Triaging in an era of macro risk overload

Triaging in an era of macro risk overload

TLDR: Much like the health care systems – company macro risk monitoring and mitigation systems are overwhelmed by an avalanche of pressing cases. Unlike the healthcare systems, companies are not set up to handle this information overload. Take a page from the hospital playbook and use triage to decide which cases to take on and which to put aside.

 

 

What we’re talking about: markets have been rising recently as countries started looking toward easing lockdowns. But the market moves are in stark contrast to the global reality – of mass unemployment, a coming wave of bankruptcies, and the “hammer and the dance” of future lockdowns.

 

But even outside direct COVID-related risks, there is so much happening that it’s easy to be shocked by a consequential story one day and quickly move on to the next headline the day after. This is similar to how the US news cycle has operated under the Trump Administration – such an overload of issues that a big story is quickly forgotten as the next one emerges. When the Pentagon confirms UFOs and it doesn’t even make the second page you know things are moving too fast.

 

But the global issues arising at the moment are much more consequential. Last week, we wrote about the four biggest questions determining the post-COVID landscape. Here’s a short recap of things that have happened in the past few weeks under each:

 

Economic outcomes

 

·         Bad economic data: Q1 data coming in worse than expectations, and unemployment continuing at an astounding and historic pace.

 

·         Emerging market challenges: capital inflows have declined dramatically. Economic trouble is coming if it’s not already here. FX is already volatile in many EM countries, and the impact of the virus hasn’t even fully hit yet

 

·         Oil crisis: certain oil prices went negative, with major consequences for oil exporters without diversified economies

 

De-globalization

 

·         US-China threats: serious risks to the phase one trade deal, discussion of US seeking reparations with various ideas floated - more tariffs, blocking US retirement funds from investment in Chinese equities

 

·         Brexit: the UK playing hardball and seemingly being willing to let Brexit fall off the cliff edge at the end of the year. Repetitive beyond boring but no less impactful.

 

·         Italexit: polls showing EU approval in Italy down from 42% in September 2019 to 27% in April 2020

 

Consumer behavior

 

·         Lasting remote work: more and more companies suggesting that remote working policies could last for the long haul (the CEO of Barclays said “the notion of putting 7,000 people in the building may be a thing of the past”)

 

·         Anti-China sentiment: a poll showed 21% of US consumers said they will no longer buy products made in China

 

·         Growing savings rate: the US savings rate spiked to a higher level than it reached even in 2008 – suggesting a possible Japanification beyond just the economics and into people’s behavior too

 

Post-crisis politics

 

·         US: Not just Biden polling well in swing states but a possible Senate flip is expanding the horizon of what’s possible in terms of policy post-COVID

 

·         EU: Germany refusing Coronabonds again and the EU suspending state aid rules through 2020 –what will it wreak through growing divides between what the richer and poorer members?

 

·         Hungarian democracy: basically game over. Poland up next?

 

·         UBI: Spain passed a permanent UBI! The details are very much TBD, but this is a major manifestation of post-COVID political possibilities

 

·         Iran tensions: US ratcheting up economic and military pressure on Iran even amidst the crisis

 

·         North Korea risk: rumors about Kim-Jong Un’s health raising stability risks across the region

 

Any one of these would have been huge global stories in their own right in a different moment. This is not that moment. Unfortunately limited media coverage does not correlate to low impact. Are companies tracking what it will mean for them?

 

Lessons to learn: Like it or not, in the long term we expect shareholders and regulators to force implementation of more robust macro risk systems. Systems that can quickly can pick up emerging issues, translate the impact on their companies, and prioritize for deeper analysis and response. That is what we have called putting your “bathing suit” on before the tide goes out.

 

At the moment though, time to take a page from the healthcare playbook. A good start is a triage system. The literal definition of triage is “to break into three pieces” – the more unsettling medical usage is to prioritize who gets medical attention in a time of resource shortages.  We recommend using the framework of black to grey swans as a way to understand what you need to do now:

 

 

While the specific issues and their mitigation differ company by company (the above is only the highest level view of a week of stories!), triage means parsing out what you need to do now, and what you can de-prioritize for later. That allows you to take necessary action immediately, and prepare a range of actions for less pressing issues depending on your current capacity. It is critical to get this right. That means a robust system to separate signal from noise (things have never been noisier) and quickly understanding value at risk.

 

With the implications of the current moment so momentous, you can’t afford to be overwhelmed - you need to be tracking. Are you tracking?

04.05.2020

Risk mitigation

Analysis