So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor's finally took the 'big step' on Friday 5 August, after the major markets closed.







So what next?






In our article 'US Treasuries - Are the markets really that bothered?' published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.






Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:






Is this an FX or market call?






What we meanby this question is:






Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?






All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.






Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.






How the US Treasury and administration now react will be crucial.






Who are we going to trust to make this big call?






theMarketSoul © 2011

Economics of Taxation

 

There are in essence only two ways of taxing citizens:

1.       A Tax on Stock (Wealth)

2.       A Tax on Flows (Income or consumption)

Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.

Now step back second and consider the tax take flows from these two options:

With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing there net tax take?  Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.

Another salvo  was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle.  Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.

theMarketSoul ©2011

A sigh of relief?

Some say that in life timing is everything...

And so too it is with economics.  We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.

Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.

In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14^th Amendment.

And this is where the timing conversation picks up its thread again.  The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending.  Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt.  In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries.  If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.

If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.

But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.

theMarketSoul ©2011

The Theory of Money and Credit

The US Treasury Yield Curves #2 – Do you factor inflation into the deal?

In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills.  The Nominal (quoted) Yield Curves and Real Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and  30 July 2006 are listed below.

Yield Curve 1

What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors.  Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields.  In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.

A cynic might make this remark:

“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”

They win both ways!

theMarketSoul ©2011

Source Material:  US Treasury web site: 

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

An Aggregated Challenge

[A forgotten article from mid 2010]


Conspiracy theories!  

Today we express an opinion on the phenomenon of ‘governmental’ economic landscape shaping.

Interference whether actively pursued or via involuntary actions heightens our sense of concern by the effects that the aggregation of supply and therefore the encouragement, either directly or indirectly of oligopolistic and monopolistic market structures, is having on the global competitive landscape.

It has occurred in the financial services sector and it happening in the oil industry too.

Even though the barriers to entry are relatively high, having fewer competitors on the scene cannot be a good thing.

The trends we are spotting in the competitive landscape are as follows:

Imperfect competitive firms (many market participants with differentiated products and services) are being deluged with over burdensome bureaucratic regulatory requirements, shifting some of these additional transaction costs onto the ultimate (final) consumers, whilst in strategically important industrial complexes, such as energy supply, the aggregation effect is indirectly encouraged to ensure that national strategic and security interests are promoted.

Funny old thing, economic theory then…

theMarketSoul ©2010


[An article we wrote in mid 2010 during the height of the BP Gulf of Mexico oil spill disaster, but somehow never published.  The theory is just as relevant today when we speak about the Debt Ceiling crisis...]

The US Treasury Yield Curves – Are the markets really that bothered?

As a general introduction today we will look at two US Treasury Yield curves.  The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.

Yield Curve 1

In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate.  The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011.  There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.

The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011.  As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.

Yield Curve 2

In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site).

It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.

theMarketSoul ©2011

Source Material:  US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx

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

The Elusive “G” Factor! – Part 1 [Economics in a Nutshell]

An Introduction

There is a conundrum here somewhere!  As a libertarian leaning Think Tank organization and publication, we instinctively know that more government interference in the economy and bigger government per se is not a good thing.  And so is sovereign debt and the servicing of that debt.  Both are drains on the economy and economic potential of any sovereign nation, yet both are necessary evils too.

But where lies the ‘sweet spot’ between the size of government, fiscal policy, sovereign debt (if necessary)?  The magic formula or ratio between the public and private sectors and their respective shares of the economic output pie?

These are questions the political and business leaders are struggling to understand and define in Europe and the USA at this point in time in order slowly and arduously drag their economies back to a ‘normal growth cycle’.

Part of the challenge we believe is the massive imbalance created by the shifting nature and sources of production, combined with the rapid uptake of technology and the disruptive influences of technology.  Our planning cycles and hence levels of understanding and ability to adjust the factors of productions to keep up with these disruptive forces are being severely challenged.  Or maybe our grasp of the theory underpinning our economic models just aren’t up to coping with the rapid nature of change and forces of change in the global economy.

