Friday, April 28, 2023
Insurance Company TPLI’s acquisition of target insurance company approved
TPLI had welcomed Finnfund, a major development financier and impact investor in Finland, with their acquisition of 17.59% shareholding in the Company. Previously, in April 2021, DEG (Deutsche investitins-und Entwicklungsgesellschaft mbH), a wholly owned subsidiary of KfW Group, Germany had acquired 19.9% shareholding in the Company. With a strong capital base and encouragement from foreign investors, the IFS rating of the Company stands at AA by PACRA.
On April 26, 2023 the Pakistan Stock Exchange (PSX) announced that TPL Insurance Limited (“TPLI”), a subsidiary of TPL Corp Limited (“the Company”), had accorded its approval for the acquisition of operations of a significant insurance player in the Pakistani market (“Target Company”).
This will be done through the scheme of amalgamation, to be sanctioned through the High Court. After its sanctioning, the net assets of the Target Company will be merged into the TPLI. Both the sanction and transaction are expected to be completed by December 31, 2023.
TPLI was launched as a general insurance company in Pakistan. It launched innovative Insurance products to increase its market share all over the country through creative marketing tactics.
TPL Insurance is also part of a larger corporation, TPL Corp, the holding company. (In 2017, TPL Trakker Limited was renamed TPL Corp Limited, which now controls TPL Insurance and so on, while the data location and tracking services were incorporated into a separate company, called TPL Trakker Ltd).
The great life insurance business in Pakistan
INSURANCE
A customer described to us a typical way insurance is sold in Pakistan. He walked into his main bank branch for unrelated work regarding his bank account. After wrapping up his work, an agent walked up to him about a ‘saving investment scheme’. The agent made a pitch about getting high returns after a few years, after depositing a sum of Rs200,000. The customer thought it sounded like a good idea, and was also told that, by the way, this comes with some insurance benefits.
The customer also assumed the agent was a bank employee, and went along with the scheme, as after all, he trusted his bank. He was told, again in passing, that he might not be able to access that Rs200,000 sum for a few months, but this was not made super clear to him. This would become a problem, because a few months later, during a financial crunch, he asked to get his money back. Whoops – that money was actually stuck in a life insurance scheme, and he would have to wait five years to access it.
Almost everything about this anecdote is typical of how insurance is sold – that is, it is not sold as insurance. In fact, it is sold as an investment vehicle.
Therein lies one among the many problems facing the insurance sector in Pakistan: the industry does not know how to sell its own product and has hence routinely relied on providing misleading information to its customers and highly skewed incentives to its employees and distributors.
This embellishment of the truth that can often veer into outright lying on the part of some insurance salespersons is unlikely to do the industry any favours in a country where the overwhelming majority of people have never even considered getting insurance for themselves for any purpose.
We do not say this lightly. But it is a fact: that the penetration of the insurance industry in Pakistan is absurdly low, even when compared to other countries with similar per capita income. In 2019, the insurance penetration in Pakistan was at 0.9% of the gross domestic product (GDP, or the total size of the economy). This is much lower than India’s penetration, at more than 3.6%, the region’s average of 2.2%, the emerging markets average of 3.2%, and the global average of 6.3%. Before one despairs, that figure is still a massive improvement on what it was previously: in 2012, it stood at a measly 0.67%.
Which leads to the obvious question: what happened? Why are we struggling to insure 200 million Pakistanis? And whose fault is this? This, primarily, is a story of nationalization, lost time, lazy selling, and desperate attempts to change how Pakistanis change their spending habits (and that is harder than you think).
History of insurance in Pakistan - How Insurance Started
In the great annals of insurance ads (bear with us), the ad ‘Ae Khuda Meray Abu’ from the 1980s has achieved some kind of cult gold status. It is included in the kind of YouTube suggestions for ‘PTV nostalgia’ or ‘old evergreen ads’, the kind featured in boomer longing for purana Pakistan.
