Benevolent governments let us keep some of our earnings!

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Over the weekend, I heard the UK government minister who is number 2 in the treasury, argue that a certain tax deduction for pension contributions should be limited as this would save the government significant expenditure.  This is the first time I have heard a tax increase effectively described, not as a tax increase, but as a reduction in government spending.  The logical extension of this is that any tax rate below 100% is government expenditure.  In other words, the government is entitled to everything you earn and is incurring an expense in giving some if this back to you.  How generous of them!

 

At the same time, while there used to be a clear distinction between tax avoidance (legal) and tax evasion (illegal), politicians are now describing the former as being part of the latter; at least morally.  (Somehow I got the words “politicians” and “morally” in the same sentence!)  We keep getting told how many billions in tax large companies and rich people are stealing from us.  Of course there is no explanation of the nature of the amount of tax avoided, or whether or not such deductions are desirable.  Is it deductions for capital expenditure for example?  Or R&D?  Or is it all more about votes with little regard for substance or truth?

 

Is political spin spinning dangerously out of control?  More importantly, are you examining your tax risk?  Cash strapped governments may be keen to trumpet lower or stable headline rates out one side of their mouths, but what they giveth with the right hand ……

Faces

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Faces are complex.  Recognizing a face is a very difficult task for a computer – much more difficult than recognizing your retina.  Faces convey a ton of information.  They convey emotions.  They also convey understanding or lack of understanding.  Faces are complex (not complicated) and thus are not easily codified.  That is why a computer cannot easily deal with them.

 

Scientific studies have shown that we pay up to 8 times more attention to faces than to objects.  I think that is interesting in a world where faceless social media is so prevalent. 

 

Now, here is a question – do risk managers pay more attention to faces or to data?  Ha!  There is not a single risk management Master’s program anywhere that talks about the importance of faces (or the importance of people for that matter).  A long time ago in this blog series, I blogged about risk management by walking around (RMBWA).  We need more risk managers to manage by reading and understanding faces.  Let the computers take care of the data – let the humans take care of the humans.

Is it time to reassess your hedging practices?

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Do you have Euro exposures?  Are you worried about the Euro exchange rates?  Are you concerned that volatility will also affect other currencies, perhaps through flight to quality? 

 

As a result, are you scrambling around looking for additional hedges?  If you are, then you should consider if what you are doing is more speculation than hedging.  You should also consider a thorough review of your hedging policies and practices.  A well-conceived hedging policy should be designed precisely for volatile situations such as this and to allow time for longer term adjustments to be implemented. 

 

That is not to say it shouldn’t be constantly reviewed and updated.  It should be.  However, it should not be prone to significant, sudden and little considered changes in times of volatility.

Fiscal Adjustment: Too Much of a Good Thing – Lessons for Risk Management

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

The purpose of models is not to fit the data, but sharpen the questions.

                                                        (Samuel Karlin)

 

Carlo Cottarelli, in a VOXEU communique “Fiscal Adjustment: Too Much of a Good Thing” dated Feb. 8^th notes that a sharp reduction in budget deficits in certain circumstances can actually increase risk.  This raises a question when we attempt to mitigate risks: Does a rapid adjustment actually increase risk? 

 

Almost everyone agrees that the fiscal accounts of several advanced economies are in bad shape and need to be strengthened.  But how fast should the adjustment be in the present circumstances.  At time over the last couple of years, the IMF has called on countries to step up the pace of adjustment when they were perceived as moving too slowly.  The IMF has argued that countries should reduce public-debt ratios through a gradual and steady process.  However in the current environment, some countries are moving too fast. 

 

The IMF Fiscal Monitor (Jan. 2012) indicates deficits are projected to fall by 2% of GDP in 2011-12 in the advanced economies, 3% in Eurozone countries.  Adjustment is reasonable in a good growth environment, but in a weaker macroeconomic environment bringing down this quickly can increase risk to the economic recovery.  IMF research suggests fiscal adjustment that lower debt ratios and deficits can reduce government bond spreads when the impact on growth is limited.  Conversely, when tightening fiscal policy reduces growth, bond spreads can widen, especially with weak growth and fiscal tightening is large.

 

In advanced countries with limited financial options, deficit reduction is the best alternative.  Structural reforms to boost competitiveness and growth along with deficit reduction are critical, but take time to work.  It is important for countries to adjust at an appropriate pace and have adequate financing to boost confidence as market perceptions adjust (such as through the European Financial Stability Facility and the European Stability Mechanism).  Markets eventually respond to better fundamentals with stronger growth and reduced deficits, but this can take a while. 

