The holiday conspiracy between cinema and television

Everyone loves holiday stories, and everyone is secretly attentive to conspiracy theories so I offer my own in the spirit of both.  I believe that broadcast (free and almost free) television is deliberately awful during the holiday season to promote the public’s attention to movies and alternative media.

 

First the films.  Holiday blockbusters and special releases have taken a disproportionate role in the annual revenues of the film producers.  (Without digressing too much, the summer releases have diminished in significance, and the long term franchise (DVD) international revenues are also boosted by the holiday ‘buzz.)  Even the ‘small’ films get major marketing investments, but there are multiplex-loaded offerings just begging for us to buy their (never discounted) popcorn whenever we have time, and at the holidays we all have time.

Next, alternative delivery media – those apps and casts and visually splendid technology based deliveries to our devices that we never quite have time to master.  At the holidays we have time to learn and practice, particularly when family activities reach the peaks of boredom.  And we do.  The online sales of everything have skyrocketed this year, none more that streaming delivery of everything from sports to reruns to new cinema releases. 

And then there is the entire catalog of television offerings during the holiday season.  Awful cannot to these pathetic schedules justice; at best they contain reruns of shows those who are DVR impaired may have missed, but most often they are low budget offerings loaded with commercials run repetitively until we are forced to……go to the movies at home or away. Even many of the sports are meaningless since they are before the championships or rarely unique (yes, I will watch the outdoor hockey game).And public television is no oasis, rerunning ancient episodes of Masterpiece or marathons of Dr Who.  No wonder everyone is, pardon the pun, left to their own devices.

Would I go so far as to speculate that the entire nonsense with the farce entitled ‘The Interview’ was exaggerated to force people into a demonstration project on how easy it is to stream a full movie?  Even if it was not intentional, it introduced millions to both movie downloading and a variety of new payment platforms – all heavily marketed. The technology press is declaring victory.  I declare conspiracy.

The best news of all is that in the year 2015 (the year of the tablet), the book industry is thriving so that on a cold winter’s night Zeke and I can sit by the fire and snuggle with Margaret Atwood.

December aches and pains

Many of us are furious that everyone keeps talking about health issues – not just some of the time but all of the time.  Casual conversations, dinner discussions, brief greetings, and telephone chats are eventually twisted into discussions of doctors and procedures and medications and rumors about all of the above. Not just us older folks…but everyone.  Boring, and I avoid it by walking away.

So…..(it is now obligatory to start narratives with ‘so…’)  Here is a summary of observations about aches and pains in the cruelest month of December, when cold and damp replace warm sunshine.  My prejudice is away from meds – even NSAID’s – unless absolutely necessary.  I am not injured, but have the same OA and creaky old body as everyone else in my age group. So I look for solutions.

Observation #1: Believe the experts on the subject of hydration. I started early in the summer on a plan to have water everywhere and drink not just the recommended minimum (eight glasses) but as much as I could. The goal was to avoid dehydration, but really test how I felt.  Simple conclusion: the more I hydrated the less aches and pains and sometimes none at all.  To the contrary, if I skipped drinking water for a half day I felt the results right away.

My apologies to the tiny bladder crowd, because I recognize the inconvenience; and my apologies to those fixated on exotic brands of bottled water (not my problem) that cost too much; and my sympathies to those often stuck in long traffic jams (try trucker’s friend) but the benefits dramatically outweigh the inconveniences.  I also recognize that some of our favorite beverages actually dehydrate when you drink, so I have adjusted (Hint:  I drink more water). The real challenge will be in the cold months, when it is not quite as natural to hydrate all the time.

Observation #2: For pain relief the solution that still works in a surefire low cost way is ice/ice packs/frozen peas or any direct application of cold with a bit of pressure.  We note that a sure sign that you are getting older is that the cooler on the passenger seat no longer is devoted to beer but now is loaded with refreezable (Velcro optional) ice packs. In a pinch plastic bags will work, or an old fashioned water bottle kept in the car to fill with ice when necessary. There is no excuse to succumb to aches and pains if you can tolerate the silly inconvenience and logistics of having ice packs plentiful and handy.