As has been argued in previous articles, by its very nature the instruments we utilise to adjust economic activity and output in specific geographical locations, namely fiscal (tax) and monetary policy, are very blunt instruments and not as effective and able to cope with the speed of change in given economies.  But are their any other mechanisms we can utilise to adjust unfavourable behaviours and activities in order to get back to equilibrium?

A further factor we believe is a lack of understanding of where exactly we are in the global economic adjustment lifecycle.  There is no real comprehensive understanding and agreement at best of these influences.  True mechanisms like the G8 now G20 have been created to address more global challenges, but there is hardly ever consensus and a collective will to act in unison to address the bottlenecks and imbalances in global economic activities.

With this introductory article we have laid out some of the areas to explore and bring back into the ‘light of scrutiny’ as part of a deeper understanding of the nature of our global economic state and status.

theMarketSoul © 2011

The Elusive “G” Factor! [Economics in a Nutshell]

Everywhere the elusive “G” Factor is beginning to raise its head in the discourse of politicians and business leaders alike.  When will a sustainable and prolonged period of economic growth start to manifest itself and drive forward development and wealth creation?

This is a very complex subject area and in a series of articles we will attempt to define and understand the drivers and blockers of growth.

We will investigate and explore the traditional factors of production along this journey and uncover the truth around debt, monetary policy and fiscal policies and stimulus process.

Any contributions and clarifications are more than welcome on this short journey along the Economics in a Nutshell series.

theMarketSoul © 2011

Risk Management Ideas

Risk has as one of its essential elements trust as a foundation.

Trust on the other hand has many other factors that interplay and interact on it.

Markets are created when there are needs that are immediately met from you local environment and therefore scarcity around.  Market participants step in to fill the void.

As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.

Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth.  Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.

Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management.  (For more information or to contact us, please click on the Contact us link).

Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation amidst the regulatory compliance constraints added to your management agenda.

TheMarketSoul ©2010

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

Collaborative nano and micro ventures

“Don’t waste a good crisis” – not entirely sure who first uttered these immortal words, although a Google search on initial analysis seems to attribute it (or some very similar words) to Rahm Emmanuel, the current Chief of Staff of the White House, part of the Barack Obama administration.  The actual phrase might be attributed to an economist called Paul Romer.

However, irrespective of who uttered the words initially, it is true that borne out of crisis the spirit of innovation always seem to rise like a new Phoenix bringing both hope and opportunity with it.

That is the great gift that the ‘study of scarcity’ that is economics provides us with.

We have the chance to think creatively about new platforms of collaboration and how Charles Handy's ‘Shamrock Organisation’ will eventually play out.

At the moment we are conducting a research study into how nano and micro businesses might find new routes to market and sustain themselves during these strained economic times as part of the extension of the outsource provider to the Shamrock Organisation.  We will be trying to uncover some of the factors that lead to collaboration and other forms of formal and informal business structures that promote and underpin this form of collaboration.

Please watch this space for updates in the very near future.

theMarketSoul ©2010

The Hungry Spirit

Today’s post is a very short and concise post, yet these are some inspirational quotes and extracts from two chapter’s of Charles Handy’s 1997 book entitled: “The Hungry Spirit“:

A Life of our own

Capitalism, efficiency and markets have their flaws, but also their uses.  They are neither the complete answer to our dilemmas nor the only cause of the.  They provide some of the context of our lives but not the purpose.  For that we need a philosophy not an economic system.

A better capitalism

Left to themselves, things do not necessarily work out for the best. Laissez faire is value free. No one is responsible for anyone else.  That is improper selfishness and can self-destruct.  We need something better.  Capitalism as an idea includes social capital as well as economic capitalism.  One without the other will not work for long. 

theMarketSoul © 2010

Capricious Markets

The market is capricious.  We are paraphrasing a line from one of Bernard Cornwell’s series of historic novels on 9^th century England, where he referred to the ‘old gods’ (pagan gods) of the Danes and Vikings as capricious.

