The Market Equation

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The Market eQuation (MeQ):

Today we are commencing our investigation and outreach to discover what we will call the Market Equation.

Basically the idea is to come up with a mathematical equation and rating or ranking system to assess the state and status of various markets.

Whether this will lead to a theory of Markets that can compete with some of the other theories in existence is open to debate.

The basic premise is this:

There should be a methodology to access the Openness and Fairness of any given market versus other comparable markets.  This specific ratio or result should therefore determine the individual participant’s level of engagement and commitment to that specific market.  The result should also be able to be repeatable over time in order to elicit trends and movements of particular markets relative to each other.

The basic equation can be expressed as MA²R⁴K²E³T³ = OF outcome (Open & Fair).

Therefore:

OF = (A)² x (R)⁴ x (K)² x (E)³ x (T)³

And derives from the Market Equation Table listed below:

The Market Equation Table

  

O	Open
F	Fair
M	Multiple
A	Accessible	Adjoining
R	Random	Rapid	Regular	Repeated	Regulated	Risk
K	Complex	Connected	Competitive
E	Effective	Efficient	Equilibrium
T	Technology	Time	Trade

Key:

Subjective measure

Objective (External)  measure

MA²R⁴K²E³T³ = OF outcome

Therefore: OF = (A)² x (R)⁴ x (K)² x (E)³ x (T)³

The subtler reader might already have seen through this equation.  Because by dropping the M (which will always be 1) the letters that remain result in the word raket if unscrambled which in effect is:

RACKET or not?  With the additional C being the complex bit so ultimately the Market Equation becomes a COMPLEX RACKET.

theMarketSoul ©2011

A Storm in a 'Tea' cup

Never resist the temptation to start a discussion with a pun.

In our previous article we highlighted the ‘battle royal’ on Capitol Hill to get a proposal agreed to address the possibility of a US Treasury default, whether actual or technical on or after 2 August 2011.

So the Republicans could not muster together enough support on Thursday to ensure safe passage of the bill to the Senate, where it looks likely to be overturned or severely amended in any case.

There is obviously a lot of back room dealing going on over this and analysts in Europe (taking their beading eyes off the Greek and now Italian and Spanish dominoes) have started to pay attention to the goings on across the pond.  We heard one commentator mention the fact that the USA’ reputation has already been affected by this, irrespective of the fact that a default occurs or not.

So there you go.  The fringe minority floating in the ‘Tea’ cup with a lack of the ability to look over the brim of that particular cup, might in fact achieve their overall objective of raising their own profiles, albeit at the expense of the nation’s reputation and standing as a pillar of the international capital market.

Look, we are not choosing sides here, because at the heart of the matter is the fundamental principles of civil society versus the public sphere debate raging and continuing to rage in the USA.

In our next article we will highlight some of the basic differences in opinion and views on the size and influence of government in the USA versus Europe, via the Rahn curve analysis.

Until then, it is tick, tock; tick, tock whilst we await the vote and subsequent consequences and fall-out from the US debt ceiling debate.

theMarketSoul ©2011

Hold your nerve!

It is a confidence thing.

We are so very, very close to seeing and experiencing another colossal collapse in confidence in the world’s financial system.

This time it is driven by the ‘US Debt Ceiling impasse’.  A steady flight to gold has been taking place over the past few months and even though most informed commentators believe the  US Treasury ‘default scenario’ is not likely to physically occur, the mere threat of a default has not yet managed to ‘focus the minds’ of the US congress house of representatives locked in an ideological battle over fundamental economic policy and direction.

At stake here is a scenario that will make the 2008 financial crisis wane into insignificance, should the threat of a US Treasuries default actually play out. 

Yet, very few mainstream headlines outside of the United States have been published about this potential catastrophic event.  And we are only a few days away from the edge of disaster (Default D-Day is chalked up for Tuesday 2 August 2011) and the Washington Post has a default clock ticking down on this deadline web site.