Observation #3: There is an entire industry, perhaps multiple industries devoted to convincing we the consumers to purchase pain relievers of every imaginable size shape and variety. If you watch television without fast forwarding through commercials you know there is a similar industry for surgery (see below), but the logical flaw to this approach is that taking , for example, an NSAID, is necessary and we just have to choose which one. I can report that if I did not try every single one, I tried many too many.  My conclusion is that they are all very different and work in ways that can be called ‘spotty’.  Long term and excessive use can be dangerous, and generally lifestyle variables have a determinate role in when and how well and how long they work. My concern is that there is not a lot of personal control. Various doses of ibuprofen or acetaphetamine under all those brands effect your entire system.[ I actually found a cocktail (‘script required) of arthrotec combined with limbrel that made me feel like superman.  Blood tests three months later revealed severely elevated readings on my liver chemistries.  That was the message I needed to avoid general meds.]

Observation # 4: Topical applications and products are of two catagories; those that work and those that merely irritate.  Again, I may not have tried them all, but I tried a lot both in the US and overseas (no script necessary). First, all those stinky menthol laden irritants have some value for ‘warming up’ and stretching before starting (just ask elite runners) bit IMHOP are not pain relievers by themselves. Second, many of the topical treatments combined with stretching and/or massage have quite a bit of value, albeit limited.  My favorite (cheap) example is good old Aspercreme; combined with a bit of massage and stretching it provides localized relief of aches and pains.  Limited, but useful.  The more expensive topical crèmes and gels (I am happy to send a list) are also of limited value, both the expense prescription variety (Rosiden and Voltaren) and the generic (pricey)sports rubs like Zostrix. I don’t use them anymore, but it does not mean they might not work for you.  Prepare to spend a lot of money.

Observation #4:  Two winning topical products have emerged from about ten years of wasting money. And the first is my pleasure to endorse  -- Arnicare (topical – I have not tried the ingestables), and the ingredient Boiron has worked for me and many of my friends.  Pinpoint and with some duration, the gell crème, or ointment is not too messy and not too costly.  The second product is not my pleasure to tell you about.  It works so well that it is scary, and worth the cost and the prescription if you are in pain.  There is a patch called Flector, and is technically an MSAID called diclofenac epolamine in conacentrated form.  Put the patch directly on the pain and the pain goes away no matter how acute.  Wear it while you sleep and the next morning you have full flexibility and no pain at all.  But the stuff is really powerful and you know that something has transformed your metabolism.  I cannot explain it, but please tred carefully. You have control, but not if you leave it on too long.  It is also expensive.

Observation #5: Is all that surgery necessary? We all have friends doing replacements and scrapings, and implants. The marketing is powerful.  The insurance  industry aides the promotion. Somehow I think that aches and pains are just a message that you have to slow down.

There you go; I have done my discussion of aches and pains for the year.  Now I just have to listen to everyone else.

What to ask about clean energy in the face of a declining oil price

I found myself facilitating a discussion about a subject I know little – energy.  I share the same enthusiasm for the eminently logical choices towards clean energy when they make sense, and certainly for the long run.  I also see how passion overwhelms logic on both sides.  The fossil fuel legacy industry has a huge investment in the status quo, and clean energy advocates place passion over everything including economic pain.

The critical question

With the precipitous decline in oil prices, the logical question involves the momentum of the transition towards long term investment in clean energy. It is impossible to be totally ignorant on the subject since the recent tipping point published by Lazard indicating that the economics of clean energy matches or surpasses fossil fuels, or the transition underway in Germany towards conversion away from fossil fuels, or the commitment of the PRC in the recent (sometimes inexplicably maligned) treaty committing to investment in clean energy equivalent to the entire US grid. The headline news gets in the way.  If oil prices are low, shouldn’t this disrupt the trend towards renewables?

The elements of the discussion

Politics, as usual gets in the way.  There are subsidies and tax breaks and market manipulations, as well as the geopolitics surrounding the oil industry and individual country interests (think Japan and nuclear).So the platitudes and the narratives emerge – always oversimplified and often ignoring data. I cringe when the topic is on the evening news or the radio news shows – they can never get it right.  Those fully committed to investment in clean energy take it as nonnegotiable.  The opponents are equally entrenched as they calculate the cost of disruption. This is my blog – I disagree with the all.

