h1

Be Prepared, Heavy Weather Ahead?

March 20, 2010

The good news in Canada these days is becoming contagious; not only is the Canadian dollar trading at par with the US dollar, its gathering strength against a host of international currency heavyweights like Sterling and the Euro. Canada’s economy is strengthening with the rebound in global commodity prices, and is showing stronger than expected growth even in manufacturing based Ontario, which was particularly hard hit by the recession. Indeed GDP growth in Canada was approaching 5% in the fourth quarter of 09, raising the distinct possibility that the Bank of Canada will raise interest rates later this year.

This solid performance has not gone unnoticed; Canada’s reputation abroad is moving from strength to strength. The Canadian banking sector came through the recent crisis with top marks, while Canadian fiscal restraint and pragmatic policies have been credited the world over. Let’s face it in financial management terms Canadians are the new ‘Scots’ (who have behaved in an uncharacteristically imprudent fashion).   

All this is very good news, and yet Canada is not insulated from global shocks, and this is where business must keep its head up and its powder dry.

What’s Ahead?

There are some serious fault lines running through the global economy, which could spoil the party. The closer you look at the global financial system the uglier things appear (see blog items below). The international system has stabilized but at great cost. The massive stimulus spending and quantitative easing (near zero interest rates) required to put thing back on the rails are now becoming serious problems in their own right.

As a result of these initiatives and a decade of financial derivative innovation the global system is riddled with excessive (and unsustainable) debt; sovereign, corporate and personal. International cooperation is eroding just at the moment when it is most needed to deal with critical issues like global imbalances, rising protectionism and currency issues – which left to their own devices could shatter the global trading system.  To top it off, China the economy most responsible for the late 09 rebound in commodity prices is littered with over capacity, bubbles and other difficulties; and is in turn becoming increasing self centered and belligerent to its major trading partners.  

Things to Think About

In a world with this many structural problems, standing still is not an option. And, as some have discovered, volatility isn’t always bad, it’s only really dangerous for the unprepared.  While longer term, volatility will be the New Normal (and you’ll need a more strategic organization to survive), in the short term there are critically important things that you can and should be doing.

Be Prepared, develop an Emergency Plan. When one or more of these systemic problems pops it could create a global crisis (and panic) not unlike the one we’ve just experienced.  Think of your emergency plan as a vital survival kit that can be applied reliably when everyone is in shock: like a fire drill.

  1. Scenario planning is vital, work through the options, stress test your strategy and its underlying assumptions. Design a variety of supplementary options, develop them with implementable tactical plans and be ready to act quickly in an emergency.
  2. Do the math and remember Cash is King. You’re levels of debt matter. If demand is collapsing you should be prepared financially, have the ability to absorb significant interest rate shocks, a collapse in earnings and most likely the freezing up of markets and sources of corporate finance.
  3. Really know what drives value in your organization today, this goes beyond traditional assets, and requires a clear understanding of the broad spectrum of new, nontraditional assets, including intangible assets, key relationships (customers, investors, employees, suppliers etc). Know what it takes to sustain these value drivers through a crisis, i.e. it may mean targeting key personal and technologies or core customers, items that do not show up on your balance sheet or financial statements.
  4. Asset options, first of all identify those assets that have value and could be sold off quickly if necessary. Secondly identify competitor’s assets that you’d like to acquire. Remember to do your homework before the crisis, or you’ll be caught like everyone else. Calculate the longer term value of these assets so you can recognize a bargain when you see one. In a crisis you may just acquire the bargain of a lifetime.
  5. Never forget the old adage, flexibility is priceless in a crisis

2 comments

  1. […] Economic Forecast, Heavy Weather Ahead? « Age of Volatility […]


  2. […] Excerpt from: Economic Forecast, Heavy Weather Ahead? « Age of Volatility […]



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: