The trouble with Innovation – Part 3

In this part of our discussion regarding Innovation, we want to turn the focus to the UK market place and some unsung heroes, some tirelessly working in the trenches, others ‘fishing in the ocean of opportunity’ at the moment, not being ‘on assignment’.

We are referring to Independent Consultants and Senior Interim Managers.  How exactly they fit into the innovation debate will hopefully become clearer very soon.

And the main issues and theme we need to explore is that of Trust.

Part of the challenge most Independent Consultants and Interim Managers find themselves facing is the fact that engaging assignments and workflows don’t always flow or fit together.  The challenge is that when on assignment, they are not feeding or seeding the pipeline enough for when the current assignment ends and when the assignment has ended, their next role or project might be weeks of months away from coming to fruition.

There is in effect no clear matching of supply and demand in the market place, as most assignments and engagements are won on relationships and not pure experience, skills and competencies.

That is particularly true if you ‘swim down the narrow channel’, by this we mean only follow one strategy in procuring your next assignment; which generally means you speak mostly to Executive Search or other Recruitment Consultancies.

It is in this area that we feel very little positive innovation and engagement has occurred over the last few years. 

Now we acknowledge that the internet has potentially speeded up and shortened the entire recruitment cycle significantly, however, is this innovation or just advancement?

Our assertion is that the internet was pure advancement, not innovation in this sector.

It is furthermore our belief that most searches and matches occur on a pure issue of timing and serendipity alone.  There is no effective clearing house to match skills to needs in a way that clears the market effectively and efficiently.  For this we evidence a report commission by ExecutivesOnline in September 2009 (see ExecutivesOnline Interim Management Trend Update) in which it was found that 48% of Interim Managers where ‘Not on Assignment’ as of September 2009, the euphemistic phrase for being out of work.  If there were such a ‘clearing house’ the unemployment rate amongst Interim Managers and Independent Consultants would have been  markedly lower, but probably higher than the national Unemployment rate, due to a variety of other  socio-economic factors, including luxury factors such as choice, to mention but one.

Sustainability and risk management and more specifically innovation in these two critical business management areas are what we desperately lack at this key juncture in our economic cycle.  We will address these two themes in further in future articles.

To conclude our assertions made in part 3 of our exploration on the trouble with innovation is that now there should be an opportunity created to more effectively match supply and demand in the labour market.  However, there is a fundamental disconnect between public sector and private sector and permanent and temporary work.  This statement is a blatant generalisation, however public sector and permanent employment does not conform to pure market driven principles, where tenure is protected, to some extent, from external market forces.  On the contrary many an independent consultant has had to contend with the shock of a new equilibrium and have realised that to ‘stay in the game’ they have had to adjust their prices downward, sliding back down the supply curve, in order to try and find the intersection with the demand curve.  On oversupply of consulting and interim management talent has ensured that the market clearing price for services have been adjusted markedly lower, than was the case before the credit quake of 2008 – 2009.

So what we are looking for is innovative new business models that will ensure the exploration of a new and sustained equilibrium and market for talent and talent matching in the future.

theMarketSoul ©2010

What do you do?

One of the comments we picked up on during the CeBIT 2010 fair was this: 

At around 80% of the exhibitor booths it is very difficult to figure out what the company does or sells.

Now we might split hairs over the accuracy of the 80% estimate, but we want to focus on the underlying theme in the message.  Are you making it clear exactly what you do?

And this is exactly where we run into some major difficulties.  There are a multitude of issues and factors to consider in marketing what we sell or do.

However, what we have experienced in the past is that it is mostly a process drive issue.  If you sell only one or two products or service lines you focus almost exclusively on the customer or client.  Transform the organisation into a multiple portfolio product and services supplier and the situation is vastly different.  It has something to do with the organisational life-cycle.  Mature organisations are so often tied up in bureaucratic inward focussed processes that they lose sight of the ultimate objective of serving their customer base as effectively as possible with internal processes promoting efficiency. 

However, what tends to happen is that the customer gets neglected, the sales message distorted and the internal political processes and empire building takes over.  Egos drive the internal bureaucracy, the buck gets passed from silo to silo and the organisational drift away from value creation is well and truly established.

And not focussing on the key sales message of what we offer our customers and the consumers in large is very evident in your display and ‘sales pitch’ at exhibitions and fairs.