The emergence of favorable economics of green energy and the future trend for low cost oil and natural gas have shaken the structure of the entire energy industry.  Suppliers, distributors, and consumers both large and small have transformed from massive groups of institutions and people to much smaller micro segments all along the supply chain.  Thus the arguments must be nuanced and the data behind those argument granular.  Nuance and granular data is hard work, and that is certainly why the news organizations will often get it wrong.

Take an easy pair of examples – an isolated tropical island with substantial population comes first.  Renewables don’t just make sense; they are already dominating energy investment for those who have access to capital.  With the anticipated decline in the costs of solar panels, the ‘islands’ in poor countries will get the benefit as well. The other easy example is the population centers that sit atop easily and cheaply accessible fossil fuels.  Here in Pennsylvania we can anticipate the future with natural gas stations fueling both industry and vehicles (hopefully in a clean application). But the world is not a simple extreme example. And the players and influencers, including politicians, are not deeply informed (remember nuance and granularity). Add short term focus, where the cost of disruption is both shocking and a personal disaster (if you lose your job or business).

One more observation – the long term investment forces have already, without reference to oil price, embraced the clean energy future.  The giant projects, generation/storage/distribution, are now promoted by the investment banks (see Lazard reference below); and the asset manager advisors have now put forward a case for divesture of fossil fuel projects and investment in clean energy. See Institutional investor references also below).  Let me take a moment to explain these two important views.  Lazard notes the fundamental shift in the value of generation facilities (the billions of dollars projects) to renewable and clean energy over fossil fuel projects.  Lazard is important because they are the investment bank that arranges the very large global projects globally.  In the Institutional Investor article, the author constructs two model portfolios – the clean energy investment outperforms the fossil fuels investments.  So in this capitalist world of ours, both the wholesale and retail investment domains have already concluded that clean energy is where capital should go – all with minimal reference to oil price. But remember these are esoteric, albeit expert, indicators, and are for the long term.  What to do about short term discussions?

Proposed solution

The result of the multiple structural pressures (in production, distribution, and storage) is a fundamental structural change in the entire industry from monoliths to disaggregated (sub market) units of analysis. So more than ever the high level arguments with simplistic views or results do not apply.  The exceptions will outnumber the normative examples, and more importantly there will not be a mean to revert to.

So….(everyone now starts there commentary with ‘so’) everyone, no matter their perspective, should embrace a disaggregated approach.  We have to recognize the micro segments in production, the multiple channels for distribution, and the diverse and emerging dispersed storage alternatives. There are scenarios, models, and results for each of these components.  The level of nuance and detail will  indicate how much work has been done in the analysis.  Once the framework is established, results will be elaborated across the ‘map’ of the components under discussion.

What does the answer look like?

Take our original extreme examples; for the island (one with access to capital) the production and distribution and storage is independent of the oil price; and for the legacy fossil fuel dependent ecosystem (without access to capital) oil price is both a short and long term determinant. The interesting part of the analytic framework emerges as the components in the value chain begin to change.  Storage comes to mind first.  When and if those mythical perfect batteries become practical, or the risks of storage of fossil fuel energy or its waste become unmanageable the game changes. But similar transformational events can occur in production and distribution.

Clean energy advocates, particularly true believers, are accused of ignoring practical matters like how cold it is in the Ukraine in wintertime. Fossil fuel protectionists, circling the wagons around their legacy systems, are accused of failing to include all the long term costs to society. A disaggregated approach to the analysis with not convert either group, nor will it ease the pain of the disruptions to the elements of societies (emerging market populations) who feel the greatest impact.

An answer

The answer is that the volatility of oil price by itself will barely impact the analysis supporting  long term investments in clean energy.  The greater the volatility, however, the greater the cost (financial and human) and benefits of all the disruption. Also, and not trivially, a very low oil price will have a multiplier effect as most economies improve and capital goods have to be replaced.  Every investment from the family vehicle to the energy distribution network needs cyclical renewal.  Low energy cost benefits the micro economy and then allows for more of these upgrading projects.  The analysis, however, is not unitary because that ‘upgrade’ may well need to be perfecting a fossil fuel system under certain circumstances –such as the grid threatened in Cuba.

(Caveat:  If you want to know the effect of oil price volatility on politics or broad public views (read news) you will not find it here.  Remember ‘correlation is not causality’ is a basic philosophical construct that is absent from both politics and the public media.)

