It is not a long time ago since food prices started to rise sharply worldwide: From wheat to milk, from coffee to cacao beans or vegetable oil. Agricultural products of all kinds are becoming more expensive even if increased price volatility doesn’t make it easy to realize the trend. Combined with increasing currency volatility like for example the South African Rand rising in a weak geoeconomic environment (or to the opposite the sudden devaluation of the Ethiopian Birr), food prices show the risk of a food crisis in Africa. Violent riots in Mozambique against rising food prices have left several people dead already.
The ongoing rally of food prices is posing a threat for the long term recovery of state budgets in Africa. For example the Ethiopian government managed to reduce significantly its debt burden over the last five years but now faces a new challenge.
With rising food prices the demons of the past seem to return. The base of modernization in Africa, the trust in a future orientated industrialized economy is heavily shaken by rocketing food prices and currency erosion. As a result the new export industries suffer from a lack of convertible currencies to buy spare parts or invest in equipment while rising food prices urge for higher salaries for their employees.
There are no credible up to date figures available about the impact of rising food prices in Africa but by having an eye on currency declines and shaky trade balances it is not difficult to understand, how sensitive food prices are for African economies.
by Niko Wolff (c)
Many small investors and consumers perceive the term of volatility as a dangerous sound. Most of them do not fully know its meaning but tend to associate it with excessive financial greed, manipulation or institutionalized fraud. Probably they feel the rapidly growing technological distance between their investment and the automatized decisions that are made about it – somewhere, somehow. Real-time electronic trade tools carrying out transactions in milliseconds cover already up to 70% of all transactions at the equity markets. Fears in the public are getting aggressive with regard to the reliability and risks of these systems. Unprecedented shocks and the increasing volatility have destabilized credibility and trust. Transparency and knowledge regarding the functions of electronic trade systems is almost zero outside the small circles of professionals. There is a fertile ground for myths and critical theories about those who know. Fundamental change might be necessary to regain trust for this industry, investment bankers and fund managers will need to open their doors. But first they have to realize how much they are depending from the trust of their remote customers. There is no space anymore for cynical ways of customer relations. US consumers have already significantly reduced their contributions to pension funds and capital insurances, the same happens in Europe.
It might be still a hidden scenario what happened if the large money machines run dry after a second downturn of the equity markets. This is getting more likely with every additional day of fruitless sidewards volatility. Eroding trust is the most substantial risk for the current markets. It might be justified assuming that even the early retirements announced by former key players of the New York investment banking scene were related to this deep lack of trust that is probably getting worse. The financial industry has not learned to communicate in an understandable language. They have not even explained to the public what the purpose of their job is.
The time when the banking sector was a playground of thrill-seeking personalities with one-dimensional educational backgrounds hunting for quick wins could be over; at least for a while. With a certain delay the financial crisis is obviously turning into a cultural crisis: bankers officially move to philanthropic activities, business schools in the US or Switzerland offer courses to connect bankers with scientist, philosophers or foundations. Some banks and funds started to care about their image, to care about their future. In the same time politicians are getting seduced by untapped electoral resources based on resentment against bankers and the financial system. Public anger and frustration about individual losses is so vibrant that political provocateurs do not even need to justify their own failures; the more radically they agitate the more support they can win. As a consequence right wing movements have high season. The political climate is changing driven by their simple paroles, on the other hand unhistorical ideas pushing for extended state regulation and control are becoming the main canon of the established bureaucracies and political institutions. A lack of transparency, rapid decisions beyond public control and hidden play is the code of the road.
The crisis of the financial system has created psychological and political gaps that could become explosive. Banks depending from governmental rescue plans or central bank loans can’t keep up former values like freedom, risk taking or entrepreneurship in a credible way. But if governments instead use banks for their own stimulus activities, they devalue the financial system implicitly by exhibiting the weakness of the whole system.
Revolution is in the air. Parameters need to be changed in shortest time, systems revised, convictions re-checked; hope, freedom and peace will depend from transparency, radical reforms and individual courage. Being smart, small and fast instead of big and slow might belong to the values of a new banking and financial order. The large funds, the big consulting companies, the big banks – they need to turn into organic networks closer to daily life and the real needs of the people.
