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Fiscal Cliff: Risk vs. Uncertainty

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December 13, 2012 – Comments (1)

Board: IV Value Central

Author: TMFRoZany

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Measuring economic policy uncertainty discussed. Reading and hearing a constant din of about government policy and the economy with a fiscal cliff looming when taxes are set to rise and government spending set to fall come Jan. 1, just how do risk and uncertainty compare?Angst continues to grow about the possibility that uncertainty regarding government policy makes a weak economy worse. There might be some points to ponder as this saga continues – and it will. Incidentally, the ‘fiscal cliff’ January 1 date for sequestration is more flexible than it sounds, Washington negotiators can ‘wiggle’ more time if they choose.

UCIrvine economics associate professor Bill Branch argues, “A number of economists – including Ben Bernanke – have been making the case that uncertainty surrounding the fiscal cliff has been a significant restraint on the economic recovery.”

Barry Ritholz, chief executive of quantitative research firm FusionIQ, author of Bailout Nation who also runs a finance blog, writes, “The term “fiscal cliff,” popularized by Fed Chairman Ben Bernanke, is really a misnomer” - a fiscal slope would be better. Clarified, sequestration is not just a January 1 event. Spending cuts and tax hikes would be phased in over time.

An assertion found among economists: When it is unusually hard to tell where the economy and government policy are going, businesses will be reluctant to invest and hire so writes David Wessel, WSJ. Begin understanding the difference between risk and uncertainty by exploring what is meant by "risk", a term with many meanings. Googling gives us some twenty-five definitions. The ‘event focused’ view is the one we focus on here, an event tied to an undesired consequence.

A consistent gnawing question for me has been: is ‘uncertainty’ an excuse CEOs have used to hoard cash rather than spend it on new employees, acquisitions, or other expansion activities?

Lots of talk about how uncertainty alone is holding back recovery for the economy. Is that really the main issue? Many ask just when has there been a time without uncertainty. We don't have complete clarity now, but the point is that we never do. (Fortune)

During the partisan presidential campaign ‘uncertainty’ became the reason for the economy’s troubles. However, polls of many executives found them more worried about demand for their wares than policies of government. Of course, things are never certain.

Yogi Berra so eloquently said it's tough to make predictions, especially about the future.

Old philosophical idea about risk and uncertainty
Mauboussin Framework. When it comes to not knowing stuff about the future, it's useful to draw a line between risk and uncertainty. In More Than You Know, a book on investing strategy, Michael Mauboussin offers the following framework:
So how should we think about risk and uncertainty? A logical starting place is Frank Knight's distinction: Risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we don't know what the underlying distribution looks like. So games of chance like roulette or blackjack are risky, while the outcome of a war is uncertain. Knight said that objective probability is the basis for risk, while subjective probability underlies uncertainty.
Knightian uncertainty. Frank Knight, an economist, formalized a distinction between risk and uncertainty in his 1921 book, Risk, Uncertainty, and Profit.

As Knight saw it, an ever-changing world brings new opportunities for businesses to make profits, but also means we have imperfect knowledge of future events. Therefore, according to Knight, risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.

“There is a fundamental distinction between the reward for taking a known risk and that for assuming a risk whose value itself is not known,” Knight wrote. A known risk is “easily converted into an effective certainty,” while “true uncertainty,” as Knight called it, is “not susceptible to measurement.”

Some economists have argued that this distinction is overblown. In the real business world, the objection goes, all events are so complex that forecasting is always a matter of grappling with “true uncertainty,” not risk; past data used to forecast risk may not reflect current conditions, anyway. In this view, “risk” would be best applied to a highly controlled environment, like a pure game of chance in a casino, and “uncertainty” would apply to nearly everything else. (Peter Dizikes, MIT)

A corollary is that without risk, there is no uncertainty. Risk and uncertainty both relate to the same underlying concept—randomness. Risk is quantifiable randomness, uncertainty isn’t. The distinction between risk and uncertainty is probabilities: risk exists when probabilities are known and uncertainty exists when the odds cannot be calculated.