Therefore, go back after the event; think about the core purpose of value creation, value management and value measurement the mantra of Value Based Management and combine this with a Risk Based Approach to managing the processes and get everyone in the organisation to understand and apply Value Based principles so that you can serve you true constituency, namely your customers first. 

This will please the shareholders as economic value gets created and the other stakeholders will benefit in proportion as long as the focus is in the right place.

Remember that a Value Based Management approach has a key value driver focus and it is both a skill and art in getting the balance right.  In future articles we will elaborate on the seven key value drivers which underpin the Value Based Management approach.

We want to conclude the ‘What do you do?’ question with a short note on performance management and bonuses.  At a broad level part of the issue underlying performance bonuses is that the focus is mostly on divisional or individual business unit performance, rather than on enterprise performance.  Again the epitome of the silo and bunker mentality.  Unless the enterprise can thrive and is sustainable, it does not matter how successful the individual business unit or division is.  Successful business units can always be divested of if the choice is made by the executive leadership team and then the unpleasant consequences of dancing to new master’s tunes are an inevitable opportunity cost to individuals. 

So rather than fall into the trap of financial underperformance, wasted energy and frustration, ensure that we understand Enterprise Value Creation and Enterprise Value Measurement, to ensure longer term sustainable business practices.

theMarketSoul ©2010

The Trouble with Innovation – Part 2

theMarketSoul decided to talk to some delegates and attendees at CeBit 2010 with respect to the problem and challenges faced by Europe in particular, regarding Innovation.

The statements made in the previous blog post did not go down well with the mixed German, Belgium and Italian (see The Trouble with Innovation - Part 1).

To recap briefly we stated that Europe did nor posses two critical factors to cradle and encourage innovation, one being a common language and two a raw capitalist model that pursued profit above all else.

With the pure profit motive there is a problem in any case and we will address this in later discussions, suffice to say we will make a distinction between profit motive and creating value.  From an economic perspective we believe strongly in the superior notion of ‘Creating Value’ over the pure profit motive and the current credit quake (Comments from a lay-economist on the credit quake 2008) has created the opportunity for us to reflect and re-evaluate our current economic models.

However, to return to our Innovation discussion the defence the Europeans put up against our controversial statements were this:

Agree with the language issue, through heavy accents, disagreed partly with the profit issues, however we had not discussed anything regarding Protectionism.

True, we hold our hands up to this accusation.

So to throw or lob stones back across the Atlantic pond to our US cousins; the States very, very fiercely protects its own market and interests.  Intellectual Property and property rights are very well developed and ingrained in the psyche of the American nation.  But the logical question to our European colleagues are this:  So why do the Americans protect their IP and Innovation so well, but we tend to give it away, losing out to both the Americans and Chinese in the process?

For this we weren’t presented with a coherent argument yet, so it is a theme we shall explore further other the next few days, whilst attending the CebIt 2010 trade exhibition.

Europe does have the framework and platform in place in order to coherently create and then enforce property and Intellectual property rights, however, integrating culture and therefore nation state laws into a single European framework is not any easy endeavour and should not be attempted without a clear focussed vision.  Therefore, we treat all the issues with kid gloves and the Lisbon Treaty and ratification processes most countries adopted does bear serious questioning and potential legal challenge.  We are not aware of any serious tests in this arena, but acknowledge our ignorance and would appreciate further clarification, should we have the wrong end of the argument in our grasp.

Therefore in conclusion of this post, we have invited two questions to be clarified:

1.       How can Europe better protect its Intellectual Property and Innovation from leaving the Greater Continental Europe?

2.       Are there any legal obstacles in the European integration project that hinders Innovation protection and enforcement of IP and other property rights?

We look forward to finding out the answers over the course of the next few days, whilst on our Continental European jaunt.

theMarketSoul ©2010

The trouble with Innovation - Part 1

Today we address one of the critical and key factors of production, it is a factor we have severely neglected addressing earlier in this forum.  It is about Innovation

Speaking to a few delegates and attendees at CeBit 2010 we found that most people view Innovation as a key driver in advancement.  Yet we have a big problem with innovation in Europe.

Our model is broken! 

If we investigate some of the underlying factors ‘driving’ this problem, we would point the finger at the social experiments we embarked on over the last two centuries in Europe.  The simple fact is that we just did not get on with each other.  There are two ways of accumulating wealth very quickly, one of them being to steal it and the other is to trade activity to get it.  However, in both choices you side require a lot of the other factors of production, namely land and capital and labour.

If neither of these two options are open to you then you need to follow the slow road of progress.  But here is where Innovation comes to the fore as an enabler. 

The USA is a far better incubator and fertile soil for entrepreneurial and innovative development.

In Europe we lack the cohesion of two factors that drove American innovation:  (1)  A common language (English) and (2) a common goal (making money).

Irrespective of the language issue, we treat ‘raw’ capitalism with disdain and suspicion in Europe, whereas the States embraces this  with open gusto, so much so that the current administration is frustrating its efforts to burst forth once more as a power house of  growth. 

Now we are not advocating abandoning regulation per se, what we would ideally like to see is innovation in the Regulatory space too, where regulation is thought through on an end to end basis, with due consideration for the law of unintended consequences that knee jerk regulation sets in motion.

So the hope in Europe now is this:  We have been building the platform for collaboration for a while now, with the EEC, EC and EU experiments and we now have continuity at the top with an appointed President and Foreign Secretary.

Lets bury the hatchet and utilise the platform of collaboration in order to launch and harness the power of ‘Innovation Incubation’, thereby eliminating the wasted effort and duplication of processes currently taking place and shaping our European hinterland.

Let’s explore these ideas further in future posts.

theMarketSoul ©2010

Signals and Green Computing

theMarketSoul is at CeBit 2010 in Germany this week.  Arrived yesterday and what struck us immediately is the focus on Green Computing.

This makes us think and turn to the issue of signals.  Signals in a system and economy, whatever people interpret, analyse and utilise to make and take decisions on.

And then how very ‘unsophisticated’ we are about the application and utilisation of the information these ‘measurement instruments’ and signals give us.

Humans have impacted this planet for around 20,000 – 50,000 years (more accurately around 10,000 – 15,000 years that we have measured ourselves), the plant has been in existence for around 3 – 5 billion years, so when we talk about the timeframe involved in measuring the human impact on the planet , the fact that purely on a matter of scale, our impact is statistically insignificant compared to the timescale that the earth has existed.

And so it has been with the money supply and economic signals the sages of our time, namely Central Bankers and economists had to interpret.

The problem comes down to a lack of appreciation, not through any fault of our own, except for the general failures of the education system, to teach and turn out conveyor belts of ‘Analysts’, rather than going further and moving into the space of innovation where the key skills set of Synthesis is required.

For years we gorged on the over supply of credit and money, however widely Money Supply is defined, and the measurement instruments at our disposal had failed to keep us from ‘banishing Boom and Bust’ cycles.  It is almost as if the more measure and the more we interpret the data, the further we move away from finding the answers we require to ‘keep the beast on a sustainable course’.

So has it been a failure of the measurement instruments or the people interpreting those measurement instruments or have we ‘chopped the timeframe into too small chucks’; meaning that we either overreact or sometimes do not act enough to intervene and steer a clear course through the mists and hidden obstacles on our life’s journey.

This is where we return to CeBit 2010 and the Green Computing issues.

It seems that the Computer and ICT industry has now reached the maturity point where they are confident enough to re-engineer the processes and scale of ‘things they do’ in order to help reduce their ‘Carbon Footprint’. 

Cloud Computing, no matter how you define it, still means that somewhere, someone has to own large tracts of real estate to house the computer farms on.  This in turn consumes energy and as a by-product increases carbon emissions. By moving some or all of your computing and application needs from your own servers and desk tops to  someone else’s, the fundamental truth still remains that all you have really achieved it to outsource and move the problem up the value chain somewhere.

However, the question really is what the landscape will look like in 50 years time, when on reflection we can look back at the way and shape of the world, with problems and challenges packaged into new shapes and sizes.   Of that theMarketSoul has not seen very much evidence at CeBit 2010 yet, but there is an awful lot of real estate and distance to cover at CeBit 2010, so watch out for some more information and or a retraction in due course.

The blog today was brought to you by Wireless Technology.

theMarketSoul ©2010

Increased militancy in tax collection - hide your credit cards!

It is quite worrying when government agencies suspend the usual formalities of the ‘rule of law’, in other words do not follow due process, in order to collect revenue.

Well this is exactly what happened to one of our clients earlier this week.  Luckily for the client, they were well prepared and did not get flustered due to the new tactics being ‘employed’ by HMRC in order to collect compliance penalties and the like.

The scenario:

Over the last few months the HMRC staff has been trained to become more than just assessors of tax to being investigators of tax. See the linked article produced by AccountingWEB.co.uk: HMRC Investigations: What you need to know.

So when you receive a phone call from an official stating that they are from the HMRC and that you should talk to then as soon as possible or face some ‘legal action’ firstly take these simple steps:

1.       Take a deep breath

2.       Calmly state that you are in the middle of something

3.       Accept their statement that you have 24 hours to get back to them or face legal action

4.       Grab, fumble or stumble for a byro and a piece of paper, for those born in the mid 20^th Century or the iPhone or Blackberry or other mobile devise if you are tech savvy and take:

a.       The Reference Number

b.      The Telephone number

they are about to give you.

5.       Call your accountant or tax advisor as soon as possible quoting the reference number. 

6.       In the reference number is a clue as to the specific item the HMRC wants to discuss with you or your professional advisor

7.       Call them back within the 24 hour window of opportunity

8.       MOST IMPORTANT – Do not give them any payment information, i.e. debit or credit card information, because this is where the crux of our problem and challenge to the new methodology lies.  There is a due process for collecting outstanding or overdue debts, however, DURESS is not one of them.

Since when have officials at HMRC been instructed to ‘suspend due process’?

We believe this is an abuse of authority and not just stepping over the line, but ‘taking a huge leap forward for mankind’ in order to plug a £177 billion black hole in the UK public finances.

theMarketSoul’s advise on this occasion:

KEEP YOUR WITS ABOUT YOU!  Do not get flustered and ensure that you understand the principles and processes behind due legal process. Follow our 8 step ‘tax collection under duress guide' above, or contact us by following the link in the profile page.

Good luck.

theMarketSoul ©1999 - 2010

theMarketSoul ©1999 – 2010 Ventures an opinion on the ‘Economics of Taxation’

[All names and references to places in this post has been changed, so as to protect the innocent bystanders].

Cracking down on ‘Tax Havens’ became a stated objective of the G20 last year during one of the meetings held during 2009.

Lets us keep the argument very simple and divide the world into two colours namely magnolia and chocolate brown (close enough approximation of two other colours normally used in arguments), or rather more accurately the regulated world and the unregulated world.

If it is regulated, it moves slowly, is a target and gets nailed very quickly.  The credit quake of 2008-2009 resulted in the implosion of this world, which today moves even slower, with a catastrophic collapse in taxable revenue and actual tax take an unfortunate consequence.

So, as our hypothetical magnolia world has ceased up almost completely, the G20 thought it right and proper to start targeting the chocolate brown world.  This is the ‘dynamic underground’ of slush funds, oiling the cogs of industry, money laundering, crime, drugs, terrorism and anything that moves outside of the regulated world arena.  Apparently this world is alive and well, with cash sloshing around the system that unfortunately does not hit the regulated world’s sides and filters, and is therefore not siphoned off as ‘direct’ tax flows and revenues.  If your jurisdiction has indirect taxes, then this cash does get siphoned off, as goods and services are also consumed by the chocolate brown world.

Now if you view these two worlds as two balls or circles, the magnolia one is shrinking and the chocolate brown one is growing in size.  So the question really becomes this:  Which one do you attack?  How do you appease the populist vote?  For one of the choices is:  “Tax ‘em to death”, because you are already taxing ‘em pretty harshly! (Those living in the magnolia space).  Alternatively, you grab the populist media’s h(d)eadlines and attack Tax Havens with the natural association of the chocolate brown world with ‘dirty’ cash.  This way you score two potential hits:

      (1)    Populism on your home turf and

      (2)    capital flight from tax havens. 

This is a great tactic if you believe that the ‘Economics of Taxation’ mean that you either tax the flows of money or the stock of money (capital and other ‘fixed’ forms of property).  Flows of money include indirect taxes and maybe this scare-mongering’ tactic does encourage capital movements between jurisdictions, however, as a general approach and tactic to attack Tax Havens, I believe this is doomed to fail.

Tax jurisdictions, fiscal policy and ‘one-upmanship’ is a national and international ‘sport’.  Therefore,  we can’t have the big boys and girls getting upset at the little boys and girls, just for trying to scrape together a few crumbs off the BIG table, in order to survive, can we?  A sense of  fairness and  a measured and proportionate response is definitely called for in this so-called ‘war on tax havens’. Or am I wrong on this call?

theMarketSoul ©2010

Introducing the 'EconoCountant © 2010' and IFRS 9 commentary

I am amending the title and purpose of this post slightly, as the content is duplicated at EconoCountant © 2010:


IFRS 9 Financial Instruments the IASB's latest accounting standard press release was published back on 12 November 2009.  So, there you have it, I took my eye off the accounting standards development radar screen and missed it.

This post makes reference to my earlier entries, see for example Comments from a lay economist on the credit quake  published in October 2009, and Asset bubbles: not just valuations but what and how we value  published in January 2010; in which the current IAS 39 Financial Instruments: Recognition and Measurement was criticized. 

In the IASB’s (International Accounting Standards Board) own words, in the preamble (Why we undertook this project) briefing to the IFRS 9 Financial Instruments documentation:

“Many users of financial statements and other interested parties have told us that the requirements in IAS 39 are difficult to understand, apply and interpret.  They have urged us to develop a new standard for the financial reporting for financial instruments that is principles-based and less complex”.

Their words, not mine.  [Lets repeat it, just for clarity:

            Difficult to          (1) Understand

                                    (2) Apply

                                    (3) Interpret]

But it begs to ask the question:  Who are the ‘they’ referred to in the above paragraph?

The Harvard Business Review (“Fair Value Accounting for the financial crisis”, November 2009) offers a possible solution and explanation:

“But European politician have far more leverage over the International Accounting Standards Board than Congress has over the Financial Accounting Standards Board, its US counterpart.  Before a new IASB standard can go into effect in Europe, it must be ‘endorsed’ by three European bodies – the European Parliament, the European Commission, and the EU Council of Ministers.  Because of these three potential vetoes, the IASB is highly sensitive to threats from EU politicians to legislate their own accounting standards for European companies.”

Again, a quote I took directly from the Harvard Business Review, not my own words at all.

As this blog is supposed to be dedicated to ‘clarity of economic thought’ and has the odd poem thrown in for good measure (besides some of my usual rants), I have decided to move any accounting related commentary to a new blog page on Wordpress called 'The EconoCountant'.

All commentary on purely accounting related, as opposed to economic and economic value related topics, will in future be posted at http://econocountant.wordpress.com , with some degree of cross referencing, just to ensure the usual level of confusion is maintained.

A further question the paragraph in the IASB’s documentation quoted above begs to be asked is this:

If the standard was so difficult to (1) understand, (2) apply and (3) interpret, why was it published and practitioners expected to implement it in the first place?

I thought that a ‘wide ranging consultation process’ was always adopted or, as in Sir David Tweedie’s words has “[benefiting] from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns”, only occurred in this round of the review of IAS 39?

“The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally.”

Is it right then to return to my assertions made in October 2009 that the crisis was partly fueled by flawed International Accounting Standards?

theMarketSoul © 2010

My learning today

The road we travel,

The pain, misfortune and misery,

Along the way; will never be witnessed.

Yet in meeting our fellow travellers,

Many a moment we will be judged,

And whether the sweat dripping from our brow,

or the dust discolouring our tunic;

always stand up proud and straight,

with decorum and faith.

Hold up your head proud,

Never in anger; bite your lip,

Wipe the tear,

But banish the fear.

For if you look or squint carefully,

You will see across the divide,

Staring back at you a face,

With more pain and fear or anger to hide...

Smile, reach out and clasp the hand in friendship,

Whether real or pretence, let civility descend,

And your humanity rule (supreme).

theMarketSoul © 2010

A plan for 'Imperfect Competition'

For the last few days I have waited before wading into the conversation regarding the Volcker Rule.

The Volcker Rule was the plan President Barack Obama announced on 21 January 2010 in which he proposed to reform the banking and financial services sector in the United States.

As usual the Press have been trying to pull this press release into the wrong direction and flawed analysis is once again being applied to the debate on financial services regulation.

In my mind, having watched the 8 minute YouTube clip, see (Volcker Plan), what the President was referring to in his statement was to the economic theory of Imperfect Competition.

Imperfect competition refers to the fact that there are:

1)             Many participants in the market both buyers and sellers

2)             All sellers have diversified products and services they sell

3)             Monopolistic competition can be a resultant format of engagement in the market by sellers

4)             All participants participate equally and fairly on a level playing field, therefore the barriers to entry are low

Therefore the supply side concentration of power in the financial markets which currently rests with too few oligopolistic institutions (Oligopoly ), will be broken by a new framework being created, under which market participants will have to engage in the free market mechanism.

