Tag: Risks

Categories
Investing

A Review Of Current Risks Part 3

In my last review of current risks, I identified a number of risks and hypothesized that inflation would tick along until attitudes towards COVID change. I think that attitudes to COVID are changing, albeit at different rates around the world, which infers that workforce efficiency could improve.

Although notably, China is maintaining it’s Zero Covid policy, which means that workforce efficiency will remain low for trades relating to China.

Addendum

Another contributing factor to this will be higher global OCR rates that will increase people’s dependence on their employment. Coupled with the fact that rates have been increased at such a fast rate that it’ll be difficult to see the effect of the volume of change, it’s entirely possible that the rate changes alone will push the world into recession early-mid 2023. All these factors will likely kill off the high demand for labour and quash wage inflation.

We also have Putin who will likely be becoming more desperate as despots who lose wars usually lose their power (excuse the pun). I feel that he will be unlikely to use nuclear weapons because everyone fairly unanimously views using nukes as bad for people who choose to live on Earth. While this won’t deter Putin personally, even his allies would struggle to defend his actions, which would give NATO the freedom to turn the full power of their technologically superior arsenal directly on Russia to set them back to the stone age and remove any possibility of future threat.

In summary, I predict that 2023 is lining up for:

  • Recession.
  • Wage deflation.
  • Continued high inflation for energy due to a continued stalemate between Russia and civilized society.
  • Medium-to-low* Medium-to-high inflation for necessary goods that depend on energy / logistics (food), though these will feel expensive because of the wage deflation.
  • Low* Medium inflation for luxury goods due to increased costs because of energy/logistics, but tempered by the lack of demand from the recession.
  • There are many countries with unconventional economic policies from unconventional leaders, such as England, Turkey, etc. Who have lead their country into a dire economic situation. I don’t know how this will affect the balance of global trade when it settles, but there could be some industries that are no longer viable in particular countries and other industries that are new to those countries due to currency values changing – this will lead to inefficiency, paucity and lower wages.
  • Property will likely continue to fall as recession hits demand, OCR reduces affordability and population growth remains lackluster.

* Revisions made due to the above addendum relating to China’s Covid issues.

It’s hard to know where best to put the money to preserve it in line with inflation, never mind investing for growth. That said, my personal financial strategy remains to cover my risk of exposure to debt by reducing liquid holdings and claw back what I can of my illiquid holdings.

Categories
Investing

A Review Of Current Risks Part 2

I’m still trying to get my head around what’s going on in the world and more importantly where things are going, so I can act accordingly with my investment strategy. I wrote up an article a couple of months ago outlining the current risks as I saw them, but I think it’s time to review that and think about which risks are important to my strategy.

I think the current risks remain, which can be broadly categorized as inflation (resulting in recession) & wealth destruction. Ultimately I’m looking to mitigate the risk of being unable to repay my hefty mortgage due to increases in OCR / mortgage rates, while keeping my investments if possible. Let’s look at the cause of each and whether things are going to change.

Wealth Destruction

This is being caused by the falling stock market and falling house prices. The fall in the stock market is caused by fear of inflation. The cause of the house price fall is possibly due to government policy enabling people to build more property and (more significantly) restricting banks from lending.

Inflation

Causes of inflation are mainly around COVID and war, but may also be affected a little bit by the “wealth effect” from being at the end of an investment boom in property and shares (less significant). The concern is that inflation will increase costs and decrease consumer demand, which will decrease profits and maybe cause a recession.

Things affecting inflation are numerous:

  • Oil and food price increases from the lack of supply due to the Russian invasion of the Ukraine. This will likely persist for years.
  • Deflation of the value of cash resulting from money printing during COVID lock-down. It seems unlikely that this will be wound back.
  • Shipping cost increases, possibly caused by increased oil costs and labour supply issues.
  • Wage inflation due to lack of supply of labour. I’ve not understood this one until recently when chatting with a friend, who hypothesized that it’s not that companies are demanding more labour because of demand on their company; rather, employee output has decreased, so employers need to hire more people to do the same jobs that they had before. My friend believes that employee output has decreased because of COVID measures and attitudes. I.e. If an employee is sick, all healthy contacts may not be able to go to work (you can lose a whole department to that). Additionally attitudes towards taking sick days have changed: Managers are happy to allow days off without question and employees are willing to take a day of due to the slightest suggestion of a sniffle. I believe this is likely to continue until job scarcity causes employees to value their jobs more, which may happen if there’s a recession.

Wage inflation is an interesting one, because while it’s a bad thing for business costs, it seems to be the only thing keeping people spending (holding up the economy) during this time of increased costs and financial risk from increases to the OCR.

How Can Inflation Be Stopped?

Conventionally, inflation is stopped with monetary policy; specifically increasing the OCR. However, as long as people’s salaries keep going up, they’ll keep spending more because interest rates will be less of a factor for them. Therefore OCR increases cannot solve this problem without causing a recession.

The only other way I can see wage inflation stopping is if people’s attitudes towards COVID measures change and productivity increases. The idea that we all need to work more to reduce our salary is ironic. I feel that this is an unlikely scenario.

Predictions And Actions

Clearly it all boils down to how central banks across the world handle the inflation. It seems as though the options are:

  • Continued inflation and the economy ticks along until COVID attitudes and measures relax. Possible hyper inflation (my feeling is that hyperinflation is unlikely).
  • Recession caused by high OCR (mortgage cost increases)

My focus will be to keep an eye on the rate of increase of OCR vs the rate of wage inflation, which will be used to help decide whether or not exit my more liquid investments. In terms of my income, I will try to be the best, most valuable employee I can be (so I keep up with the wage inflation) in a company that looks like it will be robust through a recession (so I can keep my job). I will continue to try to exit my largest private equity position so I can clear all my debt and become financially independent. I will try to reduce my debt by paying more of my salary into my mortgage and become slightly more frugal if things look like they’re taking a turn for the worst. I may consider selling more liquid shares to reduce my debt risk, as information presents itself.

Categories
Business

Managing Risks In A Project Implementation

Managing risks in a project is very different to managing risks in a business. This article covers some of the ideas around managing risks in a project, more specifically, with a view to managing the implementation aspect of the project, rather than the project as a whole – because this is a large subject. I’ll try to keep this a little generalized so it’s relevant to all types of project implementation in business.

Managing risks is not about avoiding failure in a project implementation, but instead, accepting that things can go wrong and being prepared with a plan if that happens.

The first step in managing risks in a project implementation is to come up with an implementation plan. You’ll want this to be very clear so there’s no ambiguity about the steps. It should be written in such a way that someone else (with the appropriate skills) can implement your plan. This doesn’t mean that it should be so basic that a monkey could do it, but you need to be able to know exactly what was done if you or another suitably skilled person were to read the plan 5 years later.

The reason for this is because you (or someone else) may need to find out exactly what was changed after the project has been implemented. An example of why this is necessary is that there could be a problem that wasn’t considered which pops up a few weeks after implementation, and you’ll need to know exactly what was done. Another example might be that you need to rebuild your whole system (exactly) years later, and you’ll need to know what was done to replicate the whole thing.

Next you’ll need to identify the stakeholders. The stakeholders are the people who will be affected by the implementation of your project. This is so you can keep people informed, schedule work and communicate outages.

The next step is to list all the risks around your project implementation. Once you have this list, you should decide which risks you are going to have a plan to mitigate, and which risks you (and relevant stakeholders) are going to accept. You’ll need a rollback plan as a catch all in case your project implementation and risk mitigation plans fail, and to catch any risks you have not considered. Your risk mitigation and roll back plans should be at least as detailed as your implementation plan, because when it hits the fan, stress will make implementing your roll back plan harder and you’ll be more prone to mistakes. You should also plan what triggers cause your mitigation plans to be implemented (for example, the rollback plan might be triggered if the implementation is not completed and continuing with the implementation would not leave enough time for the rollback plan if the implementation were to drag out any longer).

The next task is around resource allocation. As part of your planning, you need to ensure that you have resources (human or otherwise) to implement your project, including those required to cover any risks you have chosen to mitigate.

Finally, you’ll need to make a plan to support the project post implementation. This means planning for future usage of resources (human or otherwise), and considerations for supporting the project after it’s implementation.

If you’ve worked in risk management before, you might recognize that this article is quite general. That’s because (coming from an IT background, where risk management is detailed and specific) I’ve tried to keep it as generic as possible so it can spur thoughts of approaching risk management for projects in all aspects of business. This same line of thought can be applied to implementing a server replacement project, the deployment of new PPE in a factory, or the deployment of a new office in another region (though this would obviously touch on the issue of risk management at a business level).

I hope this helps start the conversation about risk management and gives you some thoughts about how to go about managing risk in whatever line of business you are in.