In the ad, a 10 year old, complete with barrettes, clasps her hands and sings ‘Ay Khuda mere Abu, salamat rahay’ (Dear God, keep my father safe). The reason for her joy: turns out the very mustachioed Pakistani-looking father has bought an insurance policy. The daughter then hugs her beaming parents and the ideal, insured Pakistani family go out on a family outing on a paddle boat. Reminiscent of old wedding videos, the daughter’s head then floats about on the screen, still singing, along with a rotating State Life logo. The final frame freezes on the paddle boat, and the voice over reminds us: “the guarantor of your future: State Life.”
Almost every source we have contacted for this story asked if I remembered this iconic ad. [Aside: I did remember it, only because it was my parents who discovered it again on YouTube – thanks “PTV nostalgia”]. But we asks you, the reader, if you remember this ad, because here is what we posit: that this ad was the last innovative thing that the insurance industry of Pakistan ever accomplished in marketing before resorting to outright misinformation.
The two biggest insurance players in Pakistan have traditionally been EFU Insurance, and Adamjee Insurance. EFU was set up in 1932, by businessman Ghulam Mohammad in Calcutta, with financial assistance from the Aga Khan III and the Nawab of Bhopal. The company then switched over to Pakistan after Partition. Meanwhile Adajamjee Insurance was set up in 1960, by the industrial family of the Adamjees, whose conglomerate has existed since 1896.
Now back to that ad, commissioned by State Life. Today, State Life insurance is the largest life insurance company in Pakistan. But it was not always that way. In 1972, 32 insurance companies were forcibly nationalised, and folded into one State Life Insurance under Prime Minister Zulfikar Ali Bhutto and PPP’s nationalization agenda.
EFU then operated solely as a general insurance company, and was subsequently renamed EFU General Insurance Ltd. Today, the company is owned by the JS Group.
The state of affairs would stay this way, until 1992, when private insurance players were allowed back in the game, under then Prime Minister Nawaz Sharif, and his privatisation process. This allowed for players like Jubilee Life Insurance, which was incorporated in June 1995. The company is a subsidiary of the Aga Khan Fund for Economic Development.
Today, Pakistan has 36 insurance companies, of which seven are life insurance companies. Those seven life insurance companies have a disportionate hold on the entire industry, accounting for around 63% of total gross premiums. The total size of the industry is Rs308 billion.
The three major companies – EFU Insurance, Adamjee Insurance (which is now part of the Nishat Group, the conglomerate owned by Mian Muhammad Mansha) and Jubilee – have maintained a quasi triopoly on the market.
Among life insurance, the largest player is State Life with a 50% market share, followed by Jubilee Life, then EFU Life, and then Adamjee Life (a subsidiary of Adamjee Insurance). In the general insurance, or non-life insurance space, Adamjee dominates with a 26% share, followed by EFU General Insurance at 24%, and Jubilee General Insurance at 12%.
Despite the low penetration rate, on the bright side, the gross premiums of Pakistan’s entire insurance industry has a five-year compounded annual growth rate (CAGR) of 17.7%, from Rs136.3 billion in 2013, to Rs308 billion in 2018. Life insurance has a CAGR of 17.5% while non-Life grew at a relatively lower CAGR of 9.6%.
According to Nilofer Sohail, assistant general manager at EFU Life, and head of digital initiatives there, it is a miracle that these three companies even exist to begin with.
“These companies basically started from nothing, around 1994, to grow into what they have become today,” she says. Consider: State Life has a network around 80,000 to 90,000 agents across the country. EFU has only 7,000, Adamjee around 1,000 and Jubilee around 4,000. According to Sohail, that stark contrast in numbers can be attributed solely to the lost years of nationalisation.
But the insurance industry has also grown in fits and spurts. Since the 1990s, there have been two big ‘nudges’. The first nudge happened in the early 2000s, when bancassurance as a concept really took off. Bancassurance is when a bank and an insurance company form a relationship to offer insurance products to the bank’s customers, and split the commissions.
