Transcript
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Global Risk / Global OpportunityTen Essential Tools for Tracking
Minds, Markets & Money
Shlomo Maital and D.V.R. Seshadri
RISK OPPORTUNITY 1
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What are your goals?
What are your expectations in
working through this book?
When youve finished reading it, how
will you know if your time has
been well invested?
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6 Objectives of Global Risk/Global Opportunity
To understand what it means to think and act like aglobal manager, with a true global perspective
To learn how analyze global risk and always relate toglobal risk as a form of concrete business opportunity
To build a set of useful clearly understandable tools
that will enable managers to assess and track global
risk with accuracy, systemically
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To enhance skills in analyzing a new market or
country or geography, as an initial key step in doing
business in that country
To constantly sharpen risk-analysis skills by
engaging in action-learning exercises that apply the 10
essential tools to analysis of risk in a new and perhaps
unfamiliar countryor in a familiar country where
new insights are sought.
To understand how global risk can be analyzed,
assessed and causally understood, in ways that offer
insights into likely future scenarios.
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The Structure of this Book: Chapters One To Five
Chapter One.
Global Crisis 2007-2009: Causes & Opportunities
This chapter explains the nature and origins of the global
capital market crisis that began in the United States in 2007
(as the so-called subprime mortgage crisis) and spread elsewhere.
Chapter Two
What Is Your Story? How to Build Powerful Global
Narratives
This chapter helps you understand why it is vital for
managers to acquire their own macroeconomic analytic tools
and develop their own perspective on key trends in global markets.
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Chapter Four
A Country Is a Business
This chapter helps managers perceive countries as businesses,and develop the ability to "read" a country's basic GDP data as if
it were a business profit-and-loss statement, drawing strategic
conclusions about the country's market size, saving and investment,
growth orientation, and future prospects, useful for guiding
business decisions
Chapter Three
Risk Management with Telescopes & Microscopes
This chapter explains that managers need a peculiar type of vision-- one that enables them, with one eye, to zoom out on global events
and to tracking minds markets and money all over the world
(telescope) and with another eye, to zoom in, on their own
organizations, businesses, products and clients (microscope).
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Chapter Five
Analyzing Engines of Growth
Growth is crucial for businesses and no less crucial for countries.After reading this chapter, you should know how to measure for
any country, and any period, the underlying reasons the country
did (or did not) enjoy economic growth
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Chapter One.
Global Crisis 2007-2009: Causes & Opportunities
Learning Objectives
After reading this chapter, you should understand the basics of
scenario planning, why it is important and how great organizations
used it to meet large unexpected challenges You should understand what contrarian thinking is and how it
can protect managers from herd groupthink;
You should know the difference between an analyst and a
strategist, understand which thinking predominates in your own
mind, and know why both types of mindset are crucial for meetingglobal challenges
You should grasp how Americas response to the 2000-1 dot.com
bubble directly led to the 2001-7 housing bubble, and why this
bubble ultimately collapsed.
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Learning Objectives (continued)
You should know what organizational resilience is, and whyit is of growing importance; you should be able to gauge your
own resilience and that of your organization.
You should understand what a tipping point(critical mass)is, and how it causes markets to shift quickly from bullish to
bearish and vice versa.
You should understand how and why markets are driven by
the interaction of minds (market psychology) and money
(cost and availability of credit and liquidity), and how to track
the dynamics of changing market sentiment.
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Toolbox
Tool #1: Scenario Planning: How to dispel denial by
making worst-case scenarios concrete and believable.
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DefinitionGroupthink - a type of thought exhibited by group
members who try to minimize conflict and reach
consensus without critically testing, analyzing, and
evaluating ideas.
Individual creativity, uniqueness, and independentthinking are lost in the pursuit of group cohesiveness, as
are the advantages of reasonable balance in choice and
thought that might normally be obtained by making
decisions as a group.
Groupthink may cause groups to make hasty, irrational
decisions, where individual doubts are set aside, for fear
of upsetting the groups balance.
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Action Learning: Contrarian Thinking.
Ask yourself, at the present time:
What are the prevailing common
assumptions about local and world
markets?
What are the implications, if some or
all of these assumptions are wrong by180 degrees (i.e. if the precise opposite
is true)?
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Action Learning: One Picture Is
Worth a Thousand Words:
Graphs of key variables can alert
us to looming crises.
What three graphs do you have
in front of desk, in your
workspace, that you view daily,
that serve to alert you to potentialrisks and market declines? Do
you update them regularly?
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Average House Price
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Tipping Point (critical mass): When More than X% Become Bears
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Tipping Point (critical mass): Pessimism is Self-Fulfilling
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Analyst? Or Strategist?
Ask yourself, are you primarily an analyst? Ora strategist?
Definition:
Analyst: An employee of a brokerage or fund
management firm who studies companies and makes
buy and sell recommendations on stocks of these
companies. Strategist: Those who weigh broad market
sentiment and macroeconomic factors in order to
assess the overall business environment , as an aid
to those building buy and sell recommendations.
