The (terrifying?) rise of the robots

I’ve always had an interest in technology, more from the perspective of what it can do for us and what it will mean for us rather than how it works. Back in 1994 I started to get interested in the potential of the Internet and maintained a Compuserve account for a couple of years. The problem was that few other people had even heard of email, never mind actually having an email address. I also started undertaking a bit of personal research and still treasure the October 1994 edition of the ‘Internet’ magazine, the first ever edition and also possibly the first UK magazine devoted to World Wide Web matters. I worked in the cable industry at the time just as it was about to evolve into the cable telecommunications industry. It seemed right to investigate the potential of a technology that could well help change the industry. The potential was always there but few would have predicted just how much of an impact it would eventually have.

So to today, or yesterday, February 23rd 2016. Boston Dynamics, a DARPA funded, Google owned company heavily engaged in developing robot technology released a video on Youtube which depicts how fast the technology is changing.

You really have to see this:

These ‘Atlas’ robots are still slightly awkward in their movements but it is pretty obvious that the wrinkles are slowly but surely being ironed out. Now the military applications are pretty obvious but it also looks like they are also working on commercial applications. Those heavy lifting jobs requiring limited dexterity look like they are now on countdown to being eliminated. I am no expert in the detail but it looks to me like a lot less than ten years before these ‘lifting robots’ are available as ‘off the shelf’ items. Perhaps not as domestic cleaners just yet but even here, once accepted in a commercial environment, we will soon start to see them enter the home.

I continue to read about how fast robots are developing and what they are likely to be doing. It is always good space filling material for news programmes, the middle pages of newspapers and specialist interest groups in the Blogosphere. What there is much less of, is an impact analysis of what happens when it does gain critical mass. How are we going to pay for these robots if the people who might actually buy them have had their jobs displaced by them?

Over time new technologies tend to become an accepted part of our social and economic infrastructure. Despite what could be a fundamentally different change about to be unleashed I am sure that eventually we will be interacting with robots on a daily basis and no doubt consider it an entirely normal and acceptable part of our lives. Though the transition could be painful, more so in that the widespread introduction of robots could take place not over decades but over years.

A general introduction of robots in Western nations will force developing nations to either cut labour costs or adopt the same technology. If we look at the costs of operating in Asia today, China is no longer the low cost manufacturer it once was; look to Vietnam for the lowest labour costs. But even Vietnam will be challenged in competing with a labour force that doesn’t demand higher pay, has low maintenance costs and can work 24/7. We often see the threat of robots as a developed economy issue but in a globalised economic environment it may be that the real impacts will be seen in those nations relying on low labour costs for export muscle.

As nationals of developed nations our concern will be for our own situation. If I’m a shelf stacker and become displaced by a robot what exactly will my future be? Do I retrain, if so to become what? If I can’t find any paid work in my chosen fields, then what? It is quite likely that these are the questions that politicians will be challenged with. How will they react? Will there be robot income tax? Will corporation taxes have to rise to pay for the costs of displaced humans unable to find paid labour? How will pensions be paid for?

Income is obviously high on the list of concerns for any society but it is not the only concern. What exactly are people to do with their time? Is this perhaps the destiny of huge swathes of society? Should we be promoting the education and entertainment sectors far more than today? Perhaps not necessarily as preparation for productive labour but to keep people who would otherwise be employed, occupied. If we adopt this course of action how exactly do we incentivise the people we want to keep on working, the scientists, engineers and medical staff and others who help maintain the fabric of society?

What are the responsibilities of companies and other organisations who plan to introduce robot technologies that displace hundreds of thousands of people? In the past it has been acceptable to simply ‘restructure’ with a redundancy payment and perhaps a bit of outplacement support. This may be far less acceptable in a future where there are simply no human jobs left. A restructuring in this instance really would be the end of the employment road for many people. How should companies adapt their release policies to cater for this new situation? Should expectations be set at the onset of employment? In other words no ‘evergreen’ employment contracts. Should employees be advised far further in advance of their impending release than in the past so that they can prepare? In other words should we be changing our whole attitude to employer – employee relations in a world where ‘robots are our greatest asset’?

When you do start to think about the implications of this technology the questions start to pile-up by the dozen. The worrying part is that there are not many people even thinking about these challenges and even fewer committing pen to paper and suggesting answers. In 1994 the Internet was a single magazine a few thousand basic web pages and a few million email accounts. By 2004 it had taken hold across the developed world and by 2014 virtually all major software applications had been web-enabled and Web had caught the imagination of some of the least developed nations. It’s now everywhere.

Judging by the Boston Dynamics video and some recent statistics I have seen in the growing acceptance of robots I don’t think we will have to wait until 2036 before we see robots everywhere. My guess is that the world of transformation programmes in the 2020s will look somewhat different than those of the last few years. Those skills in project and programme management, Lean Six Sigma, ITIL and other performance improvement initiatives could well become software algorithm re-writes capabilities rather useful certifications for humans. Restructures may well become human organisation elimination rather than a new Visio organogram.

At the moment the government response is to promote software development skills in youngsters going through school. This may work for now but will not be much help when software writing software really takes hold. As libraries of pre-written code are generated and artificial intelligence (AI) start to create algorithms capable of following basic functional requirements the landscape will change again. It’s not HAL that I fear in the world of AI but the more subversive threat of computers removing our ‘thinking’ roles. How then to we prepare our children for work, or non-work as the case may be?

My view is that we need some far bigger thinking than has taken place so far. Robots ad AI will not go away. We need to think through the implications of these technologies before they permeate through our whole social and economic infrastructure. The Internet has created more jobs than it destroyed and perhaps there is an argument that robots and AI will do likewise. However, until we truly analyse and gain a better understanding of their impact we will remain reactive and subject to unpleasant consequences.

After the 2008 banking crisis I often saw comments to the effect that ‘nobody could have seen it coming’. It was totally untrue of course. Similarly, the potential impacts of robot technology and AI are (sporadically) starting to be talked about. Look closely and you can see these robots on the horizon marching towards us.

We have some time to prepare for their arrival but not a lot.

Debt Matters

There are a couple of widgets I have loaded onto a page on my website. One tracks official UK public debt and the other official US public debt. I’m sure there are others I could load, Japan, China and the Eurozone for example, but these are the ones I like to keep an eye on. A few points before getting to the nub of this post. The debt trackers only measure public sector debt, not total debt; the latter including corporate debt and household debt. They also only track what I would term ‘realised’ balance sheet debt. In other words they are not tracking the aggregate future liabilities of social, health and pension commitments i.e. the net present value (NPV) of those liabilities. Add those and we are in 2008 Zimbabwe dollars numbers. I’ll stick to the hard numbers for this blog.

Debt as an absolute number does not really mean much to most people, me included. Economist therefore like to express it as a percentage of gross domestic product (GDP). That helps but is also not particularly useful. GDP doesn’t pay the interest, a country’s tax take does that. The debt to GDP ratio is the most favoured ratio but pretty useless when the exam question is about affordability.

So, to the numbers. The official UK debt now stands at £1.53 trillion and the US $19.06 trillion. Both are increasing at an eye-watering rate per minute. By the time the next US president is elected US debt will have hit $20 trillion with few signs of it getting under control. The US and the UK are in similar situations. Neither country has the means to repay the debt and only manages it on a day by day, week by week basis by revolving loans: new treasuries, gilts and bonds are used to repay older commitments now maturing. Over the past seven or eight years as interest rates have hit near or at zero and it has worked fairly well. The average interest rates on both US and UK has dropped somewhat as new securities have been issued at lower rates.

Alas in the UK’s case interest payments alone are now in the region of £50 billion a year. To put in into context total UK tax take is about £650 billion which means that 7.5% – 8% of our taxes are wiped out by interest payments (about 6% of the US budget is absorbed by interest). The fact that in both the UK and the US total interest payments have been flat over the past few years is the perverse result of interest levels being at the lowest levels since the Black Death. Interest rates rising from their current suppressed levels of 0 – 0.5% to more ‘normal’ levels of 3.5% – 5% will raise interest payments in the tens of billions in the UK and hundreds of billions dollars in the US – analysts estimate that each 1% upward movement in US interest rates translates into an additional $200bn in payments to external creditors.

In a growing economy, taxes will increase to service payments of existing debt. Growing economies also usually deliver price inflation which erodes the ‘value’ of the nominal aggregate debt accumulated over time. Debt commitments are therefore usually affordable.

However, the problem we currently have is that economic growth is not really reaching levels that is making much of an impact. The existing paradigm of over -supply of commodities, goods and services across the globe has created a price deflationary environment, discouraging new business start-ups. The money created by central banks found its way into the equity markets, recapitalised some of the banking system or has simply sat on central banks’ balance sheets. In the US FED’s case something in the order of $2.3 trillion still sits on its balance sheet as the ‘excess reserves’ of the commercial banking system. Commercial banks have been less willing to take risks and lend and entrepreneurs have been unwilling to borrow. What is the point when there is already over supply everywhere?

Having burrowed about as far as I want to into the background of public sector debt I think it’s time to surface and get to the purpose of the post. Despite the ominously financial/economic sense these initial paragraphs have conveyed, this is really a blog about change.

Our public sector debts matter. The cumulative effect of all the debt across the western world in my view has been impacting the micro-change management world for the past few years. Debts have to be serviced. Public sector debts are serviced by raising taxes or cutting public expenditure. Both approaches have economic and financial consequences. Organisations and businesses have to react to these changes.

If public sector expenditure falls, the companies relying on the revenues from public organisations need to adjust their behaviours and costs if profitability is to be protected. Falls in public sector expenditure represent a change in market conditions and it is not hard to make the case that recent changes are more structural rather than cyclical in nature.
Increases in taxation take income out of corporate and consumer pockets, income that might otherwise be applied to commercial and domestic expenditure. The theory is that taxes are just a reallocation of expenditure rather than a loss to the economy: the government can spend your money better than you can. Well, there may be some substance to this if taxes are reallocated to public infrastructure spending but the argument fails miserably when your taxes are taken just to service existing debt. This latter argument also compounds if and when interest rates go up (2020 now!) and we have a £2 trillion debt and interest rates at 3.5%. If that unpleasant prospect coalesces in our none-too-distant future it has the potential to deliver massive change management challenges for both the public and private sector. Gross UK taxes are already around 38%, the point at which economists and Treasury officials start to think about what a UK ‘Laffer Curve’ might look like. Laffer is all about the point at which increasing taxes impacts behaviours, and there is a point at which people lose interest in working. Thus, somewhere in the 40% range it is postulated that increasing taxes actually reduces total tax take.

So the real point about the blog is that debt really does matter. My own contention is that the relationship between debt levels and change management is far more tangible than it ever has been, primarily due to the enormous size of those public sector debts. Low interest rates have bought us some time but companies and public sector organisations really ought to be preparing now for the effects of these debts rather than wait for governments to effect tax increasing and spending reduction panic measures a few years from today. After eight years of emergency central bank measures we are no further forward. Even the hardened ‘cycle’ economists are starting to doubt. Equity markets have been buoyed by central bank largesse but the underlying economic conditions across both sides of the pond look more and more like structural changes are underway.

As I look at the world the big economic issues transmit into change management challenges almost immediately. In response to the banking crisis, the US FED created free money via quantitative easing (QE). Free money was thrown by the hundreds of $billions at US shale which promoted rapid technology development and in turn turbo-charged on-shore non-conventional oil production. In only a handful of years the US emerged to challenge Saudi Arabia as the biggest producer, taking tangible market share from OPEC countries. OPEC reacted by artificially increasing production to maximum output, which has hit Crude and Brent spot prices. Spot prices rapidly fell which created massive problems for the oil sector across the world. Companies have had to react quickly to an industry in financial distress. Dozens of organisations have created change programmes to address the revenue and cost problem – change management specialists with deep energy sector experience are at a premium at the moment.

Again, the point here is that big economic issues translate into organisation level change management challenges very quickly. And the ‘big daddy’ of these issues is almost certainly the level of public sector debt in western countries. When the cracks do finally appear in the current Ponzi like approach to servicing debt, it will likely affect every sector, not just one or two. All organisations and companies will be confronted by the challenge of how governments will react. Some strategic thinking and scenario planning may well be called for.

It would be nice to think that a crisis will never happen but hope has never really been much of a strategy in the past. Central banks have managed to suppress interest rates and put government debt on their own balance sheets for some years now (both the US FED and BoE own 35% – 40% of their respective governments’ debt) but at some point the jig will be up. We don’t know what the catalyst for a crisis will be but tangible signs of recession will be a promising candidate – recessions increase deficits and push public debt up at an even faster rate. Reactions to a crisis could involve printing yet more money or negative interest rates but these policies have not worked very well in the past and future effects could be even more muted.

So I’m going to continue to keep an eye on those debt trackers, despite the sceptics who see everything still working and have concluded that the financial and economic system must therefore be just fine.

For my part, debt matters.

The evolving shared service centre

I tripped into the world of shared service centres (SSCs) by accident.

The revolution in telecommunications, media and technology (TMT) during the 1990s did not appear without cost. Valuations for TMT companies accelerated at warp speed from the early part of the decade right into a brick wall during the year 2000, but that’s really for another blog. The reason for the reference is really a contextual point for the sort of environment it fostered. Mergers and acquisitions (M&A) during the ‘90s took place at ever increasing valuations, and apparently at escalating costs. Companies started and continued to borrow for this activity, not at IG (Investment Grade) rates but HY (High Yield), or ‘junk’ rates. Interest rates on amounts borrowed for infrastructure investment and M&A exceeded double digits well before the end of the decade.

So what has this got to do with shared service centres?
Well the link may appear tenuous but it was far more direct than most would realise. M&A activity created opportunities for eliminating cost through removing duplication and those enormous interest payments had to be serviced. The industry needed some new ideas for saving operational costs, and quickly.

Centralisation as a concept had been around for many years before the appearance of shared service centres but the traditional approach was rather one-dimensional. In most instances it was simply a case of consolidating lots of people previously working on a dispersed basis into a single physical site. It was far less about efficiency and effectiveness than about visible control, and they were certainly not in the business of customer service. Likewise the concept of identifying critically important performance indicators had yet to evolve into an operating process standard.

With a clear need to save costs it was down to the ingenuity and creativity of the industry to develop practical ways of making it happen. Centralisation was agreed as the obvious place to start but the traditional model would not be enough. We were fortunate in that the tectonic shifts in the telecommunications industry were being matched by similar changes in information technology (IT). Developments in IT started to open doors to improving how transactions could be effected. Thus the concept of ‘Automation’ emerged as something very relevant to providing service vs. its usual application in the manufacture of goods. For my part I usually associate automation with ‘Standardisation’, the challenge of ensuring that tasks are undertaken on a consistent basis. Centralisation, automation and standardisation initially looked like the way forward and for a short time all the emphasis was placed in this direction.

But the really big change wasn’t technical or structural, it was cultural. Instead of just ‘doing stuff’ the concept of service, of ‘customer service’, was introduced. I worked in a sales environment at the time and the sales guys were measured daily on their performance. Our relationship was direct. The output of our sales operations had an immediate impact on the performance of the sales teams. The company expected Sales to deliver so why shouldn’t we be expected to deliver on a similar basis? Reports on our own performance as well as that of our ‘internal customers’ were developed, Key Performance Indicators (KPIs), not just on cost but on the services we provided. A standard operating environment (SOE) was developed with the sales line management which outlined how sales advisors would work, what reports they would receive, when, and generally what was expected of them. For the sales people to succeed we had also to deliver. A service level agreement (SLA) emerged. We agreed the types of reports that would be produced, at what time of day they would be produced by, and to whom they would be distributed. Commitments were made on how quickly the daily sales orders would be distributed and the time it would take to process orders through the ‘stages’ in the customer relationship management (CRM) system. End to end (E2E) process thinking became the norm with initial targets soon becoming performance standards.

Thus the shared service centre emerged. It wasn’t a tried and tested, well-trodden route to an optimised cost structure providing high quality services, but a pragmatic reaction to a requirement to reduce costs very quickly. It worked through the innovative efforts of our people in developing pioneering solutions, a commitment to teamwork, sound leadership and a recognition that fundamentally we all wanted to grow the business.

So what of the 21st Century shared service centre?
The concepts are basically the same as are the critical success factors. There is perhaps a slightly greater emphasis on the people aspect but the core elements developed in the 90s are pretty much the same. My own criteria for assessing a shared service centre involves taking a look at a number of aspects of its operation:

Cost effectiveness

Has it been structured in the most cost effective manner? This could take us into the realms of physical locations and virtually centralised operations as well as organisational structure.

Are processes optimised? Are they written down? Is there a process owner? Is there a continuous improvement culture? Shared service centres are established to process transactions and the processes used should be constantly reviewed for environmental changes and other improvement opportunities. Inferior processes equate to higher transaction unit costs and ultimately to competitive disadvantage.

Are processes optimised the extent where only increased automation can deliver additional benefit? Automation is a cost as well as a benefit so its contribution should be assessed in the context of its cost.

Effective planning, both for resources and tasks for the day, week, month and year is another essential ingredient in running a cost effective SSC. Poor planning will mean more cost. The SSC needs to have the right resources available at the right time to deliver to the committed SLAs. Costs are not just financial when things go wrong.

