It was no surprise that it happened

Not to steal the thunder from Mr. Greenspan…

The markets’ slide that occurred on Tuesday has been a while in coming. It was no surprise that it happened, but the efficient market hypothesis makes it impossible to nail down the exact time. The Wall Street Journal reported the slide on the front page Wednesday with an article entitled “Markets’ Slide Spotlights Risks”. In this article, several points were made only a month after similar concerns were brought up in this very blog.

I have mentioned the pressure on the Chinese economy in several previous posts, stating that the Chinese government would sooner or later be forced to take action to slow the inflation pressures that were building due to the restrictive control the Chinese government exercises over the exchange value of its money (Chinese Currency and Inflation). Not to steal the thunder from Mr. Greenspan, but I have expressed concern over a looming recession in China in my December post, stating that I thought it unlikely that the current expansion could continue. According to this recent article, “…investors wanted to get out of the soaring market before the Chinese government made any moves to cool the markets…”

We should expect some increased level of risk

More to the point is the parallel that we have been discussing between the history of the U.S. and that of China with respect to the migration of a large portion of the population from agricultural based economy to manufacturing based economy. This period of time in the U.S. represented some of the most volatile times in the U.S. economy. Granted there are many reasons for this volatility, not all of which are present in China, but such a close parallel to an historic precedent shouldn’t be looked upon too lightly. We should expect some increased level of risk.

Even more to the point are the domestic components mentioned in the article. I spoke in the post “Response to Housing” that there was no reason to believe that the slump in housing and auto manufacturing, usually leading indicators for the economy as a whole, would not again be leading indicators. It would seem that the opinions expressed by the Fed are just now catching up. Orders for factory goods fell sharply in January, “…rais[ing] questions about the strength of capital spending which the Fed…has been counting on to offset the drag of a weak housing market.”

I am not very surprised in the reduction in consumer spending

Of course, the defaults in the sub-prime lending market are just now hitting the news. Let’s just revisit a quote from a previous post, “…as these laborers loose their income a few months later, they will begin to spend less.” I am not very surprised in the reduction in consumer spending. I mentioned before that the largest relevant moderator to the slowing economy would be change in the strength of the dollar also mentioned in the article.

So, hindsight is great, but what should we expect to happen now. I still believe that the strong housing market numbers for January do not show that the economy is out of the woods, or even that the housing market is out of the woods. As the default rate on the sub-prime mortgages continues to climb, and there are fewer lenders willing to bail out the affected (or should I say, afflicted) homeowners, these homes will be coming back on the market. We may see the number of home sales increase, but I don’t believe that we will see an increase in the median house prices for some time to come. I am anticipating a slow housing market until late spring. Beyond that, the outside forces begin to swamp the housing trends and it is difficult to predict, but I don’t see a sharp rise in home prices in the foreseeable future.

… I don’t believe that we have seen the last dip…

As for the stock markets, they usually lead the economy as a whole. China still has some issues to work through and the recent events have certainly indicated that the markets are more closely correlated than perhaps we would like. The recent drop in the Chinese stock market may make the Chinese government’s job a little easier. We can all hope that the landing is soft rather than hard, but I don’t believe that we have seen the last dip in the Chinese market or its overall economy. If no one makes rash decisions and panics, we should see a little stability on the way down, though.

In Massachusetts

… I don’t believe this bill is in everyone’s best interest

On Thursday, February 22, the Wall Street Journal published an article in the Marketplace section entitled “Bill Would Punish Retailers for Leaks of Personal Data” in which Joseph Pereira discussed the pros and cons of a bill under consideration in Massachusetts. The bill effectively offloads the responsibility for financial data security from the credit card companies to the retailers. I certainly understand the need for retailers to do their best to secure customer information, but I don’t believe this bill is in everyone’s best interest.

To be sure, the rate of identity theft is increasing at an alarmingly, and everything that we can reasonably do to curb this problem is something that we should consider, but retailers as a whole are not armed with the resources necessary to be even marginally effective in combating the issue. Certainly, large retail operations, such as Walmart and other behemoth retailers, have such a huge amount of information available that they make attractive targets. Consequently, if they spend even a little on a per customer basis, many effective techniques can be brought to bear to secure their data.

A small firm with a handful of employees can hardly afford effective security consultants…

On the other hand, many small retailers don’t have much in-house data security expertise. In the case of a small internet firm, any real attempts which would be effective at removing the security risk would be prohibitive on a per customer basis. A small firm with a handful of employees can hardly afford effective security consultants. As the Wall Street Journal article mentions, if the retailers take this responsibility and cost, it will simply be an addition to the cost already extracted from the patrons by the credit card companies, piling security costs on top of security costs.