Economic Policy Uncertainty
A recent article on measuring ‘economic policy uncertainty’ made my eyes glaze over on first reading. A recent study by three economists constructed a policy uncertainty index and showed that high levels of policy uncertainty can negatively affect the economy. Is this ‘economic policy uncertainty’ index for real?

More reading finds many references to this ‘measuring economic policy uncertainty index’, as the fiscal cliff looms. One in particular quoted last week in the WSJ from the study that uncertainty about economic policy has been rising. David Wessel asks: Does uncertainty make a weak economy worse?

That brings to mind the question as to what affects what, does uncertainty make a weak economy worse or a weak economy make uncertainty worse? First, a look at a study where the authors looking to Greece wondered why government official’s statements moved the global markets – considering Greece’s economy is smaller than that of Michigan.

Government policy change in Greece and stock prices
Llubos Pastor and Pietro Veronesi analyzed how changes in government policy affect stock prices. The equilibrium model featured uncertainty about government policy and a government whose decisions have both economic and non-economic motives.

Conclusions reached by Pastor and Veronesi cited by David Wessel: 1), there is more uncertainty when the economy is bad because that is when governments are more likely to actually do something (for better or worse), so that is when markets are particularly sensitive to clues in politicians' rumblings; and 2), stocks tend to move in unison when there is little clarity about government policy because it is hard for investors to discern which companies will be winners and which will be losers.

Stock market uncertainty relates to imperfect information about how the world behaves notes an article by the St. Louis Federal Reserve. “First, how well do we understand the process that generated historical stock market returns? Second, even if we had perfect information about past processes, can we assume that the same relation between cause and effect will apply in the future?”

Economic policy uncertainty index
Economists Nick Bloom and Scott Baker of Stanford University and Steve Davis of the University of Chicago claim to have figured out how to measure uncertainty using a three pronged approach with an index that measures levels of uncertainty that weigh on the U.S. economy. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses extend of disagreement among economic forecasters as a proxy for uncertainty.

Many commentators argue that uncertainty about taxes, government spending and other policy matters deepened the recession of 2007-2009 and slowed the recovery. To investigate this issue a new index was developed of policy-related economic uncertainty by these authors. “As measured by our index, we find that current levels of economic policy uncertainty are at extremely elevated levels compared to recent history. Since 2008, economic policy uncertainty has averaged about twice the level of the previous 23 years.” Charts http://www.policyuncertainty.com/results.html

The Professors statistically match the ups and downs of their index estimating an upturn in uncertainty between 2006 and 2011 with a drop of 16% in private investment within nine months and a loss of 2.3 jobs within two years reports David Wessel.

Doing something about uncertainty is hampered by the fact that uncertainty is almost impossible to define, let alone measure. The classic 'chicken and egg' argument makes establishing causality one of the most difficult aspects of scientific research. The answer is not found here in these professors research in my opinion, starting with methodology. Others review follows.

Skeptics challenge “economic policy index” hypothesis
Jan Hatzius and Jari Stehn at Goldman Sachs are skeptical that the causal relationship can be solidly established and write, “We do not doubt that uncertainty shocks depress economic activity, or that uncertainty has risen substantially since 2006. But we do not believe that the economy’s poor performance has been caused by an exogenous increase in US policy uncertainty.” In other words a lousy economy is more likely to produce uncertainty than the opposite and Europe worries are more of a factor than Washington worries. (Goldman, insiderbusiness.com)

Barry Ritholz, author, Chief Market Strategist for an institutional research firm, and the Chief Economics Commentator for an asset management firm who has made some excellent timing calls in the past, blogs about the claim made by Bloom, Baker, and Steve Davis that they have figured out how to measure uncertainty (showing chart from article). Sadly no says Ritholz. This is merely an index of how often uncertainty (related to policy) gets mentioned in newspapers. They also include other elements (number of temporary provisions in tax codes and variance in inflation and federal spending forecasts).” (Ritholz Washingtonpost.com

Ritholz describes a media dog pile occurred after CNBC began a campaign called ‘Rise Above’ that blanketed its airwaves since the day after the election with pleas for a solution to the fiscal cliff to rise above partisan political views as reported by Ryan Chittum of The Columbia Journalism Review. A brief break was taken by the media over the David Petraeus more salacious affair.