References that, IMHOP, do not exaggerate:

Original Lazard comment http://www.lazard.com/media/198582/levelized-cost-of-energy-release-version-80.pdf

 

http://about.bnef.com/press-releases/oil-price-plunge-clean-energy-real-impact/

http://www.ieefa.org/renewables-state-by-state-go-mainstream-bloomberg-little-green-energy-impact-from-cheap-oil-3-billion-electricity-bill-in-ohio/

http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2014/12/16/renewable-energy-companies-use-new-clout-in-statehouses

http://theenergycollective.com/jemillerep/2146151/are-declining-oil-prices-increasing-risks-opec-us-energy-security-or-clean-fuels-

http://www.theguardian.com/sustainable-business/2014/nov/10/crude-oil-texas-renewable-energy-solar-biomass

http://www.institutionalinvestor.com/blogarticle/3412313/Blog/The-Investment-Case-for-Fossil-Fuel-Divestment.html?LS=EMS1113708#.VJ1J0CIAA

The pressure for Melancholy

I have never been a big fan of moodiness, in any form.  Letting humor, in the old fashioned sense, dominate  behaviors seems awfully self absorbed.  Then there is the melancholy of the season, and more importantly how others expect you to behave.

Merry Christmas everybody…got lots of invitations from friends with the best of intentions, and Zeke is getting rubber chicken at midnight.  Melancholy my ass.

It is always a narrative….doesn’t anybody think anymore?

Now I see narratives against narratives.  Written opinions, casual conversations, and of course television commentary automatically revert to a short, tightly designed view. Seldom do the full facts get in the way of the narrative. Old and young, left and right, serious or humorous the narratives dominate.  Searching for a conversation....too bad Zeke can't talk.  Merry Christmas.

Watching television, seriously

I sat down this week and watched television for a change – got to see some long form Charlie Rose interviews and some comedy central pieces, and even a documentary about the people in the pot industry in Colorado.  I recorded what I wanted to watch so I could skip the awful commercials (although I was attracted by Reddi Wip -- the sound of Joy).

All well and good, and although I really appreciated Tom Friedman spilling ten of his recent columns in lists of four words, I am afraid I would still prefer to read than to watch.  We need a 21^st century word for luddite.

Sony’s decision was not because of risk, it was due to strategy and qualitative data drivers.

In an industry which lives and dies on sentiment and consumer animal spirits (cinema)where so much of the success of a product line concentrate during holiday seasons, Sony was already positioned at the extreme end of the risk/reward calculation even before recent events.

The delivery system for on screen films also adds the element of contagion for the multiple products on offer in the same facility.  The exhibitors could not take any risk at all.  The distributors could not tolerate any risk at all.  The producers could wait for another day or another distribution channel for this one film. I am sure there are some insurance coverages (I know that you can hedge the weather), but the industry as a whole wants the theaters filled with happy snack guzzling patrons  every December.  Any threat to that formula has extreme multiplier effects.

Deconstructing the case study (still in progress) is easy.  A product which historically would have been released as an independent film or perhaps a ‘boutique’ was pushed down the holiday highway with big film marketing.  Saturation advertising and personal appearances by the cast, accompanied by snarky comments about the potential politics.  The development, marketing, and delivery strategy was 100% revenue maximization without concern for risk.  What were they thinking?

In restrospect we always were critical when we ported analogs from our personal lives to our businesses. What about the reverse?  How many of us have bundled our personal activities into one basket – at risk for the black swan…..

Communicating scenarios and stress test results…good time to evaluate

I was always impressed, from afar, with the Saudi government approach to their stress testing of oil prices.; effectively budgeting a modest figure and implementing  a mechanism to park funds into a reserve during high price periods.  It appears to have served them well.  Their method and approach was well communicated to all who were paying attention.

Without pointing the proverbial finger,  there are some countries, after worrying about oil that has been stolen, often fail to grasp the eventual scenarios of declining oil process. One country in particular recently announced that they readjusted their budget to $65 as the price had already broken $60.

This is the third five month downward oil price shock in recent memory, hardly unanticipated; and there will be few professionals who had not developed this scenario within the body of their work.  Even the triggers and trip wires have been consistent.  Has there been consistent  communication to decision makers?  Were those at the top of organizations who are now under pricing pressure fully aware of the need to implement contingent plans?  Watch the news flow, and you will see little panic from older established organizations.  The newer industries (alternative energy) are silent while waiting for data, which is a signal on its own. The unsophisticated are relaxed while the hedges are in place but will have to face the reality soon.

In your world, it is a good test to see if you had communicated your scenarios and action plans.  Full Stop.

Does this rigor apply to self-evaluation?  Those dialogues we have with ourselves where we look at potential extreme scenarios and their possibilities are often ignored in our personal lives. Food for thought.

Required reading: Modeling human behavior…have a look at Martin Wolf’s comments today

The descriptor ‘brilliant’ is overused. But not if you refer to martin Wolf’s comment in the FT today “Make policy for real, not ideal, humans“ (Page 9). Wolf combines a review of the
world bank Development Report with a review of Daniel Kahneman’s 2011 book ‘Thinking, Fast and Slow.’  He synthesizes the two works views on behavioral economics into three imperatives  “in first, most of our thinking is not deliberative, but automatic; second, it is socially conditioned; and, third, it is shaped by inaccurate mental models.  “

 

I wrote my views a few days ago, in a framework not too dissimilar for modeling human behavior (http://kkendis.blogspot.com/2014/12/contemporary-individual-behavior.html ) but Wolf’s narrative and references and even his examples are far superior to my own. Wolf frames his imperatives in terms of policy and the implementation of policy, and I cannot disagree. Required reading indeed.

Bankers’ Conduct in Risk Taking – Enough already!

Akin to drip torture, there are now daily news items on the subject of bankers’ (mis)conduct or excessive risk taking.  Buried in the back pages of the FT we learn of the FINRA fines (last week).Monday’s FT had another innocuous article with the lead

“City of London trading desks at several big investment banks lost money after the collapse of AbbVie’s $54bn takeover offer for Shire, raising fresh questions about whether banks are skirting a ban on making speculative bets with their own funds”. 

And the Tuesday FT (you can read it Monday night) continues with the story

“Last month, there was a hint of what might be around the corner, when it emerged that Wells Fargo and Barclays had exposure to big potential losses on an oil loan — specifically, $850m of funding granted earlier in the year to back the merger of US oil groups Sabine and Forest.”

Jenkins cites a report :

“New research from Alliance Bernstein highlights the extent of US banks’ exposure. Wells Fargo tops the list. It participated in $37bn of non-investment grade loans from 2012 to 2014. Only JPMorgan, with $31.7bn of deals, comes close.”

Read it again…that’s B as in Billion. I have not read the report, but while I look at yesterday’s report I think we can anticipate another one tomorrow. This is about principles based vs. rules based regulation.  If the banks want more rules for compliance they should keep away from obvious excess risks, period.

Stress testing the restructuring of energy prices –missing is the accelerator effect on qualitative data

We are all transfixed on the five month decline in oil prices (same duration as the past two oil price declines) and we are tempted to assume the same eventual effects as historical events. I follow the speculative and authoritative commentary – and they are all resetting the parameters of their models and philosophies.  It appears straightforward if you just rely on hard data.

However, those pesky variables known generally as ‘sentiment’ or ‘confidence’ or ‘animal spirits’ that have been lurking in the background on both economic and sometimes social decisions as an after effect of the financial crisis have been tweaked by the dramatic decline in the cost of oil.

Companies, whose hedged positions continue to mute the effect, and now resetting their budgets with significantly lower cost frontiers, and so the hurdle rates on investments decline (remember all the cash in corporate balance sheets). Families, after a couple of months, probably spend the 46% of their savings that history dictates, but they also change their attitudes about future spending and investment.  Institutions, and I think of school systems that spend inordinate amounts on fuel for buses, get some budgetary relief. Energy producers remind themselves that their models had best be robust on the low end as well.  But it is the countries where both the positive and negative impacts will accelerate beyond the hard data to the sentiments of both the public officials and the populous.

In my view ‘sentiment’ has an accelerator effect that probably brings greater impact in this price cycle than historically because of structural changes which the experts cite anecdotally, but have not yet incorporated in their thinking. The positives will be stronger and longer in effect, and the negatives will be more dramatic than prior cycles simply due to pent up attitudes and animal spirits. That is why it is called qualitative, and it has a greater role than ever.

Is this a challenge to stress testing? Quite probably. Hopefully we have built in enough robost recognition of the qualitative effects to survive extreme price data.