Sohail says the advent of foreign banks in Pakistan, like Standard Chartered and ABN Amro, had successfully introduced the concept in other markets, and decided to try it out in Pakistan. It was wildly successful. Consider that bancassurance accounts for 88% of gross premiums in Jubilee, 90% in Adamjee Life, and 60% in EFU Life.
The second big ‘nudge’ happened in the late 2010s, and is continuing to this day. This is when microfinance banks really took off, and the State Bank of Pakistan (SBP) and the Securities and Exchanges Commission of Pakistan (SECP) both heavily pushed digital payments as a solution.For decades, insurance companies had been targeting, middle income and above.
According to Sohail, that meant those earning around Rs70,000 to Rs80,000 a month. In the last three years there has been a definitive switch. “No one was thinking of Rs25,000 or Rs50,000,” says Sohail. She says people were still thinking in terms of ‘cheques’. Digital payments have allowed insurance companies to suddenly think of people who can pay Rs2,000 or Rs3,000 per month, and in some cases, like EFU’s partnership with Easy Paisa, as little as Rs1 or 2.
The challenge is not necessarily innovation – almost every company is trying out new and interesting ways of selling insurance. The problem is that the main channel through which insurance is sold – third party agents at banks – needs to be broken.
Misselling - Insurance
Look back at the earlier split of the insurance industry – almost 63% is dominated by life insurance, while the remaining by general insurance. In developed markets, the inverse is true – life insurance is a minority. But Pakistan, like other emerging countries, continues to rely on life insurance.
For Muhammad Aminuddin, the CEO of TPL Insurance, the way life insurance is sold is a big problem. “This becomes a structural issue, and then also a knowledge issue,” he says.
Because people are not informed of how insurance works, they often begin to view insurance as something that will give returns, with insurance as a side benefit, as opposed to what it actually is – a way of mitigating risk.
“People view life insurance, as oh, banda mara nahi hai, I guess there’s no point. [They then want their money back] They don’t understand that it’s like if your house isn’t robbed, does that mean you ask for your chowkidaar’s salary back?” says Aminuddin.
Industry sources say the problem of mis-selling is rampant. The problem has nothing to do with education level, or socioeconomic level. One insurance executive said he had both his finance friends come up to him, to his driver’s sister, whose money was stuck in a similar insurance scheme for three years.
And it almost becomes like a chicken and egg problem: bank agents sell insurance in this manner to customers, who then believe the lie of (insurance = investment), who then do not buy or understand other types of insurance, so insurance companies continue to sell insurance as if its an investment in order to make sure customers still buy it – and so on ad infinitum.
This can lead to a trust deficit. Because customer’s money is stuck in insurance, they also are less inclined to tell their friends or family about buying insurance, instead viewing the entire industry as a nuisance.
So why do banks and insurance companies go along with it? Well, because the commissions are extraordinarily high, touching 55% of total premiums in some cases. This stands in contrast to commissions in other countries, which are considerably better regulated, with some markets having commissions restricted to even 5-10%.
mis-selling is common because it does not really affect profits, it allows insurance companies to be replaced, and it allows this bancassurance system to remain unchallenged, and in some cases, uninnovative.
To be fair, the SECP has recently become aware of this problem in the last two to three years. According to Sohail, every agent must now call back customers and ask seven or eight scripted questions about whether the customer has understood the terms of the insurance product. These also now include several references to the fact that money might be stuck in the insurance products for some years, before it can be accessed.
“The complaints ratio has now fallen to 1 to 2%,” claims Sohail, saying that was a normal rate for any industry.
Cultural norms and awareness to promote Insurance
Before the interview with Sibtain Jiwani, the founder of insurance startup Smartchoice, even began, he asked: “Do you have insurance?” I did not. But I am not unusual, as Jiwani pointed out, because not only did I not have insurance, but neither did my friends, nor my cousins, nor had it ever been a family topic of discussion. This is emblematic of the typical Pakistani experience: insurance as a conversation or a feature of our lives simply does not exist.
The problem with insurance companies is not just their lazy attitude towards getting profits. They also did a lousy job of advocating for insurance. And they desperately need to, if they are ever going to combat how Pakistanis view protecting themselves.