I fall into the camp of the skeptics over the economic policy index and uncertainty.

Briefly: What the Government Does and Why it Matters
Since the 1930s, Americans have counted mostly on the federal government to ensure a prosperous economy. Political leaders have different views on what the most important problem is, which policy tools are preferable, and who should benefit the most from government action. Americans tend to believe that individual liberty is the key to a thriving economy, but the steady rise in inequality has spurred interest in understanding the impact of government policy of economic inequality. (Government and Economy)

Fiscal cliff, a conundrum
And therein lies the fiscal cliff (a term coined by Federal Reserve Bank chairman Ben Bernanke, a sharp tightening of fiscal policy that, based on current federal law, will take effect at the beginning of 2013) to be dealt with by a very polarized Congress that works only three days a week and their Speaker of the House, and the President. As the fiscal cliff hangs in daily headlines, uncertainty about economic policy has been rising. The much evaded long term goal should be long term deficit reduction.

There are those who would say we have a fiscal slope, not a cliff. As several analysts have observed, the effects of sequestration are not a January 1, 2013, event. Those spending cuts and tax hikes would be phased in over time diminishing the impact. The stock market could become volatile. A single-variable analysis for complex financial issues is invariably wrong says Barry Ritholz. Because of the inherent complexity of economies and markets, we cannot adequately explain or predict their behavior by merely looking at just one variable.

What else might be driving equity markets?
Ritholz posits weak corporate profits, as the Wall Street Journal noted, this has been the “worst quarter for corporate profits in three years.” Weak corporate profits and future estimates for earnings growth keep sliding, fourth quarter profits July estimates were 14 percent annualized gains, by October that fell to 9.6 percent, now at 5.5 percent, according to S&P Capital IQ.

Markets were getting ahead of themselves for the first three quarters of the year, the markets put up impressive numbers, with the S&P 500-stock index gaining 17 percent, and the tech-heavy Nasdaq running up over 23 percent. Those are great numbers versus historic average gains of 10 to 11 percent.

Do not pay much attention to Wall Street’s assessment of politics. The euro-zone sovereign debt crisis is unresolved, and most of Europe is in a recession. In Asia, growth has been slowing, especially in China and India. And then there is the decreasing impact of Federal Reserve interventions in the markets. I submit that all of these other factors are weighing much more on equity markets than the fiscal cliff. (Ritholz - washingtonpost.com)

All of these other factors are weighing more on equity markets than the fiscal cliff. In fact, Ribholz continues he has much concern over declining earnings and what they mean for the possibility of a recession in 2014 saying ‘you should be, too’.

Barry L. Ritholtz is one of the few strategists who saw the coming housing implosion and derivative mess far in advance. Ritholtz's The Big Picture blog is one of the best-reviewed financial blogs on the Internet says John Mauldin. Asked, how important is the fiscal cliff for investors, Ritholz said not very.

"Whenever the media obsess over a potential crisis, history teaches us that it is most likely to be overwrought hype," Ritholtz writes on his blog. "Recall the Y2K frenzy as Exhibit 1 in The People vs Really Bad Media prosecution."

Media folks take umbrage with Ribholz. By far the biggest insult you can level at any news event is that it is "a media creation", a product of the fevered minds of pixel-stained wretches, slurping coffee while presumably cackling gleefully at the prospect of more readers, listeners, viewers or page views. (guardian.com)

Ritholtz continues his assessment in a video provided by John Mauldin, “data that Reinhart and Rogoff put together in a lot of their research, that post-credit-crisis economies have very weak job creations, sub-par GDP, poor recovery in housing, poor recovery in jobs. And so we have this muddle-along, mediocre, just-above-stall-speed type of recovery that always looks like we're on the verge of slipping back into recession, but hasn't quite stalled. . .

“I don't really care about the fiscal cliff. I find all this to be spasmodic stupidity. Oh no – the fiscal cliff!

