Last Wednesday, we were sitting in bumper-to-bumper traffic, trying to get from Penn Station over to Park Avenue. On that unseasonably warm afternoon, we waxed nostalgic about the fact that it was Back to the Future Day – the exact date to which Marty McFly time-traveled in his flying DeLorean – but alas, there was no way for our driver to go vertical and bypass the gridlock from above, nor for us to grab our hoverboards and dart across town.
Released in 1989, “Back to the Future II” made plenty of other bold future prognostications besides flying cars and hoverboards. A number of the predictions wound up prophetic, like video conferencing, Google Glass-style goggles, and more urban green space. Others, like Jaws 19 and preposterously colorful, gaudy outfits (mercifully!), or self-tying shoelaces and a Chicago Cubs World Series win (sadly!), were not nearly so prescient.
Admittedly, neither of the film’s key creators believed in their ability to foretell 2015’s reality. Screenwriter and producer Bob Gale said, “[We] knew we were never going to be able to [predict the future accurately].” Director Robert Zemeckis was even more blunt: “I’ve always hated – and I still don’t like – movies about the future. They’re impossible.” Would that every economist making predictions about key financial indicators possessed similar humility!
Yet while the film’s own creators denied any predictive abilities, as we recalled the iconic Back to the Future trilogy from our youth, we couldn’t miss an equally iconic trilogy of risk management lessons:
(1) Micro-predicting the future is impossible. Identifying thematic trends that will shape the future is critical. Residents of the 2015 Back to the Future world favored loud, multi-colored suits and hats made out of colanders. While that micro-prediction was off target, it aligned with a Zemeckis directive to depict a future world where people would wear athletic clothes all day. Even though our citizens wear Athleta-style yoga pants instead of futuristic baubles, the trend towards athletics wear as everyday clothing was uncannily accurate.
We should make future economic assessments in the same vein. While it’s impossible to predict the near-term path of exchange rates or commodity prices consistently, identifying thematic trends produces great benefits. How do seven years of zero (or negative) interest rates affect insurance companies, regional banks, and fixed-income savers? What will cheap oil mean for commodity-linked currencies like the Canadian or Australian dollar? What sectors will the Uber-ization of everything revolutionize next? Analyzing, adapting to, and shaping these trends will be critical to surviving and thriving in the future, a future where we don’t need roads.
(2) Predictions may be as likely to retain anachronisms as to depict new realities. If you watch “Back to the Future II” again, you’ll notice a shocking anachronism from the last millenium – the fax machine. No one knows what prompted Gale and Zemeckis to retain this ancient vestige from the epoch of landed phone lines, when their visionary film also included video chat with comprehensive personal data profiles.
Of course, the same pitfall exists for the economic and financial environment as well; it’s easy to assume that not much will change. For instance, even ten years ago it would have been natural to assume that multinational banks would continue to maintain significant proprietary trading desks, especially those whose high profitability largely depended on trading bonds, currencies, and commodities. Further, most would have assumed that a system of submitting quotes on London interbank lending rates, dropping the high/low and averaging the rest, would stand as a reasonable means for setting lending rates worldwide. But in this new world of increased capital requirements, scrutiny on risk-taking, and awareness of rate collusion, status quo ante LIBOR and prop trading desks face tremendous pressure not to become the next fax machine.
(3) Some future problems look exactly like current ones. The funny thing about “Back to the Future II” is that even though technology had advanced considerably, the growing pains never stopped. The television screen still had static, and the retractable garden, like Siri with our three-year-old, struggled to recognize and obey voice commands. Marty and his colleague Needles used video chat, but the data feed overwhelmed Marty with much more personal data on Needles than he could possibly need. Worse, Marty’s boss could use the technology to snoop on their conversation!
Technological innovation has allowed finance professionals a clearer view into their data, and a better chance to drive informed decision-making, than was ever possible before. Of course, these solutions can come with usability challenges, an overwhelming amount of data, and even security concerns. The need for usable, clearly actionable, data-driven, secure software to navigate financial risk decision-making has never been higher.
Predicting the future is the stuff of science fiction, but preparing for the future is the hallmark of wise risk management. If you’d like to talk about your particular situation, whether we’ve ever had a chance to work with you or not, give us a call! As Marty McFly’s 1955 father would say, you are our density, errr, destiny.