Perspective on Risk - Dec. 4, 2022 (Self-scouting)
Self-Scouting; For Those New to the Perspective
Football coaches, on their bye-week, tend to do a bit of self-scouting, to see if they have tendencies they may not be aware of. This post is ‘self-scouting’ of the Perspectives for the last year; what have I focused on, gotten wrong and maybe gotten right.
Those who have been along for the full ride may want to just skip this post. For newer subscribers, you probably want to at least read the second half of this post where I summarize the working hypothesis of the Perspectives.
Self-Scouting (Year in Review)
Background
I started this blog with the first real post on Oct. 2, 2021. As I stated then:
I like to impart what I’ve learned, so that’s what I will try and do here.
Part of this will be a discussion of the history of financial crises and risk management, another part may be a reaction to risks I perceive in the world, and the final part may just be things I enjoy (Behavioral economics, judgment and decision-making, leadership, machine learning, etc).
Some Statistics
The first post was sent to 44 of you; this post will be sent to 137 subscribers, still mostly friends and former colleagues. I don’t advertise the post, but Maarten Gelderman gave me a boost on Linked-In (thanks Maarten!).
excoriated my former employer, the Fed, for the Caplan, Rosengren and Clarida trading scandal, suggesting the Fed had forgotten the first lessons of risk management,
discussed allegations of algorithmic discrimination at Facebook, and
discussed the chip shortage and pending inflationary affects using the complexity and tight coupling framework of Charles Perrow.
Over 400 days I have written 68 posts, for an average of just under one every six days. The shortest time between posts was one day; the longest was 29 days beginning in late July when I took a vacation. This is about double the frequency I expected when all this began.
I started writing about my organizational mental model pretty early, using the Oct. 16, 2021 post to discuss trends in demographics and technology, themes I would revisit quite a few times.
The ‘most opened’ post relative to the number of subscribers was the 2-part discussion on Apr. 12, 2002 that was a follow-up to an earlier March 22 Perspective called “Rethinking The Big Picture.” In this post I reviewed/critiqued/integrated the written pieces from Poszar, Toose, Magnus, Pozen and Schuman that were in discussion. This post resulted in the most new subscribers.
I’ve probably written about the Zoltan Poszar work, who I admire greatly even when I have a slightly different view, more than any other single item.
The Sept. 10, 2022 post where i asked subscribers to play Putin or Poszar was probably the least opened and forwarded. I thought it was brilliant, but I’m strange that way.
There were three 2-part posts; the two others covered crypto and climate change.
The first management post was on Oct. 23, 2021. Overall, XX posts were devoted to management, though I doubt any of you have followed the research.
Generally, only 1-in-4 of you will click on any link in the postings.
Nov. 7, 2021 saw the first use of memes.
The first cartoon concluded the Nov. 16. 2021 post; an XKCD cartoon.
Subscribers don’t tend to leave comments, but I instead tend to get feedback in direct emails.
Topics Covered
Perspective on Risk has covered a broad range of topics.
The single biggest area of discussion has been about the intersection of economics, markets, inflation and supply chains.
‘Big Picture’ posts discussing deglobalization and demographics is probably next 7
A surprising large amount of ink was spilled on crypto - something I did not imagine covering much when the blog started.
The fourth biggest area of discussion has been around market and firm liquidity, counterparty risk, collateral and margin calls.
Climate risk closes out the top five. The first mention of climate change risk occurred on Nov. 1, 2021. Since then, XX posts have discussed, at least in part, this externality.
Other specifics covered include emerging markets, commodities and the LME Nickel scandal, the aforementioned ‘management research,’ behavioral finance, portfolio optimization and risk premia, operational risk and failures, compliance and fraud, China, technology and artificial intelligence, and ‘top risk’ lists.
Misses and Hits
An initial mistake I made was to think that the Fed would raise rates in late 2021 and be cautious and measured in raising rates, as they had been deliberate in 2014 and had learned in the 1990s that when they raised rates faster than the forwards curve, institutions, like LTCM, broke. I did note:
The risk of course is that this assumption is wrong, that the Fed feels the need to raise rates more rapidly to combat inflation. The longer the Fed waits to raise rates, the more steep the rate rise may need to be - so if they are to take the slower path of 2014, it is possible they may want to begin moving the policy rate sooner (but a at slow pace).
That was written back in the Nov. 1, 2021 post; the Fed waited until March to begin raising rates, and then only increased rates by 25bp. So maybe I wasn’t that wrong. Nothing has broken so badly yet that the Fed has had to change course.
Another miss was …
Probably the biggest hit was similarly from Nov. 22, 2021, where I parsed the evolving language in the Fed’s Financial Stability Report to argue that there was heightened Fed concern over elevated asset prices.
So For Those New to the Perspective
The Long-term Framework
Over the long-term, three things drive developments; demographics, globalization and technology. We are increasingly trying to think about how to factor climate change into this mix.
Here is the latest posts on demographics and globalization (technology forthcoming):
The Big Picture Thesis
The pig picture thesis that resulted from the Apr. 12, 2002 post mentioned earlier is:
The world is already deglobalizing
Since 2000, the US has been withdrawing from globalization
The deglobalization to date has been in immigration, foreign investment, and data and regulatory standards more than trade
Both China and the West have some incentives to step back.
Xie has taken steps to decrease his country’s reliance on (and thus vulnerabilities to) the U.S. and its allies, stressing a “self-sufficiency” campaign
China wants to de-americanize its supply chains, just as the Americans want to de-sinify theirs.
Western Currencies Have Been Increasingly Weaponized; Russia is just the latest and largest
This narrows the advantage of the US vs China in the perceived safety and certainty of recycled currency investments.
Companies in the business of advanced technology products that will be much more drawn into the crosshairs where they could be at risk of having to satisfy two masters.
Economic adjustments to the balance of consumption vs investment will need to occur both in the West and China. This will affect at the margin returns to labor and capital.
The speed of this change is uncertain.
The Current Perspective
We are now in the midst of the early stages of an environment none of us have ever experienced.
The Fed has embraced the Zuckerburg doctrine: ‘Move Fast; Break Things’
The pain (QT) has only begun
Lots of things have broken, but nothing significant enough for the Fed to pause
We are worried about a loss of adequate liquidity in the market