If a default actually occurs, confidence in the international capital and currency markets will have been breached and no serious commentator has yet fully quantified or effectively mapped out the potential consequences of this potentially disastrous collapse in capital market confidence.

The only significant contribution we can make at this publication is to cross our fingers, hold as much in cash and liquid (non US dollar) assets and hope that some real focus and a meeting of minds occurs before Tuesday 2 August 2011 on Capitol Hill.

theMarketSoul ©2011

Risk-Based Change Management

Introduction

Cost cutting has been a priority in the private sector, ever since the financial credit quake started in 2008, yet the words currently are ‘austerity measures’ and budget cuts in the public sector.

Most of the cost cutting in organisations has been along the tactical and operational lines and we believe that in the ‘age of austerity’ we are within, revisiting cost cutting from a more strategic perspective would add significant value to both the private and public sector organisation alike.

A Zero Based Approach

Within most organisations budgeting and budget setting is an incremental affair.  It is very much focused on a business as usual mentality and the status quo is rarely questioned or scrutinised with any level of depth and rigour, as long as the financial plan delivers the numbers senior managers anticipate and the investor community expects.

Yet this is exactly the kind of ‘tyranny of the status quo’ that has destroyed a significant proportion of value in organisations over the past two years.

A zero based approach addresses some of the short comings associated with incremental budgeting and financial planning.  It is by no means a perfect replacement for incremental budgeting, it cannot address all the strategic issues and it is fraught with its own pitfalls, yet we assert that a focus on some recent lessons learnt in organisations that have implemented cost cutting via a zero based approach can add value to our clients budgeting and financial planning systems.

Zero-based budgeting can be summarised as the process of preparing financial plans from a change perspective, normally building the financial plan from scratch (the zero base), viewing the process as if the organisation has not delivered the particular service of product in focus before.

Some of the lessons learnt are briefly listed below:

• Many versus few – Instructions and the interpretation thereof by individual users
• Focus on the Full Time Equivalents (FTEs)  and people cost early in the process
  
  
  • Check Payroll Data integrity
  • Understand thoroughly the organisational restructuring issues (get Human Resources understanding the financial budgeting language early in the process)
  • Ensure a distinction between building a Business Case versus Budgeting
  • Confidentiality (how, who, what and staff and managerial morale implications)
• Education process and ensuring skills, knowledge and information convergence to ensure the budget is delivered as a value added ‘conversation’
• Appreciation of management style versus timetable for budget delivery
• Over communicate (more information is better than more or inadequate assumptions)
• Concentrate on the budget story (strategy and changes) and ‘hang’ the budget numbers on the end of the storyline (Making the budgeting process less ‘threatening’ to budget owners)

These lessons can be separated into two distinctive themes, namely the Human Capital dimension and the Systems issues.

Themes to be aware of

As far as the Human Capital dimension is concerned the major lesson is to ensure that both the budget holders and prepares are fully cognisant and understand the language of both budgeting and what the inherent risks and concerns around a zero-based approach is.

Key issues and risk are around work stream teams from different disciplines (HR, Finance, Operations, IT and marketing) not always having a common language and frame of references for similar linguistic terms and phrases.  Ensure that potential for misunderstanding the objectives and delivery mechanisms are addressed early in the Zero Based Budgeting approach.

Foster a culture of empathy within the management ranks and never underestimate the emotional impact that getting rid of people can have on both the managers having to make the tough calls and both the staff being called upon to leave and the staff morale of the people earmarked to remain behind and deliver the business as usual processes.

As far as the Systems issues are concerned, ensure that enough time and preparation goes into the planning and delivery of the Zero Based Budgeting mechanisms and tools, as you will be running a process that has not been utilised and thoroughly tried and tested under operational conditions before.  There are risks in the following areas to be aware of:

• Data integrity
• Spreadsheet modelling and calculation errors
• Documentation and the support services (handling budget holder queries and concerns)
• Skills and knowledge of the budget holders and preparers might be limited

Conclusion

As was suggested in the Lessons Learnt listing above, over communicate with managers, budget holders and preparers and staff.  Ensuring that adequate information is made available in comprehensible and non-technical language is the key to success.  Too often we have seen ‘lazy’ and shortcut assumptions being made, when a little bit of extra effort, ‘digging’ and asking the right people with the operational knowledge the right questions would ensure a more robust and rigorous budget.