“India is not really a comparable market,” says Aminuddin. “The savings abilities of India is much higher whereas Pakistanis are very ‘live it up, don’t’ worry about it. We are a very consumption-based economy”.
That attitude plays into how we view the future. “There is no awareness of risk mitigation, and therefore it is faith-based. Our idea of insurance is a kala dhaga, and the Ayat ul Kursi,” he says drily.
This is unfortunate, because events such as the COVID- 19 pandemic have shown how crucial insurance can be in solving financial challenges. “When you have health insurance, you don’t have to raise money from your mohalla, or bemoan and say you are destitute,” said Aminuddin.
Jiwani also brought up India as a comparison. “India is way ahead of us in terms of financial literacy, and there is also a lot of domestic travel for work within the country,” says Jiwani. As more and more young Indians settle in different cities, they often have financial responsibilities thrust upon them earlier in life.
Jiwani, who is in his mid-30s, said he did not think really about managing money or a household until he was 28. “Financial responsibility comes a lot later in Pakistan,” he says, which explains why people simply do not factor in insurance, whether that is life, house or car.
Jiwani is hopeful that this attitude is changing, as more young Pakistanis are self-employed and working as freelancers, and typically even have some money saved on the side during university. But are insurance companies thinking of reaching out to a new generation? And what if they were just forced to?
The government’s role to play in Insurance Sector
A lot of insurance companies’ lives would be made a lot easier, if it was simply mandatory to buy insurance. That would automatically increase the number of Pakistanis insured – and it would solve the problem of Pakistanis not knowing what insurance exactly is.
Pakistan is unusual in many ways for not mandating insurance for large purchases. Take car insurance for example. It is not just the fact that car insurance is not mandatory in Pakistan – it is the fact that up until 15 years ago, the industry barely existed. As Aminuddin describes, the motor insurance industry came about, again, because of a ‘nudge’. In the turbulent Karachi of the mid 2000s, carjacking was on the rise, and companies like TPL Insurance sought to sell motor insurance.
The regulator could easily make this mandatory, but chooses not to. “The legal infrastructure is there, but the implementation has been lacking,” according to Aminuddin. “NADRA has the single largest database at its fingers – enforcing it would be a breeze – but it’s about priorities.”
Jiwani says it could be easy to make car insurance mandatory, as it already is in India and the UK. “Every time you buy a car you have to have third party insurance,” he says,” You could pay Rs2,000, Rs3,000 per month for third party insurers – not only do you protect citizens from accidents, but you could get more people involved in insurance.”
For Jiwani, the net spillover effect is very real. “You’ll get people in the mindset of insurance. If an insurance company is paying for damages, then road par fazool jhagray will stop happening.”
That spillover effect could happen at the workplace, for instance. If the government mandated that all employers must provide their employees health insurance, then it would become a social responsibility. If an employee can see the benefit of receiving insurance when someone else is paying for it, he or she might be incentivised to then consider buying life insurance for their family. “You can alway bring more people into the insurance ecosystem, but you have to give them a reason”, says Jiwani.
If the plan is so great, why has the government not done it yet? According to Sohail, for the last few years, the SECP has annually gone to the Ministry of Finance to ask them to consider changing insurance laws. And every year, the answer is the same – the government of Pakistan is concerned about burdening the taxpayer. In a country as poor as Pakistan (so the government’s thinking goes), can Pakistanis afford to pay insurance premiums?
The future of Insurance Business
So what does the future hold for the insurance industry, if government-mandated insurance is not on the cards yet? Well, that depends. For some, the future of insurance will be defined by insurance companies aggressively pursuing the consumer sector, in an attempt to get maximum coverage. So far, non-life insurance companies had been courting corporate clients. That is set to change.
Or perhaps the future will look a little like what Jiwani is attempting with Smartchoice. The insurance startup, only a few years old, serves as a comparison website for different insurance products and policies. Smartchoice has partnered with 10 different insurance companies, and customers can buy different types of insurance by simply comparing different policies. The agent in this scenario becomes obsolete.
