Tag Archives: Wall Street

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Santa’s Impact on Business and Finance

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Just as Santa Claus brings gifts down chimneys, his name alone also carries the stigma of risks that transcend all industries. Indeed, thanks to the logistics of his job we better understand the risks of reindeer-led aviation. But perhaps more importantly, Kris Kringle’s presence has long influenced finance and business.

Mentioning him on Wall Street this year may trigger an underlying wealth management risk. The annual “Santa Claus Rally” marks an uptick in the stock market and a 1.4% average return of the S&P 500 index from the last five trading days of the year through the first two of January. This phenomenon can be attributable to people spending and investing a bit extra – possibly from holiday bonuses – leading to a generally happy mood on and off trading room floors.

Since 1950, the market has declined only 15 times during the Santa Claus Rally period. But due to the uncertainty surrounding the tax reform plan making its way through Congress, that 1-in-4.4 chance of downturn is on the minds of cynical investors. As reported recently by Investopedia, “Some bears think that, if Congress fails to make appreciable progress on tax reform before their holiday recess, Scrooge or Krampus will elbow Santa aside, and send the markets downward at year-end.”

And similar to the way Punxatawney Phil seeing his shadow on Groundhog Day can predict six more weeks of winter, Santa skipping stock exchanges’ chimneys may indicate a frosty new year. According to The Stock Trader’s Almanac, some of the more recent holiday seasons without a rally included the last two, as well as in late 2007 and early 2008 leading up to the financial crisis, and just before the dotcom bubble burst in the 1999-2000 holiday period.

Santa’s influence isn’t just relegated to stock speculation and short-term investments, however. Some executives and employees may emulate his work ethic without realizing it. All eyes turn to him in good times and especially during the bad. He’s trying to meet year-end quotas while keeping a workforce happy and focused. Plus, Santa has the burden of trans-meridian travel with frequent stops over a 24-hour period, which is sure to cause jet lag. Sound familiar?

While one all-nighter might not have major long-term effects, regular ones could lead to shift work disorder, which has been linked to chronic diseases and illnesses. Anyone known to “Santa Claus it” too frequently may accumulate a large “sleep debt” over time. According to the Sleep Foundation, “if you work at night, you’re also going against your biological clock, which is naturally cueing you to become less alert and encouraging you to sleep during the nighttime hours.”

This can lead to seasonal “presenteeism,” an issue Risk Management magazine recently explored, detailing pain management in the workforce. Presenteeism occurs when a worker inhabits a space at their job, but “is unable to focus and perform as expected” and can be an even greater drag on productivity than absenteeism. The condition is indiscriminate – it can affect interns and CEOs – and may cause someone to “miss out not only on the income, but also the sense of meaning, purposefulness and belonging that can be gained from a job. Initial distress may lead to chronic anxiety and even depression.”

Identify these risks now, so that the mention of Santa Claus doesn’t put a humbug in your eggnog this holiday season.

Wall Street Uses Risk Management?

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In attempting to describe the behavior on Wall Street in recent years, the term “risk management” probably won’t be near the top of anyone’s list. But when it comes to the nearing possibility of the United States defaulting on its debt, Wall Street embraces risk management with a passion.

Right now, the Federal Reserve is preparing for the possibility of default if the August 2 deadline for raising the government’s $14.3 trillion borrowing limit is not met. All signs (and common sense sprinkled with a bit of optimism) point to President Barack Obama and Congress finding an agreement to increase the Treasury’s borrowing authority in time to avert a default. If not, the world’s biggest economy faces rating agency downgrades and runs out of cash — soon.

To prepare for that possibility, financial players are “taking steps to reduce the risk of holding Treasury bonds or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility.”

The rating agencies, which control the fateful decision of whether the nation deserves to have its credit standing downgraded, are surveying other entities that would be affected by a United States default — like insurance companies and states — and issuing warnings that a United States downgrade could result in several other ratings cuts. States that might be downgraded, in turn, are trying to reassure the market that they could still pay their bills on time.

Some say bond traders are optimistic, however — thinking there’s no way the House Republicans will blow the August 2nd deadline. But just in case, they’ve got a plan.

Now that’s some Wall Street risk management.

The “Wall Street Mind” and “Too Big to Fail”

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Simon Johnson is the former IMF chief economist and current professor at MIT’s Sloan School of Management. And to say he is skeptical about the friendly relationship between government and Wall Street — particularly Goldman Sachs — would be putting it way too lightly.

He seems to be looking around at the industry “overhaul” that has occurred since the banks tanked the economy and wondering why everything is exactly the same as it was before. Very little has changed, he asserts, and he still thinks that at least one major firm remains entirely too big too fail regardless of how much Congress members want to walk around patting themselves on the back for passing Dodd-Frank last summer.

At the Institute for New Economic Thinking conference in Bretton Woods, he asked the following. (His transcribed comments here come from the video below.)

“Who in the room thinks that if Goldman Sachs were to hit a rock, a hypothetical rock — I’m not saying they have, I’m not saying they will. If they were to hit a rock today, Saturday, who here thinks they’ll be allowed to fail like Lehman Brothers did unimpeded by any kind of government bailout starting Monday morning? Can Goldman Sachs fail?”

After this, he pauses and looks around the room from his podium. You can’t see the crowd on the video but it becomes apparent that no one spoke up or raised their hand.