So if the impulsive nature of markets is to be appreciated for what they are, then why are we trying so hard to manage risk completely out of existence? 

We will focus on two specific factors today in what we refer to as the ‘dumbing down of risk’.

A strict or narrow definition (old financial language) of risk is possibly that it is a quantifiable number with a probability ranking and we can therefore attach a statistical inference to the occurrence of the risk event.

Yet in The Health & Safety Executives language a risk and “Risk management involves you, the employer, looking at the risks that arise in the workplace and then putting sensible health and safety measures in place to control them”.  So in the common language in the work place the HSE has managed to destroy the proper use of the work risk and risk management with this dumbed-down version.

In our mind, if the risk cannot be quantified and expresses on a scale of probabilities, then it is not a risk, but an uncertainty.  And we can manage both risks and uncertainties, but the emphasis is different.

Maybe any situation or health and safety ‘risk’ can eventually be codified on a risk probability matrix, but the cost involved in getting to this situation is prohibitive, so we shall stick to our guns and call a health and safety issue a ‘Health & Safety Uncertainty’.

Let’s recap briefly the difference between what risk is (supposed to be) and what uncertainty is:

Risk in investment and market participation is the likelihood of a quantifiable measurable outcome either occurring or not occurring.

Frank Knight In his seminal work Risk, Uncertainty, and Profit, Frank Knight (1921) established the distinction between risk and uncertainty.

“

… Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term “risk,” as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. … The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. … It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We … accordingly restrict the term “uncertainty” to cases of the non-quantitive type.”

Too summarise therefore, risk should be a measurable and quantifiable occurrence, whereas uncertainty is what the HSE addresses, but misinforms as risk, namely the likelihood of something occurring, but that likelihood is not quantifiable.

So where does this detour into the use of language leave us as far as the Capricious Market is concerned?

We suppose that because market participants are both humans and mechanical systems (eg. ETS – Electronic Trading Systems), one of these participant groups, namely the humans have a level of sophistication and complexity (irrationality) that leaves the best construed risk models in tatters, once the uncertainty element of human emotion and the perception factor unleashed.

Therefore, to construct models of rational behaviours, the outcome and predictability of non-human mechanical systems (in other words more models) should be able to predict the behaviours of other models.  But to extend this to human actors clearly moves us more firmly into the domain of uncertainty and not risk.

Therefore, we conclude that the markets will always be capricious as long as irrational beings are willing and able participants.  Until this ceases to be, let us ensure that we get the use of our risks sorted out from our uncertainties.

theMarketSoul ©2010

The Morass of Mediocrity

We link today’s article to one of our main themes on our home page, namely the ‘Battle against the Status Quo’, or as per the title of this posting, ‘The Morass of Mediocrity’.

The underlying intent and theme is that of competition and competitive behaviours and the difference between rules based and principles based standards.

It is our opinion that a rules based culture encourages more insular and introspective behaviours, where the rush is for the middle ground of mediocrity, rather than as the opposite principles based culture would be the encouragement for the search for innovation and competitiveness at the margins and extremes of the ‘functional envelope’.  By this we mean the parameters and frameworks set-out in the principles based environment, to ensure that a well-defined playing field (not necessarily level), is established and market participants understand their boundaries and culture norms they have to adhere by as part of the participation process.

Yet, apparently, a more principles based regulatory framework is exactly what is being blamed for the Credit Quake of 2008 – 2010.

And if we analyse the circumstances that led to the regulatory failure and debt driven imbalance we currently experience, we would discover that it is because we operate in a hybrid world with symbiotic elements in the relationships between the private, public and third sectors.

