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jerryking : volatility   37

The Economy Needs Amazons, but It Mostly Has GEs
the country as a whole badly needs some rules-defying risk-taking. For business, that means a bit more Amazon in the boardroom and a bit less GE....The purchase of Whole Foods by Amazon introduced a level of volatility and turmoil (at least singularly to the retail sector) which had been absent from the market for a long time....The rest of the market remained placid. And months of historically low volatility has begun to look like dangerous complacency....... another, potentially more troubling explanation: stagnation. Muted markets may be an inevitable product of steady, sluggish growth, low and predictable interest rates, declining business startups and failures, and decreased competition. In other words, the problem is, there aren’t enough Amazons disrupting the stock market and the economy.....Jeffrey Bezos founded Amazon in 1994, he has prioritized expansion and innovation ahead of profit. In its early years, free cash flow—cash from operations minus CAPEX—hovered around zero. Mr. Bezos approaches new products like a VC. Many will flop (like the Fire smartphone), but some will be home runs (e.g. AWS). Amazon launched Prime, which offers free delivery in exchange for an annual fee, in 2005. John Blackledge, notes Amazon has repeatedly innovated in ways that make Prime even more valuable to subscribers.......Amazon is now profitable, yet cash retention remains secondary to building great products and delighting and retaining customers.

....If Amazon is one extreme in how companies invest, General ElectricCo. is the other. It has long been fastidious about capital and cash deployment......CEO Jack Welch perfected this approach in the 1990s.. it continued under Jeffrey Immelt. Last week, Mr. Immelt said he would retire, after 16 years struggling to restore growth. In part, that reflected how financial engineering had inflated profits under Mr. Welch. Yet Mr. Immelt ’s investment decisions too often chased the conventional wisdom on Wall Street and in Washington. ...........growth is hard for any company that dominates its markets as much as GE does. GE’s size also attracts debilitating political scrutiny. ....In response to new regulations and pressure from Wall Street, Mr. Immelt largely dismantled the business...........Investors still want GE to return cash to shareholders, and it has obliged,.....while good for shareholders in the short run, this is no recipe for growth in the long run. GE’s cash flow is shrinking despite the company’s focus on preserving it, while Amazon’s is growing despite that company’s readiness to spend it.......North American boardrooms desparately needs some rules-defying risk-taking. For business, that means a bit more Amazon in the boardroom and a bit less GE

[ See John Authers article which references Vix]

The "Minsky Moment" occurs when investors realize that they have paid far too much for the credits that have bought, no buyers can be found, and the system collapses. Aka Wile E. Coyote running-off-a-cliff....The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.
digital_economy  Amazon  GE  Amazon_Prime  risk-taking  volatility  Greg_Ip  stagnation  cash_flows  long-term  growth  start_ups  complacency  instability  conventional_wisdom  Jeffrey_Immelt  Jack_Welch  conglomerates  delighting_customers  capital_allocation  Jeff_Bezos  financial_engineering  rule_breaking 
june 2017 by jerryking
From Diaper to Soda Makers, Big Brands Feel the Pinch of a Consumer Pullback - WSJ
By Sharon Terlep, Jennifer Maloney and Annie Gasparro
April 26, 2017

Some blamed the weak start of the year on higher gas prices, bad weather and other external factors, while other executives pointed to shifting consumer tastes. Analysts say some big brands, such as Gillette and Yoplait, are losing ground to upstarts. Overall purchases of consumer packaged goods in the U.S. declined 2.5% in unit terms in the first quarter, according to Nielsen.....consumers are cutting back purchases, aggressively seeking deals and drawing down supplies at home. At the same time, he said, a growing affinity for beards has played a big part in driving down razor sales, which contributed to a 6% organic sales decline for P&G’s grooming unit....PepsiCo, like big food rivals Kraft Heinz Co. and Nestlé, is struggling as consumers shift away from diet sodas and processed foods to fresher and healthier options. It has launched new products, such as a premium bottled water brand, to adjust to the shift.....For food and nonfood staples, big brands are struggling more than the overall industry. The 20 largest consumer packaged goods companies last year had flat sales while smaller ones posted sales growth of 2.4%, according to Nielsen.

Wal-Mart Stores Inc., meantime, has been reducing inventories and slashing prices as it fights to compete with Amazon.com Inc. and European discounters moving into the U.S. Those cuts are eating into its own profit and, in turn, leading the world’s biggest retailer to put pressure on its vendors.........The dynamics are driving tough choices for companies as they are forced to decide between reducing prices and ceding market share. PepsiCo and Coca-Cola Co. have been shrinking packages and raising prices.
brands  hard_choices  large_companies  volatility  P&G  Gillette  Yoplait  CPG  PepsiCo  healthy_lifestyles  Kraft_Heinz  Nestlé  Wal-Mart  Coca-Cola  price-cutting  price_hikes  Fortune_500  upstarts  supply_chain_squeeze  shifting_tastes  Amazon  Big_Food 
april 2017 by jerryking
Unnatural calm sparks visions of a 'Minsky Moment'
31 December/1 January 2017 | Financial Times | John Authers.

Argues that it is bad news that volatility on financial markets has dropped to an all-time low as measured on the CBOE's Vix index. Economist Hyman Minsky postulated that capitalist financial systems were inherently unstable, and that stability begat instability. As markets grow calmer and bankers more confident, lending steadily rises until it is out of control. The "Minsky Moment" occurs when investors realize that they have paid far too much for the credits that have bought, no buyers can be found, and the system collapses. Aka Wile E. Coyote running-off-a-cliff....The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.
instability  Vix  indices  volatility  economists  financial_system  risk-assessment  warning_signs  complacency  dangers  high-risk  low-risk  fear  bad_news 
january 2017 by jerryking
Emerging markets offer clue for investors in 2017
December 31/January 1 2017 | Financial Times | by Gillian Tett.

Now (people = politicians = capriciousness/alternatively, unpredictable waves of populism) are shaping events, not established party platforms or policy programmes....the pricing of political uncertainty has moved from being an emerging market phenomenon to an emerged market issue....Is there any way for investors to adapt to this new world? ....(1) Start by abandoning the idea that asset values can be predicted by using neat economic models alone. ...investors urgently need to think about the difference between "risk" (i.e. events that can be predicted with a certain probability) and "uncertainty" (i.e. unknown future shocks). Until now, investors in developed markets have tended to focus primarily on risks and assume that these can be priced (and hedged against). But 2017 is likely to produce uncertainty. That cannot be easily priced or hedge--and investors should recognize this. (2) Investor should also embrace "optionality": the only way to prepare for a world of uncertainty is to stay as flexible and diversified as possible. Now is not the time for investors to put all their eggs in one basket, or bet on just one asset class. Nor is it time for businesses to be locked into rigid business plans: political and geopolitical upheaval could strike almost anywhere. (3) If 2017 does deliver more risk and uncertainty, expect financial markets to be "skittish" about "news" of all types, and not just economic....Bad news for those who despise market volatility (expectation: we're in for volatility like we've never seen before)....Uncertainty can deliver huge opportunity alongside risks..."good" surprises....Surviving 2017 in the developed economies requires that investors use tools beyond those found in the realm of economics: psychology, sociology and political science. Also, talk to successful emerging market investors to find out how they practice their craft.
concentration_risk  Gillian_Tett  emerging_markets  political_risk  unpredictability  Brexit  investors  Donald_Trump  uncertainty  risks  optionality  geopolitics  financial_markets  politicians  volatility  tools  economics  psychology  sociology  political_science  FT  institutions  rule_of_law  Gary_Cohn  populism  indicators  human_factor  assets  asset_values  asset_classes  diversification  dislocations  bad_news 
january 2017 by jerryking
At BlackRock, a Wall Street Rock Star’s $5 Trillion Comeback - The New York Times
SEPT. 15, 2016 | NYT | By LANDON THOMAS Jr.

(1) Laurence Fink: “If you think you know everything about our business, you are kidding yourself,” he said. “The biggest question we have to answer is: ‘Are we developing the right leaders?’” “Are you,” he asked, “prepared to be one of those leaders?”

(2) BlackRock was thriving because of its focus on low-risk, low-cost funds and the all-seeing wonders of Aladdin. BlackRock sees the future of finance as being rules-based, data-driven, systematic investment styles such as exchange-traded funds, which track a variety of stock and bond indexes or adhere to a set of financial rules. Fink believes that his algorithmic driven style will, over time, grow faster than the costlier “active investing” model in which individuals, not algorithms, make stock, bond and asset allocation decisions.

Most money management firms highlight their investment returns first, and risk controls second. BlackRock has taken a reverse approach: It believes that risk analysis, such as gauging how a security will trade if interest rates go up or down, improves investment results.

(3) BlackRock, along with central banks, sovereign wealth funds — have become the new arbiters of "flow.“ It is not about the flow of securities anymore, it is about the flow of information and indications of interest.”

(4) Asset Liability and Debt and Derivatives Investment Network (Aladdin), is BlackRock's big data-mining, risk-mitigation platform/framework. Aladdin is a network of code, trades, chat, algorithms and predictive models that on any given day can highlight vulnerabilities and opportunities connected to the trillions that BlackRock firm tracks — including the portion which belongs to outside firms that pay BlackRock a fee to have access to the platform. Aladdin stress-tests how securities will respond to certain situations (e.g. a sudden rise in interest rates or what happens in the event of a political surprise, like Donald J. Trump being elected president.)

In San Francisco, a team of equity analysts deploys data analysis to study the language that CEOs use during an earnings call. Unusually bearish this quarter, compared with last? If so, maybe the stock is a sell. “We have more information than anyone,” Mr. Fink said.
systematic_approaches  ETFs  Wall_Street  BlackRock  Laurence_Fink  asset_management  traders  complacency  future  finance  Aladdin  risk-management  financiers  financial_services  central_banks  money_management  information_flows  volatility  economic_downturn  liquidity  bonds  platforms  frameworks  stress-tests  monitoring  CEOs  succession  risk-analysis  leadership  order_management_system  sovereign_wealth_funds  market_intelligence  intentionality  data_mining  collective_intelligence  risk-mitigation  rules-based  risks  asset_values  scaling  scenario-planning  databases 
september 2016 by jerryking
Ex-Currency Trader Braves Tumultuous Market - NYTimes.com
By JENNY ANDERSON SEPTEMBER 17, 2014.

The forex market is being radically reshaped by new regulation and technology.

Mark Taylor, dean of Warwick Business School and a professor of finance, said he expected more regulation. “It’s a tough market to regulate because by definition, it’s a global financial market,” he said. “So where do you regulate it?”

Many banks have quietly lamented changes in foreign exchange market, specifically a move toward more online and thus transparent trading where spreads are thinner and profits smaller, but Mr. Sabet appeared more reconciled to the changes.

“The financial world is being completely regulated,” he said. Everything is becoming electronic and automated, he said, which makes compliance easier. “A human can’t make a mistake because a human is not involved.”
currencies  traders  London  fin-tech  foreign_exchange  turbulence  turmoil  volatility 
september 2014 by jerryking
The Biology of Risk - NYTimes.com
By JOHN COATES JUNE 7, 2014

What is it about risk taking that so eludes our understanding, and our control?

Part of the problem is that we tend to view financial risk taking as a purely intellectual activity. But this view is incomplete. Risk is more than an intellectual puzzle — it is a profoundly physical experience, and it involves your body...Risk by its very nature threatens to hurt you, so when confronted by it your body and brain, under the influence of the stress response, unite as a single functioning unit....The state of your body predicts your appetite for financial risk just as it predicts an athlete’s performance.

If we understand how a person’s body influences risk taking, we can learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed to excessive risk taking.

Consider the most important risk manager of them all — the Federal Reserve. ...Uncertainty over the timing of something unpleasant often causes a greater challenge response than the unpleasant thing itself. Sometimes it is more stressful not knowing when or if you are going to be fired than actually being fired. Why? Because the challenge response, like any good defense mechanism, anticipates; it is a metabolic preparation for the unknown....Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge....One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment.

Continue reading the main story
Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite....As uncertainty in fed funds declined, one of the most powerful brakes on excessive risk taking in stocks was released....There are times when the Fed does need to calm the markets. After the credit crisis, it did just that. But when the economy and market are strong, as they were during the dot-com and housing bubbles, what, pray tell, is the point of calming the markets? Of raising rates in a predictable fashion? If you think the markets are complacent, then unnerve them. Over the past 20 years the Fed may have perfected the art of reassuring the markets, but it has lost the power to scare. And that means stock markets more easily overshoot, and then collapse.

CONTINUE READING THE MAIN STORY
120
COMMENTS
The Fed could dampen this cycle. It has, in interest rate policy, not one tool but two: the level of rates and the uncertainty of rates. Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community....IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.
Wall_Street  risks  risk-management  risk-taking  uncertainty  U.S._Federal_Reserve  bubbles  volatility  behavioural_economics  risk-preferences  risk-aversion  biology  psychology  interest_rates  emotions  human_experience  human_behavior  human_frailties  human_psyche  financial_risk  signaling  stress_response  market_crash  immobilize  paralyze  bear_markets  policy_tools  physiological_response  risk-appetite  unpredictability  physical_experiences  calibration 
june 2014 by jerryking
Hedge-Fund Managers Playing Larger Role in Art Market - WSJ.com
By
Kelly Crow,
Sara Germano and
David Benoit
Jan. 23, 2014

Hedge-fund managers, who play a vital but disruptive role in the broader financial markets, are increasingly throwing their weight around the art market: They are paying record sums to drive up values for their favorite artists, dumping artists who don't pay off and offsetting their heavy wagers on untested contemporary art by buying the reliable antiquity or two. Aggressive, efficient and armed with up-to-the-minute market intelligence supplied by well-paid art advisers, these collectors are shaking up the way business gets done in the genteel art world.....Today, are applying their day-job tactics to their art shopping, dealers say.

Corporate raiders a generation ago typically held their art purchases for at least a decade. Today, the average holding period for contemporary art is two years, according to a former Sotheby's specialist. That is enough time to reap a tidy profit on a rising-star artist but hardly enough for art history to rule on the artist's lasting merits.
art  artists  collectors  Wall_Street  hedge_funds  contemporary_art  moguls  Sotheby's  investors  dealerships  Citadel  Ken_Griffin  volatility  Christie's  market_intelligence  herd_behaviour  aggressive  art_advisory  real-time  holding_periods  art_market 
january 2014 by jerryking
The Heat Is On for Farmers - WSJ.com
Nov. 20, 2013 | WSJ | By Neena Rai.

Ongoing extreme weather shocks are threatening global food security: Agricultural harvests are now more prone to drastic variations in size, making food prices increasingly volatile...The sharp increase in 2013 cereal production is due to a rebound in the U.S. corn crop and record wheat harvests in countries in the Commonwealth of Independent States. World rice production in 2013 is also expected to grow.

Global cereal stocks are thus anticipated to increase 13% this year to 564 million metric tons. Wheat and rice stocks are projected to rise, by 7% and 3% respectively, said the FAO...."In the last decade, food prices have been highly erratic and we have never seen such instability before," says Bruce Campbell, director of the CGIAR Research Program on Climate Change, Agriculture and Food Security. "There are a number of causes, but an important one relates to the weather, where drought or heat hits a major food-producing region of the world. "I think the extremes we have seen in the last few years are here to stay," he warns.... Raju Agarwal, executive director of OneProsper International, an Ottawa-based charity, which distributes drip-irrigation kits to Indian farmers.....While boosting crop production and improving access to food are key to ensuring global food security, in developed nations a more efficient use of available food could also help to feed the hungry. Even small, easy acts by consumers and retailers could dramatically cut the 1.3 billion metric tons of food wasted each year world-wide, the U.N. has said. It claims approximately one-third of all food produced, worth around $1 trillion, is wasted or lost in the food production process.
farming  agriculture  climate_change  grains  cereals  weather  volatility  instability  pricing 
november 2013 by jerryking
Canadian business, heal thyself
Oct. 18 2013 | The Globe and Mail |Jeffrey Simpson.

, the lessons BlackBerry/RIM once followed still seem urgent for the Canadian economy: research, innovation, productivity improvements, global perspective beyond the United States.

On Oct. 1, the Council of Canadian Academies summarized seven years of studies into Canada’s capacities in science, technology, innovation and productivity, releasing a report, Paradox Lost (the title must have come from the fertile brain of the brilliant Peter Nicholson, a member of the advisory group), that laid it on the line.

The government has been doing its part, especially in funding university research, the council concluded – although more money would always be welcome. What’s lacking is an “aggressively innovative business sector.”...Canadian companies rely excessively on U.S. innovation. They are content either to play an upstream role (extracting resources) or as subsidiaries of foreign companies. Too many Canadian businesses settle, the council reported, for a “profitable low-innovation equilibrium” (a fancy way of saying second-best) that conditions Canadian business’s behaviour and ambitions.....This problem of lagging innovation and inadequate R&D coincides with four major trends that will slow Canadian growth. First, the United States is in relative decline. Second, the growing global appetite for commodities means environmental challenges and volatile price swings. Third, scientific revolutions in fields such as genomics and nanotechnology will shape business and social life, but Canadian firms are behind the curve in both areas. Fourth, our aging population will be a drag on economic growth (and government revenues).
Jeffrey_Simpson  R&D  innovation  economic_stagnation  resource_extraction  America_in_Decline?  commodities  volatility  aging  complacency  Peter_Nicholson  aggressive  beyondtheU.S.  genomics  nanotechnology  productivity  paradoxes  laggards 
october 2013 by jerryking
True innovation doesn’t flow from a pipeline
Feb. 22 2013 | The Globe and Mail |Konrad Yakabuski.

... If the oil companies can’t ship raw Canadian resources using that 150-year-old technology, they will rely on an even older one – rail. And if not rail, they might just float their bitumen on barges down the Mississippi.

Huckleberry Finn might have marvelled at this inventiveness, but it doesn’t quite cut it as a 21st-century national strategy for wealth creation. Yet our frantic obsession with exporting minimally processed bitumen is sucking up all the oxygen in the national conversation. Getting Alberta’s oil to market is “the most important economic issue” facing the country, says former federal cabinet minister Jim Prentice. There is “no more critical issue facing Canada today,” adds Enbridge chief executive Al Monaco.

In fact, the most critical issue facing Canada today may just be figuring out why we find ourselves in this situation. Raw resources can be a tremendous source of income, but they are volatile, and we’ve always known that overreliance on them is a recipe for economic stuntedness. As Bank of Canada Governor Mark Carney says: “Real wealth is built through innovation.”

Innovation is not wholly absent from Canada’s oil patch. But it’s hardly a first line of business. You’d think it would be a top priority, given the vexatious characteristics of Alberta bitumen, the oil sands’ distressing environmental footprint and the Canadian industry’s growing global image problem. Even in boom times, however, the Canadian oil and gas industry spends a piddling proportion of its revenues on research and development......Last week, PricewaterhouseCoopers predicted that the coming boom in global shale oil production could slash the price of crude by $50 (U.S.) a barrel over the next two decades. “One effect will be to cut the need for expensive, environmentally destructive extraction techniques like the Arctic and tar sands,” the head of PwC’s oil and gas team told Reuters.... the real issue facing Ontario is its failure to make the shift from making low-tech goods to advanced manufacturing, the only kind that can support middle-class wages. Governments have showered the industry with tens of billions of dollars trying to make Canadian firms more innovative, to little avail. Cash-strapped and fed up, federal Finance Minister Jim Flaherty slashed R&D tax credits in last year’s budget. The result will be even less innovation, as domestic companies cut back and foreign-owned firms shift R&D elsewhere.

“Canada’s problem,” says Robert Atkinson, the author of Innovation Economics, “is that it’s not Germany, which has a much better engineering innovation system, and it’s not the U.S., which has a very good system of science-based entrepreneurship. You’re mediocre in both.”
Keystone_XL  pipelines  crossborder  oil_industry  Mark_Carney  Ontario  innovation  oil_patch  wealth_creation  books  natural_gas  natural_resources  fracking  shale_oil  hydraulic_fracturing  Konrad_Yakabuski  oil_sands  complacency  mediocrity  commodities  volatility  cash-strapped  national_strategies  environmental_footprint 
march 2013 by jerryking
U.S. Crop Tour Draws Global Crowd - WSJ.com
August 26, 2012| | By IAN BERRY and OWEN FLETCHER
U.S. Crop Tour Draws Global Crowd
Increased Foreign Participation Reflects Price Volatility, International Demand.... the four-day Pro Farmer Midwest Crop Tour, which took place last week, and similar excursions by the increasingly high stakes of agricultural commodities and the chance to gain intelligence that could give them an edge on competitors.

The increased foreign participation in the crop tours comes amid higher volatility in corn, wheat and soybean futures markets in recent years and the heightened globalization of agriculture. The U.S. farm boom stems in part from the expansion of the middle class in China, which has led to increased meat consumption, fueling more demand for grains and soybeans to feed livestock.
commodities  food_crops  pricing  volatility  slight_edge  agriculture  futures_markets  high-stakes  market_intelligence 
january 2013 by jerryking
As Natural-Gas Bills Rise, Landlords Face a Choice - WSJ.com
March 12, 2003 | WSJ | By RAY A. SMITH | Staff Reporter of THE WALL STREET JOURNAL.
natural_gas  volatility  energy  pricing 
january 2013 by jerryking
Antifragile
by Taleb, Nassim Nicholas.
Year/Format: 2012

Just as human bones get stronger when subjected to stress and tension, and rumors or riots intensify when someone tries to repress them, many things in life benefit from stress, disorder, volatility, and turmoil. What Taleb has identified and calls “antifragile” is that category of things that not only gain from chaos but need it in order to survive and flourish.

In The Black Swan,Taleb showed us that highly improbable and unpredictable events underlie almost everything about our world. In Antifragile, Taleb stands uncertainty on its head, making it desirable, even necessary, and proposes that things be built in an antifragile manner. The antifragile is beyond the resilient or robust. The resilient resists shocks and stays the same; the antifragile gets better and better.

Furthermore, the antifragile is immune to prediction errors and protected from adverse events. Why is the city-state better than the nation-state, why is debt bad for you, and why is what we call “efficient” not efficient at all? Why do government responses and social policies protect the strong and hurt the weak? Why should you write your resignation letter before even starting on the job? How did the sinking of theTitanicsave lives? The book spans innovation by trial and error, life decisions, politics, urban planning, war, personal finance, economic systems, and medicine. And throughout, in addition to the street wisdom of Fat Tony of Brooklyn, the voices and recipes of ancient wisdom, from Roman, Greek, Semitic, and medieval sources, are loud and clear.

Antifragile is a blueprint for living in a Black Swan world.
antifragility  Black_Swan  blueprints  bones  bone_density  books  brittle  city-states  disorder  improbables  libraries  Nassim_Taleb  revenge_effects  stressful  tension  turmoil  unpredictability  volatility 
november 2012 by jerryking
Learning to Love Volatility: Nassim Nicholas Taleb on the Antifragile
November 16, 2012 | WSJ | Nassim Nicholas Taleb

In a world that constantly throws big, unexpected events our way, we must learn to benefit from disorder, writes Nassim Nicholas Taleb.

Some made the mistake of thinking that I hoped to see us develop better methods for predicting black swans. Others asked if we should just give up and throw our hands in the air: If we could not measure the risks of potential blowups, what were we to do? The answer is simple: We should try to create institutions that won't fall apart when we encounter black swans—or that might even gain from these unexpected events....To deal with black swans, we instead need things that gain from volatility, variability, stress and disorder. My (admittedly inelegant) term for this crucial quality is "antifragile." The only existing expression remotely close to the concept of antifragility is what we derivatives traders call "long gamma," to describe financial packages that benefit from market volatility. Crucially, both fragility and antifragility are measurable.

As a practical matter, emphasizing antifragility means that our private and public sectors should be able to thrive and improve in the face of disorder. By grasping the mechanisms of antifragility, we can make better decisions without the illusion of being able to predict the next big thing. We can navigate situations in which the unknown predominates and our understanding is limited.

Herewith are five policy rules that can help us to establish antifragility as a principle of our socioeconomic life.

Rule 1:Think of the economy as being more like a cat than a washing machine.

We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own.

By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times.

Rule 2:Favor businesses that benefit from their own mistakes,not those whose mistakes percolate into the system.

Some businesses and political systems respond to stress better than others. The airline industry is set up in such a way as to make travel safer after every plane crash.

Rule 3:Small is beautiful, but it is also efficient.

Experts in business and government are always talking about economies of scale. They say that increasing the size of projects and institutions brings costs savings. But the "efficient," when too large, isn't so efficient. Size produces visible benefits but also hidden risks; it increases exposure to the probability of large losses.
Rule 4:Trial and error beats academic knowledge.
Rule 5:Decision makers must have skin in the game.

In the business world, the solution is simple: Bonuses that go to managers whose firms subsequently fail should be clawed back, and there should be additional financial penalties for those who hide risks under the rug. This has an excellent precedent in the practices of the ancients. The Romans forced engineers to sleep under a bridge once it was completed (jk: personal risk and skin in the game).
Nassim_Taleb  resilience  black_swan  volatility  turmoil  brittle  antifragility  personal_risk  trial_&_error  unknowns  size  unexpected  economies_of_scale  risks  hidden  compounded  disorder  latent  financial_penalties  Romans  skin_in_the_game  deprivations  penalties  stressful  variability 
november 2012 by jerryking
Managing Risk In the 21st Century
February 7, 2000 | Fortune | By Thomas A. Stewart.

Take risk management, a responsibility of the treasury function. Most risk managers haven't begun to cope with the real threats 21st-century companies face. Like the drunk in the old joke who looks for his lost keys under the streetlamp because the light is better there, risk management is dealing with visible classes of risk while greater, unmanaged dangers accumulate in the dark.

Risk--let's get this straight upfront--is good. The point of risk management isn't to eliminate it; that would eliminate reward. The point is to manage it--that is, to choose where to place bets, where to hedge bets, and where to avoid betting altogether. Though most risk-management tools--insurance, hedging, diversification, etc.--have to do with reducing loss, the goal is to maximize the gains from the risks you take (alpha? McDerment?)

So where should we look for these new risks?

--Your reputation or brand. When a bad batch of carbon dioxide in Coca-Cola sickened some Belgian children last summer, Coke's European operating income fell about $205 million, and Coca-Cola Enterprises, the bottler, incurred $103 million in costs. What about the cost to brand equity? One highly imperfect proxy: Coke's market capitalization fell $34 billion between June 30 and Sept. 30, 1999.

--Your business model. Asset-free, knowledge-intensive competition is to entrenched business models what the Panzer was to the Maginot Line. MP3s changed the music business more fundamentally than anything since radio. E*Trade, 18 years old, forced Merrill Lynch, 180, to change its way of doing business. Yet the new guys' very nimbleness creates its own risks, which traditional risk management can't help. You can protect the hard assets of a brick-and-mortar mall. Click-and-order stores are much more exposed: Cash flow is just about all they've got.