“Insurance companies are coming to the realisation that alternative channels exist, that you can make innovative products which are bitesize,” says Jiwani. “More millennials are entering the workforce, and saving and investing money – insurance can help in protecting your future from uncertainty.”
To get there though, might be a bit of an uphill struggle. Pakistan’s insurance industry will have to finally get on the digital payments bandwagon, stop their overreliance on agents, and spend extra time and effort educating their customers. The days of “Ay Khuda Mere Abbu’ should finally be left behind.
Australia to change immigration system ensuring smooth entry for skilled workers
Australia proposed on Thursday overhauling its immigration system to speed up getting highly skilled workers into the country and smoothening the path to permanent residency.
The federal Labor government said the current system used to select skilled migrants — the points test — will be modified to identify people with the correct skill sets the Australian economy needs going forward.
“Our migration system is broken. It is failing our businesses, it is failing migrants themselves. And most importantly, it is failing Australians. That cannot continue,” Home Affairs Minister Clare O’Neil said in a speech at the National Press Club.
Australia has been competing with comparable countries, like Canada and Germany, to lure more skilled migrants, with the surge in demand exacerbated by an ageing population.
The government said the visa process for high-skilled professionals will be made quicker and easier, while steps would be taken to retain international students.
Temporary skilled visa holders, who had been denied even the opportunity to apply for permanent residency, will be able to do that by the end of this year, O’Neil said. But it will not add to Australia’s annual intake of permanent migrants, she said.
In September, Australia raised its intake of permanent migrants to 195,000 this financial year, up by 35,000, to help businesses battling widespread staff shortages and pledged more staff and funds to speed up visa processing.
From July 1, the government said it would raise the migrant wage threshold of temporary skilled workers to A$70,000 ($46,250) from A$53,900, stuck at the same level since 2013.
Around 90 percent of all full-time jobs in Australia are now paid more than the current threshold, leading to the exploitation of migrant workers, the government said.
Thursday, April 27, 2023
US economic growth slows as firms cut investment
The US economy slowed in the first three months of the year, as businesses reduced investments in the face of higher borrowing costs.
The economy grew 1.1% on an annualised basis, the Commerce Department said.
That was down from a rate of 2.6% in the prior quarter, despite strong consumer spending.
Analysts are watching nervously to see how the world's largest economy handles a mix of higher interest rates and rising prices.
The latest report on gross domestic product - the widest measure of economic activity - showed the economy has now grown for three quarters in a row.
The US economy had contracted in the first half of last year as trade flows adjusted from the pandemic and higher borrowing costs led to a sharp slowdown in home sales.
But a strong job market has kept consumer spending - the main driver of economic activity - resilient, despite rising living costs, helping to defy predictions of a recession.
Spending was up 3.7% on an annual basis in the January-to-March period.
US President Joe Biden has cast the slowdown as a necessary adjustment after the boom following the reopening from the pandemic.
"Today, we learned that the American economy remains strong, as it transitions to steady and stable growth," he said in a statement following the report.
However, many forecasters still expect the US to fall into economic recession sometime this year.
"Overall, the data confirm the message from other indicators that while economic growth is slowing, it isn't yet collapsing," said Andrew Hunter, deputy chief US economist for Capital Economics.
"Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon."
The US central bank has pushed interest rates to more than 4.75%, from near zero last March, moving aggressively to try to slow the economy and ease the pressures pushing up prices.
Since the campaign started, inflation - the rate at which prices rise - has dropped back, falling to 5% in March, but it remains higher than the bank's 2% target.
Meanwhile firms - especially in sectors such as housing, finance and tech where low borrowing costs had fuelled growth - have been growing more cautious.
Recent weeks have been marked by announcements of job cuts from many big businesses, including consultancy Deloitte, manufacturer 3M, retailer Gap and tech giant Meta.
Thursday's report showed the biggest drop in business investment in equipment since the pandemic in 2020, falling 7.3% on an annual basis.
Analysts say they expect further pain ahead as the job market weakens and banks grow more wary of lending after a string of US bank failures last month.
Retail sales have already slowed since the start of the year and consumer confidence has taken a hit.
"GDP growth is being held up largely by the consumer at present, but growth in consumer spending appears to have lost momentum over the past month or two," Wells Fargo economist Jay Bryson said.
"We forecast that the US economy to slip into recession, which we expect to be of moderate severity, in the second half of the year."
US economic growth slowed sharply in the first quarter of 2023 despite strong consumer spending, as the Federal Reserve ploughed ahead with its historic monetary tightening campaign.
Economy grew 1.1 per cent on an annualised basis between January and March, according to preliminary data released by the commerce department on Thursday.
That marked an abrupt deceleration from the 2.6 per cent pace registered in the final three months of last year and came in well below economists’ expectations of a 2 per cent increase.
US government bonds sold off after the data was released, pushing the two-year Treasury yield — which closely tracks interest rate expectations — up 0.13 percentage points to 4 per cent. The benchmark 10-year yield rose 0.09 percentage points to 3.52 per cent.
Thursday’s GDP figures showed that the US economy continued to exhibit pockets of strength even though its momentum ebbed. Strong consumption growth over the three-month period offset a drag from inventories and a slowdown in housing and business investment.
“I actually thought it was a fairly positive GDP report,” said Kristina Hooper, chief global markets strategist at Invesco. “Really peeling back the layers, it is very positive in terms of consumer spending,” she added.
“Now of course, in this environment in which the Fed dominates markets, any good news one worries could be bad news. So seeing a robust amount of consumer spending can raise concerns that is going to fuel more Fed rate hikes.”
Inflation-adjusted consumer spending rose at a 3.7 per cent annual rate, up from 1 per cent in the last quarter of the year.
Private domestic investment fell nearly 13 per cent. Final sales to private domestic purchasers — a measure of consumer and business spending considered one of the most important proxies for underlying demand — rose at an annualised rate of 2.9 per cent in the first three months of the year. That followed muted gains last year with no change in the fourth quarter of 2022.
“At first glance this looks like a fairly robust GDP report despite the weak headline number,” said Aditya Bhave, senior US economist at Bank of America. “The concern is that a lot of the strength was driven by what happened in January.”
“The handoff to the second quarter doesn’t look particularly encouraging,” he added.
The broader growth slowdown comes as the Fed has pursued a year of aggressive monetary tightening in an effort to damp demand. Since March last year, the US central bank has lifted its benchmark policy rate from near zero to just under 5 per cent, the fastest increase in decades.
Officials are poised to deliver another quarter-point rate rise next week, which would lift the federal funds rate to a new target range of 5 per cent to 5.25 per cent, before considering a pause in their rate-rising campaign.
A pause from June would allow Fed policymakers to assess the impact of their actions over the past year as well as the severity of the credit crunch stemming from the recent banking turmoil that chair Jay Powell has previously said could have the same effect as rate tightening. But some officials have not ruled out further action by the Fed if warranted by the data.
What has kept officials on edge is the surprising resilience of the consumer, which has been buoyed by a tight labour market. But nascent signs of a cooling in monthly jobs gains and wage growth have provided some comfort that the worst of the inflation shock has passed and that the Fed is moving closer to getting price pressures under control.
Officials maintain that, to return inflation to the Fed’s longstanding 2 per cent target, it will require a period of “below-trend growth and some softening in labour market conditions”, but they have stopped short of forecasting a recession.
As of March, most officials expect inflation-adjusted GDP growth to slow to 0.4 per cent in 2023, before rebounding to 1.2 per cent the following year. The unemployment rate, meanwhile, is projected to peak at 4.6 per cent in 2024, according to most officials, up from its current level of 3.5 per cent.
“Our view has been that the economy has been heading for a recession going back for almost nine months now,” said Josh Jamner, investment strategy analyst at ClearBridge Investments. “I think we’re probably getting closer to that. We think a recession is [likely] in the back half of this year.”
In a statement released on Thursday, president Joe Biden touted the report, saying it showed the US economy “remains strong, as it transitions to steady and stable growth”.
Federal Reserve economists were projecting a "mild recession" when the US central bank decided to further raise interest rates last month, according to the minutes of the meeting published Wednesday.
WASHINGTON: Federal Reserve economists were projecting a "mild recession" when the US central bank decided to further raise interest rates last month, according to the minutes of the meeting published.
"The staff's projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years," according to the minutes.
Members of the Fed's policy-setting committee voted unanimously last month to raise its benchmark lending rate for a ninth time in just over a year, the minutes showed, as they sought to balance curbing high inflation and averting further banking sector upheaval following the rapid collapse of Silicon Valley Bank (SVB).
The quarter-point increase, which was in line with expectations, lifted the Fed's interest rate target to between 4.75 and 5 percent, with the Federal Open Market Committee (FOMC) adding in a statement that "some additional policy firming may be appropriate" to help bring inflation down to the Fed's target of two percent.
All members of the FOMC favored the quarter-percentage-point rise last month, according to minutes.
But "several participants" had considered holding interest rates steady due to the turbulence in the banking sector unleashed by SVB's collapse, the Fed said in a statement on Wednesday.
Some members had also noted that they would have pushed for a larger hike of 50 basis points, "in the absence of the recent developments in the banking sector."
Since the Fed's decision, the economic picture has improved somewhat, with the personal consumption expenditures (PCE) price index -- the Fed's favored measure of inflation -- slowing to an annual rate of five percent in February.
Much of the market turbulence unleashed by SVB's collapse has also receded, with the VIX index down more than 30 percent over the last month.
That lower metric, which is often used to gauge the level of market volatility, suggests traders see less risk in the financial markets.
The U.S. Federal Reserve is likely to need at least two more interest-rate hikes, lifting the benchmark rate to above 5%, to slow an unexpectedly strong labor market seen as contributing to high inflation.
That was the betting in financial markets on Friday after the U.S. Labor Department reported employers added more than half a million jobs last month, far more than expected, and the unemployment rate fell to 3.4%, the lowest in more than 50 years.
The Fed earlier this week increased its benchmark rate by a quarter-of-a-percentage-point to 4.5%-4.75%. Fed Chair Jerome Powell said that with the labor market still tight he expects to need “ongoing” increases to get monetary policy “sufficiently restrictive” to engineer a more balanced job market and bring down too-high inflation.
Interest-rate futures prices, initially skeptical of that view, now reflect that expectation, with a better than even chance seen that the Fed will continue get its policy rate to the 5%-5.25% range by June, if not by May.
Financial markets had earlier heard Powell’s repeated references to the start of a dis-inflationary trend as signalling that just one more rate hike, in March, could suffice.
“This is the kind of report that you want to see when coming out of a recession to signal strength in the economy, not when the futures market is looking at the Fed finishing its rate hike cycle,” said Quincy Krosby, chief global strategist at LPL Financial.
Traders still expect the Fed to cut rates later in the year, despite Powell saying he does not expect inflation to fall fast enough to allow such a thing.
The Fed targets 2% inflation, now running at 5% by the Fed’s preferred measure, the personal consumption expenditures price index.
Friday’s Labor Department report did show slower growth in average hourly earnings to a 4.4% pace, from an upwardly revised 4.8% in December.
“While the Fed welcomes any signs of easing wage pressures, the pace of growth in average hourly earnings is still too strong to help lower inflation,” Oxford Economics’ Ryan Sweet wrote.
The only constant: change itself
With the amoebic orientation of political, scientific, economic and social realms in the past 100 years, the structural transformation of the four have been revolutionary and thorough. However, amidst this continual variable what remained constant throughout has been the behavioral pattern of the mankind.
Those in power remain skin-deep while the one on the periphery go round in circles as ‘The Lost Generation’. The wedlock of international crisis and the ceaseless national conundrums serve to be a clear manifestation of a new world which is ‘complex’ than the 1920s.
