RSD Solutions - Blogs

A striking feature of recent equity market volatility is that politicians and government bureaucrats are making the news. It seems that statements about bailouts, restructuring, budgets and regulatory reforms are driving stock market volatility. Policymakers’ and bureaucrats choices are dominating headlines in the global crisis.

Policy uncertainty and the stalled recovery (Scott Baker, Nicholas Bloom & Steve Davis, VOXEU, October 22^nd). The authors distinguish between economic uncertainty and economic policy uncertainty, constructing an index to measure policy-related uncertainty and argue that reducing policy uncertainty would add dramatically to job creation. Prior to the financial crisis of 2008, stock markets moved in response to economic numbers such as GDP or employment and corporate earnings. But today, it is politicians and government bureaucrats. They cannot agree, generating massive economic uncertainty. This policy uncertainty is a key factor in stalling the recovery and contributing to the risk of a double dip.

Baker et al constructed a new index of US policy uncertainty by combining three types of information: frequency of articles that reference economic uncertainty and policy, references to expiration of various federal tax code provisions and disparity among forecasts about inflation and government purchases of goods and services. In addition, the authors are able to separate an indicator of economic uncertainty from that of policy uncertainty. They note the key drivers of policy uncertainty are dominated by monetary and tax issues.

When businesses and investors are uncertain about taxes, health care costs, budget prospects and regulatory initiatives, they adopt a cautious stance. They find it costly to make a hiring or investment mistake, waiting for calmer times to expand or consider riskier investments. As a result, the recovery never takes off as business remains cautious on making investments in capital goods, research and worker training – key determinants for long-run sustainable growth.

Investors remain on the sidelines in “safe” investments avoiding risk.

The lessons for European and US policymakers are clear. They need to take action that will reduce policy uncertainty for business and investors.

For more on this follow the link: www.voxeu.org/index.php?q=node/7137

Thursday, July 21, 2011

Continuing uncertainty and volatility – are you immune?

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

info@RSDsolutions.com

Moody’s has placed its Aaa U.S. government bond rating on review for possible downgrade. Financial institutions linked to the government rating such as Fannie Mae and Freddie Mac are also placed on review. This is because the federal debt limit may not be raised in time leading to default because of a late interest or principal payment. Most assume default would be of short duration but such talk would have been unthinkable until very recently.

Across the pond, it was assumed that markets would move their attention from Greece onto Portugal and Ireland. However, the focus has shifted to the much bigger fish of Spain and Italy with sharp increases in their debt yields. European politicians are still muddling around trying to find a way to get out of the mess without creating a formal default on debt where there is no foreseeable means of repayment – at least for Greece and likely Portugal. But there is stiff resistance in Germany in particular to bail out private investors in the troubled sovereigns at the expense of domestic taxpayers. Of course politicians everywhere usually want to win the next election above all else so they have one eye on how to fix the unthinkable and the other on opinion polls.

Whatever happens, we have the recipe for a degree of turmoil. Not just for the countries directly involved but turmoil which could easily spread to exchange rates, interest rates, commodity prices and the global economic outlook generally. So if you have exposures in any of these areas have you identified, quantified and instituted robust risk management strategies? Have you evaluated and updated your existing risk management processes recently, possibly with an independent external evaluation? Isn’t it better, cheaper and more comforting to fix the roof before the storm?

Sunday, May 29, 2011

Wobbly dollar …. wobbly America

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

[1] www.reuters.com/article/2011/05/25/economy-un-idUSN2511223620110525

info@RSDsolutions.com

Forget Greece, Portugal, Ireland and Spain for a moment. Reuters[1] reports that the United Nations warns of a possible collapse of the U.S. dollar. No wonder! And no wonder S&P placed a negative outlook on U.S. government debt! Such public utterances were inconceivable in the very recent past, which indicates just how fast things seem to have got out of hand. The U.S. has hit its $14.3 trillion federal debt ceiling (close to 100% of GDP and close to post second world war levels) and there is now a game of political chicken going on. Some accounting contortions are allowing ongoing funding of expenditures but this can only be very temporary.

The level of spending cuts being mentioned falls far short of dealing with the deficit, let alone the gargantuan mountain of debt. Meaningful tax increases don’t seem to be on the table. Add to this debt at State and municipal level, the demographic time bomb of pension and health care liabilities, etc., and we have the script for a disaster movie. With debt at existing levels, even tiny increases in interest rates will lead to huge increases in interest expense. Currently, U.S debt yields are slightly above those of Germany. However, the more scare stories there are, the more this gap is likely to rise. Canada fell into this trap in the early 1990’s when it found out just how insidious compound interest is – spending cuts were more than offset by year over year increases in interest spending. And the latter cannot be cut. The more it rises, the more spending elsewhere must be cut and the fewer options are available.

Unfortunately, due to the staggering size of the problem, it has the potential to affect almost everyone on the planet but most of us can only look on with astonishment. We don’t have a say in any of this. Foreign currency exchange rates and interest rates have the potential to be very volatile for some time to come.

There is not a lot that we as individuals or companies can do but there are some things. Companies should urgently re-evaluate their foreign currency exposures, even if they have done so recently, and revisit governance and risk management strategies for hedging and mitigating such exposures. They should also examine current and future interest rate / capital structures. It is imperative to have strong handle on these risk exposures and perform extreme scenario analysis.

Friday, April 8, 2011

In the tank or on the plate? Bioenergy vs. Food. It's game on.

by Michael Arbow, MBA

Partner, RSD Solutions Inc

http://tinyurl.com/3b6tfgz

info@RSDsolutions.com

Jeffery Rubin in his book “Why your world is about to get a whole lot smaller” talks about triple digit oil prices and the effects this will have on our economies one being the push to bio-energy; energy derived from plants such as corn, sugar cane, palm oil. Interestingly as the price of these commodities has risen the Chinese have sought out other plants capable of producing an oil substitute. They have recently moved to and focused on cassava, a tropical plant whose root we use for animal feed, tapioca pudding and ice cream. While the ingenuity is admirable the effects of this and new government regulations forcing the consumption of bio-energy is having distributing ramifications namely a growing trade-off between crops for fuel or crops for food. The upshot of this is an unstable equilibrium in food commodity prices which looks set to continue for the foreseeable future.

What all this means to the food processors and bio-fuel makers is that price volatility may become the new normal and having a better economic understanding of price movement causality may be beyond the skill sets of the accounting department and conceivably the more traditional risk management team.

For more on the food/energy trade-off click on the link to a New York Times article:

For more on Mr. Rubin’s thoughts on energy prices, click on the link:

http://www.jeffrubinssmallerworld.com/blog/

Monday, April 4, 2011

Price increases begat production increases begat production decreases begat,…

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

http://tinyurl.com/4s7ue63

First year economic students need look no further to witness the basic world of supply and demand than in the world of cotton. With historic high prices of cotton recently reached due to 3 years of poor crops (fall in supply) and increased wealth in the emerging economies (increased demand) the expected follow through is happening namely farmers globally are planting more cotton. Assuming the weather co-operates the world store of cotton will soon start to increase – cotton commodity prices are already reflecting this possible reality. However, the story doesn’t end there. With world population growth – another 40 million in Asia alone over the next 4 years, wealth creation compliments of the US Federal Reserves quantitative easing the rate of increase in the demand for soft commodities (food) is outstripping productivity gains for the foreseeable future. The result: the shift to increased production will mean a decrease in production of another soft and with that the price of that soft will increase.

What does this mean in the risk world? For suppliers and users of soft commodities you are in for a wild and volatile ride and that is before natural disasters enter the picture. The world has entered a new period of price movements which are more inter-connected and caused by shifts in production from one commodity to another rather than just meeting demand through increased planted acreage. This, I believe will lead to greater price volatility and threaten the existence of firms not adapting through more sophisticated risk strategies. It is time to re-think the “normal”.

For more on the price of cotton follow the link to this Globe and Mail article:

Friday, March 11, 2011

Volatility can hurt – personally or corporately

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

Personally I am short Sterling and long U.S. and Canadian dollars. Therefore I am intimately, sometimes painfully and always nervously acquainted with the recent volatility of currency exchange rates. I wake up in mornings wondering if next week’s credit card bill or next month’s property tax can get paid.

Against the U.S. dollar Sterling is way off where it was a couple of years ago but still significantly higher than 8 years ago. The strength of the Loonie (Canadian dollar) is a blessing that I currently enjoy. However, whenever news like the latest inflation figures come out (not good) or Gaddafi kills civilians, I either take a deep breath or heave a sigh of relief.

So far I have kept out of the local mission but my concerns are a microcosm of those that all treasurers should be familiar with, whether it is currency volatility or related to commodity prices, interest rates or any other such variable.

I feel comfortable when I manage or hedge my position in some way. This might be converting in advance of my needs when rates are favourable or incurring an expense in dollars or gaining some income in sterling. This is short term. In the longer term, I might take the option I have to move back to North America!

I do know that I am aware of my position and risks and am doing just about everything I can and that I am constantly reassessing and looking for better ways to do things. I am also often seeking other views and ideas.

The question every financial executive and treasurer should be asking themselves is do they have the same satisfaction that they know their risk exposures and are managing them the best they can?

Tuesday, March 1, 2011

Lamborghini sales exceed forecasts in Saskatchewan and Iowa: WSJ June 2015

by Michael Arbow MBA

Partner, RSD Solutions Inc.

http://tinyurl.com/4m9kexf

Difficult to believe? This “news” headline maybe more the reality than you think. Followers of this blog know that we have blogged about the new normal of high and volatile agricultural commodity prices consistently since the beginning of this year. Indeed in the first two months of the year some basic commodities have experienced some wide swings, with agriculturals generally rising and industrials generally falling (an economic slowdown warning sign?). However, according to American Jim Rogers of Rogers Holdings in Singapore we are still in the early stages of the bull market in agricultural commodities and have a long way to go to reach inflation adjusted historic peaks. His arguments are sound; increased wealth in the emerging economies, erratic weather patterns and more people. In the longer term Mr. Rogers foresees “farmers driving Lamborghini’s and stock brokers working for them” for wealth will be created down on the farm once again. It is perhaps not surprising that the world's uber rich are buying up agricultural land.

If you work for a firm that represents commodity end users ask yourself; How has the corporate risk management strategy changed to reflect this new normal of volatility with the added long term uptrend in commodity prices?

For more on commodity prices in perspective from CNN Money follow the link below:

For more from Jim Rogers follow the link below:

http://www.bloomberg.com/video/67100110/

Sunday, February 27, 2011

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

by Michael Arbow MBA

Partner, RSD Solutions Inc.

http://tinyurl.com/6zq7xm9

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:

Thursday, February 24, 2011

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

by Michael Arbow MBA

Partner, RSD Solutions Inc.