Some of these factors include, but are not limited to:

1. Market structure – free market versus socialist structures
2. Regulatory framework – the disjointed regulatory frameworks and mixed agendas and the sense of urgency in the global regulatory framework
3. Cultural setting – Anglo-Saxon, European, Middle Eastern, Far East, etc.
4. Reliance on macro-economic tools including monetary and fiscal policies
5. Skewed nature of national performance measurement
6. Balance between equilibrium and disequilibrium clearance mechanisms in the economy
7. Erosion of moral hazard and other distorting signals

However, as a mainly libertarian focussed publication, it would be remiss of us not to endorse the principles of minimal interference (small government in other words), yet we also realise that this has to be tempered with personal responsibility.  However, because the symbiotic (hybrid) relationships have become so skewed and dysfunctional over the last few decades, was it any surprise that the uncertainty this created led to opportunist behaviours?  Because a ‘moral compass’ is a very relative term, is it no surprise that depending on your own individual position and point of view, that the direction it indicates will be different from others?

The G20 are meeting again this weekend and the global regulatory framework will again be in more detailed focus, yet other priorities are again distracting the main thrust and issues on the agenda.

Therefore to conclude this brief interlude into the ‘morass of mediocrity’, the real question is:

If we all run and work hard for the centre ground, who will remain at the margins, pushing the envelope and ensuring that we break the tyranny of the status quo by exploring new unchartered territories and responsible risk taking behaviours?

theMarketSoul ©2010

The Sustainability Gene

The focus on sustainability and sustainable practices is a self defeating objective.  Sustainability means that business leaders take their eye off the equity holder’s value creation ideal, as it flies in the face of self-interest as promoted by Adam Smith some 234 years ago (The Wealth of Nations , 1776).

Self-interest and the pursuit therefore is being clouded by a multitude of other non value adding factors that is diluting the message and contributing to more uncertainty and risk and therefore capital flight and volatility in the financial and capital markets as we have experienced over the last 2 years.

This process and Zeitgeist will not disappear or be properly understood, unless we develop a deeper understanding and familiarity with uncertainty as a driver of the innovative spirit of human endeavour.

Risk management per se is not the answer and panacea it is held out to be, and if it promotes a more risk-averse society, then we are heading for the middle ground of mediocrity, tyranny and decline in social values and structures that have taken many hundreds of years to create.

Being part of the system with a myopic view, rather than standing outside the system with a holistic and reflective frame of mind is causing more damage than good.

Yet how are we to live and deal with the cognitive dissonance that these two views by the very nature induce?

Let’s open up to good honest debate, search and reflection, rather than to dogma and a narrow focus on defending vested interests and old world models.

We are in the midst of a major cultural, economic and world order paradigm shift and the outcome is uncertain, potentially destabilising, but we must embrace this exploration of uncertainty and chaos the will inevitably ensue.

theMarketSoul ©2010

Short-sighted: Actor behaviour in the market for competitiveness

Competition is a good thing.  Of that we are sure. 

It is one of the key ingredients of a dynamic market process, yet is competition and the potential negative consequences of short-sightedness a means or an ends in itself?

Today we argue that the unfettered aspiration of competing for competition’s sake and the shedding of what is seen as non-core processes and competencies in organisation will eventually lead to sub-optimal performance and is an unsustainable practice.

In the unrelenting search for shareholder value creation, which is the fiduciary and main responsibility of the board of any shareholder / equity owned organisation, we believe that sub-optimal decisions are being taken, both because of target operating model enhancements and short-term return of investment (ROI).

One of the underlying objectives of International Harmonisation of Financial Regulatory Standards (as currently promoted by the IASB & FASB) is the desire for greater transparency and ultimately more regular and frequent reporting cycles.  The view is that the greater the frequency in reporting, the less information asymmetry will be in the market, thereby eliminating insider trading and other undesirable ‘sharp’ market practices that regulatory bodies such as the SEC, London Stock Exchange, NYSE, NASDAQ, DAX, etc., are trying to stamp out.