Chinese households will undoubtedly make use of the intended further liberalisation of the gold market in China as it was announced by the government recently. The volume of physical gold kept by private households in China is rapidly increasing. Further effects on the gold price because of this big demand can be expected in mid and long term. The gold policy of the Chinese Government has an increasing influence on the further price development. It might be interested to allow more private purchasing of gold to fight the real estate bubble that represents the only other major investment opportunity for Chinese families.
by Niko Wolff (c)
The increased volatility of the markets as an aftermath of the financial crisis has become a dominating subject of finance experts, finance media and bestselling doom-prophets. Aspects of investment psychology have started to become common helping to cool down the hearts and minds of anxious savers who had transferred the responsibility for their retirement wealth to institutional investors or who took their financial fate in their own hands. In this regard volatility management was promoted by financial advisors as the ability to stay cool in times of rapid ups and downs, as a reminder to keep the long-term perspective of investment decisions and last but not least as an approval for the expertise of professional investment managers. Examples of historic trend reversals like the Dutch tulip crisis in the 16th century, charts of market performances covering decades of volatility and the anatomy of economic cycles were undoubtedly convincing arguments to stay the course and they have surely contributed to an impressive public learning effect considering economics. Stochastic descriptions and forecasts of market volatility may stay anyhow with a relatively small circle of experts but the basic understanding of the ups and downs are felt as understood by a majority of small and medium investors. The mainstream seems to have left panic behind as market indicators and institutional stability shows.
But volatility dynamics could stay on unprecedented levels due to a number of factors that are highly volatile in themselves: the consequences of climate change, the geopolitical shift related to China and India, the volatile currency markets, the demographic development and the rapid technological progress that will further increase the speed of product cycles and the change of consumer cultures.
Risk managers of international insurance companies therefore have already started cooperating with a multiplicity of interdisciplinary teams like climate experts, social scientists, relief workers, public health experts or security advisors to forecast and estimate potential shock events or rapid political shifts. Hyperinflation, state bankruptcies, natural disasters, social rebellion or abrupt political moves of major economic powers have become more likely risks. In this coherence the term of volatility management associated with risk management goes far beyond the markets. The increasing volatility of family income in the industrialized countries for example, the volatility of migration trends or the high volatility of GDPs in emerging economies affects not only markets globally but also social development and political stability. Newly established knowledge management departments may help to locate information, to optimize its flow and to cluster it, but they do not cover the need of strategy development for decentralized environments of high volatility.
Studies of organizational design show that increasingly volatile environments around international organizations and companies require management models coping with volatility in a broader sense. Those need to include internal risk communication, acceptable simplification strategies and innovative visualization concepts. They will redefine human resource requirements as open platforms of individual capabilities and skills related to the ability to cope with volatile environments individually or in teams. The common profiling of future employees by certified education and standardized experiences need to be replaced by learning behavior, volatility tolerance and creative response assessments. The employee as a rather independent personality might handle volatility much better than an employee whose function was defined by a HR department in a tight technical scheme.
Volatility management in a broader sense accepts natural and human limitations as boundaries of the controllable space that can’t be crossed without damaging the own perspectives. Therefore Volatility Management promotes the re-humanization of the economic sphere in the interest of a sustainable economic and social development.
The dynamic of China’s trade balance surplus shows a much higher volatility than the dynamics of the US trade balance deficit
The permanent growth of the US trade balance deficit since June 2009 alone (chart 1) shows not much volatility in its continuous negative trend. In an experimental projection this negative trend is reflected by the US inflation rate (chart 2) declining from almost 6% in July 2008 to around 2% in July 2010 (chart 3). Signs of a deflationary trend are backed by current data provided by Moody’s describing recessional trends in various cities and areas of the US (chart 4).
To the opposite in China the trade surplus shows a high level of volatility since end of 2008 including a very short phase of negative figures in April 2010 (chart 5). In the same time inflation rose from a deflationary – 2% in August 2009 to almost 4% in July 2010 indicating a rapid non-volatile upwards trend with 6% increase of inflation within 11 months (chart 6).
The comparison of these reciprocal trends of the economies in the US and China signal asymmetric risks that might have a mutually balancing effect but could also spiral into a downwards trend of both economies.