The mechanizations of the world and the domains therein can be credibly explained through the science of Complex Systems. It is important, rather, critical for individuals in every field of life to understand the nuances of these systems and beware of their highly complex nature. Working to improve one variable(s) (human behavior) can result in a serious loss of other variable(s).
As Jawaharlal Nehru said in his book ‘The Glimpses of World History’, “History is like a vast ocean which hides as much as it reveals. It moves with many feet, and at different rates. It is often difficult to know in which direction it is moving or what is happening on its farther shores.”
Before we move ahead it is instructive to note some basic principles of complex systems:
1 - Complex systems can be physical, biological and/or social. The overall characteristic and pattern of behavior of them is determined by the way the variables interact with each other: steam and ice are made from same molecules but behave differently. This is called the Emergent Property which means “that is not a property of any component of that system, but is still a feature of the system as a whole”.
2 - They are non-linear. It means that a seemingly insignificant incident can cause an extraordinary effect.
3 - They have feedback loops that, once set in motion, are almost impossible to reverse. For instance, we cannot go back to the old ways of living to reduce our anthropogenic emissions as doing that would incur financial loss in trillions of dollars and also affecting millions of lives.
4 - These systems carry a high degree of interdependence and we cannot always see the whole extent and depth of it. Recall that despite extraordinary growth in technology and data sciences, no one (or very few) could see the collapse of Lehman Brothers or more recently that of Silicon Valley Bank.
We can also look at Robert Musil’s, the famous Austrian writer, idea of centipede. In one of his famous essays titled ‘On Stupidity,’ Musil wrote about a centipede that was asked how it coordinated the movement of its many legs. The centipede was unable to answer the question and subsequently found itself unable to move.
That is symptomatic of the fact that it becomes really hard to understand causation in these systems. This also underlines the importance of bigger picture thinking when looking at complex systems.
With the constant change in the complex system, the moral dilemma weaved in the human behavior remains the same. The humans continue to contribute less in terms of empathy hence the need of maximizing goodness in the community seems to be a dream.
As mentioned in a Harvard Business Review article, Homo sapiens emerged on the Savannah Plain some 200,000 years ago, yet according to evolutionary psychology, people today still seek those traits that made survival possible then: an instinct to fight furiously when threatened, for instance, and a drive to trade information and share secrets.
Human beings are, in other words, hardwired. You can take the person out of the Stone Age, evolutionary psychologists contend, but you can’t take the Stone Age out of the person.
Evolutionary psychologists suggest that there are three reasons why humans have not experienced further evolution despite the significant changes in the world.
Firstly, humans became so dispersed across the planet around 50,000 years ago that any new beneficial genetic mutations were unable to spread.
Secondly, there has been no consistent new environmental pressure that has required further evolution, such as drastic changes in weather or food supply.
Thirdly, 10,000 years is not a sufficient amount of time for significant genetic modifications to be established across the population. Therefore, according to evolutionary psychologists, while the world has undergone significant changes, human beings have not evolved in response.
While efforts have been made to promote empathy and compassion, there is still much work to be done. As we continue to evolve as a society, it is essential that we prioritize building empathy and compassion, in order to emotionally and psychologically survive the brunt of the contemporary world.
If we narrow down the magnifier of analysis to the silhouette of Pakistan, we will see that with so much development in the socio-economic framework, what sustains is the ethnic divide, social polarization & alarming rates of crime.
Therefore, in order to nurture the empathetic sensory of individuals we should normalize and promote enrolling in the courses that are already being offered, such as ‘Empathy for self & others’, ‘Empathy and Emotional Intelligence at Work’ and ‘Empathy & Emotion in Policymaking’.
Even in a course like ‘Design Thinking’, design revolves around the nucleus of Empathy that sets the stage for a functional design that in return can serve a particular purpose for a specific audience.
“People ignore design that ignores people.” — Frank Chimero, author of The Shape of Design
Subscribe to:
Posts (Atom)