Customer service culture

Has the concept of delivering a service been embedded into the operation? Do the people within the service centre think in terms of delivering services to their internal customers, or is it just an administration job?

My firm belief is that you will never deliver excellence in a shared service centre unless the people operating it believe in service, and their part in contributing towards excellent external customer service. This means measuring your own performance, accurately and with integrity, and managing to the internal SLAs you have committed to.

It should also be remembered that it is a ‘shared’ service centre. There should not be preferential treatment to some functions at the expense of others. Agreements may be made within the context of a broader SLA from time to time, but they should be transparent and fair.

Most SSCs use individual financial incentives as a method of supporting the service goals of the organisation. These certainly underpin the importance of providing service but they ought to be carefully designed so that the cost aspects are not undermined and that there are no other ‘hidden’ costs relating to staff.

Customer service feedback is also important. KPIs may provide one communication route but opportunities to use response surveys and user groups should also be sought.


A third theme is around the people operating the shared service centre. Today’s centres can be substantial in size and the work repetitive. Consideration needs to be made of the training and career development needs of staff and work ought to be rotated. Teamwork is essential, not just within the SSC but with the functions and people supported. Teamwork will help foster ownership which itself helps promote customer service.

As with other functions the roles and responsibilities of people working within the SSC should be constantly evaluated and adjusted if necessary. The demands on an SSC will evolve over time and with those demands so will the processes and the roles played by individual line managers and staff.

Shared service centres evolved through internally centralising transactional environments. They have now moved externally and in some cases offshore. The emergence of external solutions has introduced a whole host of other sourcing related issues encompassing pricing, contracts, cultures, languages and time zones. The challenges of control, intellectual property and core strategy and also not too far away. Shared service centres are now not just about how they are run but who should run them, where and for what cost.

Looking beyond the present there is a significant chance that the functional tasks of the SSC will become further automated. There are already signs that Robotic Process Automation (RPA) will make significant steps over the next decade into replacing people processing tasks with automated hand-offs. It is not beyond possibility that the SSC of 2030 will look more like a server in an air conditioned IT room than an office in India processing transactions for a European bank. As past experience has often informed: if it can be automated then it most likely will be automated.

It has taken fifteen to twenty years for the modern SSC to evolve to where it is today. The next ten to fifteen could well introduce changes that are even more dramatic and possibly even lead to its elimination as a management concept.

Global oil demand, supply and prices

It’s been almost enjoyable fuelling-up the car over the past few months. Prices have been dropping saving 25 – 30% on what I had been paying eighteen months ago. I live somewhat off the beaten track which means I don’t have access to gas supplies; oil central heating has been the only option. Filling up the oil tank has been much more satisfying. Heating oil doesn’t suffer the same taxation regime as transport fuel which mean that the lowered costs of barrels of oil (‘bbls’) have been far more noticeable. Combined with a milder, though wetter, winter than usual my current account is far healthier than it would normally be for this time of year.

The problem is that it doesn’t feel real. As with most of the developed world we have been inculcated with the notion that consumer prices should go and that 2% inflation is good for us. Creating 2% inflation has become a primary objective of most central banks; even the U.S. Federal Reserve joined that party a couple of years ago.

So what exactly is going on with oil prices?

There are several versions of history relayed by the media on this but they seem to distil into two broad themes. The first is one of supply, demand and price and the other relates to global politics.

The $140 price reached around the time of the 2007/8 banking crisis set the scene for more production but it was the reaction to that crisis that really acted as the catalyst for today’s low prices. The U.S. Fed printed money, QE (Quantitative Easing), and lowered interest rates to near Zero. The hundreds of $billions of ‘free money’ found its way into the U.S. energy sector coincidental with an accelerated development of ‘fracking’ technology. High oil prices encouraged lenders to pump money into the sector and produce. And produce they did. U.S. ‘tight oil’ or shale oil rocketed from a few hundred thousand bopd (barrels oil per day) of production in 2008 to well over 4m bopd by late 2014. You can see how this production turbocharged overall US crude production in the statistics here:

It peaked in spring 2015, also reflected in the statistics.

The nexus of politics and economics converge in the market reaction to this increase in U.S. production. OPEC saw this as a threat and Saudi Arabia are the biggest player in OPEC. Allegedly, the Saudis felt that ‘their’ market share was under attack and responded by increasing output to maximum with a view to influencing the price downwards and undermining the economics of U.S. shale production. It also had the added benefit of a poke in the eye of the Russians, also a major threat to Saudi production dominance. It worked. When combined with a recession in global activity in the Asia-Pacific markets a ‘glut’ emerged which naturally had a big effect on price.

Shale economics are complex. You don’t switch off a producing well overnight, even at prices well below profitable levels. And there is also the question of paying interest on those humungous debts accumulated during the ‘go-go’ years of shale expansion. ‘Hedging’ (selling forward) is also common in commodity markets and the shale producers had substantially hedged their output at contract prices extant prior to the price crash. Thus in 2015 while spot prices had plummeted many shale producers had been protected by their 2014 hedging contracts.

It’s getting complicated. My cheap petrol and heating oil seems to be tied-in with what will happen to the shale producers in 2016 and when the Saudis decide to reduce output.

On the former, it looks like only about 15% of shale production is hedged in 2016.

Shale wells also deplete rapidly and the U.S. Fed is not as ‘accommodative’ as it has been in throwing ‘free’ money about. It does indeed look like U.S. oil production is going to fall somewhat in 2016, at least according to the EIA. The EIA has a rather optimistic outlook suggesting that overall output will drop from an average of 9.43m bopd in 2015 to 8.73m bopd in 2016 and 8.46 bopd in 2017. I suspect that the fall will be far more dramatic when you start to factor in the depletion rates for shale oil wells and an expected tranche of energy company bankruptcies during the course of the year.

