Almost nine years in, and it should still be Day 1…

As Awbury approaches the ninth anniversary of its founding (which, in the wake of the time distortion caused by the pandemic, seems a “lifetime” ago!), it is worth addressing how one can continue to be productive, remain relevant and generate value.

The term “Day 1” has been made famous by Jeff Bezos, founder of Amazon, who, by any definition, has built an extraordinary business since starting Amazon some 25 years ago. In essence, Day 1 is defined as the antithesis of Day 2: “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

Day 1 means moving and deciding quickly. It requires constant experimentation and adaptation, running the risk of the failure of a particular idea, and, if necessary, discarding concepts or products which are not, or no longer, fit for purpose. It involves identifying themes and trends, and following, rather than resisting them.

It does not sound that complicated, does it?

Yet, the apparent simplicity often becomes overlooked and overwhelmed as businesses scale and mature, because their managements fail to grasp that:

– Being obsessive about meeting and exceeding clients’ expectations
– Resisting the dead hand of process
– Identifying and responding to external threats; and
– Rapid, targeted decision-making

ensure not only the creation of an effective and valuable business franchise, but also sustain its long-term viability.

Unfortunately, as has long been evident in many industries (including (re)insurance), and has been made evident in the wake of the pandemic, businesses (as represented by their supposed “executives”) tend to slip into a seemingly comfortable “middle age”, when really they have become senescent, deluding themselves that they are still youthful and effective. They may just about earn their cost of capital (in a “good” year) and when the economy is expanding; but their irrelevance is revealed when their fitness and adaptability are tested. Their stasis leads to paralysis, and one begins to hear their “death rattle”, as they flail and grasp at anything that may stave off the end. Nothing lasts forever, but squandering the advantages gained by focusing on the attributes described above amounts to a reckless disregard for the Darwinian framework of any competitive environment. Adapt or die.

Of course, there is always the risk that, when something such as the concept of “Day 1” achieves what amounts to cult status (compare “The Warren Buffett Way”) and becomes “received wisdom” it can become a problem in itself, because no-one questions its premise any more.

At Awbury, we are very well aware of this and the so-called “framing” issues that limit or constrain thinking and exploration. So, we take great pains to avoid believing that one approach will always work. (Re)insurance and the world in general are far too complicated and complex for that. Nevertheless, adopting the approach that it is always Day 1 is a valuable part of our intellectual toolkit.

The Awbury Team

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What a world, or what world…?

There is much debate, not surprisingly, about the ways and extent to which the current pandemic will change people’s behaviour and assumptions. The phrase “the New Normal” is much used, which we find interesting, as one could argue that the world has never been “normal”, because it is ever-changing through processes of what one might term natural, economic and political selection. Normal for whom exactly?

Be that as it may, clearly there will be changes- some of which are already evident, and some of which are still speculation.

For example, the Chinese Communist Party (CCP) in its guise as the government of the PRC has clearly used the “opportunity” of a distracted world, and in particular the internal contradictions of its only serious rival, the US, to increase its control over Hong Kong, pretend that its actions in its “Far West” are to reduce the risk of terrorism, test Indian military and political resolve, and enhance its surveillance and coercive capabilities both internally and externally. That is quite evident. Actions speak. And so, far, there have been few material consequences for PRC.

Elsewhere, new approaches to managing and deploying labour are being widely tested (of necessity), but their final configuration or scope remains unclear, as the true balance of advantage versus the “old ways” is as yet unclear.

The balance of power in the financial markets has clearly shifted. No longer do “bond-market vigilantes” over-awe any but the feeblest central bank; while there is more capital available to be deployed than most investors know what to do with, and savings rates have spiked, at least temporarily. The important question, to which the answer will only be obvious ex post facto, is whether that capital will be invested productively, or wastefully. When major central banks are “hoovering up” their own governments’ bonds (or the Eurozone’s in the case of the ECB) and depressing yields, being able to analyze and price risk adjusted returns will be a distinct competitive advantage, because there really is little, if any, “easy money” to be made.

What is also evident is that politicians are extremely poor allocators of capital. Think of how many trillions of dollars, or the equivalent have been “thrown” at economies almost indiscriminately (and sometimes corruptly given the largesse available), when, reportedly, only tens of billions have been applied to research on vaccines. There is a clear absence of a coordinated Manhattan Project” for vaccine development, no matter what all the rhetoric would have one believe. Of course, the current disorganized “competition” may quickly result in a safe, effective and rapidly deployable vaccine. Let us hope that the capitalist approach to health policy works in this case, while recognizing that the “obvious” approach is often known only with the benefit of hindsight.

As we stated above, “normal” is the wrong term to use for any historical period. The arc of recorded history shows that becoming complacent, or assuming that certain things simply will not happen (even though they clearly can) is an approach which leads to dislocation, and often disaster. Crises occur regularly. They just come in different forms.

Much of the population of the world has been (and in many cases still is) the subject of an economic and social experiment of epic proportions through enforced “lockdowns” of different degrees of severity. That may be feasible once (the shock of the new), but it is highly unlikely that, in the absence of authoritarian repression, the experiment can be conducted at scale repeatedly. Even dictatorships end, because they require the acquiescence of the governed or repressed. At some point, that no longer works.

All this may seem a little abstract, but consider what the world has become and how it may have to adapt in the absence of an effective vaccine.

At Awbury, we work on the assumption that one always has to adjust one’s mental and analytical models in the face of new information. The current situation is simply another example, albeit one with potentially broader implications.

The Awbury Team

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What happens when the music stops…?

As Jim McCormick, of NatWest Markets, recently pointed out in a Financial Times article, in spite of the negative economic impacts of the pandemic to date, credit markets have been remarkably buoyant, with many indices actually positive year-to-date, and borrowing costs for companies perceived as creditworthy falling to very low levels.

The perception is that central bank actions (whether by the Fed, Bank of England, ECB or Bank of Japan) have been the key factor underpinning this outcome. In some senses, this is accurate, as markets perceive that the central banks have significantly widened the scale and scope of their operations and so will continue to “underpin the bid”.

However, while central banks can create liquidity, they cannot fix solvency. After all, eventually debt has to be repaid or re-financed, and that requires a business that has the ability to survive the pandemic and “come out the other side” in a viable (even if changed) form. Only governments can address solvency on an economy-wide basis.

To date, while varying in form, governments have provided support on a hitherto unprecedented scale through subsidies, rebates, deferrals, forgivable loans and outright grants. They can do all this because they can borrow (currently at very low, or even negative interest rates) and have the coercive power of taxation. Of course, that ability to borrow at such low rates is only feasible because of central bank policies and the continuing belief of investors that those same governments will be able (and willing) to honour their obligations when due. If that belief and confidence changes (likely to be tested if inflation eventually returns) governments will face a challenge. Modern Monetary Theory (MMT) posits that government spending can be paid for by the creation of money, with the purpose of taxes being to limit inflation, by controlling the money supply, so spending should not be determined by deficit levels. It may have suddenly become “fashionable”, but its robustness has yet to be tested.

And, as Mr. McCormick quite reasonably points out, what if “fiscal policy fatigue” sets in? Most politicians have short attention spans, little real understanding of economics and markets, and are driven by a desire to be re-elected. If electors’ own attention moves on to a different focus, will fiscal policies be maintained, or adapted to meet new needs, setting to one side the issue of funding all the commitments made? Once what one may call “solvency support” it taken away, or re-directed, then what?

Given the level of uncertainty which still attends the timing and likelihood of the pandemic being brought under control in many large economies, there is an increasing risk that at some point what amounts to a precarious equilibrium (created by central bank expansion of the money supply, ultra-low interest rates and trust in the current system) will come to an end, whether as the result of a change in capacity, or because of policy fatigue, even if economies are not “back to normal” in terms of activity and demand.

While we would not be so foolish as to make specific predictions on a macro-economic scale, it seems to us that at some point there will be a “winnowing” across a range of industries (including (re)insurance), which will separate the “prospering survivors” or beneficiaries of the pandemic from those who are not viable without continuing solvency support and/or a significant and swift rebound in demand for their products. Of course, as specialists in credit, economic and financial risks, our aim is to continue to make appropriate assessments and decisions at the micro level, and ensure the integrity of our existing portfolio and business model, while sourcing new business that will prove robust in the face of all the uncertainty.

Not straightforward in the current circumstances, but one we are confident it is achievable with appropriate caution.

The Awbury Team

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