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Riskope International SAwww.riskope.com Case postale No 28+39-347-7007420
’
1055 Froideville, Suisse+41-79-6218795
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Updating our prediction, one year later
By Cesar and Franco Oboni, www.riskope.com www.foboni.wordpress.com 
On 14-15 Sept 2008 Lehman Brother went down in flames.
In the aftermath of Lehman Brother crash we published on internet a forecast of the crisis “durationand magnitude” (http://www.slideshare.net/Foboni/Communiqueorhttp://www.youtube.com/watch?v=G_sq21fP5-4 ) .Interestingly, only a handful of contacts asked us clarifications and to give details on the scale of consequence we had used (is it linked to stock markets? To financial indicators?)...May be, no one believed that reasonable predictions can be made?As we were publishing our prediction, we were indeed already seeing in the media statementsreporting that “quantitative models were wrong” and other inflammatory statements. As usual, inpanic/emergency situations, our society tends to react with little finesse (that's by the way onereason why Crisis Management Plans are so important to implement BEFORE a crisis).“Models” as a whole were discredited in the eyes of many readers and “forecasters”, now seen aspariah, became
 persona non grata
.Apparently no one botherd to say that “some models” are plainly wrong or were very poorly used,but others may work just fine!No one bothered either to say that may be some ruthless people had used the models in order to getthe replies they wanted (we have seen the same happen in fields as different from financial forecastsas humanitarian deming, and we have even published papers on this subject, all along with others).Below we summarize the prediction as it was made one year ago, and we analyze how it stands infront of one more year of history.
The Prediction, November 2008
The prediction, as published one year ago, can be seen athttp://www.slideshare.net/Foboni/Communiqueand can be condensed as follows:
 Duration Forecast
:
•
80% chances this crisis will be shorter than 3 years (Fall 2011).
•
30% chances the crisis will be shorter than 1.5 years (Spring 2010),
•
10% chances the crisis will be longer than 6 years (past 2014)
 
NB: From the data above it can be inferred that the probability of the crisis lasting between 1.5years(Spring 2010) to 3 years (Fall 2011) is 80%-30%=50%
Magnitude Forecast
:
•
20% chances the present situation will persist (The Blues, see the Measurements Section).
•
25% chance there will be a significant worsening (getting to Generalized Poverty, see theMeasurements Section).
•
55% chance we will reach a critical level of disservice (Severe Impoverishment andCatastrophic Disruption, see the Measurements Section).
Measurements of Magnitude
As a measurement of the Depth of Recession we selected the “loss of service and control” in a “G20type country” system, rather than usual financial indicators. As a matter of fact, the review of 200years of history clearly shows that finance and societal well being do not always follow the sametime scales.We used simple terms to define the damage, to allow readers to easily get a mental image of whatwe meant when we defined the various increasing levels of “loss of service and control” as follows:1.
The Blues
, which corresponds in our case to the Status Quo, i.e. the state of affairs in November2008, i.e. wide-spread budget cuts in the non- key services, for example starting with culture, arts,then spreading to to education
1
; some protests
2
.2.
Generalized Poverty
, high rate of unemployment (up to 10%-12%), poor to inexistentmaintenance of civil systems, reduced health programs, reduction of salaries of public officers,protests, some criminality increase, and some violence
3
.3.
Severe Impoverishment,
extreme rate of unemployment (over 12%), severe reductions of publictransportation offer
4
,gradual replacement of police forces with armed forces patrolling
5
, reductionof state-managed retirement plans, with generalized protests and criminality increase, high violenceetc.4.
Catastrophic Disruption
(of Order and Quality of Life), global rioting, wide-spread criminalityand sacking, and critical loss of control.Reportedly some countries in the G20 group had already passed the Status Quo level one year ago,but as we were developing this study for a “generalized” country within the group, we did not focusour attention on these particular cases.Using these four steps it appears that a country in:
TB: the Blues
, can be considered as a lightly damaged system;
GP: Generalized Poverty
can be considered as in critical state, but still functioning, meanwhile acountry with
SI: Severe Impoverishment 
or
CD: Catastrophic Disruption
can be considered as in a “failed systemstate”.The paucity of available data, quite common in our practice, in any industry we work for, did notdeter us from defining probabilities (which of course were not based on proper statistics as they
1
 
cuts were already being performed in various countries, France, Italy etc.
2
 
also in act, Russia, Japan, etc
3
 
to some level already reportedly happening in some G20 countries
4
 
already we have seen in many countries a reduction of the railroad network over the pastdecades, but not yet emergency cuts
5
 
already in act to some extent in Italy, US, sometimes under the “war on terrorism” cover
 
were not available). To do the job, we used specific methods we have developed in the past(Appendix 2 in “Improving Sustainability through Reasonable Risk & Crisis Management F. Oboni& C. Oboni ISBN 978-0-9784462-0-8”, 2007), and used for many years while performing risk assessments around the world (http://www.riskope.com) for a wide array of industries, butironically, never for banks.Based on the criteria that “future does not equate the past”, we adjusted historical durations andrates of occurrence, taking into account possible compounding of the present recession with otherfuture potential crises such as oil reserves depletion and water scarcity, climate changes (NB:interestingly people are now beginning to talk about possible “double dip” recession).
Where do we stand now?
A review of the recent world media and cursory gathering of factual data on jobs losses lead us tosay that we are at the beginning of GP state (see definition above).The U.S. unemployment rate increased to 9.5% by June 2009, the highest rate since 1983 androughly twice the pre-crisis rate. It is now reportedly above 10%. Similar increases are happening inFrance and other European countries.Several countries including the US are operating severe cuts in all non vital areas, health programs(let's see what will happen in the US), reduction of salaries (or benefits) of public officers. Protests,criminality increase, and some violence are rampant; as an example, the 2009 May Day protests, aseries of international protests that have taken place across Europe, Asia and in the other parts of theworld over the current global economic crisis turned violent in Germany, Turkey and Venezuela asriot police battled protesters in their respective countries.
Do we change our prediction?
First of all let's make it clear that we will not delve in endless discussions bearing on “is thisrecession now finished? Are we going to have a “double dip”? Are we still in the same recession”?These would be, in our mind, futile discussions, based on semantics. We are interested to knowwhen we will be out of it and care very little to know if there will be another up and down, or morein the way.Furthermore, remember that our prediction is not a financial prediction, but a more general one, asexplained in the prior sections, and the parameters we are looking at do not have the same volatilitythan indexes like the Dow-Jones. DJ may go up and down 10% per day, but unemployment andconsumers well-being take longer to change....It is quite obvious the data we are analyzing these days do not invite us, for the moment, to changeour prediction and if anything point out to a possible “longer” and painful solution of the situation.
So, what do I do with this prediction?
We published how the prediction can be used ten months ago
http://www.slideshare.net/Foboni/Using-Economic-Downturn-Magnitude-and-Duration-Forecast-to-Manage-your-Future
Of course that presentation shows examples that can be developed in detail, for example during ourcourses, or custom tailored to define a development/survival strategy for any enterprise.
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