Offsetting U.S. shale oil is Iran’s expected output. I have seen media comments projecting that Iran will add another 1m bopd over the course of the next year although traditionally the more experienced oil analysts have indicated that it will be more likely in the 200,000 to 400,00 bopd area. Let’s take the higher number. If this is the case the net effect of U.S. production decrease and an Iranian increase is still a decline of 300,000 bopd.

The last official world oil production statistic in the public domain is 96.2m bopd, the June 2015 figure also published by the EIA:

Switching over to demand, the IEA (International Energy Agency) suggests that Q1 2016 demand will be 94.69 bopd, so the difference between world production and consumption is probably about 1.5m bopd.

But what is really interesting is that the Q3 and Q4 2016 IEA projections indicate that the demand will increase to 96.4m. In other words that wafer thin margin or ‘glut’ will evaporate during the course of the next six months, and we may even end up with a supply deficit.

My own view is that the decline will be greater and probably a little quicker than the forecasts suggests. We can’t guarantee that Iran will deliver 400,000 bopd nor can we guarantee that the Saudis will persist in maintaining maximum production. It’s not beyond the realms of possibility that oil prices will increase rather dramatically during the middle of the year and catch a lot of people by surprise. Anything is possible in our now highly interconnected world.

I think I’ll be filling that oil tank up long before winter this year.

The Implications of Demographics

While not in contract I tend to increase my visits to the gym. This tends to be two or three times a week either for a couple of dozen lengths in the pool, in a structured exercise class, and frequently one followed by the other. The reward is relaxing coffee afterwards which is where you often bump into one or more of the ‘regulars’.

So what’s the link between this little nugget of personal diary and demographics?

A conversation between myself and a couple of regulars meandered from the usual minutiae of the daily soap opera to my own contract status. I indicated that economic activity was an increased level compared with a few years ago, unemployment was lower and opportunities greatly increased; 2016 looked a lot better than 2010 despite the gloomy soundbites starting to emerge from No 11 Downing Street. This seemed to act as a catalyst for the parent of a banking employee in Manchester, to relay a trial of ‘recruitment horror’.

The young manager, formerly an ex-Big 4 management consultant, needed to recruit another manager for his banking team. He had commissioned an agency with a specification and they had returned with about a dozen CVs. Alas, the CVs were not what was required; they were either “over-qualified people in their fifties” or younger but inexperienced and not right for the role. He had complained to the agency for going ‘off-spec’ but had not had a response. The complaint story had obviously been relayed to his parent but instead of encouraging flexibility the parent had suggested that he did not want “someone in their fifties coasting along to retirement”, and anyway, “would a person in their fifties take instructions from someone in their thirties?” The story then veered back towards the agency. I interjected that the agency could not legally discriminate on an age basis and that the employment situation was such, that they probably had little choice. 2016 was not 2010, there was far more work around.

The problem of course was not the choice or quality of candidate but the fact that they were predominantly older. A mix of the fear that someone with more experience could be a threat and the prejudice of perception, older workers don’t work as hard. As with every age group there are some that work harder than others, although in the case of older workers it may well be that some just work a little smarter. Having undertaken performance improvement projects for many years it’s often the case that additional hours don’t enhance productivity but better planning, processes and reporting typically do.

As a more experienced worker the story was uncomfortable listening. A major bank, branding itself as an ethical leader, appeared to be endorsing age discrimination filtering it through an agency. It looked like the point agencies have made about employers coercing agencies into age discrimination could be true. But perhaps more disturbing was the attitude of the parent of the person recruiting. She was already in retirement and seemed happy to endorse these archaic perceptions and encourage another generation to hold them.

Meanwhile, governments across the world introduce later retirement ages and toothless age discrimination legislation. Organisations generally still don’t seem to get it. The reality of an ageing population is a current and growing issue. Spoilt by six or seven years of the post-banking crash economy, where there were dozens chasing every application they have not adjusted to current conditions, even less so to the ageing population. If there are more CVs with people over the age of fifty in your inbox it’s simply a reflection of the fact that there are more experienced people currently available.

Organisations need to adapt if they want to survive these changes. If they don’t their ageing customer base soon will, perhaps with their feet. Age discrimination is very much at the coal face of change management. It looks like there is a lot of work to do before this final, and probably greatest, shibboleth of prejudice falls.

(24 hours after writing this the Sunday Times reported that the ‘ethical’ bank had been ‘Rapped by the Ombudsman’ for age discrimination in its mortgage business. I guess if they are prepared to this to their customers it looks like an institutionalised age prejudice culture. Many companies claim to employ older workers but fewer actually hire them, and there is a difference. Thank goodness for contracting!)

Almost ready to return

Still under construction but fear not, posts are coming.

In the meantime I’ve uploaded a few old blogs from 2012.

How little has changed. Current themes have evolved but the underlying situation is little improved. If anything it looks like the banks and the Europe problem is due a resurgence, adding of course to China, ‘sub-prime U.S. energy investments’, and the general deflation in financial assets.

Plenty to get worried about….

Derivative thinking (June 26th 2012)

From June 26th 2012)

Rob Kirkby’s June 2012 blog article, ‘The Greatest Hoax Ever Perpetrated on Mankind’, recently caught my eye:

It is one of those arcane areas of Finance that really ought to have a little more light shed on it, and probably should be written about much more than it has been. It may be a complex subject and prone to ‘buzzword bingo’ but we ought to persevere. Most people will be out of their comfort zone when exploring the ramifications of derivative trading and I am no exception. However, we should never be afraid to learn or ask questions.

So here goes.

The BIS (Bank of International Settlements) produces a half yearly report of the total number of global derivatives believed to be in existence at the end of a reporting period. The report dated 9th May 2012 had the following comments on ‘key developments in the second half of 2011’:

‘Notwithstanding the increase in the reporting population, total notional amounts outstanding of OTC derivatives declined between end-June and end-December 2011, to $648 trillion. At the same time, gross market values, which measure the cost of replacing existing contracts, increased to $27 trillion, driven mainly by an increase in the market value of interest rate contracts.’

So it would appear that we had $648 trillion of derivatives in place at the end of 2011.

Drilling further into the detail we find that of this $648 trillion, the largest element is that of interest rate derivatives, and of those nearly $403 trillion are ‘Interest rate swaps’:

My feeble and amateur understanding of a credit interest swap is basically that of an exchange of cash flows between two parties. It might be to change a flow based on a fixed rate of interest to a variable rate, perhaps to exploit arbitrage opportunities, or maybe hedge risk in currency based transactions. The purpose and variety of these instruments appears to be almost limitless; each derivative being created pretty much on a bespoke basis to address a specific financial objective.

It stands to reason that as they are ‘binary’ on an individual basis then one of the two parties will be ‘in the money’; one wins, the other loses. Somebody has to take the other side of the trade.

Now this is where I start to have a bit of a problem. Either I need to better understand these things, or something about the whole derivative construct does not add up.

Let’s move on to the banking system, the ‘Big 5’ U.S. banks. I am not comparing ‘like with like’ from a definition perspective in switching from BIS tracking to OCC tracking but that is not really germane to the point I want to make. Limitations and inconsistencies acknowledged, let’s move on.

At the end of March 2012 the total notional amount of derivative contracts for the top five U.S. banks stood at $292.4 trillion:

This is an aggregate amount and includes those defined as ‘interest rate swaps’ by the BIS. ‘Swaps’ remain the largest category within the OCC data definition at $168 trillion.

Now this is where my brain starts to seize. The total capital base of these same banks amounts to $8.2 trillion, and this plays an aggregate $292.4 trillion derivative book. Irrespective of whether we are looking at an element of this total or the total itself I cannot believe that the total net exposure between all the banks within the global derivatives market is zero, even less the case for the five largest banks. Are we to believe that the collective banking mind is coincidentally split 50/50 on its global perspective on future interest rates and future FX trading conditions?

The question for me is really one of how much the net exposure of these banks exceeds their aggregate capital base. Is this now the real role of the Exchange Stabilisation Fund, to act as an amelioration element within the global derivatives market?

As implied by Rob Kirby you either believe:

a)    That everything eventually nets out to zero.

b)    There is an unseen force acting to maintain long term stability.

His ESF argument is starting look plausible.

Far smaller in size but perhaps of more interest to those of us interested in gold and silver is the value of the notional amounts of gold and precious metal contracts at the end of March 2012. According to ‘Graph 8’ this totalled around $153bn for gold and $33bn for other precious metals. However, care is needed in recognising the note: ‘Figures above exclude foreign exchange contracts with an original maturity of 14 days or less, futures contracts, written options, basis swaps, and any other contracts not subject to risk-based capital requirements.’ Refer also to ‘Table 9’ which provides a breakdown by the ‘Big 4’ banks. With $117.4bn in gold and $18.5bn in ‘precious metals’ it will not be a surprise to find that JPM is by far the largest derivatives player in the PM space.

I don’t draw any new conclusions from this other than that it is a confirmation of what we already know: JPM’s PM derivative positions are extraordinarily large and they don’t seem to have any obvious counterparties. Are they supposed to be hedging against themselves, other market derivatives, or is someone else pulling the strings for purposes we can only speculate upon?

The more I learn, the less I seem to understand.

Catalyst for collapse? (June 8th 2012)

From June 8th 2012

I recently tripped over the almost-forgotten story of the September 1931 Invergordon Mutiny. As part of a government austerity drive, to deal with the effects of the Great Depression, the British Government instructed the Navy to impose a pay cut of 10% across the board, and 25% on certain junior ratings. It was poorly communicated and naturally provoked a reaction, which itself wasn’t particularly well handled.

Mutinies had always been very rare events within British naval history, and so it came as something as a shock to the wider community when news finally filtered through. Indeed, by the time it hit an already unsettled Stock Exchange it caused a panic, which of course rapidly rippled through into the currency markets. Despite an ultimately successful imposition of a flat 10% cut, confidence in Great Britain, its government and currency had been irreparably damaged; it caused a run on the Pound. On September 20th 1931, less than ten days after sailors had read about their pay cut in newspapers, Great Britain was forced off the gold standard.

An apparently minor event geographically remote from our centre of finance acted as a catalyst for a tectonic shift in global power. Fast forward to 2012 and we have a level of interconnectedness exponentially greater than that of 1931. News, action and reactions are almost instantaneous; perceptions are reality and markets can be moved with a carefully worded phrase.

We are overwhelmed with an almost infinite universe of choices for what might be the actual catalyst for systemic collapse, some more obvious than others. It is as likely to be the less obvious as the obvious. After all the obvious are being managed, those ‘known knowns and known unknowns’ are almost certainly being choreographed towards what they hope will be a least-worst outcome. The lack of action from the ECB, MPC and FED this week is more likely to be part of an ongoing crisis management strategy, than an attempt to telegraph an air of confidence in global recovery. ‘Not now, maybe later’; ‘it’s too early to tell’. All focused on economic recovery elements, rather than the real issue; a debt laden and failing Europe, the herald of global failure. The trigger may not have been pressed but the bullet is in its chamber.

Spain the state may be bailed out, and the associated austerity imposed may well guarantee negative growth for a number of years, perhaps a decade. As with Greece, Ireland and Portugal, the credit markets will effectively close to them, rendering an indeterminate reliance on the Eurostate. It will be managed; it’s a known unknown, unknown only at the quantum level. ‘Experts’ may guess at €400bn but the Eurostate propaganda will ensure that the amount will be significantly less. Perception is reality.

It’s the stuff not being talked and reported about that we should be worrying about. It suits many in the City and on the other side of the pond to maintain focus on Spain, Greece, Ireland, Portugal and next on the block, Italy.