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Understanding 2007-9: Six Key Principles1. In capital markets, it is not stocks, bonds and other paper
assets that are bought and sold. It is RISK!
2. In global capital markets, one form of risk is consistently
underestimated. It is called perfect storm risk.
3. Be sure you understand the dynamics of the industry in
which you do business.
4. Capital markets will regularly have major crises, every
five years or so.
5. In the contest between Wall St. and regulatory bodies,
Wall St. will always win.
6. In a perfect storm, one domino topples another, amplifying the
impact by a thousand times.
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U.S. Year-to-year % change in corp. net income, 19622008.
---- Incl. financial sector
----Excl. financial sector
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Toolbox
Tool #1: Scenario Planning
A scenario is simply a story, describing vividly what may happen and
how it will come about. Because it is vivid, it is believable, even though
improbable.
Scenario analysis: a) describes perceived current realities
as a mental map (which may differ widely among members of the
group constructing them); b) defines several alternative images of the
future, in tangible, concrete form; and c) describes paths that could be
followed that generate these scenarios.
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In any industry, when the rules of the game are beingradically rewritten, there are huge opportunities for
persons with energy, wisdom and creativity. The financial
services industry is a vital and integral part of the global
economy. Global business and trade is dependent on asmoothly-operating global capital market. Hence, the
financial services industry will be reinvented and reborn.
Those who lead this processleaders with courage and
visionwill do both good for society and do well for
themselves. We urge all those who seek careers in financial
services not to abandom them, while cautioning that the
road ahead may well be rocky for several years.
From Risk to Opportunities
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Learning Objectives:
After reading this chapter you should understand why
it is vital for managers to acquire their own
macroeconomic analytic tools and develop their ownperspective on key trends in global markets.
You should understand precisely what a global manager
is, and how a global manager thinks and acts on that
thinking. You should know what 'teleology' (the study of cause
and effect) means and why becoming good at
understanding teleology in global markets is important
Chapter TwoWhat Is Your Story?
How to Build Powerful Global Narratives
L i Obj ti ( ti d)
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Learning Objectives (continued):
You should also understand how a systems thinker uses
dynamic feedback loops to understand fundamental
causality as it unfolds in world markets. You should beable to construct feedback loops that identify the key
dynamic processes occurring in global markets.
You should be able to use the GELT model (geopolitics,economics, lifestyle, technology) to identify key global
trends and build a narrative from them that leads to
global strategies.
You should be familiar with the recent history of global
markets and have in your mind a teleological account of
events as they unfolded from Nov. 9, 1989 to the present.
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The featured tool in this chapter is:
Tool #1 GELTGeopolitics, Economics, Lifestyle,
Technology.
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Teleology: Global Cause and Effect
Definition:Tel-e-ol-o-gy. n. Gr. telos, an end; -logia,study of; the quality of being directed toward a
definite end, or of having an ultimate purpose.-Webster's New World Dictionary
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The Teleology That Created A Market Leader
Jorma Olilla, while vacationing in southern Francein Nov. 1989, observed the Fall of the Berlin Wall.He reasoned: the fall of the Wall will quickly cause the two
Germanys to unite,
this, in turn, will hasten European unification, andthe single European Market
in turn, the European Single Market will need,above, all, communication,communication will require mobile phones,because of difficulties in integrating national
land-line systems.
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Fall of the
Berlin Wall
9.11.1989
Unification of
East and West
Germany
Creation of
European
Single Market
Need for Europe-
wide communication
Establish
Nokia Mobile
Mobile speeds
Single Market
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GELTGeopolitics, Economics, Lifestyle, Technology.
G - Geopolitics: Instabilities and changes resulting from politicaltrends, in various regions and countries in the world.
E - Economics: Economic trends, including exchange rates,economic
growth, trade, exports, finance, interest rates, capital flows.
L - Lifestyle: Sociology, the way people live, social trends, cohorteffects (differing values across age groups.
Ttechnology: Technology trends, new technologies, new basicscience that can lead to new technologies.
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G - GeopoliticsInstabilities and changes resulting from political trends invarious regions and countries in the world. Example: TheIranian ayatollahs, the war in Georgia, the new FrenchPresident, the American 2008 Presidential elections.E - Economics
Economic trends, including exchange rates, economic growth,trade, exports, finance, interest rates, capital flows.
T - Technology
Technology trends, new technologies, new basic science that canlead to new technologies (new ways to produce semiconductors,new ways to test and evaluate them, new technologies for
increasing transistor density on microprocessors, etc.).
L - Lifestyle
Sociology, the way people live, social trends, cohort effects
(differing values across age groups). Ipod, Iphone, are lifestyleproducts.
