What goes up must come down (please, please, please)

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Over the centuries, our world has experienced many financial bubbles, most recently from real estate.  Most of these bubbles have been burst in large part by some increase in supply, either through improved crop yields or just building more homes or silicon chip factories.  However, as the emerging economies become wealthier, their populations healthier, the ability to continue to limit price increases by upping supply has diminished.  This is particularly so in the world of finite commodities and even more so in oil.  Recently, the International Energy Agency stated that even with soft global economic growth, the oil producing nations will find it difficult to meet the world’s demand requirements of 89 million barrels a day in the second half of 2011.

 

The result of this supply constraint – which cannot be remedied in weeks will be the pushing up of oil prices (Brent crude has been trading at triple digits for almost the entire year).  Motorist will feel the pinch immediately and the rest of society will feel it in the following months as wheat prices (50% of which is derived from the price of oil), transportation etc. move up or possibly down in the case of houses in the exurbs.  For those living in the risk world the demands for hedging will possibly move from idea to necessity as business’s struggle to lessen the pace and impact of another wave of commodity price increases.  I believe that it will be the pro-active risk managers that are acting now that will survive and possibly thrive in this new environment.  Hopefully you will be one of them.

 

For more Jeff Rubin’s thoughts on oil prices, click on the link:

http://tinyurl.com/5wnlwdb

Red Rover. Red Rover. We calllll,… the Risk Manager over

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

A few months ago, I wrote a blog about the closing of toboggan hills as a way that towns in the US were attempting to reduce their risk exposure.  Well it seems that some government officials in New York state want to reduce their risk exposure in the summer as well.  The target this time is summer day camp games such as Red Rover (a game I played endlessly growing up in Toronto), kickball and of course the most dangerous – tag.  Unlike the toboggan ban, cooler (?) heads have prevailed and New York state’s children will still be allowed to get fit, learn strategy and share laughs while playing the aforementioned summer games. 

Perhaps what the State Sen. Patricia Ritchie of Watertown may have unconsciously realized is a phenomenon in risk management we call risk homeostasis: that is, by reducing risk you actually increase risk taking behavior.  In this case, with the opportunity to playing tag removed from day camp activities what activity would replace it and could it have been even more risky.  Of course the other problem Sen. Ritchie may have seen is that the cost of reducing playground risk may have been greater than the benefits of happy, out of breath children. 

So the question is, is your organization a victim of risk homeostasis?  In other words have you reduced risk to such a high level of confidence that you are now blind to the new risks that that feeling of safety introduces?

 

For more on risk in the playground click on the link to the NBC story:

http://tinyurl.com/3nu4xvn

Déjà vu. $4.00 gas ($1.40/litre in Canada) looms on the horizon

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

If you love roller coasters, 2011 is certainly setting itself up for a wild ride stemming from commodity price volatility.  Events in the Middle East, the US Federal Reserve's quantitative easing and globally low interest rates are providing an unstable combination of market volatility triggers.  Of note recently is the upward march of oil with Brent now trading above $105 USD.  Predictions from the markets of a 10% price increase in gasoline for the summer are given a 1:3 and prices of $4.00 at 1:10 (in California it may be occurring as this blog appears).  For those folks that drive to work and for those firms that have energy as one of their main cost drivers how do you plan cope – what is your risk management strategy to retain as much of your income as possible and thus keep cost down?  One analyst has noted that between $3.00 and $4.00/gallon "real pain" hits the US consumer. What is your company's tolerance?

 

For a read of the original Fortune article follow the link:

http://tinyurl.com/6zq7xm9

 

The (Forgetful) Dismal Scientists or “Yesterday’s logic is illogical today”

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

As the US Federal Reserve Chairman’s own version of the QE2 sets sail, commodity prices continue their upward move. The upward march in oil was initially caused by the increase in demand for product as world oil consumption moved from about 88 million barrels/day last year towards an expected 90 million this year. More recently, Brent crude has been pushed above $100 because of increased uncertainty of continued delivery from the Middle East.

Now those of us with long memories, say 12 months, will recall that the dismal scientists as economists are affectionately (?) known, predicting that the next recession would start when oil trades above $100 USD/bbl. Interestingly, the Street has not renewed their talking of this outcome but rather they focus on the renewed and continued strength of the US economy. It is strange that all the arguments Street economist gave about the effects of triple digit oil and $4.00/gallon gasoline 12 short months ago are no longer gain attention.

This blog raises 2 points:

1. It takes a paradigm shift for yesterday’s logic to be illogical or have reduced impact. Effective risk management must be dynamic but not at the expenses of forgetting the past.

1. It looks like price volatility will continue in 2011 and downside risk is starting to appear.For corporate risk managers: what are you doing now that the likelihood of downside economic risk is increasing or are you seeking safety in the crowd?

In fairness.  I caught the following (taken from the Globe and Mail) just prior to posting:

"The International Energy Agency’s (IEA) executive director Nobuo Tanaka said prices above $100 per barrel for the rest of the year could drag the global economy back into a repeat of the 2008 economic crisis."

If art imitates life; call your risk team. JR is back.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Last week it was announced that Larry Hagman had agreed to return to Southforks Ranch and reprise his role of JR Ewing. Back in 1979, I was an economic student at the University of Western Ontario, who with my Ivey Business School friends would gather on Friday night before attending any party or social activity to watch the TV soap opera Dallas and cheer for the exploits of JR. During the first 5 years of the show the price of oil reached historic high levels (inflation adjusted) and was 63% higher on average than the previous 5 years, interest rates spiked in Canada up towards 20% and food prices reached historic levels. And now we hear that JR is coming back, ranch and all. 

How interesting that as JR makes his comeback, Brent crude is at triple digits, interest rates are rising (slowly at the moment), inflation is being forecasted and commodity prices are on a tear. JR will surely be having a déjà vu experience, feel right at home and be glad it is not a dream. I wonder if those at Western studying economics and business will be cheering him on this time.  As for your risk team – it might be time to get netflix for their office. 

For more on the Dallas’s rebirth follow the link:

http://tinyurl.com/5wl2x2a