“The worst-case scenario about the fiscal cliff is we'll lose $600 billion in spending we can't afford and increase taxes that we should have increased a while ago. So $600 billion in a $14 or $15-trillion economy is a relatively modest impact. Might it cause a slowdown? Sure, if we're running at 2% GDP and this takes half a percent off, we are now running a 1.5% GDP. The only way it really causes a severe recession is if there is a lot of shenanigans that go around, and if everybody causes trouble.

“Ideally, if we were rational adults and weren't engaged in this sort of primal warfare between tribes known as politics, we would all agree that the ideal time to cut spending and raise rates is during an economic expansion.” (source: video)

Disagreement on the fiscal cliff comes from Alan Blinder,former vice chairman of the Fed, writing in the WSJ this week, the result of heading over the cliff at year’s end will be brutal: “Millions of jobs will be destroyed, incomes and wealth will fall, and businesses will fail in droves – all because a bunch of politicians couldn’t agree.”

Other headwinds - Robert Reich
The US economy has identified more headwinds than just the fiscal cliff. For example, Robert Reich, the Chancellor’s Professor of Public Policy at UC Berkeley and former Secretary of Labor to the Clinton Administration, writes about three: The child poverty cliff, The baby boomer cliff, and The environmental cliff. The point is, there are others.

Comment. Reich’s child poverty cliff calls my attention to children, something that should concern everyone, as this is our future talent as all entitlement cutting is on table. Additionally, euro-zone sovereign debt crisis is unresolved, most of Europe is in a recession, and Asia growth has been slowing, especially in China and India.

Going over the fiscal cliff will cause another recession some say, others say we are still in one. Peter Shiff sees the economy so screwed up from years and years of bad monetary and fiscal policy that it’s going to be painful to correct the problem, avoidance cannot continue because the pain gets bigger. The country needs a shock like the cliff to adopt financial discipline.

Uncertainty concerns impact
Professor Bloom and co-authors in their analysis suggest that uncertainty over long-run fiscal policy is the key issue in the U.S., uncertainty weighs on investment, hiring and output. Unfortunately, consumers and investors do not have a seat at the negotiating table of Boehner and Obama.

Political, fiscal, and regulatory uncertainty in the United States is hampering capital investment in the country and beyond, said Tom Kloet last week, CEO of TMX Group, Canada's biggest exchange operator.

Sebastian Mallaby, journalist and author, at the FT.com suggests that there is “a second consequence of enduring uncertainty, which relates to an old truth about economic forecasting. In acutely uncertain times, precise predictions are of dubious value; the risks around a forecast are more significant than the forecast itself.”

Furthermore, Mallaby writes it is time to create something similar to the Sharpe ratio, only applied economic growth. William Sharpe invented a way of combining expected returns from a security with the expected risk of holding it. Economics must heed political risk.

“With the election over, the focus is back to figuring out just how much uncertainty actually hurts an economy,” notes WSJ David Wessel. “Possibly consumers could save more and spend less, the problem for many is still no job or underemployed. It could deter already-wary executives from taking risks. And by making investors uneasy, uncertainty could make financing more costly for companies.”

US Consumer Confidence Index compiled by the University of Michigan fell eight points in early December as fears over the imminent fiscal cliff comprised of tax rises and spending cuts weighed in on consumers. “Whether or not this drop in confidence is actually reflected in lower consumption will depend on the outcome of the fiscal cliff agreement,” said Michael Gapen at Barclays in New York.

FederalTimes, “Figures suggest world’s largest economy has a little more momentum than previously thought, despite slowdown in exports and fiscal cliff fears.”

Highest concern of worldwide executives
PricewaterhouseCooper Survey. PwC 2012 survey finds that talent concerns continue to top executives list. CEOs are changing talent management strategies to confront skill gaps. Skills shortages are seen as a top threat to business expansion. One in four CEOs said they’ve had to cancel or delay a strategic initiative because of talent constraints. Rising compensation is one factor, but for more CEOs, there is simply a deficit of qualified candidates at a time when more CEOs expect to expand their workforces than to reduce. Slow recovery of global business markets is impacting CEO confidence.