Why You Should Read About The Embedded Volatility Optionality Debate -- expanded

Writing this makes me feel like I should add a subtitle ‘or why we are never invited to dinner parties’, because the subject seems so wonky and almost alien to most observers, but what the debate represents is a metaphor for or a snapshot of the state of the regulatory debate.

The CFTC (who else? They are the lingering menace in compliance departments’ nightmares) has promulgated rules involving supply contracts for commodities to interpret whether or not these contracts contain swaps and options. The extreme interpretations of these actions range from gross regulatory overreach to kudos for identifying a potential area of extreme risk exposure.

The problem is not what is on the surface but the details we do not know.  Why do/did financial institutions stockpile commodities and positions in commodities in entities that were or were not transparent in their corporate organizations? In any market with highly sophisticated (read computer based) trading and hence price setting should there not be some skepticism? But should Federal agencies really care about inventories and deliveries of corn?

The lobbyist line up (billable time, for sure), and the complexity of the discussion builds. The fights are behind the scenes and mired in the wonkish details. By watching this isolated battle progress, we get a view of the framework of many battles for the foreseeable future. However, this one is too complex for Jon Stewart, so we will have to read the articles ourselves.

For those of you who have ignored the news flow since 2007 (I am jealous) there was a global financial crisis which lingers to this day.  Most would agree that at the root of the crisis was excessive risk by risk takers, often using other people's money and with very little regulatory oversight.  Fast forward to today, where the same institutions who established and still continue a strategy of regulatory capture are terrified (justifiably IMHOP) of the trend towards regulatory overreach at all levels from all agencies resulting in turning their jobs into compliance factories. The antagonists du jour are the CFTC pitted against the legions of lobbyist whose mission in life is to write the most detailed rules I have ever seen and then imbed these rules into the process.  The commodity suppliers (read corn harvester in Iowa) is forced into regulatory oversight due to the detailed language in the supply contract with the grain elevator.  I said it was wonkish.

Contemporary individual behavior revised (an overview)

For the purposes of analysis, the traditional wonkish data on economic behavior remains in place.  The consumption and expenditure and sentiment calculations still revert to mean in most analysis.  There are a lot of changes on the margins, but the big picture has not restructured according to experts.

What has changed dramatically is how individual humans behave in the economic processes—often in the inputs to surveys, but decidedly in how they interpret the results they read or hear.  With a potential for overstatement I offer these high level generalizations:

              Individuals appear predominantly self-absorbed                                                            

              When an opinion, a prepared narrative dominates the dialogue

              Influences on attitudes and behavior appear to be tribal in nature

              Comments indicate great information inequality between individuals, by choice

              Discussions and views turn, remarkably often and with little reason, to issues of health

For my own presentations (and even personal discussions), in order to facilitate reception of communication, I simply assume that the individuals with whom I interact  are self-absorbed, will launch into a practiced narrative, revert to the attitudes of their group, either know the data or do not care about data (or science), and sooner or later will mention health concerns. Works for work, but ruins dinner discussions.

For 2015 – Vow to eliminate webinars and boring PPT reading

I have decided to promote the concept of eliminating monotone lectures and boring PPT presentations from seminars (even if the senior exec wants to do it) in favor of case study work and/ or panel discussions with subject matter experts. Throw in the elimination of webinars as we know them, and we can concentrate on learning without the distraction of sub-professional delivery.

Now you can do it – Brainshark is a cloud based application which (in the versions I have seen) conveniently flash single images with an overlay of brief commentary.  Your target audience can use their smart devices prior to the learning event and review the material sent by email and  these Brainsharks.  The secret appears to be very low production costs both in time and bills to pay.

Now your learning event can pull together mini cases or full case studies (from the field) and you can assemble a panel of subject matter experts to debate the components of the case. The panel discussion will have high production costs.  The cases and their background material might require some anonymity and certainly research and data. We can assume that you will have to use digital interfaces when necessary (rehearse first) to avoid the travel of your experts (unless they wish otherwise).  The outcomes and synthesis will oblige you to portray a bit of Charlie Rose with the panel – teasing out the insights necessary.

I am promoting the redesign of the learning experience and the role of the lead instructor.  More work, less boredom should result in more learning.

