Most complex systems have multiple inputs, lets call them X, Y and Z. →...read more]]>

Convexity is an outcome. Convexity when plotted looks like it goes through the roof.  Hyper-inflation is price convexity.  Looking at extreme outcomes isn't as interesting as understanding the drivers that create them.  please note, I am not talking about typical bond convexity, but rather system behavior outcome as convex.

Most complex systems have multiple inputs, lets call them X, Y and Z.  In some systems these components are independent and additive.  For example if I make lemonade for a living, my Lemons, Sugar and Cups are mostly independent cost inputs.   Inflation may make them all correlate, but by and large they are independent and slowly rising as a function of inflation X+Y+Z=cost of lemonade.

Some systems have inputs that act on each other and drive each other.  When this happens X, Y and Z may have multiplier effects on each other.  A stable system with X growing 5%, Y decreasing 5% and Z with no change 0% may have a stable output.  A system with X times Y times Z all growing goes exponential by definition.

Debt bubbles and negative economic consequences can get into situations where, X,Y and Z not only all change having the same directional rate of impact on an output, but may even have feedback loops relative to each other.  This can cause convexity, i.e. extreme outcomes.  The change when all the variables turn positive or negative can lead to inflection points, or places where things appear to go vertical.

Most bubbles (manias) are like this, multiple drivers converge and feed on one another and then all invert at the same time the (panic).  An asset class has a few years of positive returns, leading to a perceived lowering of risk allowing for greater leverage allowing more people to buy into the newly discovered "money machine" asset class. Read Kindelberger to really appreciate how common this is.

Roll Risk & US debt

The US debt markets may be approaching an inflection point towards positive yield convexity.  Each week the US treasury issues about $120 billion in debt via auctions. The multiplier effects which are currently benign but are becoming ever more sensitive and fragile.  The X, Y and Z are the following.  

• Debt issuance is growing as a function of the deficit (nothing new there) at 6-9% annually
• The nature of the issues maturity cycle is shrinking roughly 40% matures in less than a year with the average maturity at <4.5 years
• Low yields are the result of strong Global demand for debt as everyone is afraid of other investments

So far so good, each week the US auctions $120 billion and most of it gets soaked up as nervous participants roll expiring govt. debt into the new issuance and a few others purchase excess debt keeping yields extremely low.  Out of politeness, I will skip discussion of the Fed's appetite.  Approximately 50% of US debt is foreign purchasers, more on that later.

The risks are the following.  If the world has continued demand and we run deficits of only 6-7% of GDP the amount of issuance in just 4 years will go up roughly 30%, if rates jump 400 bps issuance requirements (supply of weekly US debt issuance) could grow by more than 30-40%.  

The first convexity impacts are that the greater issuance (supply) could depress prices, thus raising the rates, creating the need for more issuance.  Short term finance exacerbates the amount of debt that must be issued to roll the debt.

The other 2 drivers of potential positive US debt yield convexity are foreign demand and foreign issuance.  

Foreign demand is going to be based on returns and fear based appetites, should the US debt start declining in price or should the dollar lose value which some deem desirable for export led economic growth, demand for debt from foreign holders may shrink.  

A declining asset in a declining currency rarely appeals.  Foreign holders of US debt may lose their appetite.  Remember Japan got to play the debt game at 200% debt:GDP because >90% of holders were domestic holders and the global supply of govt. debt wasn't out of hand.

The other important issue is that most OECD countries are facing similar if not worse situations, meaning they themselves will be issuing potentially anywhere from 30-60% more debt in the next 4 years assuming similar situations to the US in regards to deficits albeit with higher borrowing costs.  The Supply of debt could grow significantly globally. Fear based demand and blind faith in central banks may keeps yields low...until they don't. 

Please remember debt to GDP ratios a la Rogoff  over 90% are important, but the cost of debt service to govt revenue is just as important.  One represents solvency, the other a proxy for liquidity.  One can still be solvent but have a crisis precipitated by liquidity fears. 

Convexity 2012-14 anyone?