--Your human capital. The obvious human-capital risk is flight--especially in a tight labor market--but it's only part of a larger, subtler problem. When the CEO intones, "People are our most important asset," he's wrong, even if he's sincere. People are your most important investors. Your stock of human capital matters less than your flow of it. Any turbulence--and is there anything but turbulence these days?--can disrupt the flow, damaging your ability to attract human capital or people's desire to collaborate. Says Thomas Davenport, a partner at Towers Perrin: "Uncertainty is a real enemy of human capital. People rebalance their ROI by cutting back the investment."

--Your intellectual property. Many risks to intellectual property--theft, for example--can be dealt with in obvious, if sometimes onerous, ways. Here's the cutting-edge question: How do you manage risk in the process by which new intellectual property is created? How do you cope with the fact that the safer a given R&D project is, the less likely it is to be a big-money breakthrough? How do you balance the virtues of specialization against those of diversification?

--Your network. No company is an island, entire of itself; odds are your business is embedded in a network you do not control. It's not just that AOL might crash and cost you a few days' sales; your whole business may depend on tangible and intangible assets that belong to outsourcing partners, franchisees, sugar daddies, or standard-setters.
There are a couple of patterns here. First, an ever-greater part of business risk comes from sources your company can't own--people, partners, environments. Second, volatility isn't just a currency or stock market risk anymore. Labor markets, technologies, even business models oscillate at higher frequencies--their behavior more and more resembling that of financial markets.

In those patterns are hints of how to manage intellectual risks--which we'll examine next time.
risk-management  21st._century  risks  Thomas_Stewart  reputation  branding  business_models  financial_markets  talent_management  intellectual_property  networks  human_capital  turbulence  uncertainty  volatility  instability  nimbleness  labour_markets  accelerated_lifecycles  intellectual_assets  e-commerce  external_interaction  talent_flows  cash_flows  network_risk  proxies  specialization  diversification  unknowns  brand_equity  asset-light  insurance  hedging  alpha  Michael_McDerment 
june 2012 by jerryking
Go Ahead, Take a Risk
June 22, 2004 | WSJ | By ADRIAN SLYWOTSKY

What are the risks you should be taking but aren't? Most managers treat risk as an unwanted byproduct of the business. They think narrowly of financial, operating, and hazard risks, such as currency fluctuations, employee fraud, and earthquakes. And they defend themselves through practices like hedging, internal controls, and insurance.

But disruptive strategic risks can be a much larger source of value destruction for a firm. I looked back to the bull market of the 1990s to analyze movements of the Fortune 1000 stocks; even then, before the market collapsed, 10% of stocks lost over one-quarter of their value in a single month, primarily because of strategic-risk events.

The most successful companies do not try to simply minimize strategic risk; they embrace such risk by making prudent bets in their growth-oriented strategies. Strategic risks include not just the obvious, high-probability events that a new ad campaign or new product launch will fail, but other less-obvious risks as well: Customers' priorities will change quickly -- as when baby-boomer parents quickly migrated from station wagons to minivans, catching most automakers off guard. New technology will overtake your product -- as mobile telephony has stolen market share from fixed-line voice. A one-of-a-kind competitor will render your business model obsolete -- as the Wal-Mart tidal wave has washed over mid-range department stores.

Although insurance and hedging can't address strategic risks, there are an array of countermeasures that can, including these three:
1) Smart sequencing for new growth initiatives. Look for incumbents that are moving deliberately, leveraging existing assets and customer relationships to gain the experience, knowledge, and reputation necessary to take the next step with confidence.
2) Proprietary information to reduce the risk of each new initiative. Gather and generate proprietary information that produces a depth of insight into the customer's needs and activities that traditional suppliers cannot match. This will make you a supplier of choice, reducing bidding volatility and allow you to plan with greater certainty.
3) Double betting to minimize the risk of obsolescence. When several versions of a new technology are competing to become the standard, it's impossible to predict which will prevail. So smart managers make double bets. Betting on both Windows and OS/2 positioned Microsoft to be the winner, regardless of which operating system prevailed.

Traditional risk management seeks to contain losses. But that's just one-half of the growth equation. By embracing strategic risk, Cardinal, JCI, and other risk-savvy companies have raised their growth potential in addition to reducing their economic volatility. That's important at a time when aggregate market growth is sluggish: The biggest risk of all is not to take the right growth risks for the business.
leaps_of_faith  Adrian_J._Slywotzky  risk-taking  proprietary  sequencing  scuttlebutt  information  growth  strategic_thinking  Mercer  Oliver_Wyman  product_launches  nonpublic  low_growth  slow_growth  insights  customer_insights  value_destruction  disruption  insurance  new_products  obsolescence  countermeasures  volatility  customer_risk  one-of-a-kind  hedging  overly_cautious  risk-aversion  de-risking  double_betting  risk-management  bull_markets  customer_relationships  dark_data  risk-savvy  internal_controls  financial_risk  risks 
june 2012 by jerryking
What makes Mick Davis stand out -- strong nerves
27 Mar 2007 | The Globe and Mail pg.B.2. | Eric Reguly.