Beware the comfort in the numbers—a reminder

Every year I need to remind myself that the expanding data sets upon which we rely are wonderful in the aura of transparency and comfort that we can study the numbers and analysis and relax about the details.  Back tests?  Challenges to granularity?  Scrutiny of the methodology?  That is a lot of work.

With the recent increase in volatility, I need a reminder. Each year I take a peek, in a granular way, and note that at the roots and drivers of the data we find:

                             Sentiment

                             Confidence

                             Animal Spirits

                             Reputation

                             Culture

All the usual qualitative inputs to the models, trends analysis, stress tests, and polls.  Now (as they say more than ever) these qualitative elements are imbedded and rarely documented at the root of the inputs to the analysis. Cultural bias to polls.  Reputation to appraisal. Animal spirits (pick your animal) for the markets. Confidence and reputation everywhere.

In isolation, these qualitative components are small if not trivial; but compounded, even additive; they have the potential for significance and materiality (even if they are masked through netting). Thus this is a note to myself reminding me to dig a bit into the data before relaxing in the results.

When the rules may be wrong

Much in the headlines involves rules and rulemaking and rule enforcement (or rule breaking). The conflicts and problems arise in the face of the arduous task of implementation, but at the origin is the age old debate between following the intent of the rules and the strict interpretation of the words (literalism). By my observation, rule makers seem to be responding by issuing even more rules (and you may substitute regulations if you wish). Missing is the rhythm of consolidation and rationalization.

Companies, institutions, and sometime even governments have always regularly revisited the naturally expanding landscape of rules and policies and procedures to try to make some sense for implementation. Under the name of rationalization or consolidation or streamlining; experts review and reduce and consolidate the volume of tasks, remove anomalies and simplify processes. This has always followed a rhythm – expansion then consolidation then expansion and a synthesis, often but regularly.

Recent history, for convenience just take this century, shows the rules keep expanding without rationalization.  The benefits of more digital storage seem to assist this proliferation, but implementation and oversight do not benefit. Critical voices appear to spot the single momentary issues but lose the big picture.  I suggest that everyone ask how recently and often the rules in question have been revisited.  If the answer is not often, I believe there is an automatic obsolescence making the desired outcome problematic.

(End note:  There is a rising literature on the issue of complexity that deals with this issue, often targeted to law or finance, but I am addressing a much simpler issue…the rhythm of revision. I also submitted a comment in the NY Times http://dealbook.nytimes.com/2014/12/05/basel-banking-chief-expects-fine-tuning-of-risk-rules/?comments#permid=13521432

Conduct risk my foot! Feeling as if everyone has forgotten principlism – and spotting a common thread

The approach of winter and less daylight brings us all indoors and we read more and expose ourselves to more television and radio.  I am observing the swing of the pendulum in all manner of issues.

There was always a tension between humans who were principles based in their thinking, from medical staff to researchers and teachers to law enforcement (even bankers), so that their codes of conduct were always driven my higher order considerations (do no harm, etc); and the advocates of detailed proscriptive rules of behavior.  Laws and regulations and codes can be exhaustive in their precision, but seem to break down in even the most obvious situation.  I think of the preventable disasters of the past few years, where simply following proscribed protocol could have saved lives. The current news flow is filled with stories of rules broken or ignored and the consequences.

The pendulum has indeed swung.  All the debates appear to concern the details of rules and codes and the level of enforcement or sanctions or retribution. The miscreants devote their efforts to tailoring the rules in such a way that they can be manipulated, and well intentioned advocates believe that a good video and record of actual events is all you need to modify the bad behavior.  Once again, correlation does not mean causality.  Wrong behavior will turn to detailed fiddling with the rules.

Principles based foundations to behavior, regulation, oversight, and reaction is what is missing. We all realize what is wrong.  What to do about wrongdoing is the issue, and as long as the answer dives deep into minutia of rules-making the underlying behaviors may never change.

In my humble opinion the discussion and debates might consider the starting point to be a statement of what is wrong.  Genocide, for example, is wrong; so the rich and powerful should combat all that enables genocide.  Allowing conditions to develop leading to improper death and destruction is wrong, and those conditions should be reversed.  Deliberatively deceptive behavior in pursuit of risky profits is wrong – full stop.  More rules on environment or finance or drugs or armed force will become mired in their own complexity and not solve the problem.

