Complex Systems such as ‘economic risk’ demand a new approach to potential modelling?

“Many people in various fields tend to follow the Young method. If they are studying economics, or the human body and health, or the workings of the brain, they tend to work with abstractions and simplifications, reducing highly complex and interactive problems into modules, formulas, tidy statistics, and isolated organs that can be dissected. This approach can yield a partial picture of reality, much in the way that dissecting a corpse can tell you some things about the human body. But with these simplifications the living, breathing element is missing. You want to follow instead the Champollion model. You are not in a hurry. You prefer the holistic approach. You look at the object of study from as many angles as possible, giving your thoughts added dimensions. You assume that the parts of any whole interact with one another and cannot be completely separated. In your mind, you get as close to the complicated truth and reality of your object of study as possible. In the process, great mysteries will unravel themselves before your eyes.”

This quotation from the book ‘Mastery’ written by Robert Greene, addresses the limitations of the formulaic, mathematics based approach to studying what are now called ‘Complex Systems’.

Complex Systems are systems that operate on the basis of so many random variables that they cannot be successfully expressed within mathematical models. You will find a fascinating explanation of Complex Systems, and the technique recently developed in order to understand them, on the TED website – TED.com - in a presentation by James B Glattfelder, titled ‘Who Controls the World?’

The global economy is a Complex System since it is created and influenced by the actions and decisions of billions of global citizens. Each action and decision is potentially a random variable.

Credit risk, particularly Probability of Default, is a Complex System as it is impacted by many variables both within a business entity and external to a business. That is the reason why Probability of Default has not been successfully modelled at the enterprise level.

Statistically derived Probability of Default does have a use at the portfolio level – provided the potential failure of one customer or supplier is a sufficiently small portion of the whole portfolio so as to be survivable. In other words, provided the portfolio is large enough and diverse enough.

This supports the contention that credit risk at the enterprise level should not be managed on the basis of Probability of Default, as derived from a mathematical model. It should rather be based on a holistic assessment of the forces shaping the future viability of the enterprise, and therefore on the practical probability that it will pay or fail to pay its debts in full and on time.

BarrettWells
info@t3plimited.com

'Credit Risk Management - The Novel’ an ePUB version is now available

Now available in .pdf and .ePUB versions for £3.18 each; ePUB is designed for use with eBook Readers and Mobile Devices.

This is a new concept in business books, which is ‘difficult to put down’…

"It's a great idea to dramatise a subject like credit risk. I hope this becomes a trendsetter..." (Reader Comment)

The reader is drawn into an historical fiction that is interwoven with the day to day challenges of a credit risk management team. There are interesting twists and turns, characters are developed, fascinating places are visited, and little known facts emerge.

There are case studies galore that you will hardly notice but will remember, and will no doubt apply when appropriate.

See more details on: http://www.t3plimited.com/thenovel.html

In order to purchase a pdf or ePUB copy, click this link to eStore T3P: http://www.t3plimited.com/estore.html

Pdf and/or ePUB copies are also available from Google eBooks and other online retailers; search by Title or ISBN 978-0-9576279-0-1.

A Kindle version is available on Amazon.com and all other Amazon websites; i.e. India, UK, Germany, Italy, France, Spain, Australia, Korea, Japan and Brazil.


BarrettWells

‘Credit Risk Management - The Novel - Part One’ has been published by T3P LIMITED

I am excited to announce that my new book has now been published as an eBook.

It is available through the T3P LIMITED website currently. Within ten days it will also be available through Google eBooks and then distributed to other online retailers.

I am hoping to attract young business graduates to the credit profession as well as provide them with a little credit risk management education and entertainment.

I have arranged a 45% coupon discount for all GCMG readers; see below for details of this offer.

………………………………………

Credit Risk Management - The Novel – Part One
ISBN: 978-0-9576279-0-1

This is the first narrative non-fiction novel to feature the true to life experiences of a team of professionals managing business to business credit risk, day to day. This creative and personally satisfying endeavour is set within the context of the largely untold story of the inexorable progress the human race is making towards achieving world peace.

James and his colleague Jenny mask his endeavours on behalf of peace by managing the credit risk for a global enterprise. In so doing they pass on their accumulated experience and knowledge to fellow team members and the reader.


…………………………………………………

If you wish to purchase a copy taking advantage of the discount, please do so before April 30, 2013.

Simply log onto the store link below, click the relevant ‘Add to basket’ button, choose your country, enter the coupon code GCMGCRM, and then proceed to pay via PayPal the revised discounted price. You will subsequently find a download link when you revert to the Roman Cart page.

Please recommend the book to those of your friends and colleagues who may find it interesting.

Anyone wishing to purchase a copy should log on to the store at:

http://www.t3plimited.com/estore.html

The recommended price is GBP 3.18, USD 4.88, EUR 3.78, or the local currency equivalent. Payment is through PayPal using a PayPal account or credit card.

A Kindle version will be made available on Amazon.com within 10 days.

I hope you find the book an enjoyable read.

I will start writing Part Two when I complete the initial publication and promotion activity for this book.

Ron Wells
info@t3plimited.com

Why is Brent Crude Oil more expensive than West Texas Intermediate (WTI) Crude?

The USA is maintaining its ban on the export of crude oil, which depresses the price of WTI (West Texas Intermediate blend) as domestic plus Canadian supplies exceed demand, thus creating the WTI – Brent differential, now around $14 per bbl. However export of refined product is allowed. The result is US refiners are expanding while the European refining complex is in dire financial straits, and the future of Asian refiners is threatened….

Standard Chartered Bank Research refers, as this extract illustrates:

“Valero’s 4Q12 profit jumps 20x YoY, benefiting from cheaper crude. Valero Energy Corp (VLO US, NR) reported a 20x jump in its 4Q12 net profit to USD 1.01bn on 29 January 2013. This was mainly driven by higher refining margins from processing cheaper US crude. WTI, the US crude benchmark, was at a discount of c. USD 22/bbl to Brent in 4Q12. Valero also disclosed plan to ship additional cheaper crude via rail and barges to its refineries on the US Gulf Coast, until the Keystone XL pipeline becomes operational

Valero looking to increase product exports: Valero said it exported 110k bpd of gasoline in 4Q12, up 70% from the normalised level of 60-70k bpd. The company said it has a gasoline export capacity of 225k bpd, which it seeks to capitalise. It also disclosed plans to increase diesel export capacity to over 400k bpd from 280k bpd currently”

It is also public knowledge that Canada’s Nexen plans to avoid the US blockade on crude exports by railing crude to Canada’s West coast, for export to China, which will cause the WTI-Brent arbitrage to continue to close. Nexen is not the only producer of crude in North America seeking ways to capture the differential for itself, rather than leaving it to the refineries. Others in the US have requested export permits.

Legally permits can be granted by the US authorities but only for minor volumes and only on condition that the refined product produced from such crude is repatriated to the USA. On the other hand the Canadian crude producers only face logistical barriers in that their oil has traditionally been piped into the USA ending up in storage tanks at Cushing, Oklahoma, with no currently built route to a port. The consequent buildup of crude oil volumes at Cushing creates the Brent vs WTI arbitrage and hence Nexen’s move to rail crude to a Canadian port.

Ironically the US refineries presently capturing the arbitrage by exporting product were mostly sold by crude producers who were integrated companies, because they suffered from low refining margins in the past. Such refineries are unlikely to be able to compete with the likes of Reliance in India, i.e. modern sophisticated refineries, when the arbitrage no longer exists.

BarrettWells

In a world of complex technology only those with mastery will always find work – have you adapted your career plans?

As early as April 2001, Carayol & Firth wrote:
"Create and establish your own goals and your own road map for your own success."

" ... see your organisation as a temporary partner in your life but not the means and the end of it. Your company (employer) is a momentary co-creator with you of developments, growth, learning, fulfilment, meaning and wealth - not the source or benefactor of those crucial things. This mind-set, funnily enough, will reciprocate your organisation's real thoughts about you ..."

"The syndrome of employment as a ghost-marriage is a great danger to one's personal Voodoo. For better or worse, for richer or poorer, staff stay on and on, not daring to imagine, let alone attempt, the single life again. This slow paralysing of thought, innovation and empowerment wreaks havoc in time on any healthy organisational system - and on the personal system."
René Carayol & David Firth, ‘Corporate Voodoo: Business Principles for Mavericks and Magicians’.

Richard Scase noted in his article ‘The Future for Business’ several years ago:

"Companies are being forced to reinvent their management cultures ..."