Canadian mining bosses should get out of the office more often...For Canadian (mining CEOs) when the price rises sharply, visions of price collapse immediately fill their heads, and for good reason. The last downward cycle was so brutal that the mining companies were lucky to come out of it alive. They totally misjudged the current cycle, though. The Canadian CEOs should have spent less time on the golf course and more time watching stockpiles of nickel (and copper, zinc and lead) in Shanghai, Mumbai, Taipei and Seoul disappear like beer at Oktoberfest....Xstrata CEO Mick Davis and the intelligence gatherers at Glencore International, the commodities trader that controls 35 per cent of Xstrata, endlessly traipse around the planet to pick up information on reserves and supply and demand. They feed the data into a black box, which rattles and shakes and spits out a range of eye-popping numbers. Then Xstrata runs out and buys nickel companies when nickel prices are outrageously, unsustainably, stupidly high, or so everyone else thinks. Then the company and its shareholders make obscene amounts of money....CVRD and Inco have been spectacularly right, the Canadians spectacularly wrong. The result is a Canadian nickel mining industry with no nickel miners left of any size. Falconbridge, Inco and LionOre have been eradicated as independent, home-grown names. Investors who sold Inco and Falconbridge left fortunes on the table...The Xstrata lads didn't just get smart on price forecasts. They also figured out how to treat the hedge funds: Respect but don't fret about them. The hedgies pump volatility into the system. When commodity prices fall, say, 10 per cent, share prices might fall by double that amount as the hedgies head for the tall grass. As a CEO, you need strong nerves to endure such violent up and down movements. Mr. Davis has strong nerves and it has paid off. Many other mining bosses look at the hedge funds with fear.
CEOs  commodities  commodities_supercycle  Eric_Reguly  Glencore  inventories  lessons_learned  market_intelligence  Mick_Davis  mining  price_forecasts  scuttlebutt  sellout_culture  stockpiles  volatility  Xstrata 
june 2012 by jerryking
UNPRECEDENTED VOLATILITY A HALLMARK OF AGRICULTURE’S NEW AGE
* Have a plan for the future – perhaps a surprise to some, but many farmers don’t have a plan in place that paints a vision for where they want to take their operation over the next 2, 5 and 10 years.
• Have credit in place before it is actually required – it is human nature to leave things to the last minute.
• Implement a sound hedging strategy – in addition to the system of crop insurance in place in this country, there are many ways that Canadian farmers can take actions to manage their risk. Diversifying into new businesses is one example.
• Well-managed risk can pay off – at the same time, taking on some risk that is prudent and ts the risk pro le of the farming operation can pay off handsomely for farmers. In such a volatile and fast paced environment, there are bound to be some buying and selling opportunities that open up. Knowing when to take advantage of them can separate successful farms with those that muddle along.
• Know your costs – many producers have a good sense of how their top line is performing. But it is just as impor-tant to have a good understanding of the cost side of the equation.
• Maintain adequate liquidity and reasonable leverage – in order to mitigate the risks associated with increasing asset prices, it would be prudent for farmers to ensure that they have sufficient liquidity and manageable leverage if they are expanding.
• Use reasonable interest rate assumptions in assessing investment opportunities – even though borrowing costs are unusually low, farmers must be mindful of the fact that this low-rate environment won’t last forever.
agriculture  uncertainty  volatility  farming  liquidity  leverage  hedging  futures_contracts  diversification  new_businesses  risks  risk-management  risk-taking  OPMA  WaudWare  interest_rates  vision  long-term  never_forever  business_planning  credit  costs  anticipating  risk-mitigation  low-interest  cost-consciousness 
may 2012 by jerryking
How to feed 9 billion people: the future of food and farming
By Jonathan M. Gitlin | Published about a year ago.

Professor Beddington began by giving a brief overview of the report, also entitled The Future of Food and Farming, stating that the case for urgent action in the global food system is now compelling, and denying the "foul slander that I've been buying wheat futures to drive the price up." Although he was able to inject some levity, it is a deeply serious and somewhat worrying issue.....we need to stop romanticizing small farmers. The solutions to future food production can't and shouldn't be an either-or between them and large agrifarms. She claimed that big food companies' objectives do align with sustainability needs, but they're villainized unreasonably. Nestlé benefits from adopting small farm techniques that decrease contamination, and farmers benefit from stable access to customers.
agribusiness  agriculture  Big_Food  climate_change  cost_of_inaction  demonization  farming  food  Nestlé  smallholders  sustainability  volatility 
april 2012 by jerryking
GE Chief Charts His Own Strategy - WSJ.com
September 23, 2003 | WSJ | By CAROL HYMOWITZ.

"We're living in a world of more volatility, higher environmental risks and slower growth," says Mr. Immelt. "Companies that depend just on acquisitions to get growth will be left behind. The only way to get growth is to differentiate oneself with new products and services."
Carol_Hymowitz  GE  Jeffrey_Immelt  slow_growth  new_products  risks  volatility  differentiation 
march 2012 by jerryking
Moving beyond that flat-world theory - The Globe and Mail
May 2, 2011 | Globe and Mail | Harvey Schachter.