“I’ve asked this question around the country [and] only one person has ever raised his hand. It was in New York. He had a big short position in Goldman stock. That’s New York. But seriously, it can’t happen. Goldman Sachs is a $900 billion bank, total balance sheet. You might want to say it’s too big to fail. You might want to use the language of [Bank of England governor] Mervyn King and say it’s ‘too important to fail.’ You wouldn’t allow it to fail. I wouldn’t allow it to fail if it was my decision. You wouldn’t either. It’s too scary today given the nature of the global economy. And from that scariness comes power — comes an enormous amount of power.”

He then asks the audience what happened to the plans to reform this? Why is “too big too fail” still allowed to persist? Why is, as he claims, “it going the other way … too big to fail firms have gotten bigger”?

In his explanation is a lot of truth and straight talk about what he believes has been a failure to reform. Watch the video below in its entirety to hear all his insight. It’s 10 minutes long but you can make the time. (via The Economist)

In somewhat related news, New York magazine has put together a multi-part feature on “The Mind of Wall Street.” At it’s core, the piece asks if, when it comes to post-financial crisis reform, Wall Street won then why is it so worried.

Combined, both go a long way to explaining the current climate in the financial sector.

The Risk Management Angle on Time’s “10 Ideas for the Next 10 Years”

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Each year, Time magazine does a story on “10 ideas that are changing the world.” This year, the editors have made it a more forward-thinking feature, labeling it “10 Ideas for the Next 10 Years.” And as is the case with most everything these days, I managed to see several risk management-related angles in some of the trends they expect to shape the coming decade.

Here is a run-down with some thoughts.

time 10 ideas for the next 10 years

Time’s Idea: Remapping the World
“Good borders make good neighbors. Bad ones make wars”

This idea basically says that physically redrawing some national borders — or at least minimizing their importance over logistical factors like multi-national infrastructure — will cause less international and intra-national conflict. Obviously, the risk management benefits here would come from less political risk across the globe.

If Sudan could be divided, the civil wars there may become less intractable and economic opportunities may open up to multinationals — which could help both companies otherwise too concerned about conflict to set up shop in-country and the people living there who desire jobs and better access to goods. A world full of “good neighbors” also clearly benefits any utilities or other companies trying to lay down the transnational pipelines or internet cables that will be increasingly necessary in our increasingly globalized future.

Particularly in the Middle East.

Time’s Idea: Bandwidth Is the New Black Gold
“And it’s a scarce resource”

An under-reported risk, the dependence on bandwidth for real-time information exchange is increasingly vital to all companies and organizations. Whenever this is interrupted, so is business. Today, aside from major disaster situations, this interruption is mostly an inconvenience. But in the future, as more and more of this bandwidth is taken up by video and other resource-intensive applications, there may be real problems.

In time, the mere slowdowns we see today may be eclipsed by full-scale information traffic jams. But beyond that, the deeper problems will be with high prices and possible profiteering. As demand for bandwidth goes up, suppliers will logically be able to charge more, as happens in energy markets.

Can we rely on private industry — the cable and telephone companies — to build its way out of these problems? In a word, maybe.

It will be difficult to manage this risk individually, but organizations need to be thinking about these “information jams” in years to come. Tim Wu of the New American Foundation explains it further in this video.

Time’s Idea: In Defense of Failure
“Making mistakes is a great American freedom”

This idea centers on the idea that the great innovation that marked the United States’ ascendence to the front of the global economy in the 20th century was greatly aided by the fact that its citizens were not afraid to fail. They took big chances knowing that even if they failed, they would have a chance “to try, try again” without being entirely wiped out.

The article worries that this courageousness is waning, mainly due to macroeconomic realities, and that “rather than launch a quixotic war on failure” as the author argues has been done against complex financial instruments on Wall Street, “we should be using what we’ve learned to build a system that fails better.”

This, of course, is the new tenant of risk management: We should never try to avoid all risks — we just need to make sure we are taking calculated risks with contingencies built in for failure.

Time’s Idea: TV Will Save the World
“In a lot of places, it’s the next best thing”

Globally, the biggest impediment to better disaster preparedness and building codes is poverty. Places like Haiti and rural China just don’t have the resources to mandate and enforce developed world standards for things like foundations and reinforced concrete.

Somewhere lower on the list of challenges — but no less worth striving to overcome — is the educational gap. More so than in the developing world, the United States and Europe have learned from their past disasters. A lot of this has come from in-depth, post-mortm investigations of disasters. And a lot of the demand for such investigations has always come from the proliferation of TV news and the fact that citizens are generally outraged that such calamities could happen. People want to know why people were allowed to die or houses were permitted to burn, and the impetus behind that outrage often comes from seeing the tragic images in moving picture form on TV.

Too much TV has been associated with violence, obesity and social isolation. But TV is having a positive impact on the lives of billions worldwide, and as the spread of mobile TV, video cameras and YouTube democratize both access and content, it will become an even greater force

Sure, a lot of TV is more candy than vegetables (think Jersey Shore, SportsCenter or American Idol), but if you are still among those who erroneously think that television will rot your brain, you obviously haven’t seen The Wire. Or Spike Lee’s When the Levees Broke, which premiered on HBO.

In related news, The Wire creator David Simon’s upcoming HBO show Treme will focus on the music scene in post-Katrina New Orleans. Expect something amazing that will speak on what was the worst “natural” disaster to hit this country.

And, yes, this was mostly just an excuse to make you watch the new trailer for Treme embedded below. (via Video Gum) (UPDATE: That trailer is no longer available … replacement video below. Don’t worry, it’s just as good. Probably even better.)

You can also view the other six “ideas for the next 10 years” over at Time.com. Let us know of any other major risk management-related concepts that stand out to you.