"In this emerging future business world, old textbook categories that separate the economics of large and small firms, different economic sectors and the importance of geographical location no longer apply. The core assets of companies cease to be their technologies and other tangible assets. Instead, the core competitive advantage of businesses is now intellectual capital; in other words, brain power."
To read the full article see: http://www.richardscase.com/articles?art=6

Lynda Gratton in her book ‘The Shift: The Future of Work is Already Here’ published in 2011 notes:

“In a world of more and more complex technology, it is the highly skilled employees, or what I will call those with mastery, who will always find work.”

Writing about the year 2025 she continues later, “With the emergence of mega-cities, instead of connected parts these suburbs are increasingly becoming slums. Far from claiming their own purpose and identity, these concentrated areas of ‘surplus humanity’ exhibit intense poverty and little direction. This disconnection has been exacerbated by vast urbanisation that has seen millions of people leave the land, hoping for a better life in the cities. As the slums around Mumbai or Johannesburg will attest, these hopes are rarely realised.”

The term ‘surplus humanity’ is jarring when first read but it should be noted that this quotation is taken from the ‘downside’ 2025 scenarios presented by Lynda Gratton in this ‘wake-up call’ book. It is clear that having a general skill in future will increasingly see one competing for employment with five billion equally capable people, as well as robots and computers. Therefore one will need to cultivate mastery – the ability to add value that no one else can match – in a series of fields over a career. A career that will likely span, not 35 years but up to 50 years, as life expectancy lengthens towards 100. Certainly the days of starting a first job with a corporation and leaving one’s career to the corporation to decide, then retiring on an adequate pension at 60 or 65 ended more than 20 years ago. Sadly many companies still see from their point of view the advantages of having employees think that that is still the contract, at the same time as corporations have no intention to return such ‘loyalty’. When it no longer suits the next quarter results to retain an employee, or indeed a whole division or business line an unceremonious parting will swiftly ensue.

‘The Shift’ is a book well worth reading if you do not intend to leave your future, and the future of those you care about, entirely in the hands of others and the forces that will shape work in the future. Those forces, as listed by Lynda Gratton are; (a) the needs of a low carbon economy and finite energy resources, (b) rapid advances in technology, (c) profound changes in longevity and demography, and (d) important societal changes. The book gives the reader an opportunity to imagine what a work-day in 2025 could be like, and some guidance as to how one may prepare to ensure the outcome is positive rather than negative. See: http://www.lyndagratton.com

William Gibson was inspired in 1993 when he said, “The future is already here — it's just not very evenly distributed.”

It behoves us to look around, see what is already happening and position ourselves and those we care about to ensure the best possible future outcome.


BarrettWells
info@t3plimited.com

Employment has been decoupled from Growth

In his insightful book The New Barbarian Manifesto, first published in 2000, at page 63, Ian Angell wrote;

“When will politicians and their lackeys ever learn that technology is the problem not the solution? Today, productivity is delivered by technology needing only a few machine minders. National economies are no longer able to grow themselves out of unemployment. Growth has been decoupled from employment; it is created from the talent of a few knowledge workers, not from the labour of low-grade service and production workers. Neither does it come from arbitrary education programmes, nor from throwing capital investment at it. Growth is delivered by entrepreneurs, but only if they are given incentives, and otherwise left alone to get on with business.”

The current rate of growth of the global population is about 1% per annum, at which rate population would double in 70 years to 14 billion. Seventy years seems a long way away but realise that many planners are predicting that the population will level off at around 9 billion by 2050.

In fact at 1% per annum growth rate a population total of 8 billion will be breached by the end of 2025, less than thirteen years away. That is based on simple mathematics, one per cent compound annual growth from 2012.  Hence in just over 13 years the population will increase by over 14%; more troubling, at one per cent per annum the global population will grow past the 9 billion mark in 2036 i.e. 14 years prior to 2050.

This indicates that forecasters are asking us to believe that population growth will approach zero per cent per annum between now and 2050.

In reality it is completely naïve to expect that the present growth rate will be held at 1% per annum, let alone that it may fall below that figure.

It is already apparent that every developed nation is exhibiting concern about its declining population and many are introducing measures designed to encourage their citizens to have more children.

The burning question has to be – not how we will feed all the people, not where they will be accommodated – it is what will all the people do to occupy themselves? I have no doubt that we will be able to solve the food, accommodation and other challenges, but I am unsure about the latter challenge.