Declining global stability is real and the days of a stable world are gone. Mark Anderson, editor of the Strategic News Service, lays out 10 provocative pieces of advice.
Climate change is real
Global consumer explosion is on
Your company will lose money if you go to China
Don't try to serve both the consumer and enterprise technology markets
Innovation is a creative process
Protect intellectual property
The world is not flat
Be prepared for Chinese competitors
Manage for currency manipulation
flat_world  Harvey_Schachter  climate_change  BRIC  China  Chinese  competition  innovation  intellectual_property  volatility  currencies 
october 2011 by jerryking
In the Insider Trading War, Market-Beaters Beware - NYTimes.com
Sep 22, 2011 |NYT|ROGER LOWENSTEIN.A problem with the SEC’s
focusing on high-return funds is that it skates over the crucial
distinction between short- & LT investing. Some of the 8,000+ hedge
funds in the US are engaged in rapid-fire trading —trying to outguess
the competition w.r.t disclosures that’ll become public in a week.Some
are obsessed with trying to outguess Wall Street “whisper
numbers”.Absent tips regarding forthcoming news, their managers have no
value added/edge. For investors working longer horizons the picture is
different.Skillful, L.T. investors can make $ without tips, by analyzing
info. that’s already public...Society has an interest in genuine
research (e.g. whether GOOG will be a more dominant biz.)...Hedge fund
hypertrading doesn’t add to economic output--it ratchets up mkt.
volatility...A marked increase in volatility complicates the SEC’s
job...the payoff for trading on insider tips rises as well.Ferreting out
the prescient & the crooked becomes more important.
insider_trading  insider_information  SEC  Roger_Lowenstein  white-collar_crime  Wall_Street  hedge_funds  SAC_Capital  volatility  long-term  investing  personal_payoffs 
september 2011 by jerryking
FT.com / Life & Arts - Lightning in a bottle
October 30 2010 | Financial Times | By Steven Johnson. The
physical density of the city also encourages innovation. Many start-ups,
both now and during the first, late-1990s internet boom, share offices.
This creates informal networks of influence, where ideas can pass from
one company to the other over casual conversation at the espresso
machine or water cooler....By crowding together, we increase the
likelihood of interesting ideas or talents crossing the companies’
borders. The proximity also helps to counter the natural volatility of
start-ups...Economists have a telling phrase for the kind of sharing
that happens in these densely populated environments: “information
spillover.” When you share a civic culture with millions of people, good
ideas have a tendency to flow from mind to mind, even when their
creators try to keep them secret....The musician and artist Brian Eno coined the odd but apt word “scenius” to describe the unusual pockets of group creativity and invention that emerge in certain intellectual or artistic scenes: philosophers in 18th-century Scotland; Parisian artists and intellectuals in the 1920s. In Eno’s words, scenius is “the communal form of the concept of the genius.” New York hasn’t yet reached those heights in terms of internet innovation, but clearly something powerful has happened. There is genuine digital-age scenius on its streets. This is good news for my city, of course, but it’s also an important case study for any city that wishes to encourage innovative business. How did New York pull it off?
ideas  creativity  innovation  cities  cross-pollination  urban  idea_generation  scenius  Steven_Johnson  proximity  information_spillover  unpredictability  serendipity  collaboration  densification  ideaviruses  volatility  network_density  start_ups 
october 2010 by jerryking
The European Union rescues Greece and Portugal
May 24, 2010 | The New Yorker | by James Surowiecki. "...The
fact is, this kind of volatility isn’t going away, because we now live
in an environment dominated by what economists call “political risk”—the
uncertainty that businesses face as a result of government actions. Of
course, government actions always affect the economy, but usually in an
undramatic way: an interest-rate cut here, a new regulation there. The
economic downturn and the debt crisis have given us instead a world
where governments are among the most important players in
markets—injecting money into economies on a colossal scale and routinely
propping up, or even nationalizing, troubled companies."
IMF  political_risk  James_Surowiecki  Greece  Germany  geopolitical-risk  E.U.  Angela_Merkel  bailouts  uncertainty  instability  volatility  economic_downturn  debt_crisis  Portugal  central_banks  sovereign-risk 
may 2010 by jerryking
Intact Financial: Defensive, disciplined and eyeing acquisitions
Jan. 09, 2010 | The Globe and Mail | by Tara Perkins.
Canada's $36-billion property and casualty insurance sector, a
fragmented industry where the top five players hold only about one-third
of the market....Charles Brindamour, is the CEO of Intact Financial
Corp.(IFC-T ) Canada's biggest home, auto and business insurer. He saw
three main themes in 2009 that not only defined the year for his
industry, but also set the stage for the months ahead: the global
capital markets crunch that marked the start of last year, increasing
evidence that the weather is becoming less predictable, and the return
to optimism in capital markets. Weather patterns..."We've done much
work here on pricing, products and equipping our customer service
operations to deal with storms and water damage. And we're doing a lot
of work with our clients on prevention as well as climate change
adaptation". Opportunity for Pelmorex?
weather  CEOs  patterns  insurance  Intact_Financial  fragmented_markets  volatility  climate_change  catastrophes  natural_calamities  threats  capital_markets 
january 2010 by jerryking
reportonbusiness.com: What? Me worry?(2)
September 26, 2007 From Friday's Globe and Mail by Doug Steiner

....after opening the most recent monthly statements from my asset-dieting RSPs, I haven't been smiling. And I've had to give myself advice about market risk-again. "I turned the October, 1987, crevasse into a hill of savings years ago. My strategy? Solve the following complex equation: Cash In - Cash Out = Savings. If you include a time element in the equation for retirement, it looks like this: Future Savings - Future Spending = Not Living Only On CPP. "....Here is some good and rational advice: If you have equity investments and this worry thing is really getting to you, take a breather. Think about shifting all your savings into good old Government of Canada treasury bills for six months. Want a little more action? Add some ETFs that track stock market indexes to your portfolio-that will give you market volatility similar to what you had when you were sleeping well before the markets went berserk.

But the best rational advice I can give you is to learn the discipline of setting risk limits and sticking to them. That will allow you to live with any volatility in the markets. It really is that simple.
Doug_Steiner  markets  risk-perception  calm  risk-assessment  panics  self-discipline  volatility  risk-limits  ETFs  retirement  risks  GoC 
march 2009 by jerryking

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