Meanwhile, other financial cancers eat away at the integrity of the system. The masses are not aware of the problem, and those that are think they are in remission. The collapse of credit within the shadow banking system never made it beyond the secondary media, out of sight but continuing to shrink. A lack of transparency in the $600 trillion global derivative market remains unreported. Four years after Lehman CDS’s remain un-backed by capital and continue to be traded opaquely, off any recognisable exchange on the planet. Commercial bullion banks, having negotiated extension after extension see the ever-closing threat of Eastern demand for physical bullion heading straight for their overexposed short positions. The widely presaged volatility is already starting to occur. We were warned to expect $100 moves in gold in a single day as the systemic spinning top gyrated in ever wider movements towards its inevitable fall; we saw $66 last week. A failure in any one of these areas could unexpectedly cascade through into the global arena.

Then there is Iran, away from the headlines at the moment.

Would it suit Israel to attempt a strike coincidental with the Euro break-up dominating the media? Few nations in the Middle East want nuclear armed Iran and the patience of the Israelis in the EU brokered negotiations is not infinite. It is a known unknown that could surprise at any time with a predictable impact on oil prices and gold.

And of course we have the unknown unknowns, the ‘black swans’ ready to take flight.

What will be the Invergordon Mutiny of 2012?

IAS39, ‘mark to market’ and UK GDP (June 5th 2012)

From June 5th 2012)

There is a significant divergence between the way the mainstream present the UK’s Debt to GDP ratio and the approach taken by ‘alternative media’ economists and writers in the blogosphere.

It very much depends on what you include and what you don’t.

Back in early 2011 the Office for National Statistics (ONS) included this under-reported gem as a header for its 25th January public finances news release:

‘For the first time data for Royal Bank of Scotland and Lloyds Banking Group have been fully incorporated into the public sector finances. This has impacted considerably on the measure of public sector net debt that includes the effects of the financial interventions. It has not materially affected the measures excluding temporary effects of the financial interventions, that are used by HM Treasury for the purpose of fiscal policy and are the measures that are forecast by the Office for Budget Responsibility.’

Further into the release we find out that at the end of December 2010:

Net debt excluding the temporary effects of financial interventions was £889.1 billion,equivalent to 59.3 per cent of gross domestic product (£2322.7 billion, equivalent to 154.9% including interventions)

The measures excluding the temporary effects of the financial interventions are used by the Office for Budget Responsibility to forecast the public finances and by HM Treasury for the purposes of fiscal policy.

For the record let’s bring the numbers through to the end of 2011. They are slightly less obvious in this January 2012 release but are still there to be seen:

Public sector net debt at the end of December 2011 was £1003.9 billion (64.2 per cent of GDP). This compares to £883.0 billion (59.4 per cent of GDP) at the end of December 2010;

Public sector net debt at the end of December 2011 was £2329.9 billion (149.1 per cent of GDP). This compares to £2257.0 billion (151.8 per cent of GDP) as at the end of December 2010.

And a link to the ONS media release:

So the ’64.2%’ ratio is our officially recognised year end rate, not the ‘149.1%’ which happens to include the liabilities of our semi-nationalised banking system.

It is ‘temporary’ of course, however long that may be.

My concern lies in what happens if we have a system-wide crisis with Europe acting as a catalyst. Will those banking liabilities crystallise? After all, although not included in the headline debt ratio by bringing them on to the national balance sheet the UK is effectively announcing to the world that it is standing behind them. How could the UK not be held to account in the panic of a crisis?

And of course what other ‘off balance sheet’ derivatives are also lurking in the banking undergrowth? Are there additional unknown contingent liabilities?

But our nationalised banks have assets. The £1.3 trillion is not reported because the assets of these banks exceed their debt. Indeed, there is a net book gain so there is nothing to worry about.

Enter IAS39, ‘mark to market’ and our global property problem.

Over on the asset side of our balance sheet we have lots and lots of loans and complex derivative securities predominantly secured by some form of property or financial asset. Alas, in many cases the underlying value of that security has tanked since the bursting of the property bubble.

But for the support of the regulatory authorities on both sides of the Atlantic in 2008 and 2009 we would already be in something of a pickle. Without labouring the point the U.S. authorities relaxed the ‘mark to market’ rules at the height of the credit crisis. In other words if the systemic drop in value threatened the system, get rid of the rule that required assets to be based at market value. I’ll leave Wiki to explain the background on this little wheeze:

I mention this because within the profile of our local banks U.S. investments are not exactly under-represented.

IAS 39 is an international accounting standard that sets the basic framework for the recognition and measurement of financial instruments:

It is a technical document so I will get to what I find the most interesting element, the paragraph on the measurement of financial assets. On the face of it the document seems to make a lot of sense but the problem of course has been current market conditions. During 2008 and 2009 the banks carried too many assets as ‘available for sale’ which would have involved making them down to a ‘fair value’. The quantities involved were so great that they would have threatened the integrity of the entire system.

So, as in the U.S., a way was found to take these assets out of that category. They would be ‘held to maturity’. Some elaborate and very creative balance sheet manipulation took place, SPV’s, ‘Special Purpose Vehicles’, were created to hold ‘bad’ assets which could be held to term. Tainted and overvalued assets could be shifted and legitimately held at book value without impacting future profitability. No significant write-downs were necessary; the banking system survived and bonuses continued to be paid.

Our £1.3 trillion or so of banking assets are ‘backed’ by an asset portfolio which on the face of it should not cause concern. But what proportion of these assets are held at book value and how much of it truly represents underlying market values?

What happens when the sovereign debt problem does become a systemic issue?

Which number should we be looking at?

All roads lead to gold (June 3rd 2012)

From June 3rd 2012

I once made the unfortunate mistake of suggesting that the revenue interest cover (not EBIT!) on my employer’s debt pile looked like it was heading for 25%. In other words revenues covered annual interest payments by a factor of four. It was obvious to me that the situation was unsustainable and that at some point in the not-too-distant future cash flow would bring the situation to a head. The comment was made to an exec board director of a large PLC, whose brand you would have recognised then, but which has now been consigned to corporate memory. It wasn’t what he wanted to hear.

Eighteen months later its U.S. holding company filed for Chapter 11 bankruptcy protection in what at the time was regarded as the largest failure in UK corporate history.

My analysis had been spot-on but my timing was off.

During 2009 and 2010 I came to the conclusion that the structural issues within the global economy would manifest themselves in some way through some sort of crisis. A few years earlier a move out of employee status into that of an independent had forced me into thinking about how to improve management of my investment portfolio – you need to carefully plan for those ‘downtime’ periods. It wasn’t long before I discovered gold and silver. Perhaps surprisingly, I had never really considered them as monetary alternatives. As with most people my education had conditioned me to think of that paper stuff as ‘money’. Keynes had come into favour by the time I had started to study my economics ‘A level’; it certainly did seem to make some sense, especially some of the basic formulae which seemed to suggest that you could manage an economy by pulling certain levers from time to time. In retrospect I feel pleased that I did not pursue the subject to degree level. While I had picked up an elementary understanding of the subject it was not enough to condition my thinking for the ensuing decades. I could still exercise an open mind about ‘alternative’ economic paradigms, unencumbered by an economics higher education. So I bought-in to the gold and silver story, literally, in 2006.

2006 and 2007 were still boom years. But the seeds of collapse had been planted many years earlier and artificially nurtured by nutrient accelerants. Those nutrients of course later manifested themselves as poison. Growth had certainly been substantial and endemic. Unfortunately our economic roots were not strong enough to hold the overwhelming foliage of debt that had appeared. Ugly, improbable and aberrant derivative growths appeared, exacerbating an already distorted and misshapen construct. Our economic tree looked like it was about to topple, slowly being crushed by the effects of its own weight, and being eaten away by elements clearly violating natural law. There had simply not been enough time to build strength into the eco-system, nor had it been effectively nurtured.

Our economic tree started to topple.

The Neo-Keynesian rulebook was consulted. Or eco-system needed more nutrients and better accelerants. Interest rates were forced down and money printed. A rapid injection of both provided some respite. Ugly, distorted and a fundamental violation of natural law it might be, but it still stood. We had a cure. When the system looked uncertain all that was needed was another injection of medicine.

But we don’t have a cure. Those economic steroids may have kept the system afloat for a time but our eco-system is still fundamentally flawed. Those genetically engineered derivative ‘growths’ are still there and the weight of debt shows no sign of decreasing.

The threat of entire branches falling away suggest an early autumn. Leaves, people and small businesses, are already falling; unemployment is on an upward trajectory. But it’s the threat of entire branches cascading down that will catch the headlines. Greece, Spain, Cyprus, Portugal may be followed by Japan, the U.K. and ‘eventually’ the U.S.

Only a few months ago it looked like we had a cure. The U.S. and the U.K. appeared to be in recovery, and the talk was of a ‘soft landing’ in China.

How things change.

The world is now polarised into two separate thinking paradigms. The U.S. conditioned by the awful effects of the Great Depression is fearful of an even greater depression. Concern is not with inflation but deflation. On the other side of the Atlantic Germany sits as marionette-master. It has a genetic memory of the Great Inflation, the wheel barrow Weimer Republic experience of the early 1920’s. And within Europe we have a tussle between an intractable Germany and an equally incorrigible European periphery, desperately seeking a world where someone else continues to pay.

We have an impasse. We don’t even have outcomes that could be seen as binary, none look positive.

As I write we also seem to have the worst of all worlds: decision paralysis. Twenty summits with no decisions have finally led to the Eurocracy being ‘found-out’ by the markets; and Europe’s people are starting to vote with their feet.

The politicians have effectively terrorised the Irish into voting ‘For’ austerity. In Greece, Cyprus, Spain and Italy the situation is different. Unemployment is already off the scale in some areas, thousands are homeless and the prospect of power cuts and food shortages threaten Greece. And Spain cannot afford to bail out Bankia, not to mention the queue of IAS 39 protected banks behind it. IAS 39, the one that facilitates ‘innovative’ presentation of property related assets on bank balance sheets. The unemployed in Spain and Greece have little more to lose; many have already lost a roof over their head, resorting to bins for the next meal. What possible hope can ‘austerity’ offer these people?

So the world teeters on the brink. What looked like years away only a few weeks or months ago may already be upon us.

My timing is not always exact.

But the analysis is usually close.

And the analysis suggests that all roads lead to gold. The move in gold on Friday June 1st should act as a beacon to the world. The forty year experiment in a purely fiat based system is coming to an end. The rhyme and rhythm of history is repeating and natural economics law will reassert through creative destruction.

Fear has taken hold.

Whatever happens over the next few days, weeks or months does not look encouraging for the old fiat based system. Either we get a nuclear level of money-printing into the world’s system, or we don’t. Tinkering at the edges simply threatens to fuel the panic. Confidence evaporated on Friday and money is looking for a new home. Printing threatens high, possibly hyper-inflation in time; not printing will totally eviscerate confidence and almost certainly lead to a global deflation based ‘super-depression’. There are no good choices.

Nobody wants to be in a currency backed by a nation whose sovereign debt is supported by negative growth. And don’t forget that GDP does not matter. Borrowing and spending to create income would put you in jail in the private sector. It’s tax-take that matters. Taxes support payments, not GDP.

All roads lead to gold. If precedent is anything to go by, gold and gold-backed equities are amongst the few havens of safety in the new world, at least for the period of transition – however long that may be.

Meanwhile I feel uneasy on the timing.

While billions across the planet distract themselves with myriad tasks and entertainment, small groups of financial power-brokers are making decisions about what to do next. But they don’t think and act at internet speed. They work within a political paradigm where seconds of time in the markets equate to months of dialogue and dialectic.

They think they have time.

I’m not so sure.

The wheel of history looks ready to turn.