About the Age of Volatility
November 30, 2009
This blog is dedicated to investigating volatility and managing through the stormy weather of today’s economy. The Age of Volatility is here, an environmental reality. It is a new world for management, a seismic shift in the underlying predictability of the global economy.
Our world has been rocked in the past few years by a host of intersecting forces, including the Financial Crisis, most of which are themselves rooted in two deeply seated, causal mega trends:
(1) The rapid industrialization and urbanization of China and other emerging countries, these forces are changing global trading patterns, unleashing vast competitive forces and fundamentally altering the rules of global commerce as Asia begins to take a greater and greater share of the global GDP.
And (2) the Asset Revolution in the West, the transition of developed economies from a traditional (and predictable) industrial asset foundation to a new and immature knowledge foundation.
We’re on a massive learning curve to understand the full implications of these changes, build the skill sets and institutional norms necessary to stabilize and fully optimize this new economic order.
Unfortunately, many of the key institutions and decision makers are unaware of the scope and scale of these changes and those that are aware are simply overwhelmed by the task. So these trends will continue to play themselves out in the economy and be a source of volatility and instability for some time to come.
The New Normal is another concept that we’ll also be investigating in parallel. It is essentially the management consequences of all this change.
At the level of the organization the volatility created by the deeper forces has changed the rules of the game. For instance it is almost a ritual in the mining business to use 30 year rolling averages for the prices of materials and commodities in planning large scale capital projects. So the costs of a project, i.e. the steel used in a major construction project etc, is predicted on this basis. As well the price of the output, the commodities for sale are simply extrapolated forward – tweaked here or there for anticipated changes in supply/demand – to determine the overall economics of the project. Both of these are old ‘normal’ assumptions that can – essentially – be tossed out the window these days.
As a result, during the past few years planning in the mining industry has been completely out of whack and although at the top level many have been aware of growing volatility – in the bowels of the organization the staff are often operating as if nothing has changed. It has caused some major embarrassment, mistakes and loss of shareholder value. For instance I know of a major mining project, a new metals mine that was planned and approved utilizing traditional assumptions, upwards of $500m was spent and then the project was cancelled because project costs exploded ‘unexpectedly’. It went almost unnoticed at the planning level that during this period capital projects costs were rising at 35% year on year in a kind of exponential growth curve. So it was a rapid rise followed by an equally rapid fall and now a return to ‘normal’ so to speak, but the older certainty has vanished, a New Normal of volatility has replaced it.
So the Age of Volatility blog will be about all this, a site where insights can be gained on the sources of volatility, which will hopefully give interested people a view over the horizon at potentially disruptive changes that are on the way.