Two years to the week after the collapse of Lehman Brothers, the new Basel III global financial regulations are out (what’s that?) and the British Bankers’ Association complains on behalf of consumers everywhere: “This means the end of ‘cheap money’!”
Well. That is a good thing, is it not?
Remember what’s at the heart of our global environmental and social challenges:
- Our key resources are too cheap – be they food, oil, money.
- Our systems are too good at separating reward from risk – be it here and now, over time, through geographies.
Are there insights to be gleaned for other sectors from how financial regulators conceptualize and try to manage these issues? The financial system represents our economy at its most abstract and quantified, so it’s fascinating to think about, anyhow.
Basel III raises the Tier 1 capital requirement, which means that banks will need to hold more common equity to buffer against unexpected losses, which essentially comes down to this: more skin in the game. And more protection against financial crises, and, apparently, good things for the economy (at least as measured through GDP – see explanation from finance blogger Felix “Shedding No Tiers” Salmon).
This month’s WIRED is this perfect constellation of things I find really interesting:
Spurred to post by my friend Steph who may be, along with another webby friend Yai, the only person to look at this dormant site in some time. We are thinking of setting up a co-blog.
So somewhere in the last six months I’ve become obsessed with supply chains and value chains – obsessed as in spending too much time thinking about them while on public transport kind of obsessed. Just been at American Electric Power’s offices in Columbus, Ohio, for a roundtable my colleague JP coordinated on managing sustainability in supply chains.
Lately I’ve been thinking how much modern supply chain management thinking and design thinking have in common with sustainability thinking – SCM because of its focus on total cost of ownership and collaboration, and design because of the emphasis it places on understanding needs and innovating to meet them. One of the reasons making the usual cashflow sort of business case for sustainability investments is a challenge is because valuation tools have trouble with what’s hard to quantify or to predict, especially in the longer term.* Framing sustainability in the languages of SCM or design might be a compelling way to make another kind of business case that doesn’t rely so much on numbers or linear predictability.
Came across a fabulous example of the language of business and the business case in a Goldman Sachs investor research piece thoughtfully passed on by a friend of a friend. The research, on “Long-term opportunities in a changing world,” turns that pesky tendency to favor the short-term on its head – by pointing out that it’s precisely because financial markets are better at understanding (and arbitraging out) short-term investment opportunities that investors thinking long-term have a better shot at higher returns. Or as they analyst-ishly say:
Reflecting a disproportionate focus on nearer term profitability, the equity market is typically relatively indiscriminate in differentiating between companies’ abilities to sustain above-average returns over the long term. … This relative lack of discrimination between long-term winners and losers is consistent with a greater focus of many analysts and investors on nearer term performance and creates an opportunity for investors able to identify those companies that can sustain above-average returns over the long term.
You go, Goldman. So that’s what these folks are up to.
*Another challenge: incentive structures. BusinessGreen discusses why managers aren’t necessarily interested in initiatives that result in cost savings – they’re trying to protect their future budgets. I think this is yet another example of why spend isn’t a good metric when you’re trying to get to results, but need to think about this a bit
Just finished Nassim Nicholas Taleb’s The Black Swan and found it surprisingly difficult to get through. But have been thinking about it a lot. Some takeaways:
- Reality is lumpy, not linear.
- Theories are too Platonic for their own good.
- Most successes and indeed most events can’t be said to be caused by anything, due to the survivor effect and the role of luck. Free markets work not because they reward hard work, but because they enable lots of tinkering (on a macro, societal level).
- The bell curve is a big fraud. So is any sort of forecasting. So are most post-Keynes economists and financial theorists, particularly those with Nobel prizes, with the exception of Friedrich Hayek and Daniel Kahneman, who’s actually a psychologist.
- What this all means for investing: Put a good majority chunk of your portfolio in the safest assets there are (T-bonds, though I wonder about those now). Take wild risks on the rest.
[Originally posted on a now-defunct blog]
Just a very quick post for the novelty of posting from a small island in the Gulf of Thailand. We completed the 10-day meditation retreat yesterday.
Now staying at the rather posh Panviman resort at Thong Nai Pan beach on the northeast side of Phangan. I’ve been out in the sun all morning and reveling in the brownness, while reading When Genius Failed: The Rise and Fall of Long-Term Capital Management, passed on to me by Parker and to be passed on to Stéphane when I’m done. Have just got to mid-1997, as the Asian financial markets were collapsing, Merton was about to win the Nobel and LTCM was about to implode. Nail-biting!
We are going to have a bit of lunch now and then rent a kayak to paddle round the bay. Afterwards I’ll get back to Merton, LTCM and sun.