The model below is extremely crude.  I would welcome others to real models and scenario tools of how this could play out, and yes the deficit projections could be overly optimistic.  If you are an investor and have a time horizon greater than 3-5 years, this could be very germane to your actions and thoughts now.

Convexity type risks come creeping up in the night stealthily on tip-toes and then whoosh.  Risk of this nature is process based, most people only focus on the event.  The convexity drivers are all there and tension is building in the system.  Stop watching CNBC to hear about the particular straw that is going to break the camels back.  Just look at a very burdened and tired camel and move on.  

Understanding risk processes and system risk dynamics is more important than being able to talk about risk events.

A lot of people never look at the pension fund assumptions in public sector companies as it isn't really sexy stuff.  Most public companies hire "consultants" to adjust their pension fund assumptions.  If the consultants come to the conclusion that the pension fund will return 8.5% versus →...read more]]>

Private sector pension plans exist to make public sector pensions look serious and responsible.  

A lot of people never look at the pension fund assumptions in public sector companies as it isn't really sexy stuff.  Most public companies hire "consultants" to adjust their pension fund assumptions.  If the consultants come to the conclusion that the pension fund will return 8.5% versus a previous 7.5% the difference can be booked as earnings and the consultants probably get retained for their wisdom on future such issues. Nice bit O'business that.

Raising the expected returns on pension funds is a swell trick to goose the ole CEO lifestyle-o-meter a bit.  Those found "earnings" in the pension fund can really come in handy when it comes time to sell shares or make the quarter / year.  But publicly traded firms pensions are another topic for another day and I don't want to get all GMtastic on you.

The good people at the Pew trust have published their report of the Trillion dollar short fall in state pension funds. full report here. 

The net story is a $1trillion shortfall. Woops! I love the smell of federal bailout in the morning.  You can practically feel the Fed groaning and the ratings agencies ever soooo slowly reaching for their after the fact I told you so downgrade to state muni-ratings.

Here is the deal.  This graph shows the assumptions used by various states.  I took the liberty of pulling out the current state shortfalls and plotting them against the assumptions.  

Surprisingly there is a group of states leading the pack both on optimism about the future with 8.5% returns and pension shortfalls 30-45%.  I call them team: fingers crossed and eyes closed.  With the US 30 T-bond yielding 3.66% and the S&P at a 19.6 PE ratio it'll probably all work out in the end.....

Here is the Excel file data I extracted from the PEW report for those who want to play along at home.StatePensionLiabilities and assumptions.XLS

I would suggest reading When Money Dies.

Culturally shared narrative in companies allows people to align behind a vision and understand their role in being a part of something greater than themselves.  The quest for contributing to something →...read more]]>

Had a few conversations recently about corporate strategy, UX and the power of narrative, shared stories which allow leaders to deliver amazing things, vision statements to use parlance du jour.  

Culturally shared narrative in companies allows people to align behind a vision and understand their role in being a part of something greater than themselves.  The quest for contributing to something profound.  

Art history is all about studying narrative and context, cultural leftovers.  Here is an excerpt from Simon Shama’s Power of Art Series on Bernini.  I would highly recommend watching the series on Netflix etc.  Amazing stuff, makes me miss my Art History classes.

The ability to inspire to greatness in physical output, organization, or raw creative genius in others is a powerful skill.  This classics tell stories and are timeless.  Is your team reaching for greatness and timelessness?

You sell, program, design, create, lead, manage etc.

If you are American the first thing you do when meeting someone is ask what they do. It is so ingrained in the culture we get weirded out when someone appears to not care or talks of deeper things art, politics etc. or about meaning.

I challenge you to get to really know someone at →...read more]]>

You sell, program, design, create, lead, manage etc.

If you are American the first thing you do when meeting someone is ask what they do. It is so ingrained in the culture we get weirded out when someone appears to not care or talks of deeper things art, politics etc. or about meaning.