 

If growth slows, countries should avoid further fiscal tightening.  Countries with flexibility, such as some Eurozone members with lower interest rates, can slow the pace of deficit reduction.   The projected 2% reduction in the U.S. deficit in 2012, the largest in forty years, is excessive.  It is more important for countries, such as the United States, to formulate credible medium-term adjustment plans and gradually reduce the deficit.  The adoption of credible medium-term adjustment plans, which is missing in many advanced countries, would reduce uncertainty.  The cost of policy uncertainty is high, especially if growth starts to slow.

 

Can we learn anything for risk management?

 

For more on this follow the link:  www.voxeu.org/index.php?q=node/7604

 

 

 

Tom Coughlin

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I am writing this blog before the Super Bowl starts – in fact a couple of days before the Super Bowl starts.  Thus by the time you read this blog it may be totally out of date.  But I will take that risk as I suspect you are tired already of figure skating and already longing for next football season to start.

 

As with every Super Bowl there is no end to the media buildup.  The articles really become quite stupid, and just like reality TV, the more stupid the reporting becomes the more interesting it becomes to look at.

 

Killing time this week while I should be doing something else (although I am writing this blog so that should count for something) I read an article by Joe Posnanski on cnnsi.com.  The article was on “Why Tom Coughlin has become such a good coach”. 

 

One of the players interviewed for the article (Giants linebacker Michael Boley) came out with this gem; “… one of the things that Coach Coughlin always talks about is adjust and mystery.” (Italics added for emphasis.)

 

“Adjust and mystery”.  What a great way for a risk manager to be labeled a good coach.

As Downside Risks Rise, Fiscal Policy Has To Walk a Narrow Path

by Don Alexander, MBA

Assocate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The IMF noted in its latest Fiscal Monitor (24^th Jan.) that countries continue to make progress on deficit reduction. 

Fiscal deficits in many advanced economies fell significantly during 2011, and most plan substantial adjustment this year. The pace of fiscal consolidation may slow as too rapid consolidation could exacerbate risks.  Continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment.   Conversely, too rapid a consolidation in a slowing growth scenario could exacerbate risks.

 

Given the large adjustment already in train this year, governments should avoid responding to any unexpected downturn in growth by further tightening policies, and should instead allow the automatic stabilizers to operate, as long as financing is available and sustainability concerns permit. When economic conditions deteriorate they can cushion the impact on demand.

 

Countries with enough fiscal space (the room in a government's budget that allows it to provide resources for a desired purpose without damaging the sustainability of its financial position or the stability of the economy), including some in the euro area, should reconsider the pace of near-term adjustment. At the same time, some countries—notably, the United States and Japan—need to clarify their medium-term debt-reduction strategies. Adjustment should be supported by the availability of adequate nonmarket financing when, as in the euro area, market confidence is slow to respond to reforms. 

 

Some emerging economies with low debt and deficits and declining inflationary pressure have room to make policy more supportive of economic activity. Others have little space for more than the operation of automatic stabilizers if growth slows.  Emerging economies highly dependent on commodity revenues and external capital inflows also need to consider the risk of a large and protracted decline in these flows.

 

Corporations, like governments, should have contingency plans for meeting funding requirements as part of their risk management plans.

For more on this follow the link: www.imf.org/external/pubs/ft/fm/2012/​update/01/pdf/0112.pdf

 

 

 

 

 

Hippocratic Oath

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

While doing research for my forthcoming book on complexity I came across this modern translation of the Hippocratic Oath.  This of course is the famous oath that medical doctors take when they start their practice.  I thought it was interesting for this risk blog.  Before I explain why, simply read through the oath that I have clipped verbatim from the Wikipedia page on Hippocratic Oath.

A widely used modern version of the traditional oath was penned in 1964 by Dr. Louis Lasagna, former Principal of the Sackler School of Graduate Biomedical Sciences and Academic Dean of the School of Medicine at Tufts University:^[8] 

I swear to fulfill, to the best of my ability and judgment, this covenant:

I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.

I will apply, for the benefit of the sick, all measures [that] are required, avoiding those twin traps of overtreatment and therapeutic nihilism.

I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon's knife or the chemist's drug.

I will not be ashamed to say "I know not", nor will I fail to call in my colleagues when the skills of another are needed for a patient's recovery.

I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given to me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.

I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person's family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.

I will prevent disease whenever I can, for prevention is preferable to cure.

I will remember that I remain a member of society with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.

If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest