12/29/11

Uncertainty and The New Normal

On a call with Greg Kaple and Gillian Neer from IMS, our conversation lead to a small epiphany for me. We were talking about how firms and clients are dealing with change and the current uncertainty in the market. This lead me to conclude that Uncertainty is part-and-parcel of the New Normal. You might say … Duh, everyone knows that. But bear with me on an explanation.
As an economist, watching the New Normal unfold has been a fascinating experience. One widely held economic belief has been that significant amounts of capital have been sitting on the sidelines waiting for markets and global politics to settle down before reentering the market. This makes perfect sense. People with money want some idea of the risks associated with their investments before they will make them. So it is better to sit on some cash for the short-term rather than invest it in unknown risk / reward options.
But here’s the epiphany: That level of uncertainty may be here to stay. And it may even expand in the future. Two examples to demonstrate this:
- Recent news about Iran threatening to blockade oil shipments gave speculation to the possibility of $5 per gallon gas by summer. Wild fluctuations in the market like this have been occurring with greater frequency and make it very difficult to predict the trend of prices, even in the very short-term. If you are in the energy business, your investment decisions will be highly impact by the difference between $3 and $5 per gallon.
- Anyone expecting the US government to become more consistent and rational after the next election cycle needs to change their medication. The New Normal is about constant change and government is the last institution to give in to change. So expect ongoing uncertainty here as well.
The bottom line is that rapid change results in uncertainty. And rapid change has become the norm.
In our conversation, we wondered with so much uncertainty where should a law firm invest its IT dollars? Our answer: invest in flexible infrastructure. Uncertainty drives the need to be able to adjust quickly to changing environments, driving the need to add and remove functionalities under very short turnarounds.
For the broader market it will be interesting to see how investment decisions adapt to long-term uncertainty. Capital cannot sit on the sidelines forever.
What I learned today: Epiphanies are fun, but they can make your head hurt.

Bookmark and Share

3 comments:

George E. Bourguignon, Jr. Attorney at Law said...

Congrats on being named an honoree of the ABA Journal's top 100 law blogs for 2011!

George E. Bourguignon, Jr. Attorney at Law said...

The world is becoming faster and faster, which is not a good sign for the future. This is "uncertainty" -- when it is coming so fast not much can be expected. Does anyone have a hold on the wheel?

gkaple said...

"Once more into the breach, dear friends, once more" a somewhat poignant quote for 2012 by William Shakespeare. As certainly as uncertainty will continue to increase, leaders need new tools to make decisions and move forward. Will applying chaos theory, behavioral economics and real options decision making become the table stakes for managing firms in the future?

 

© 2014, All Rights Reserved.