Put simply, how will the mass of people be gainfully employed?

The follow on question is surely; how should education and training change in order to equip the mass of the population to make a contribution to society through gainful and purposeful employment in future?

I sincerely hope someone has some ideas as to the answers to these questions, if not the answers.

Some of the thoughts expressed by Seth Godin in his book Linchpin: Are you Indispensable? How to Drive your Career and Create a Remarkable Future may prove helpful.

If you have some ideas please comment on this blog or send your comments direct to the editor.

BarrettWells
info@t3plimited.com

The Bank Payment Obligation (BPO) is Worth Serious Consideration

The BPO promises to replace Open Account and simple Standby Letters of Credit (under UCP 600 or ISP98) payment terms, for domestic and international trade transactions relatively soon.

Unfortunately the BPO will not supplant Documentary Letters of Credit or Standby Letters of Credit that require presentation of complex or detailed documents in order to prove that the correct goods were in fact dispatched as contracted, as a pre-condition of payment. In other words the BPO process will not provide a mechanism to protect the buyer in the way that a Documentary LC will do, when the buyer does not know or trust the supplier.

The Bank Payment Obligation (BPO) is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to an industry-wide set of rules.

The ‘rules’ referred to are in the process of being drafted jointly by the ICC - International Chamber of Commerce (www.iccwbo.org) and SWIFT – the Society for Worldwide Interbank Financial Telecommunication (www.swift.com); these rules will be referred to as the ICC Uniform Rules for BPO (URBPO) and should be published during the first quarter (Q1) of 2013.

In a recent article titled ‘Standard Chartered Pioneers the First End-To-End Automated Bank Payment Obligation Transaction’ David Vermylen, Global Credit Manager BP Chemicals Ltd was quoted as saying: “The BPO programme offers us a number of efficiency benefits through reduced document handling and lower confirming costs, and by conducting business with less paper compared to traditional Letters of Credit.” Mr Vermylen is also a member of the European Advisory Council of FCIB Europe, the European arm of the Finance Credit and International Business Association (www.fcibglobal.com).

See: http://wholesalebanking.standardchartered.com/en/mediacentre/pressreleases

BarrettWells subsequently asked Mr Vermylen; ‘How is the Buyer protected against the risk that the goods invoiced are not in fact in transit or do not meet the specifications stipulated in the Purchase Order? To which he replied;

‘Less than under an LC as a bank is not vetting the actual shipment documents. Then again if the seller wants to defraud the buyer, the bank would not necessarily catch the crime. There is indeed less protection against unintentional mistakes. (Also no protection against supply of the wrong goods, quality or volume/mass/number deficiencies, or out-right fraud. Editor) The SWIFT team therefore advises (and is very honest about this) that the product (BPO) is first and foremost suitable for well established relationships where there is a lot of trust between buyer and seller…’

Either by using the SWIFT TSU (Trade Services Utility) link for delivery of SWIFT messages received by a bank straight into a company’s accounting and banking systems or a bank’s proprietary bank-to-client trade system, companies will be able to capture a number of benefits from the BPO system; for example:

1. Improved cash flow management based on certainty as to when invoice payments will be credited.

2. Reduced document handling – whether paper of electronic – since purchase orders and invoices are keyed into the system and communicated automatically; via one or two banks in nanoseconds. The SWIFT system is exceptionally secure and reliable, and covers more than 10,000 financial institutions and corporations in 210 countries

3. Reduced information discrepancies and/or reduced time involved in identifying and correcting mismatched data. The BPO system automatically matches buyer and seller data against the Purchase Order and provides various reports

4. Better payment protection (for the seller) compared to a Standby Letter of Credit; with reduced costs and handling required on both sides of a transaction

5. Access to financing options is improved for both buyer and seller

It is not clear whether the joint ICC-SWIFT URBPO drafting committee will tackle the question of buyer protection in order to re-shape the BPO as a fully-fledged replacement for all types of Letters of Credit. However one could conceive of such an objective perhaps being achieved by introducing the option for the seller’s bank - upon viewing the shipping documents and inspection certificates - to enter certain required data (such as the Bill of Lading date) into the system to be matched against the Purchase Order, in order to trigger payment to the seller.

This ICC flow chart illustrates the process.

BarrettWells