So there we have it in a nutshell, a democrat proposing a free market framework in which risk is shared over a wider continuum of participants and no one participant able to be a 'pure' price maker and thereby skewing the 'rules of the game' in their favour.

What better testimony to the theory of Imperfect Competition than to just ask the players to merely move away from the current uneven playing field on to a new more equitable playing field for us all to share.

As long as these players take one of the libertarian principals of personal responsibility to heart, we might actually end up with the “Socialist President” creating the (im)perfect free market mechanism for financial services competition for many a generation.

theMarketSoul ©2010, is open to one or two more pleasant surprises from beyond the pond.

Values and morals! Who's values and who's morals?

This post was inspired by another fellow “LinkeInner’s” question which read as follows:

Do you think that the core of the current economic crisis is a crisis of ethics and values?

Two-thirds of people believe the current economic crisis is also a crisis of ethics and values. But only 50% think universal values exist. These are among the findings of the World Economic Forum’s Faith and the Global Agenda: Values for the Post-Crisis Economy, an annual report on issues related to the role of faith in global affairs.

Global religious leaders identify the key values for a more just and sustainable post-crisis economy.

http://www.imf.org/external/np/pp/eng/2009/021909.pdf
http://www.universityworldnews.com/article.php?story=20091011105058536
http://www.weforum.org/en/media/Latest%20Press%20Releases/PR_Faithvalues

My answer is:

What do the other third think who DO NOT believe the economic crisis is a crisis of ethics and values? 

If we were to ‘layer’ the global economic landscape, we would discover that the playing field is never and never will be level.  As an example, in your part of the world, one man’s commission is potentially viewed as another man’s bribe...?  (See the Serious Fraud Office’s investigation into the BAE System’s contractual relations in Saudi Arabia).  I am not pointing any fingers or inferring wrongdoing on anyone’s part, but I am trying to highlight the problem of ‘relativity’.  Points of view on morality, ethics and values different depending on your position, relative to the other people involved in that exact same ‘transaction’.

But, to answer your question directly I would say NO, it isn’t a crisis of ethics and values.

My justification is this:

1.       There is a general misunderstanding of the Laws and forces of economics that are at play here:

The fundamental Laws and forces at play in economics have nothing to do with morality or values.  These are emotional characteristics and only ‘enter the field play’ and manage to distort the rules of the game.  Yes, don’t get me wrong there is hopefully a morally correct framework set up in the first place, in order to allow everyone access to an opportunity to participate in the market, however, as we know in practice, this is not necessarily the case.

Markets, on the whole, tend towards and actively seek states of ‘equilibrium’.  However, on the odd occasion there are factors at play (political, regulatory, information, access to resources, etc.) that distort and cause markets to deviate from this natural tendency to seek the ‘clearing price and volume’ in the market.  Equilibrium is defined as that point at which the demand and supply curve interacts in such a way that all parties are satisfied (achieved utility) and all products in the market is ‘cleared’ at a given price.  There is therefore no shortage or surplus available. 

Scarcity of resources leads to a continuous search and flow of innovation, capital, land, labour and resources into the economic landscape (the market) thereby combining to meet some economic need or want by the production, distribution and consumption process.

If we are lucky, we participate with like-minded ethical and value-based actors in this market-place, however, if we are not so fortunate, we have a choice as to whether we participate or not.  Regulation is supposed to assist us in defining the rules of engagement, however, sometimes these rules become so onerous that participants actively seek ways and means to avoid or circumvent them.  That is way libertarians in general favour principle based, rather that rule based systems of compliance and participation in free markets. 

Because of Information Asymmetry we do not necessarily know the intentions, wealth, capabilities, etc. of our fellow market participants.  This is why one of the fundamental principles of market participation is ‘Caveat Emptor’ or ‘buyer beware’.

2.       Compliance and regulation are well intentioned in order to help define the rules of engagement, but as I stated above, they can become onerous, leading to dysfunctional behaviours in the market place and can contribute to the Law of Unintended Consequences.

