By Franck Schuurmans, Ph.D.
A year ago (June 15, 2009, to be precise), Steve Williams, a senior partner at the highly respected Cornerstone Advisors consulting group out of Scottsdale, Ariz., published a provocative piece on the GonzoBanker Web site—a must-read newsletter for bankers and credit union folks alike—titled "Inflation Fears are far From Inflated."
Referring to the sorry state of affairs in Weimer (sic) Germany in the 1920s, Steve, who I have known for many years and whose newsletter entries I never miss, quoted Pearl S. Buck. She described a world of German zombies living in the aftermath of World War I, who had seen their economy and life savings wiped out by the "Great Inflation Beast." Talk about an attention getter!
Steve went on to rail against the "weenie(s)," particularly Nobel prize winner and New York Times columnist Paul Krugman, who did not buy the inflation scare and instead pointed to the danger of deflation and Japanese style stagflation ("Lost Decade") in the absence of a robust fiscal stimulus package. Wholly dismissive of the elitist technocrats, Steve considered Krugman's column at best an exercise in "whistling past the graveyard."
What was needed was a clear understanding that (hyper) inflation was imminent and unavoidable and that credit unions and banks should put their ALCO process on steroids, expand shock testing to 500 basis point-swings, and a call for lobbying to keep the Fed honest so that it "lives and dies on providing sound money."
Now fast forward a year to the present, Aug. 19, to be specific. Mohammed El-Erian, CEO of PIMCO, has just joined Krugman in the Deflation Camp [Aug. 13 Financial Times (free with registration)], pointing to, among other things, "the failure of Washington to grapple with the fundamental problems of the U.S. economy." El-Erian is not alone. In fact, at this moment, many inflation proponents are capitulating. While fund managers have no lack of strategies, hedging against deflation is increasingly in their cross hairs.
At times like this, there is no lack of dramatic prognosticators on the future turn of markets. Thus Robert Prechter of Elliott Wave International—which relies on extensive quantitative modeling of market and psychological data and has been in this business since the 1930s—forecasts that in five years the Dow Jones will be at 1,000 (yes one thousand, no typo and, yes, time to pack your guns and head for the hills). Jeremy Siegel of the Wharton Business School presents a much rosier picture. His research leads him to conclude that stocks will rise as much as 11 percent per annum in the coming years.
With such disparate data, Federal Reserve Chairman Ben Bernanke rightfully refers to our time as an era of "unusual uncertainty."
What then do we do? For starters, we accept that no one knows what will happen in the next five to 10 years. When you meet folks who do know what will happen in the next five years, you should hold on to your wallet and head for the exit.
Furthermore, in this world of uncertainty and ambiguity you can look at all the down side risk, but do not forget to look at all the opportunities that will be out there. Opportunities that arise because competitors have to abandon space, because your reputation is stronger than others, etc.
Finally, in this world of "unusual uncertainty" we need to move beyond the traditional risk tools that focus on interest-rate risk, credit risk, market risk, etc. and approach risk in a strategic or "holistic" fashion that includes both exogenous forces beyond your control and the industry, market and firm.
The 2015 scenarios that CUES commissioned for its membership is a good starting point to shock-test your current assumptions, your business plan and your business model! Moreover, you can use these scenarios not only to check for risk but also identify opportunity. Most importantly, scenarios underscore the fact that long-range planning is not about being precisely right or wrong, but is about being approximately right.
By the way, the Weimar Republic eventually became a poster child for fiscal stimulus plans and monetary policy. However, full recovery and full employment, just as in the USA, did not come until the Second World War!
Franck Schuurmans, Ph.D., is senior consultant and director of non-profit practices for Decision Strategies International, Conshohocken, Pa., and a former UW-Madison history professor.
