Business Planning with a Black Swan Event: Currency Policy Event and Macroeconomic Impact

Executive Summary: How does a global business make country specific plans in the face of black swan currency events? How do you cut through the noise and focus on the macroeconomic impact of a dramatic currency policy move in a BRIC country? Ask fundamental questions after thinking through the factors at play. Some quick Thanksgiving holiday thoughts. For quicker reading, skip the Background section and jump to Factors for key points. 

Background

US economic trends and recent events have captured our attention. In these interesting times, we consider a currency policy black swan event and leverage that for some thoughts that may help you with business planning in these volatile times.

What makes a black swan event? How about making specific currency notes- that make up a significant portion of notes in circulation- legal tender no more, at short notice? India took the dramatic step to 'demonetize' the existing 500 and 1000 rupee notes.

As additional information, a blog post, by Larry Summers and Natasha Sarin, is here:
http://larrysummers.com/2016/11/21/most-sweeping-change-in-currency-policy-in-the-world-in-decades/

Factors
Now, the impact of this move needs to be assessed in terms of several factors:
- Existing currency policy and economic context,
- Consumer behavior and impact on share of wallet of goods and services for the near and long term,
- Different strata of economic activity that make up the complex country, starting with digital economy versus lightly banked economy versus the cash economy versus the barter economy and their economic interactions, not just the taxed versus the un-taxed parallel economy,
- Industry sectors, ranked by their dependence on the cash economy (do consumer discretionaries, cellphone and construction industries take a hit? For how long?),
- Cash management approaches across industries,
- Legal framework to deal with defaults, bankruptcies and working capital challenges,
- Asset classes and impact to specific stores of value like the dollar and gold and potential 'microbubbles',
- Banking and financials sector structure and fractional reserve systems trends,
- Trade,
- Global interconnections with other economies not explicitly identified from sectoral trade,
- Currency exchange rates and the assets and factors backing and propping up a currency,
- Monetary policy and implications of currency that ceases to exist and is no longer
- Central banking tools and accounting for currency events,
- Communication and planning for the event, including managing business and citizen concerns,
- Social change implications of the event and associated hand holding of citizens,
- Central bank, government, large banking and financial institution and industry co-ordination over operational aspects, processes and execution.

Key Questions
There are a wide variety of views on this complex topic that may or may not cover all the factors outlined above. Regardless of the diversity of thought and ideas, here are three questions that may help start the conversation on potential outcomes:
1. What is the risk, in %age terms, of the Indian economy (or large parts of the economy) going into deflation after the 'demonetization' move?
2. What is the risk, in %age terms, of the Indian economy going into stagflation?
3. What is the risk, in %age terms, of the Indian economy suffering some sort of a Japanese Lost Decade?

These questions are a starter list to help us cut through the noise and identify potential, pragmatic outcomes of the dramatic currency policy decision. This may also form your framework for tweaking your business planning for 2017 for a BRIC economy.

What do you think?

Note: This post can also be found on Medium, here: https://medium.com/@insightplusidea/currency-policy-black-swan-and-macroeconomic-impact-5b56c25fe244#.3j594cf8l

US Credit Rating Downgrade- The S&P AA+ Club

Executive Summary: Standard and Poor's downgrade of the US credit rating can be evaluated in terms of signaling power, economic comparisons of countries, and a review of the members of the S&P AA+ rating club. We take a brief look at two countries with sovereign debt ratings the same as that of the United States. From the Desk of If-It-Talks-Like -A-Duck-But-Does-Not-Walk-Like-A-Duck... What do you do? Worry about a double dip instead!

For a little while, folks were focused on the possibility of the US economy slipping back into a recession. Then, Standard and Poor's downgraded the US Credit Rating to AA+. There are various ways to review the implications of this move. Below are three. We take a quick look at two countries in the S&P AA+ club. This is just a quick look, since my take is that the core focus needs to be the possibility of a double dip recession.