Competition and the way in which ‘free markets’ operate invariably lead to ‘cutting of corners’ and finding ways and means of gaining some form of an advantage, be it lower costs, more features, better built quality, etc.  The problem is when sub-standard materials, labour and skills get involved and is then presented and ‘superior’ products and the purchaser does not derive the ‘intended utility’ he expected from that product.

The question really is whether this is a moral, ethical and values based issue?  No-one wants to be cheated o feel cheated and taken advantage of and therefore be disappointed in the market place; but as realists we all know that utopia is a very distant aspiration...

This is but the beginning of the debate and I would like to continue this theme in future posting

All the best.

theMarketSoul © 2010

I lost my glove tonight...

Well, it was borne out of anger, causing stupid behaviour and the next minute my glove was gone, fallen between the platform edge and the almost departing train. Next followed frustration, with a few expletives thrown in for good measure.

However, I look to this episode and try to draw a lesson from it. An economic lesson and this is what I came up with:

Gloves come as pairs. To the two handed individual, one glove is not really fit for purpose, except if you decide to permanently put the other non-gloved hand in your pocket, thereby proverbially 'tying one hand behind your back'.

This is what happened, figuratively speaking, during the lead up to the financial crisis.

Accounting regulatory standards meant that Financial Asset valuations had lost one of its gloves. The intentions were good, but as financial instruments increasingly became impaired the 'Mark to Market' ruling of IAS39 meant it forced banks to write-down instruments to market values.

Effectively the Profit & Loss account (Income Statement) became the dumping ground for the now 'toxic' assets. In the past any revaluation was done via the balance sheet.

The intentions of IAS39 were good, with a stated aim of increasing transparency and better valuations of banks and financial institutions, however, this was drafted and conceived during the go-go boom years, not anticipating a catastrophic downturn such as the one we just experienced.

Another factor I am paying a bit more attention to these days is the pricing of risk into financial products. As previously commented, if risk is priced in properly and this resulting premium capitalised as a reserve, then we should have a buffer for the rainy day.

The one problem or challenge we face is competition. Competition generally should encourage innovation, efficiency and cost reductions, via scale, however, it also encourages risk taking at the expense of risk pricing. This is one of the areas whereby our 'free-market mechanism' fails the test and does not 'balance the books' effectively.

How and what we do to address this deficiency is the stuff future blogs will explore in more detail.

But for now, the one-gloved 'soul' has had to wave goodbye to a matching pair.

theMarketSoul (c) 2010
------------------

Asset bubbles: Not just valuations, but what and how we value

Where is the next Asset bubble likely to emerge? And what class of assets will drive and become the next bubble?

This is a question that is addressed in The Economist of 9^th-15th January 2010, p.65 "The danger of the bounce". Link: [The danger of the bounce]

The arguments are clear and concise enough; however a further factor to consider as part of the general historical trend and valuations analysis expounded in the article is the accounting distortions recently caused and driven by IAS 39 – Financial Instruments: Recognition  & Measurement.  The problems with IAS 39 are being addressed by the IASB, however, in a nutshell the challenges we face at the moment is thus:

Having changed the historical cost accounting valuations of corporate balance sheets to ‘the dumping ground of the "mark to market" tyranny’ on the Profit & Loss (Income Statement), we are not currently comparing apples with historical apples.  Having switched to "mark to market" accounting and utilised the Profit & Loss account as the dumping ground and not the Balance Sheet, we are currently looking at corporate balance sheet asset and liability valuations that are not what they were or have been over the last 100+ years of the historical comparison cycle referred to in the article.

Now I hope and trust that this issue is so blatantly obvious and has already been corrected and factored into the analysts calculations, that I am wrong about this; however, my experience of the analysis in the past, does not fill me with enough confidence to ensure that this is not the case.

Further to this, the fact that the debate is already starting about Asset bubbles, is good and an encouraging sign, however, there is also the little matter of risk (outside of pure compliance risk) and the pricing and factoring of this into the asset valuation equation, which needs to be highlighted and debated further.

Part of the debate this column attempts to stimulate is a ‘true and fair’ economic factor cost model and approach to understanding economic discourse in general.

So, let’s continue adding value and centring our arguments around this important issue.

theMarketSoul ©2010

An unfinished Poem...

Don’t Hurry

The world will still be turning

And time will run your emotions

And we will still be living.

The struggle is in knowing

And wisdom still eludes us,

Like the sands of time

Its flowing

Should we catch it now or just keep it going?

theMarketSoul ©2010