Embracing volatility. This PwC survey shows how CEOs from 60 countries are embracing volatility. Mounting uncertainties are pressuring CEOs’ confidence. The rise in investment and commerce to and from emerging economies – more pronounced than in any period over the past decade – is lending support to CEO confidence despite today's economic volatility. Half of CEOs in developed markets believe emerging economies are more important to their company’s future than the developed markets they're currently in, as do 68% of CEOs who are themselves based in emerging markets. (PwC.com)

A few CEO individual concerns on interview:
--- Roger W. Ferguson, Jr. is President and CEO of TIAA-CREF
The biggest risk is the behavior of individual consumers.
---David Cote, chairman and CEO of Honeywell.
Talent has always been a strategic issue for us.
---Doug Oberhelman, Chairman and CEo of Caterpillar Inc
What we’re seeing today in Europe—and throughout the US and many other countries—are the ill effects of nearly 30 years of low interest rates coupled with high government borrowing and deficit spending. Right now we all need to keep an eye on sovereign debt, particularly countries with high debt to GDP ratios. . . Certainly I’m concerned about the debt bubble around the world.
---Martin Senn, CEO Zurich Financial Services Group.
Clearly, the most worrisome factor concerns the ongoing discussion over the sovereign debt crisis in the Euro-zone. . . Low interest rates are a challenge for the industry.
---Brian Duperreault, President and CEO of Marsh & McLennan Companies.
The reality is that we have two different worlds - the developed world and the emerging world. In the developed world, there’s tremendous uncertainty, which impacts the willingness to invest for the future, and discretionary spending comes under pressure.
F William McNabb III, President and CEO Vanguard Group. Government
---Government develop long term fiscal plans. Biggest issue structural, second lack of jobs ?training ?education
---CEO Dominic J. Frederico, President and CEO of Assured Guaranty Ltd -
Biggest risk is too many people rely on real estate market
Link to 38 CEO interviews. http://www.pwc.com/gx/en/ceo-survey/2012/ceo-profiles/index....

Inside Value pick BlackRock, “The uncertainties that need to be addressed are well known: In the US, it is the fiscal cliff of taxes and budget cuts; in Europe, it is the fiscal side of the political union, as well as the health of the financial system. . . . Our suggested focus on high-quality equities has not changed. Companies with
ample free cash flow look particularly attractive and we have a bias toward those
with the ability to grow their dividend payouts over time.”

Small Business
Gene Marks, a columnist, author, and small business owner, writes, “I don't hear the word "uncertainty" from true blue entrepreneurs. You know who I'm talking about. Inc.com reports on them every day. These are the ones who are getting financing, creating new technologies, making a killing on Wall Street, snapping up competitors who lose their mojo, buying used equipment for a song, or partnering with sketchy people in China or East Africa because there's money to be made. Are these people uncertain? Of course they are. But they love it! Because that's their thrill. That's how they make money. Business, all business, is a bet. A gamble. Because they are true business people, they understand the concept of risk and reward. The more uncertainty, the more reward for the right bet.

“I don't hear the word "uncertainty" from the typical small business owner. The 20 million of us who are running tech firms, baking pizzas, changing oil, mowing lawns, buying high, selling low. I hear words like "slow," "terrible," "frustrating," and a host of other profanities for which my editors could lose their jobs if they allowed them to be displayed here.”

Different view from a Wells Fargo/Gallup Small Business Index survey published November 30, U.S. small-business owners expect to add fewer net new jobs over the next 12 months than at any time since the depths of the 2008-2009 recession. “One of the more stunning aspects of the November survey results is the decline in small-business owners’ optimism for the future. As entrepreneurs, small-business owners tend to be optimistic by nature, and relatively more optimistic about the future than the present. Given this context, owners’ increasing pessimism toward their future not only reflects uncertainty, but also may imply a weakening economy going forward…”

One of the more stunning aspects of the November survey results is the decline in small-business owners’ optimism for the future. As entrepreneurs, small-business owners tend to be optimistic by nature, and relatively more optimistic about the future than the present. Given this context, owners’ increasing pessimism toward their future not only reflects uncertainty, but also may imply a weakening economy going forward…

Differences in opinion; however we can agree that there's never been an easy time to run a small business.

