having a “complicated” risk management system, rather than a simple one that works.  In other words, companies believe a “complicated” timepiece will help them tell time better than a “Timex”.  “Complicated” does not mean better.  Functional is better.  Is your risk management emphasis on functional or complicated?

Welcome to Phase 2 of the Eurozone Crisis – What are the Risks?

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The Eurozone crisis moved into phase 2 when the contagion spread to Italy, Spain and European banks.  ECB purchases of government debt have provided a temporary solution, but may have political problems and legal implications that make them unsustainable and may include the need for time-consuming changes in the underlying treaties. 

 

Baldwin notes that phase 2 bank problems are entwined with government debt concerns.  The line separating illiquidity and insolvency for nations and banks was crossed last month.  The ECB provided a temporary solution, but the financing facility (EFSF) itself remains insufficient to cover government debt service and banking system assistance/recapitalization.  The estimated facility could need funding well above $1 trillion. The only policy combination that policymakers may agree on, and implemented in a timely manner, involves political cover for ECB bond buying in exchange for credible national fiscal reforms.  The ECB’s actions are unsustainable politically (acting for politicians) and illegal without changes in the underlying treaties. 

 

The near-term need is for ECB to backstop the debt of solvent European countries that would help temporarily stabilize financial markets.  There are two options: either the ECB continues to backstop European bonds with political coverage or leaders create a Eurobond scheme for government debt.  These are short-term solutions, both requiring credible control of new debt issuance.  This can be accomplished if national governments adopt credible fiscal policy (Germany) and/or it is shifted to a supranational level.  The best policy option in terms of timing is ECB backstopping of government debt with political support and domestic fiscal reforms.  But the implementation of fiscal union or Eurobond issuance would take too long. 

 

Given the magnitude of the problem, the current EFSF will not work since it is capped at €440 billion.  The risk is that policy paralysis and contagion may require a more radical solution if prompt action is not taken.  The more likely scenario is for a restructuring of the eurozone and increasing chances of reduced membership until countries get their fiscal house in order. 

 

For more on Welcome to Phase 2 of the Eurozone (EZ) Crisis (VOXEU, Richard Baldwin, Sept. 5^th), follow the link: http://www.voxeu.org/index.php?q=node/6942

Top 50 Risk Management Blogs + 1

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

RSD Solutions has been blogging about risk and the topics surrounding it for a few years now and more recently stepped it up to a regular blog.  While RSD tends to look at finance, the "art" of risk management and a few daily quirks we see in the field or on the net, there are innumerable other areas of risk we do not reach into.  For the benefit of those who work in areas outside of finance or strategic risk management, we at RSD thought you might like to see what other risk blogs are out there.  So,… click on the link (http://www.pmpcertificationtraining.org/risk-management) for the top 50 blogs, as chosen by the good people who bring you the Project Management Professional designation.  It is an interesting list of risk blogs on subjects such as workers' compensation, IT security, and injury prevention plus many more. 

 

Of course, we at RSD do hope you continue to follow us and "subscribe" to our blog.  We endeavor to bring you a variety of contributors who write about risk management issues in both a general and targeted way and sometimes with a touch of humour. And who knows, maybe one day RSD will gain a spot on that list and you will be able to point out how you were an early adopter/follower and trend setter.

The Real Effect of Debt – Rising Systemic Risk

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The Real Effect of Debt (Federal Reserve of Kansas City Jackson Hole Economic Policy Symposium, Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli, Aug. 2011) Cecchetti et al, in a recent paper referenced below, looked at the debt levels and saw in moderate levels, it can improve welfare and enhance growth.  However, high levels can have damaging effects. 

The authors extend the work of Reinhart & Rogoff (2009) on government debt by including non-corporate and household debt.  Based on estimations that include government, corporate and household debt from 1980 to 2010, the authors find that excessive debt levels can have a damaging impact on economic activity.  The safe level for government debt is in a range of 80-100% of GDP.  This was consistent with earlier studies, but the study was limited to advance countries and looked at data from the last 30 years. 

The implication is that countries with high government debt levels must act quickly to address fiscal problems.  Otherwise, these countries can experience a sustained period of stagnation.  Long-term, a fiscal cushion is needed as a buffer for extraordinary events. 

Similarly, the authors find that moderate levels of corporate and household debt can enhance economic prospects.  The results suggest the threshold level for corporate debt is 90% of GDP and the level for household debt is 85% of GDP, although the result is less robust.  Total debt levels in all three sectors have increased from 165% of GDP to 310% of GDP over the last 30 years.  The most striking implication is that advanced countries are in worse shape than previously thought. 

The problem is compounded by future promises made to the people, an aging workforce and slower population growth, and lower long-term economic growth prospects.  As a result, debt rises faster, reinforcing its downward impact while raising the return demanded by investors.  The authors, economists at the Bank for International Settlements, conclude that advanced countries need to act decisively to address fiscal problems before the adjustment costs become prohibitive.

Systemic risk will be elevated for the immediate future until the debt overhang is addressed.  

 

For more information on this, follow the link:  http://tinyurl.com/3lwhww2