I challenge you to get to really know someone at the next introduction. Ask them, “Why do you do, what you do?” You may have to ask a few times. If a person has a great internal drive or works for a company with real vision, you should hear an inspiring and inspired answer.  You will definitely get a chance to learn more and get a chance to really listen and understand.

A small but profound book on the importance of  having a "why" is Man's Search For Meaning by psychologist and Holocaust survivor Victor Frankl.

People's beliefs change with age.  Who will you become?  Cultures also change over time.  If you visited your own country in 1970, you would feel like you had travelled to another culture as beliefs, behavior and social norms would be slightly different, a bit like an American waking up in Canada.

According to this chart as individuals our political identity changes with →...read more]]>

People's beliefs change with age.  Who will you become?  Cultures also change over time.  If you visited your own country in 1970, you would feel like you had travelled to another culture as beliefs, behavior and social norms would be slightly different, a bit like an American waking up in Canada.

According to this chart as individuals our political identity changes with time in a fairly standard path.  I haven’t looked deeply at the data and source OK Trends, but the thesis bears further consideration. As a countries median age increases it tone may shift.  China for example is currently the fastest aging country in the world.

Most political opinions of course are a mix of life experience born out by events and the process  of cultural enculturation.   If one found oneself in another country say the UK or France, which party would one vote for?  The Economist pointed out this conundrum in regards to a recent meeting Japan for various intl. far right groups.

Who were you at age 18, where are you now? Everyone changes, nothing is fixed.  your political beliefs will change as well...and this too shall pass.

Here is a great video on the distinction between intrinsic and extrinsic motivations.  I found this via one of the best psychology and economic blogs out there, Farnam Street. Yes that is a big endorsement for a very important resource.

The video above highlights the management skills and style of shifting between extrinsic and intrisic motivations using the simple analogy of trying to →...read more]]>

Here is a great video on the distinction between intrinsic and extrinsic motivations.  I found this via one of the best psychology and economic blogs out there, Farnam Street. Yes that is a big endorsement for a very important resource.

The video above highlights the management skills and style of shifting between extrinsic and intrisic motivations using the simple analogy of trying to pay your mother-in-law $1,000 for a terrific holiday dinner in front of everyone.  By shifting her labors from an intrinsic to an extrinsic motivated environment you have shifted and cheapened the outcome.

Why is knowing if your group/brand/team is intrinsically or extrinsically motivated important?

Intrinsic motivation is all around, in good will, craftsmanship, professionalism (pride in work not pay), relationships, artistry and maintenance of cultures of goodwill and comraderie.

The social era of software may well be killed if the shift to extrinsic motivators isn’t handled very carefully.  Sometimes referred to as “selling out”.  etc.  Shifting a behaviour, culture or belief system from intrinsic motivation to extrinsic motivation can kill a culture, company or brand.

On the other hand simple extrinsic or transactional environments may be difficult to shift to “trust” or belief based intrinsic environments due to a lack of faith in authenticity of motive and intrinsic passion.

Cultures, companies and brands can’t simply toggle between one type of motivation and another, managing, leading or maintaining consistency in belief systems is critical to stability. The authenticity of the motivation or belief will get lost leading to dis-illusion.  Sub-cultures (the coders, creatives, designers, musicians, story tellers, teachers etc.) who are intrinsically motivated may move on or get burn out if they feel their core group is now populated or motivated by sell-outs.

This isn’t an anti-capitalist rant, but rather an acknowledgement that as movements, groups, brands and organizations shift from either intrinsic to extrinsic motivations, change happens and isn’t easily undone.  

Among the best companies, there is a big difference in culture between individuals seeking to be the best paid and people seeking to be their best.  The outcomes are not mutually exclusive, but I would argue one is more sustainable than the other and organization focused on craftsmanship, pride in work etc. are more effective than climb the greasy pole type firms.

If you are contemplating a culture change (pay for performance) or acknowledgement instead of bonuses for your company, product, , brand or team, firstly know thyself and then consider what is going to happen when as many a band puts it, “when did it become more about the money than the music?“

What happens when the pharmacy is in your body. New chips and implants are being released that allow for the dispensing of medicine and or body monitoring in real time.  Imagine your doctor reading your vital stats for the last 10 days, by simply waving a RFID reader over you.  