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Economy Lifestyle
Geopolitics
Technology
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Step 2: Categorize
Beside each trend, write a letter: G, E, L or T. Depending on itscategory. Some trends may be hard to categorize: if so, thenwrite down two letters, e.g. G and T.
Step 1: The Shopping ListList the major trends, over the coming 3-5 years, that youbelieve will impact the world. Put them down quickly. Eachindividual should take 10 minutes to write a 'shopping list, thenthe team should together build a single list based on the lists of
its members. Write down the key trends irregardless of theirGELT category. Write them on a flip chart page.
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Step 3: Prioritize
Of the entire list, select the major trends that the team believeswill be most important for ..'s industry. There should be 10-20of them.
Step 4: Quantify
For each trend, assign two numbers on a scale of 1 to 10. First:IMPACT: the impact of the trend on the industry, from 1 (verylow) to 10 (very high). Second: TIMING: WHEN the trend will
fully be felt.1 = right now, immediate. 10 = not for 5 years. There can be arange: e.g. 3-5 from 18 months to 2 1/2 yrs.
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Impact
Timing (years)
0 1 2 3 4 5
G
Berlin Wall Falls;
Germany reunited
E
European Single Market
hastened
L
Need for Europe-wide
Communication
TBuild Cellular
Technology
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Tool: Feedback Loops
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Housing prices
fall
Mortages widely
exceed house value;
Net equity is negative
Mortgage owners
default; banks foreclose
Banks sell
foreclosed properties
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Understanding History: Teleology, Feedback and Dominos
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Nanyang Business SchoolMBA 2008 S. Maital 38
Teleology: from Mexico to Argentina
1. Mexico: borrowed Dollars.. High interest rates2. flight of capital.sale of pesos.sell $...3. Crisis: peso is devalued3.50 to 7.004. Emergency loan: IMF $50 b. (lenient)5. Mexico recovers6. Washington: strengthen the dollar..raise interest rates7. Asian countries in BIG BIG trouble8. Thailand: flight of capitalbaht collapses9. IMF loan
10. Other Asian currencies fall rapidly: 1997/9811. oil prices fall rapidly Russia loses revenues12. BRAZIL
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Global Risk: Taxonomy or Ecology?
Taxonomy shopping list of kinds of risk
Ecology global analysis of systemic risk
Chapter Three
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Chapter Three
Risk Management with Telescopes & Microscopes
This chapter explains that managers need a peculiar type of vision
-- one that enables them, with one eye, to zoom out on global events
and to tracking minds markets and money all over the world
(telescope) and with another eye, to zoom in, on their own
organizations, businesses, products and clients (microscope).
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Microscope:
On a scale of 1 to 10: How 'sharp' is your zoom-inmicroscope (i.e. how well do you understand the products,
strategies, operations, and business design of your
organization?) (1 is 'poor'; 10 is 'excellent' or superior).
1________________________ 10Business Design
1________________________ 10
Products
1________________________ 10
Operations
1________________________ 10
Strategies
Average score / 10: X = _____
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Telescope:
On a scale of 1 to 10: How 'sharp' is your zoom-out
telescope (i.e. how well do you track and understand globaltrends and markets ?) (1 is 'poor'; 10 is 'excellent' or
superior).
1 ____________________10
Global economics1 ____________________10
Global finance
1 ____________________10
Global technology
1 ____________________10Global social trends
Average score / 10: Y = _____
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Place yourself in the 2 x 2 diagram below, by plotting the (X,Y) coordinate.
What action items emerge from this analysis? How can you increase the resolution of your
microscope? Of your telescope?
Telescope
Microscope
1
10
1 10
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Case study:
Bankers Trust: When value-at-risk
risk management models collapsed
Case Study:
Goldman Sachs Heads forHarbor
Who and What Caused the Crash of 2007-9?
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Who and What Caused the Crash of 2007 9?
The Three Streets: Wall St., Main St., Massachusetts Ave
Wall Street (capital markets):
Exotic securities that were complex, risky, and largely
unregulated; Compensation: bonus systems that encouraged
bankers and traders to accept undue risks, because rewards were
based on returns but not on risk Leverage: Investment banks gotthe American Securities Exchange Commission to relax their capital
requirements and vastly increase leverage (ratio of debt to capital);
Main Street (ordinary people)
Americans lived well beyond their means, overspent and
overborrowed; small and midsized banks overlent to builders;
greedy homeowners used inflated home prices to borrow and
spend;
M h A (F d l )
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Massachusetts Ave. (Federal government)
Gramm-Leach Act let commercial, investment banks recombine;
Alan Greenspan (Fed Chair) lowered interest rates drastically andexcessively, fueling the housing bubble; Community
Reinvestment Act: forced lending to people with bad or no credit
rating.
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Assetprices rise
Profitsfuel more
leverage
Borrowmoney,buy assets
Assetprices fall
Lossesfuel morede-leveraging
Sell assetsto reducedebt
Bubble
Collapse
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