1. Signaling Power:

Review and compare economic fundamentals across the OECD and come to your own conclusion on whether this credit rating event is a response to an economic reality that have already been factored in by the market, or this rating provides new information (broadcasts a new signal?) to the market that needs an economic reaction.

Here is a scenario analysis of the downgrade's impact on U.S. based financial institutions sectors:
http://swampland.time.com/2011/08/06/sp-downgrades-itself/

Here is another view of the impact of this downgrade:
http://www.reuters.com/article/2011/08/07/usa-ratings-financialsystem-idUSN1E7760AD20110807

2. Relative Macroecnomic Performance:

Review relative economic fundamentals across the globe, and reevaluate if there is a relative change in the US economy vis-a-vis the rest of the global economies, and if there is an across-the-board change in a set of economies across the global.

Here is Standard and Poor's view of the European economies and that the US credit rating downgrade means for them:
http://www.cnbc.com/id/44053959

At the bottom of this article below is an opinion of the coupling of the APAC region economy with the US economy:
http://www.reuters.com/article/2011/08/07/us-global-economy-weekahead-idUSTRE77628V20110807

3. Review Members of the Standard & Poor's AA+ Credit Rating Club:

To get started, here is S&P's sovereign ratings page:
http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us/;jsessionid=6TZhT1HpLpw3Slb1QjJZM1NR4wLTThcH4MfNp4JHbLZcGVHG0yhL!603717864?subSectorCode=39&start=100&range=50

Let's review two members of this club:
1. Belgium:
Here are some quick statistics on Belgium:
https://www.cia.gov/library/publications/the-world-factbook/geos/be.html

Belgium set a record for the number of days without a government. If you think there's a message in there about fractious politics, here an extract about Belgium as a poster child from the Economist:

“Most surprising, perhaps, maddeningly ungovernable Belgium is being held up by many as a model for debt-crippled euro-zone governments.”http://www.economist.com/node/18988904?story_id=18988904&fsrc=rss

If you thought Texas was its own country, here are more details on the political stress and strains at work in the country:
http://www.economist.com/node/18988904?story_id=18988904&fsrc=rss

You could also review Belgium's interest rates in the context of the European Central Bank long-term interest rate statistics for member states.
http://www.ecb.int/stats/money/long/html/index.en.html

In contrast to the Economist article about Belgium a few weeks ago, the Wall Street Journal reports growing concerns about Belgium's borrowing costs:
http://online.wsj.com/article/SB10001424053111904007304576494042192351786.html

Les Belges thought setting a record for existing without a government was worth a party:
http://www.france24.com/en/20110217-belgium-world-record-longest-period-without-government-iraq-election

If you were Belgium, what would you do?

What do you think?

2. New Zealand:

Here is the NZ treasury's review of the NZ economy:
http://www.treasury.govt.nz/economy/overview

The factbook (https://www.cia.gov/library/publications/the-world-factbook/geos/nz.html) tells me that New Zealand has the following key industries:
Food processing,
Wood and paper products,
Textiles,
Machinery,
Transportation equipment,
Banking and insurance,
Tourism,
Mining

New Zealand's economy is coupled to the Australian economy, and you may review the industry sectors to understand weaknesses in the economy relative to the other members of the AA+ club. This would be my starter list:
- Banking and insurance,
- Textiles,
- Machinery.

While you are at it, here is New Zealand's reaction to the United States joining the AA+ club:
http://online.wsj.com/article/BT-CO-20110806-700118.html

If you were New Zealand, how would you react?

What do you think?

Financial Crisis: Economists comment

If, like me, you would like to hear what seasoned economists think about the current financial crisis, below is an interesting site called The Economists' Voice:
http://www.bepress.com/ev/

Its a subscription site- however, the individual subscription fee does not cost an arm and a leg.

It was shortlisted for the best new journal here:
http://www.alpsp.org/ngen_public/default.asp?ID=251#new

Many thanks to Lori Sullivan for sharing the site.