Feeling quaint, I believe I am suggesting that every controlling organization reinvigorate its code of conduct (writ large or small).  If individuals or groups cannot comply with the essence of an agree code of conduct they cannot participate in the activities of that organization – full stop. Conduct risk my foot!  If the behavior is egregious, then legal penalties could be pursued, but all must agree from their entry into public activities (whether for a public or private entity) on the desired mission and conduct expected. The costs of non-compliance, spelled out early on, would be dismissal, forfeitures, and claw backs –penalties so severe as to hopefully modify behavior. Of course the implementation details are complex, but we have to start with the principle.

Quick Guide to determine that the news is suspect (wrong)

Print, internet, TV and radio are overflowing with news and opinion.  No need to fact check, although it is satisfying in a dark manner, because there are two patterns many experts now site that tell if a report ‘smells’ suspect.  These are philosophical, psychological, economic, and simply common sense rules:

1. Correlation is rarely causality.  If the stated views make this leap, it is suspect.
2. ‘Reduced form’ thinking is seldom 100% correct.  Today’s news, if it is based upon science or fact, rarely digs deeply into facts or science or literature.

In my observation, authors or commentators, even when pressed for time or space, indicate references (or hyperlinks) providing indication they have taken care to develop their reports or views thoroughly.

The Philadelphia Eagles are slowly becoming America's team

Football fans come in many varieties of course, but the past two years has seen a wave of interest in the Philadelphia Eagles and their coach (Kelly) and his training methods and game tactics. It emerges in the television broadcast – not just the announcers, who marvel at the rapid pace and broad variety of play selection on all three aspects of the game—but also the images repeatedly flashed on the screen.

Every time the opposition defense is shown in a close-up image they are breathing heavily and covered with sweat and the announcer usually quips ‘they are gassed’.  America, after all, still believes in hard work (with Philadelphia in bold print) and here we see every week how the team that works harder and smarter is grinding its way to weekly victories. Errors diminish each week, injuries heal, and there will always be a superstar in the opposition who overwhelms results; but the print and TV commentators have already jumped on the Chip Kelly bandwagon and my friends in other cities tune in the Eagles’ games by choice just to watch the pace.  ‘They just do not slow down’ is really refreshing.

Simple view of Bank Capital Rules

A recent review of the supranational regulatory agencies and the rating agencies, all of whom are readjusting their analysis, we can now comfortably specify the capital requirements for most financial institutions in a few sentences:

With the CCAR (DFAST) and AQR results published, we merely have to derive the PPNR and TLAC to calculate the leverage ratios and tier one capital ratios (CET1), we can calculate the supplementary leverage ratios (SLR) and enhanced supplementary ratios (ESLR) plus any conditional buffers required and/or additional loss absorption capacity (ALAC) the analysis (adjusted for contingent capital) required.  All of this includes consideration of advanced vs. standardized approaches, any transitional arrangements (or parallel run), any netting interpretations, and the appropriate risk weighting applications. For international considerations, there are significant cross border differences each step in the calculations. There is also the potential intersection of the liquidity coverage ratio(s) and the leverage ratios.

Piece of cake

Posted in the Linkedin Risk managers group in November

We do not Tweet, but like the news

News aggregators for those who do not tweet (these are straight providers and not RSS feeds)

http://www.bloomberg.com/   both the Bloomberg news and Bloomberg view

http://www.ft.com/fastft   Market-moving news and views, 24 hours a day

www.economist.com/espresso  A new morning briefing delivered to your inbox each weekday before breakfast.

http://online.wsj.com/public/page/news-viewer.html  WSJ News Viewer is a list of news published by The Wall Street Journal and displayed in reverse chronological order.

https://news.google.com/   is the google news reader

http://www.therealnewsmatters.com/  News that Didn't Make the Evening NEWS or the Financial Networks.

(and I still look at Fark)

http://www.fark.com/    as well as offbeat and hilarious news that you won't find listed anywhere else

 

The full Reuters or N.Y. Times (et al) is too unwieldy for me and is not in the list

Rules of Engagement

Writing short pieces for 20 years for work and friendly correspondence I posted the serious work material on Seeking alpha and sometimes LinkedIn; but after many many encouraging words I am posting non-work related views in this space.  The notes will , if consistent, be fact and data driven even if they are my opinions, and I intend to include links as often as possible.  Now I can appear just as self-absorbed as everyone else.