Clothing Inflation: Say goodbye to cheap Ts

by Michael Arbow MBA

Partner, RSD Solutions Inc.

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The trickle down from rising cotton prices is now hitting clothing retailers and of course consumers will be next.  In this interesting article from the good people at the Guardian newspaper in England the view from some top retailers is that the day of the cheap T and jeans are over.  Material manufacturers have absorbed some of the price increase in cotton and now it is time for retailers as they stock up on next season’s fashions.  Unfortunately upward price pressure on cotton looks set to continue as floods in Queensland, Australia will add further strain on the global supply of cotton.  One British fashion retailer expects clothing inflation to last till 2014.  The question to be answered by management at clothing retailers and those firms in the wholesale garment industry is: will their firm’s risk strategy allow them to last till then?

http://tinyurl.com/2aquvk8

Grade 6

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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As professionals we are always asked to volunteer in some way or other at school.  One of the most dreaded tasks is to explain what you do.  (Try explaining trading credit derivatives to a group of 9 year olds.)

A famous physicist (I believe it was Richard Feynman) once claimed that if you can explain what you are working on to a child in grade 6 then you do not really understand what it is that you are working on. 

Can you explain the risk management function in your company to a child in grade 6?

Thermostats Not Thermometers

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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Marketing and change guru Seth Godin has this crazy idea that the world needs more thermostats rather than more thermometers.  I agree.  Is your risk management team a thermostat or a thermometer?  I trust that question makes sense to you.  Does it make sense to your risk department?  It didn’t make sense to buggy-whip manufacturers at the turn of the century.

The Perfect Calm

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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November 19, 2010

The past three years have been the perfect storm for financial institutions in terms of their risk management.  Chaos (folly) seemed to be the operating mode during the height of the financial crisis.

What about corporate financial risk though?  It seems to have been lost in the shuffle of the daily business news and perhaps understandably so.  Relatively speaking, exchange rates have been calm – although the recent saber rattling about currency wars might be shifting.  Interest rates for most of the world were at record lows before the crisis and, since, central banks have been playing a game of limbo dancing to see how low they can drive their domestic rates.  It seems that only commodity prices and perhaps demand have been relatively volatile.

Has the recent past then been a case of the perfect calm for corporate financial risk?  Will the lessons learned from the financial institutional mess translate to the corporate world?  (Were there lessons learned from the experiences of the financial institutions?)  One thing for sure is that the road to recovery (hopefully there will be a road to recovery) is likely to be interesting risk wise.

Fuzzy Or Garbled

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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Just finished reading an older (1997) book called “The Universe and the Teacup” by K.C. Cole.  She made an interesting point in this very readable and entertaining mathematics book about how “fuzzy logic is associated with garbled thinking”.  Fuzzy logic of course is a branch of mathematics that does not subscribe to the normal black and white thinking that we have commonly come to associate with mathematics.  Fuzzy logic, which has many wide-spread practical applications, basically asserts that while some answers and measurements are more correct than others, there is not an absolute value or answer to some questions and equations.

The interesting thing about this is that when you think about it, most of your daily actions are based on fuzzy thinking.  How did you decide what to have for breakfast this morning?  How did you decide what e-mail you would open up first?  When asked by a colleague how your day was going, how did you decide to respond?

Fuzzy logic is not garbled thinking.  Fuzzy logic is reality.  Perhaps it is our insistence in risk management on strict black and white absolute value thinking that is garbled.

Billy Collins

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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Mathematician Keith Devlin is quoted in “The Universe and the Teacup” by K.C. Cole as saying, “To really understand what it means to think rationally, mathematics will need to team up with psychology and sociology, and perhaps even biology and poetry.”

This was very similar to a presentation I made earlier this summer to the CFA Society of Toronto on New Axioms, Assumptions and Paradigms of Risk Management http://www.rsdsolutions.com/quotrisk-management%0Bnew-axioms-assumptions-and-paradigms, (see in particular slide 37), and a different presentation I made on “Sociological Finance” to the 2010 CFA Pension Conference in Toronto.

Risk management, as well as mathematics, needs to learn from sociology and psychology.  To be clear I am NOT talking just about behavioural finance.  Sociology, psychology, and biology tell us about complex systems and how complex systems and human interactions evolve (become emergent to use the technical term).  What is needed is creative people who are not hung up with the mathematics of risk management.  The confines of mathematics have taken us a long way in risk management, but it is time to realize that we are asking too much of the mathematics and the mathematicians.  Perhaps it is even time for risk departments to employ poets.  I wonder if Billy Collins is interested in doing some moonlighting.

Surfing or Passion?

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

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Last week I read Yvon Chouinard’s book “Let My People Go Surfing”.  Yvon is the founder of Patagonia clothing company and I think I may be the last business person on the planet to have read his book.   In case you have not read it, it is the story of his founding of the company and the many path-breaking business principles that he and his associates founded, such as on-site day-care and flex time, etc. etc.  The book also outlines how he, his company and his associates became passionate and active supporters of environmental causes.

The book is a fascinating case study in how to run a company.  So many of the business practices that Yvon and his partner’s started are now common-place benchmarks – but they were anything but when he first introduced them.

When the company first started making mountain climbing gear, they warned their customers not to expect fast service during mountain climbing season as they (the founders) would be out mountain climbing rather than filling customer orders.  This passion for activity and passion in their chosen field, rather than following best business practices turned out quite well for them.  The title of the book of course refers to the fact that employees are encouraged to go surfing when the conditions are good, rather than wait until the 5 o’clock whistle has blown.

Yvon is obviously a very smart but also a very charismatic person.  (I assume he is charismatic from the way that the book was written.)  His company is a blue-print for many others that have tried to follow in his footpaths.  His book is also a popular read amongst B-school types. 

This brings up an interesting question.  Is Patagonia and Yvon successful because of his passion for mountain climbing and surfing, or is he successful because of his passion, or is he successful because of his education (he basically has no formal post-secondary education)?  Can risk managers be successful in the same way?