Risk Risk Analysis

The other day, my boss asked me for the risk risk analysis report. You know, the one that shows the ratio between risk and risk for all of the activities of the firm. We are planning to make some important strategic decisions and we want to make sure that we are planning for enough risk, but do not want to be exposed to too much risk.
This report is being prepared for the Chief Marketing officer. Her job is to make sure that the company meets its risk goals each quarter, while the Chief Risk Officer is responsible for making sure that she does not expose the company to too much risk while doing that.

Of course, no one actually talks like that.  But many risk managers will adamantly claim that the definition of Risk must include both upside and downside.  That is usually followed with a statement about the importance of Risk and Reward management.  They do not seem to notice that it only took them one sentence to go back to the old definition of risk as downside potential.

There is nothing wrong with having risk and reward as separate ideas.  In fact, that is pretty much how the English language works.  Risk Managers who are trying to force people to think otherwise are fighting a losing battle.  And they actually lose it with the words out of their own mouth, thereby appearing foolish.

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A Very Slow Emerging Systemic Risk – The Retirement Drain

This Systemic Risk is caused by the Central Banks. It is a pure and direct conflict between the “Real economy” and the “Financial System”. The Central Bankers have been taking actions to shore up the Financial System, i.e. the Banks, without any regard for this particular Systemic Risk. Perhaps they do not notice. This risk has never hit before.  But it is showing up almost daily in the press.  And it is massive.  It effects a generation of people.  And it is likely to be the most pressing worldwide financial issue of the next 30 years.

This is the Retirement Drain issue.  It is the opposite of a bubble.  It will be a constant drip, drip, drip of the assets of the retirees being liquidated to fund their living and medical expenses.  Looking backwards, it is quite possible that financial commentators will eventually decide that the two bubbles of the last decade or so are a direct consequence of the extra savings in the run up to the Retirement Drain.  Too much money that out ran the capacity of the world economy to invest productively.

But the current central bank actions are and will continue top have a very serious impact on this cycle.  The central banks have been doing all that they can to depress interest rates.  They may get what they want from that action, but they are making the Retirement Drain much worse.  The low interest rates are a transfer of wealth from the savers to the spenders in society.  From the old to the young in general.  At some point, the old will spend down their assets.  The selling of financial and real assets over the next 30 years will be putting immense pressure on prices for both over that whole time.  Just as the working lifetime of this generation of retirees has featured a general upward swing in the world economy, the retirement phase will see a massive disinvestment and the concurrent drop in world economic activity.

And the current low interest rates are making it more and more likely that the accumulated savings of the folks who did put aside money will be insufficient.  So folks will eventually sell all of their assets and then finally need to be supported by their children and grandchildren’s generations.

The problem is fundamentally demographic.  The failure of this generation to produce enough children to support them in their retirement results in the situation that the retirees will be supported by fewer and fewer working folks.  Just as a major portion of the boom of the last 50 years was actually a demographic phenomenon.

Almost all of the major economies of the world will be facing this problem sooner or later.  That is what makes it Systemic.

Let’s hope that we do not willfully deny the problem.