The other effect to the economy was not mentioned in the article. This liability can be so great to many of the smaller retailers that it makes the acceptance of credit card and debit card payments no longer attractive. No doubt, this would be a boon to the internet payment companies, such as PayPal, who offer the only real alternative to internet payment methods. Smaller brick and mortar merchants would have to make other adjustments. The reduction in convenience and money velocity, although too small to notice at the national economic level, may still have a negative influence on smaller retailers.

Scrap the bill…

In the end, the potential in reduced usage of credit cards may be negative enough to warrant a close inspection of the situation by the banking industry. Already, cell phone payment methods and internet banking are threatening to take some of the credit card business away. Banks and credit card companies at least have economies of scale going for them in the battle. Perhaps ratcheting up those fees a little more and using the funds to consult with retailers on how best to secure their data would actually be cheaper for all concerned. Scrap the bill. I don’t think it will help and can only hurt the smaller retailers who don’t have in house IT departments.

WoW!

It is not a tremendous stretch of imagination to see that…

My previous entry on this blog brought forth a lot of interest, most of it focusing on the real-world practicality of using a game environment such as World of Warcraft (WoW) for the assessment or training of corporate leadership. There are only a few people with experience in both building guilds to achieve WoW objectives and recruiting teams to achieve business objectives, but those few will easily recognize the commonalities of the efforts. It is not a tremendous stretch of imagination to see that the relatively risk free environment of WoW can be used to prepare for similar business situations with real lives and money at risk.

Can leadership skills be developed in a WoW environment? Certainly examples can be found of good leadership and management skills in the players’ actions. Many times, guild leaders will turn over the reins of the guild during a raid to others in order to train them so that the guild can function more efficiently even if the leader can’t be present. The experience of trying to coordinate dozens of people and multiple lines of communication in a time pressure situation without making enemies of allies can be truly enlightening. Just as in an academic environment, there is no better arena in which to make mistakes, where there are no financial assets on the line.

Weaknesses in communication skills can become more evident when the pressure is intense…

Can leadership skills be assessed in a game environment? I believe that they can in several ways. Weaknesses in communication skills can become more evident when the pressure is intense. The ability to “think on your feet” and improvise has long been known to be a valuable skill for managers and sales staff alike. Problems requiring quick thinking are different than those requiring coordination, planning, and team building, but both are abundant in this game environment and translate directly into many business situations.

As is true with virtually any simulation or academic safe haven, one can spend all one’s time in the classroom and never take those skills into the real world. But suppose that a Massively Multiplayer Online Role Playing Game is approached as just that, a classroom for practicing communication and organization skills. It could be a valuable, effective, and fun way to learn just where those skills reach their limits.

The whole experience is not for the faint of heart…

WoW requires the cooperation of a small army of real life players to combat other guilds and computer generated monsters alike. Some of the competitions and tasks (called “quests”) can require days of in depth planning and coordination to prepare, no less intense than many high level sales efforts in traditional corporations.

Execution of these plans is often a demanding communication task including several levels of command hierarchy needed to implement both attack strategies and defensive positions involving dozens of players. Lines of communication can multifaceted involving auditory channels, with the latest web conferencing platforms, or text channels, with multiple threads and text windows all happening simultaneously. The whole experience is not for the faint of heart, but neither is the coordination of the legal department, sales department, contract negotiation team, and production lines in a fast paced corporate environment.

“Communication skills” and “Leadership skills”

Two broad categories of skills seem to form natural groupings in WoW that could be useful for assessing skills or developing them. Let’s call these categories “Communication skills” and “Leadership skills”. Communication skills are much faster to evaluate and easier to develop in WoW than leadership skills, just as they are in real world situations. Invariably, communication skills are a necessary prerequisite to leadership skills, though the reasons are not so obvious. There are far more people with communication skills, helpful in lower and middle management positions, than there are people with leadership skills seen in middle and upper management.

Leadership skills encompass both the knowledge of what character traits would be most useful to put together and the ability to recruit players and characters with those traits. In a business environment, this skill is the ability to build teams knowing both what skill and experience is required in each team member and what personality traits will build a compatible corporate culture. Leadership skills include not only the ability to identify people with the needed qualities, but to present them with a vision compelling and convincing enough that they desire to throw their lot in with the rest of the group and follow the direction of the leader. Leadership skills are more difficult and time consuming to assess, however, the act of assessing these skills can often develop them as well.

Even without standardizing modifications…

There are a couple of obstacles to using the game to evaluate management skills, one of which can be overcome easily by Blizzard making adjustments to the game on a specific server to allow the creation of a set of standardized characters. This would be helpful to minimize the effort required to make a situation repeatable for comparison between one approach and another. Even without standardizing modifications, using the game as it exists, it is usually possible to observe the different skill levels in potential management candidates, but standardization would allow a training regimen to be developed around a predictable game situation. The other obstacle is the acquisition of enough volunteers to give the practicing leaders someone to lead. This, too, is a solvable problem.