Finally, ensure that both the process and outcomes are well documented and articulated as they serve as your shield and defence when the reality does not turn out as the best laid financial plan might have anticipated.

We view Zero Based Budgeting as a risk-based change management tool that assists and informs the senior managers in any organisation of the opportunities and risks inherent in designing and building innovative change processes to help add value to the organisation’s overall performance.

At theMarketSoul ©1999 – 2010 we have practitioners available who can assist you on a consultancy basis to operationalise the full 360 degree Financial Management practices most organisations require in order to ensure that they remain competitive, profitable and continue to create value.

Random Collisions of Chance

Chance and spontaneity are two interesting phenomenon required for innovation and creativity.

We were reminded of this in an interview recorded of a LinkedIn executive recently*.  He stated that chance encounters are "where we make some of our most significant connections", be it your life partner, business associates, etc. and that speeding up those chance encounters was one of the fundamental principles and aims of social networking.

That idea struck a chord with us.  Like our free market principle of ‘Spontaneous Order’, random collisions and network creation, leading to opportunity exploitation and ultimately wealth and welfare maximisation is intuitively an attractive proposition.

So, we have the mechanisms in place, with online tools and social networking sites, but how much of this activity is outward focussed revenue and income generating?  What is meant by this is that the revenues are not focussed on increasing advertising and network operator revenues, but individual participant to participant’s opportunity flows.

And beyond building an online presence with followers and individuals being influencers and thought or trend leaders in their domains, how many of us focus on being revenue leaders and wealth and welfare ‘maximisers’ in this space?

Do you have personal metrics of success, which help inform and modify and moderate your personal behaviours to ensure that you maximise your ‘Return on Ether-time’? [ROET]

Maybe it is well worth a thought because in the neo-classical world of market participation, if you aren’t in the market and making a living (or a half descent living) from it, you might get marginalised and lose out on the wave that hit us when Web 2.0 arrived.

theMarketSoul ©2010

* We are searching for a link / reference to this interview.  Once we have found it, we will update this post

End to End or Integrated systems and thinking processes

Silos. 

We hear this management buzz word quite often touted in office settings, and conferences in the media, etc.

We argue today that silos are cultural norms.  They are national cultural models possibly endemic of certain national cultures.  We certainly have no empirical evidence for this, so this is pure opinion and conjecture on the part of theMarketSoul contributors.

In our previous article titled Increased Friction Costs we briefly touched on the issue of processes being back to front in Britain.  Processes are very much driven by the national ‘Carrot & Stick’ approach, rather than an enablement, ‘build and they will come’ approach where solutions are found and embedded then suitable and profitable markets are found for those solutions.

Now we can argue that in a very narrowly defined risk management culture and faced with the reality of reduced opportunity to obtain and procure financing to ‘build solutions on speculation’, we just cannot afford to change our exiting disastrous management and control processes.

But this is exactly where we have to stop the train as quickly as possible and change direction to ‘climb the hill ahead’ so that we can experience the potential and opportunity to ‘see the view from another mountain top vantage spot’…

We are in a tight spot.  That is a fact.  However, we are being held to ransom at the moment by a ‘political’ system and governing party trying to string out the last days of their tenure in power.  [This article was initially written before the General Election in Britain].

There is hope, there is a sliver of light and opportunity on the horizon.  However, we will need to learn to deal with some pain, as we readjust the ‘crowding out’ of growth by the public sector and debt burden.  However, we need to recognise that we will have to apply a bit more ‘market discipline’ to finding, scoping, building and implementing solutions to our problems.