But if we extend this logic, or rather shorten the current reporting cycles from the regular quarterly updates to say monthly, weekly , daily or even hourly updates, the already short-sighted mentality will become even more sharply focussed.  And this begs the question:  “How will CEOs and other business leaders have to ‘defend’ their decisions on a minute by minute basis under this unrelenting 24 hour news and sensationalism culture”; thus leading to an even more intense short term focus on their part.  Certainly, this must be the worst of all downward spirals and tyranny of information overload?

But, by logical extension, this is exactly where we are heading in a decade or two’s time.

So, if the focus is then on more short-term results and ‘core processes’ where does this leave the current wave of outsourcing, off-shoring or near-shoring of non-core processes?

We contend that the already well established trend of ‘letting go’ of all non-core processes and competencies has a negative effect on the longer-term sustainability of the organisation.

Succession planning could already be outsourced and thus not on the board’s agenda, as recruitment consultancies now fulfil the non-core ‘attraction of suitable candidates’ services, with the traditional Human Resources fulfilling a more Risk mitigation / management functions of ensure compliance with Health & Safety Executive , employment law, equality laws, etc.

Another unintended consequence is the fact that because organisations more and more frequently utilise professional specialists to deliver projects and programmes, the esprit d corps is disappearing from organisational life.  It is difficult for managers to gain this motivational force of esprit de corps when they are managing ‘virtual teams’ and a cadre of temporary service providers through dysfunctional processes of ‘on-boarding’, induction, project management, quality control, motivational traps, engagement, focus, etc.

Therefore, to conclude this opening article in a new series around the ‘new labour market models ^{[1] [2] [3]}’, currently being practiced in the western free market democracies, let us ask the key question that is one of the foundations of the factors of production in achieving economic advancement:

“How do we recognise, incubate, nurture, develop and sustain talent and talent management in our organisation, when this critical activity is handed over to outside consultants who have a different business model and agenda to our corporate ambitions?”

We know that there are some ‘labour supply aggregators’ or forward thinking recruitment consultancies that realise that their own models of engagement has to change, in order for them to move into the value creation and value addition space, but there are still far too many ‘factories’ with conveyor belt mentalities out there.  Not to let the corporate ‘talent managers’ off the hook, because if you don’t have people and processes in place to manage the talent anymore, you only have yourself to blame when the ‘transparency machine’ of financial regulatory reform forces you down the channel of short-term decline...

theMarketSoul ©2010

Does Law inform or enforce culture?

If ‘the Law’ is the codification of cultural norms and practices, does the Law then not inform culture?

Policy, social malice and engineering of social outcomes bend these laws into legislative blunt instruments designed to enforce cultural behavioural changes on a grand scale, trouncing the common law of good judgment, neighbourly relations and common sense and thus freedom in their wake?

Within the above question and assertion lies the ‘malice of the free market’; where misguided and misinformed regulation channels behaviour and economic interactions in directions and with outcomes not anticipated or foreseen.  Thus unleashing the ‘law of unintended consequences’.

Take as an example the economic condition referred to as Moral Hazard.

A definition is:

Moral Hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.

Moral Hazard therefore flies in the face of the principles of personal responsibility and thus accountability for our actions to a wider stakeholder community.

Is Moral Hazard perhaps promoted and therefore amplified by the fact that business leaders are not more formally educated in their fiduciary responsibilities?

Is this a function of weak or inefficient corporate governance structures and frameworks, or merely an oversight that is readily addressed by ‘occupational licensure’ or the professionalization of directors by only allowing formally qualified persons to serve on certain corporate boards?

Would this formalisation process of understanding fiduciary responsibility hinder the spirit of free enterprise and risk-taking or enhance the governance and risk aptitudes in a controlled and more channelled and focussed practice?  Would it have as a positive consequence an amplifier effect for raising the corporate governance and Enterprise-wide Risk Management practices?

theMarketSoul © 2010