Imagine being dependent on a therapeutic drug that is implanted in →...read more]]>

What happens when the pharmacy is in your body. New chips and implants are being released that allow for the dispensing of medicine and or body monitoring in real time.  Imagine your doctor reading your vital stats for the last 10 days, by simply waving a RFID reader over you.  

Imagine being dependent on a therapeutic drug that is implanted in your body that is time released weekly and receiving a payment due message via SMS on your phone.

Chips waiting to go onto pills

Now in vivo (body) feedback is happening.  The era of one drug fits all business model is going to be seriously challenged.  Genetic screening related to efficacy and live individual pharma-efficacy are going to rise up very fast.

Studies involving the ever changing macro-biome of you will be common.  These studies will provide greater and more transparent context to a treatments efficacy than ever seen before.

When a-prior genetics and context are tied with drug reactions and efficacy one can expect a raft of changes to both dosages and treatment suggestions.  This will be fantastic for patients and most likely have a “grey” period of off-label activity either in the US or other jurisdictions.  This new flood of information will also cause confusion and even more greatly potentially alter the doctor patient power balance information asymmetry due to the patients greater access to information and motivations to get things right.

By off label, I mean using a screening test to determine amounts and go/no go decisions for medications.  A passive test while not explicitly off label will provide information that alters a typical course of therapy. Eventually this information will most likely mean smaller but more effectively targeted drug markets.

Here is one of the bio-physical tools that will help this. A pill with a chip in it that will tie-pharmaco-kinetics to body responses in real-time.  All I can say is wow.  The pharma industry will probably not notice this as it will take a few years to have impact and a lot of the activity may happen outside of the US in more progressive and experimental jurisdictions.

The Competitive dynamics between various therapies and medications may mean an increase in fights for market share and eventually big-pharma will be arguing for genetic test kits to arm their patients with.  Large standardized pharmacodynamic info assays will probably be matched against a whole host of therapies and become bolt on additions to standard genomic screenings.  They will after all, only be software and bio-informatics stuck onto existing data sets of patients.

The FDA seems to be in a “close your eyes and make it go away” state of mind in regards to off the shelf genomics testing, but this won’t stop this revolutionary technology from seeping into the rest of the world.

A lot of systems get out of hand due to feedback loops, whereby the inputs of something end up getting amplified by a system and then increase the input again.  Biology, finance and other complex system fail when a system goes haywire and self amplifies exponentially until system failure.

There isn’t a good language for graphic feedback story telling outside of the systems →...read more]]>

A lot of systems get out of hand due to feedback loops, whereby the inputs of something end up getting amplified by a system and then increase the input again.  Biology, finance and other complex system fail when a system goes haywire and self amplifies exponentially until system failure.

There isn’t a good language for graphic feedback story telling outside of the systems thinking world.  I was looking for a quick graphical way of showing Feedback loops and how they can get out of hand or change over time from stable to unstable.  I couldn’t find a visual narrative language like flow charts so I designed one. 

I would appreciate, critiques and comments on how to make this approach to graphic story telling easier and more intuitive for sharing.  Floops (feedback loops) are vital to understand as many complex systems are operate in a stable fashion and then a rule or participant changes and things go haywire.

Have a look at the presentation and post some comments.  If you like Floops, use them. 

A little more clarity, listening, showing and sharing about systems thinking is a good thing and my hope is a graphic language may help people come to shared perspectives on things can be built better.

This is a great video about the impact of creative solutions by thinking about experience and the small stuff.  Design thinking applied with humour and really understanding user context.

The world isn’t linear. Find the small things that matter, for they are the levers that can move →...read more]]>

This is a great video about the impact of creative solutions by thinking about experience and the small stuff.  Design thinking applied with humour and really understanding user context.

The world isn’t linear. Find the small things that matter, for they are the levers that can move the world.