Overall in my view, businesses are not investing more because of a dysfunctional Washington, not the thought of taxes.”We're willing to pay slightly higher taxes if it means that we've got the kind of certainty and stability over the long term that allows us to invest and hire with confidence.” They also say “our nation’s entitlement programs are unsustainable.” (Business Roundtable and other meetings with President Obama, csmonitor.com)

In business, there is much to be understood about psychology, emotions, and financial decision-making made under risk. The event-focused view of risk held in the technology and economics fields is too restrictive during the decision-making process because the largest risks are inherent in the uncertainty of information and the knowledge and models on which decisions are based. (robustdecisions.com., also Handbook on Psychology of Decision-Making: New Research $215.00)

Nassim Taleb - Riding out uncertainty: Thrive in an uncertain world
Nassim Taleb’s latest book Antifragile: Things That Gain from Disorder, reveals how to thrive in an uncertain world; what he has identified and calls “antifragile” is that category of things that not only gain from chaos but need it in order to survive and flourish.. He says we benefit from stress, disorder, volatility, and turmoil.

Mr. Taleb thinks the big mistake is trying too hard to avoid shocks. Long periods of stability allow risks to accumulate until there is a major disaster; volatility means that things do not get too far out of kilter. In the economy cutting interest rates at the first sign of weakness stores up more trouble for later.

Uncertainty - you want to have it. In an interview Motley Fool Money radio show, Taleb says uncertainty is desirable, the book now on my list to read.

I totally agree with Taleb’s theory having long been a student of Hans Toronto’s Hans Selye hypothesis about the general stress adaptation syndrome (GAS. He was the first to began piecing together the puzzle of human stress. There are many types of ‘good stress’ (termed eustress by Selye), Taleb reiterates the theory when he says stress can actually strengthen systems, elimination of stressors is not a good thing in all cases.

Bones in the human body become stronger when subjected to a limited amount of stress. He argues seemingly undesirable events like bankruptcy and plane crashes are actually good for systems in the long run.

Awesome Reality
"Whosoever desires constant success must change his conduct with the times."
— Niccolo Machiavelli

Concerns remain over U.S. politicians' ability to reach a budget deal to avoid the so-called "fiscal cliff" but it is apparent, this dance too shall pass. Uncertainty is ubiquitous in our daily lives. To scientists, however, uncertainty is how well something is known. Uncertainty has always been a big part of running a business.

Smart businesses will have focused on their core strengths. Positive thinkers will see uncertainty as a state of possibility. At Inside Value our leaders are positive thinkers who sift through businesses finding core strengths, commitments, and possibilities.

Animal Spirits prowl and destabilize our economy while a poll of internet based voters by a firm with a good record — finds that, by a margin of almost four to one, people think that going over the fiscal cliff will cause the deficit to increase. CBO and most economists say the correct answer is that "It will decrease." (businessinsider.com, also see Animal Spirits, Robert Shiller ‘s book that describes the role played in our economy by “animal spirits”)

People have lives and do not follow politics too closely. Public Policy Polling found that an impressive 39 percent of Americans have an opinion about the Simpson-Bowles deficit reduction plan while 25 percent of Americans also took a stance on a mythical Panetta-Burns plan. Chinese proverb, we live in interesting times. (sigh)

Meanwhile, the fiscal cliff dealmakers are not panicking, risk and failure consequences have been overdone. There might be a strong blow to confidence. CBO estimates the U.S. economy could shrink by 0.5 per cent next year, not exactly catastrophic. If they would cut a deal, that would reduce uncertainty but there would be something else lurking out there for the Kabuki dancing Washington decision-makers. It may be debt ceiling, a purely political (and arbitrary) machination. I am still trying to understand why we have one.

We want lots of ‘things’ but we don’t want to pay for them and that appears to be the crux of political uncertainty. Continue to try satisfying everybody with the absurdity of illusion – or try to instill fear for the future. The fiscal cliff would reduce the federal deficit.

There is a possibility that Congress takes action that would be good for the economy in the short term, preventing the tax hikes, spending cuts and a possible recession. Paradoxically the federal budget deficit in 2013 would be $1.037 trillion rather than $641 billion.

The fiscal cliff is a lose-lose situation for Americans, because neither outcome is desirable. Although we don’t know what Congress will do, we can take steps to prepare our own finances for the potential effects of the fiscal cliff. (sltib.com) One size does not fit all in investing, avoiding imminent higher taxes is one step for many as the investing game is about to change.

Budget arguments and Kabuki dancing between the President and Speaker Boehner is nothing more than our messy democracy at work. No matter how frustrating, be grateful that we are privileged to witness these messy disagreements. Power unrestrained can become deadly.

My assertion: Political gridlock and standoff have hurt the economy. In conflict resolution, one style is compromise a word that was rejected early on by Mr. Boehner. Of course, this was just a quirk in semantics, Frank Luntz told Boehner the "c" word polls poorly, so it's been dropped from the Republican lexicon.

Words do matter.
Regards,
Ro
TMFRozany, Home Team

Selected References:
Risk and Uncertainty in Financial Markets http://faculty.fuqua.duke.edu/~rigotti/bio/uncertaintyandris...
Uncertainty and Risk http://ftp.rta.nato.int/public//PubFullText/RTO/TR/RTO-TR-SA...

Breaking down the fiscal cliff. http://www.economics.uci.edu/node/15293
Trying to Calculate the Cost of Uncertainty. David Wessel http://online.wsj.com/article/SB1000142412788732331680457816...
Corporate America’s Favorite Excuse Bites the Dust http://finance.fortune.cnn.com/2012/11/07/rest-in-peace-unce...
Carlyle Boss: Uncertainty is (hopefully) dead
http://finance.fortune.cnn.com/2012/11/08/carlyle-boss-uncer...

Risk vs. Uncertainty http://www.hardballtimes.com/main/article/risk-vs-uncertaint...
Explained: Knightian Uncertainty http://web.mit.edu/newsoffice/2010/explained-knightian-0602....
The Difference between Risk and Uncertainty. http://www.robustdecisions.com/decision-making-tools/risk-vs...
Dealing with risk and uncertainty in decision-making http://accounting.e-video-lesson.com/index.php/accounting/ac...
The Stock Market: Risk vs. Uncertainty, (article adapted from “The Stock Market: Beyond Risk Lies Uncertainty”.) http://www.stlouisfed.org/publications/itv/articles/?id=1185...

Measuring Economic Policy Uncertainty (the index study) http://economics.uchicago.edu/workshops/Davis%20Steven%20J%2...
Economic Uncertainty Index http://www.policyuncertainty.com/
Uncertainty Index Methodology http://www.policyuncertainty.com/methodology.html
Is Policy Uncertainty Delaying the Recovery? http://siepr.stanford.edu/?q=/system/files/shared/pubs/paper...
US deficit down http://www.rawstory.com/rs/2012/10/12/u-s-fiscal-deficit-tak...
Senator McCain’s Economist Warns: If you Criticize Banksters They will Prolong Recessions (co-author economic policy index)
http://neweconomicperspectives.org/2011/11/senator-mccains-e...
Fiscal Cliff Worries? Could be worse, index shows.
http://www.reuters.com/article/2012/12/03/usa-fiscal-uncerta...
The Great Debate©: Does Government Create Uncertainty and Prolong the Recession? http://econintersect.com/wordpress/?p=16269
Fiscal Cliffhanging Causes National Nervous Breakdown – Bloom discussion
http://www.thefiscaltimes.com/Articles/2012/11/26/Fiscal-Cli...

Government and Economy http://www.wwnorton.com/college/polisci/wtp7e/full/ch/16/cha...
Three Issues More Concerning than the Fiscal Cliff
http://ivn.us/editors-blog/2012/12/05/robert-reich-three-cli... http://robertreich.org/
Goldman Sachs Explodes One Of The GOP's Biggest Talking Points On The Economy
http://www.businessinsider.com/goldman-sachs-on-uncertainty-... http://www.businessinsider.com/goldman-sachs-on-uncertainty-...
How important is the fiscal cliff for investors? Hint: Not very http://www.washingtonpost.com/business/how-important-is-the-...
Barry Ritholtz Interview (can’t say for sure you can access this one) http://www.mauldineconomics.com/landing/ritholtz-video/MEC01...
The fiscal cliff won't go away if you stop reading the newspapers http://www.guardian.co.uk/commentisfree/2012/dec/03/fiscal-c...