Small and localism are in fact parts of (but not the entire) solution, where small providers (entrepreneurs) are incentivised and tasked with coming together to experiment and create solutions, that hopefully mitigates the risk of large scale failure, but at the same time find scalable solutions that can rapidly be deployed to solve some of the challenges we currently face.

In IT deployment and development projects they call this kind of rapid, ‘low hanging fruits’ approach to development work Agile Development or AD for short.  Maybe this together with the professional service chains and clustering we will touch on in subsequent articles is the way forward.

theMarketSoul © 2010

Our Change Process methodology.  Click the link.

The "Harsh" Market

It is true. This is not a playground, kinder-garden experience...

As we don’t live a purely Command and Control or 100% Free Market environment we have to constantly adjust our actions and interactions with the market around us based on factors such as:

• Geography

• Jurisdiction and cultural norms

• Experiences

• Sophistication levels

• Access points

• Openness

There are many other factors to add to the list above, but we are referring to the behavioural aspects inherent in any market interaction.

One of the greatest challenges facing the political class in the UK at the moment is the Truth or Dare conundrum.

We are specifically referring to the urgent need to cut public sector spending, yet the painful reality that it is:

a) Very difficult and not politically expedient to admit the ‘Truth as seen by any politician’ (see the ‘Force of Hell’ reference uttered by Alistair Darling on trying to speak the truth

b) People cost money (and a lot of money)

c) Efficiency savings are akin to an admission of guilt and proof of mismanagement

Most public sector jobs are not subject to ‘market-forces’ at the best of times, therefore the automatic adjustment mechanism and signal that ‘price’ sends is not a factor in the equation.

What do we mean by this?

In a free market driven environment, price is the single most important signal and measure against which both suppliers and ‘demanders’ (consumers) measure value. In the absence of all other qualitative factors, price has a very important role to play in ‘clearing the mismatch between supply and demand. 

So when we experience either a supply or demand shock, as the Credit Quake of 2008 – 2009 has proved; we need to face harsh realities and make serious behavioural changes.

We are still not able to face up to the difficult ‘adjustment phase’ that both ‘deleveraging’ and the new economic reality, post election 2010 has in store for UK plc.

Many a household across the length and breadth of the UK (and beyond) has had to come to terms with the stark realities of the ‘market mechanism’ and adjusted their behaviours and ‘prices’ to move towards a new economic equilibrium, yet the public sector has not had to face this tough reality.

Maybe because the Public Sector in Britain now accounts for between 52.1% - 53.4% (depending on which economic Think Tank’s research you believe), the crowding out of the private sector and ‘loss of touch’ with the economic reality of market mechanisms has been softened.

However, irrespective of who governs Britain and runs UK plc after the ‘expected’ elections in May 2010, the winner will have to make a few very hard choices:

1. How to reduce the dependency on and of the Public Sector and bring the percentage that the Public Sector ‘consumes’ of GDP to below 40%

2. How to ‘financially engineer’ the public debt and bank guarantees the current administration dished out in 2008 – 2009 (Anywhere between £200 - £350 Billion)

3. Run the country along more traditional market disciplines,

Therefore managing the country along market principles as opposed to a ‘socially engineered’ artificial egalitarian level playing field. 

The ‘ladder’ exists for a reason in the true market environment, to help set aspiration and make the system work in order to ensure progress, growth (over the long-term) and advancement.

This all favours innovation as a driver for feeding the need for progress, growth and advancement.

In our next article we will continue our theme of Innovation, with part 6 of the series.

Let’s keep on ‘following the money’ on this occasion

theMarketSoul ©2010

Everything I know about business

Everything I know about business I learned from the Dung-beetle!

This will be the title of my next series of articles. For when I grew up, we lived in a straw hut in Africa, with cow dung smeared on the floors to serve as insulation or to keep the snakes away; I can't quite remember anymore.

My children don't appreciate the sense of history and perspective that living in the 'civilised' world affords them, because for cultural entertainment, we had to watch the Dung-beetles mate. What start in life was that I ask you?

Anyway, I digress.

A lot of business life is like chasing, or at least wiping off the muck and dung that life throws at you. Dung smells and so does money! And a great deal of this mucky stuff is pretty sticky, therefore dealing with the mucky stuff can be made so much more tenable if we are able to deal with the dung in the way the Dung-beetle manages to deal with it.

These (muck scraping) thoughts will be developed further...

If you are interested in hearing more about it, please post a comment.

Thank you.

theMarketSoul (c)2009 & Idea Merchant
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The Ice Age is Cometh

Information Asymmetry is what drives the market. I alluded to this in an earlier blog posting (see Market Responsibility, Saturday, 18 October 2008). Yet I still hear the socialist agenda mention regularly that if it wasn’t for the recent government interventions to ‘save the market’, the market would have collapsed. I am sorry, but I just don’t buy this. Yes it is true that individual institutions in the market would have failed, but as a mechanism, the market would have wobbled and other participants would have picked up the distressed bits and pieces and carried on. True, there was a crisis of liquidity in the system, with severe knock on effects, but as a mechanism for allocating resources, effort and reward, I still believe the market would have survived, with or without the ‘nuclear’ option intervention we saw. The moral of this tale is that unfortunately the socialist elite now believe and make the rest of the market believe that they hold the moral high ground and can dictate the agenda for the next several years. Oh well and so the pendulum swings…

Which was entirely a side track to the real intention behind this posting.

‘The Ice Age is Cometh’ was an article headline in the Radio Times edition of 16 – 22 November 1974. I friend of mine came out with the rank smelling edition of the Radio Times of late 1974, that he discovered stuffed in the chimney breast of his new home. Stuffed in that chimney-breast to obviously keep the cold draughts out, as according to the subtitle the next 1,000 years could be very, very cold, with an advance of the polar ice caps and glaciers. Did I blink or something? I will challenge the BBC to dig out the programme aired in the week of 16 – 22 November 1974 on BBC 2, so that we can be reminded how quickly the agenda and the focus can shift, if we take our eye off the ball and let information asymmetry spin the agenda out of our control.

And I suppose we cannot deny the evidence currently in front of our eyes. Polar ice caps are retreating, which is true if you focus purely on an evidence based approach to trying to understand the wider system. But do make your observations and emotive arguments from within the system, or do you need to step outside that system in order to be more objective. And what about intuition? On a purely intuitive level I believe the earth of GAIA is a self correcting system but we do not have enough evidence to conclusively prove this assertion.

So, in the meantime, we swing one generation to the next, waiting for the ‘Information Assymetrists’ (yes my new made up word de jour) to set the agenda and the morals of the market.

As a soul in this market arena I just keep on being amazed, day in and day out. Please just give me the ability to take the long view…

theMarketSoul ©2009

Business Ideas...

“Ideas, we’ve had them
Since Eve deceived Adam
But take it from me,
Execution's the key”

A stanza from a poem entitled “How to get Rich” by Felix Dennis

I would suppose an approach to answering your question, would be to state:

“It depends on how you slice and dice it?”

What is meant by this statement, is that it depends on "where you are now?" and "where are you coming from?"

Are there any urgent needs or unfulfilled desires?
Is there a “tyranny of the status quo?”
Is there a need to re-invigorate profits?
Is it innovation you are after or merely idea generation?
As examples…

If we learn to open our eyes and engage and interact in the world around us, on a slightly different basis, veering slightly off the normal path or direction, keeping an open mind and asking “why” type questions all the time, we might continuously stumble across opportunities to recognize business ideas.

I am investigating the “open source of ideas” via social networking at the moment and your questions fits neatly into this type of category and investigation.

Ideas can also set off a chain reaction and following on from the themes in the poem by Felix Dennis in summary chain would probably look like this:

Ideas [require]
Funding [which attracts]
People [who engage in the]
Execution [adding to]
Overheads [which reduces]
Profit [margins shrinking and leads to a]
Focus [and a need to]
Question the initial proposition [which again leads to]
Ideas….

Rohan Badenhorst
liberate@comestealmyideas.com