The Bankwatch

Tracking the consumer evolution of financial services

A more pragmatic view of the near future for scenario planning

Right after I posted this piece, thinking that finally people were starting to look to the future with a more pragmatic eye,  I came across this from David Olive in The Star.  I am by nature an optimist, however rationalisations such as this piece cannot alter some obvious facts.

David Olive: Will the economy get worse? | The Star

No. The current market downturn is still small by historical standards and the seeds of recovery are already planted. By talking the crisis up, we’re only prolonging it. Here’s some ammunition for the optimists among us.

First we can begin with this graph of the unemployment rate of growth compared to previous recessions.
07jobs-graf01
Both the rate of fall off in jobs and the extent of fall off are unprecedented.  incidentally no-one is expecting a turnaround in March.

Secondly, the value of assets in the world since a peak in Oct 2007 has dropped between 25% – 65% depending on mix of real estate and equities.  Yet consumer debt levels remain at historic highs.

No-one disputes that there will be a turnaround in the economy sometime, and whether it is 2009, 2010, or 2011 is not something I am qualified to judge.  However in my area of interest, or in industry in general, it is clear that the ‘recovery’ will not bring back ‘business as usual’.  The unsaid truth about recovery remains that it will not take us back to where we were before.

Relevance to Bankwatch:
Surely a better approach would be to plan for  a different future – a set of new assumptions to build into strategic plans that are not based on a return to ‘normal’   – for example, over the next 7 years what if we see:

  1. reduced car and home ownership by 30%
  2. increase in rent as a way of life/ reduced home ownership
  3. debt reduction as a way of life for many segments
  4. retirees with portfolios valued at 25 % of what they had expected

These are new reality scenarios that banks must consider, and more likely to generate a sense of positiveness by being grounded in a sense of the possible.

Written by Colin Henderson

March 9, 2009 at 22:54

6 Responses

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  1. You could not have offered any better advice: “Surely a better approach would be to plan for a different future – a set of new assumptions to build into strategic plans that are not based on a return to ‘normal.'”

    Jeffry Pilcher

    March 10, 2009 at 10:40

  2. Thanks Jeffrey – it seems many including government are going through denial that a seismic shift has just occurred. Your Google trends post is more reflective of what people are really thinking about.

    Colin

    March 10, 2009 at 23:18

  3. Colin, thanks for the post. How did you calculate these new assumptions?

    JJ Hornblass

    March 11, 2009 at 21:21

  4. @JJ – re new assumptions. I used observation of house value declines in US, UK and Canada, and losses on same stock markets – then eyeballed the average. Also some relevant posts:

    https://thebankwatch.com/2009/02/03/comment-on-beyond-the-age-of-leverage-new-banks-must-arise-niall-ferguson/

    https://thebankwatch.com/2009/02/04/the-great-unwinding-part-1-2009-2012/

    And ……. this written by Niall Ferguson.

    Colin

    March 12, 2009 at 20:39

  5. Very interesting post.

    We’re in the midst of pulling together a set of scenarios to think through these issues with the sort of details you started to sketch out, Colin. Objective is to test business strategies and identify opportunities.

    We clearly won’t see the same markets again. I believe we face two dominant dimensions of change. First, the level of consumerism in society — characterized by low saving, high spending, high leverage, high risk-taking, and all of the lifestyle choices that tend to go with those behaviors. Second, the level of government involvement in the economy. We were in a high consumerism, low government involvement world for some time.

    We’re moving quickly toward a different world of higher government involvement and lower consumerism. But of course, we may not stay in that world, and might even end up back in the low-government, high-consumerist world again. But it won’t be the same after the detour.

    So what would the four worlds or scenarios, with the different high-low combinations, look like? Demand patterns, input costs, regulatory schemes, and any other significant economic characteristic will vary. Constructing predictions is hard, maybe a fool’s game. But constructing plausible scenarios for “stress testing” business models and strategies is doable.

    Thanks for some raw material as we work this out.

    Jerry Hughes

    March 13, 2009 at 21:15

  6. @Jerry … this is fascinating stuff, and nothing we know recently helps us, so this is novel territory. Let me know if I can help in any way.

    Colin

    March 16, 2009 at 22:21


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