Economists must need political risk, Sebastian Mallaby. http://www.ft.com/cms/s/0/73e2e428-2804-11e2-afd2-00144feabd...

Talent priorities http://www.pwc.com/en_US/us/10minutes/assets/pwc-10minutes-o...
Impact of talent constraints on growth http://www.pwc.com/gx/en/ceo-survey/2012/key-findings/hr-tal...
Embracing volatility http://www.pwc.com/gx/en/ceo-survey/2012/key-findings/strate...

BlackRock https://www2.blackrock.com/webcore/litService/search/getDocu...

Let’s stop complaining about ‘uncertainty’. Gene Marks http://www.inc.com/gene-marks/small-business-stop-complainin...
U.S. Small-Business Owners' Hiring Intentions Plunge
http://www.gallup.com/poll/159098/small-business-owners-hiri...

An animated discussion of concept ‘anti-fragility’ - Nassim Taleb. http://www.youtube.com/watch?v=Hs_DORLTWLU&feature=plcp
Nassim Taleb educates a quant. Black Swan author Nassim Taleb encounters a quant and sets about educating him. http://www.youtube.com/watch?v=A72cc8mM5gY&list=UL
http://www.quantapology.com/

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Robert Shiller says our Animal Spirits have changed. http://www.amazon.com/Animal-Spirits-Psychology-Economy-Capi...
Federal Debt Ceiling http://topics.nytimes.com/topics/reference/timestopics/subje...

The Motley Fool and the ‘Cliff’
How the fiscal cliff you affect you.
http://www.fool.com/investing/general/2012/12/07/here-are-th...
Exclusive: Former Romney Advisor John Taylor on the Fiscal Cliff. Morgan Housel TMF http://www.dailyfinance.com/2012/12/10/exclusive-former-romn...
Four Questions to understand the fiscal cliff. Alex Dumotrier.
It’s time to find a better place for your money
http://www.fool.com/investing/general/2012/12/04/4-questions...
Here are the numbers. You fix the fiscal cliff. http://www.fool.com/investing/general/2012/12/07/here-are-th...

 

1 Comments – Post Your Own

#1) On December 14, 2012 at 7:23 AM, grahamsway (< 20) wrote:

An excellent article and point of discussion!

Regarding uncertainty, it seems more likely that uncertainty is one of the best excuses for corporate America these days. In most things on the cost side, companies generally have a good idea what's going to happen. You pretty much know the trend for wages, cost of goods sold, and other admin expenses etc.

Volatile expenses, if significant, can be or are usually hedged. You know insurance costs, including health, are going up, probably meaningfully.

It's usually on the demand side that's most uncertain. But that's always the case and it derives most from competition for product or service and the propensity of demand. Between the two, I'd say it's the competitve factor that is most critical. Though in serious economic downturns there will probably be some across the board demand issues.

One can see this pretty well in the Airline industry, which may be one of the most uncertain of all. You have weather, accident risk, fuel cost, labor issues, price wars. Yet they are rarely paralyzed because of uncertainty. 

So I guess what I'm basically saying is that unless one expects a deep recession, a business can pretty much model some probably reasonably accurate scenarios pretty easily. Changes in tax rates, health care costs, even costs due to regulation can be pretty well estimated and adjusted for.

The key adjusting and most uncertain variables are probably going to be the interplay between pricing the product or service and demand, which are always the most uncertain.

After these forecasts, I'd be pretty certain that any company will undertake just about all projects that show their threshold positive return under their "most likely" scenario.

I believe, unfortunately, because of the need for companies to meet or exceed growing "street" targets it is more the necessary increased ROI threshold that holds back corporate reinvestment than any real uncertainty on a company's part.  

 

 

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