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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 “duration and magnitude” (http://www.slideshare.net/Foboni/Communique or http://www.youtube.com/watch?v=G_sq21fP54 ) . 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 statements reporting that “quantitative models were wrong” and other inflammatory statements. As usual, in panic/emergency situations, our society tends to react with little finesse (that's by the way one reason 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 as pariah, 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 get the replies they wanted (we have seen the same happen in fields as different from financial forecasts as 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 in front of one more year of history. The Prediction, November 2008 The prediction, as published one year ago, can be seen at http://www.slideshare.net/Foboni/Communique and 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 the Measurements Section). • 55% chance we will reach a critical level of disservice (Severe Impoverishment and Catastrophic 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 “G20 type country” system, rather than usual financial indicators. As a matter of fact, the review of 200 years of history clearly shows that finance and societal well being do not always follow the same time scales. We used simple terms to define the damage, to allow readers to easily get a mental image of what we 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 November 2008, i.e. widespread budget cuts in the non key services, for example starting with culture, arts, then spreading to to education1; some protests2. 2. Generalized Poverty, high rate of unemployment (up to 10%12%), poor to inexistent maintenance of civil systems, reduced health programs, reduction of salaries of public officers, protests, some criminality increase, and some violence3. 3. Severe Impoverishment, extreme rate of unemployment (over 12%), severe reductions of public transportation offer4, gradual replacement of police forces with armed forces patrolling5, reduction of statemanaged retirement plans, with generalized protests and criminality increase, high violence etc. 4. Catastrophic Disruption (of Order and Quality of Life), global rioting, widespread criminality and 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 focus our 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 a country with SI: Severe Impoverishment or CD: Catastrophic Disruption can be considered as in a “failed system state”. The paucity of available data, quite common in our practice, in any industry we work for, did not deter us from defining probabilities (which of course were not based on proper statistics as they
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cuts were already being performed in various countries, France, Italy etc. also in act, Russia, Japan, etc to some level already reportedly happening in some G20 countries already we have seen in many countries a reduction of the railroad network over the past decades, but not yet emergency cuts 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 9780978446208”, 2007), and used for many years while performing risk assessments around the world (http://www.riskope.com ) for a wide array of industries, but ironically, never for banks. Based on the criteria that “future does not equate the past”, we adjusted historical durations and rates of occurrence, taking into account possible compounding of the present recession with other future 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 to say 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 and roughly twice the precrisis rate. It is now reportedly above 10%. Similar increases are happening in France 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, a series of international protests that have taken place across Europe, Asia and in the other parts of the world over the current global economic crisis turned violent in Germany, Turkey and Venezuela as riot 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 this recession 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 know when we will be out of it and care very little to know if there will be another up and down, or more in the way. Furthermore, remember that our prediction is not a financial prediction, but a more general one, as explained in the prior sections, and the parameters we are looking at do not have the same volatility than indexes like the DowJones. DJ may go up and down 10% per day, but unemployment and consumers wellbeing take longer to change.... It is quite obvious the data we are analyzing these days do not invite us, for the moment, to change our 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/UsingEconomicDownturnMagnitudeandDuration ForecasttoManageyourFuture Of course that presentation shows examples that can be developed in detail, for example during our courses, or custom tailored to define a development/survival strategy for any enterprise.
The methods exist, and they are solid. What is less solid is the human commitment and desire to actually do something serious about it. In the October 2009 issue, Nature magazine shows an article by Michael Bond that discusses precisely this point, as we did earlier this year: http://foboni.wordpress.com/2009/05/13/empower yourorganizationwithskillsandtoolsneededforhealthygrowthdevelopment/ . The ball is in your hands: play or....