Select Feedback II – Icelandic Volcano Black Swan
From Japan, US, UK and Spain

London, UK - 22nd April 2010, 12:20 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

We are grateful to ATCA, The Philanthropia and HQR distinguished colleagues for their excellent feedback in regard to the Icelandic Volcano Black Swan. Some of the private feedback for the mi2g Intelligence Unit (mIU) and the ATCA Research and Analysis Wing (A-RAW) will be absorbed into future briefings. We have selected some ‘open’ responses from Japan, US, UK and Spain. See what you think!

Volcano Black Swan - II

Dear DK and Friends

Re: Contrarian View - Positives and Negatives

As an ash-cloud victim and a contrarian investor with a keen interest in social moods, I would like to offer the following observations on the recent travel chaos.

1. Public and especially elite opinion is strongly pre-disposed to pessimism and risk-aversion. When a potential disaster looms, the instinctive reaction is to expect it to be of "unprecedentedly" large-scale and followed by other worse disasters -- in this case, even larger volcanic eruptions. Nicholas Taleb's "black swan" concept has trained us to assume that tail events are more probable than the consensus expects. But are they? After all, the very concept of the black swan is subject to survivorship bias. Black swans did indeed exist, whereas unicorns, mermaids, yeti and other creatures once firmly believed in have still to appear on our screens.

2. Risk that can be visualised has a stronger impact than risk that cannot. Everyone can imagine a plane crash. The suffering caused by budget cuts implemented to pay for the loss of recent economic output is much harder to grasp.

3. There is a puritanical, anti-materialist undercurrent to much of the commentary. Perhaps all this air travel is "socially unnecessary", to borrow Lord Turner's criticism of the financial sector. Perhaps we should content ourselves with simpler pleasures from simpler times -- caravan holidays in Devon, rather than weekend trips to Barcelona.

4. Anti-business sentiment is very strong. In bullish economic conditions, Willie Walsh, the head of British Airways, might have been hailed as a hero for offering himself as a guinea-pig and taking to the air. Post-Lehman, the presumption is that the airlines are merely trying to protect their short-term profits for the benefit of greedy shareholders and option-loaded executives.

5. Faith in regulation and government is very high. In this case, the size of the ash-cloud and its potential damage appear to have been statistically modelled, like the default risk on synthetic CDOs, rather than being derived from empirical research. Even so - and despite the record of governments in over-hyping recent health scares - press and public opinion has generally being respectful of official efforts. In the UK, the image of Dunkirk has been evoked to describe the "rescue" of travellers stranded in France and Spain -- the Second World War being a paradigm of government-led solidarity and social cohesion.

From an investment point of view, the above contains both positives and negatives. High risk-aversion is bullish, but deeply-rooted anti-business sentiment is worrying. It will be interesting to monitor further developments in weeks to come.

- Peter Tasker, Founding Partner, Arcus Investments; One of the foremost authorities on Japanese finance, economics and culture; Ranked as the No. 1 equity strategist by Japanese institutional investors for five years running - Tokyo, Japan

Re: Fragility of Just-In-Time Global Economy

My most sincere thanks to the Intelligence Unit for its timely and insightful reports on the air travel drama of recent days. The thoughtful comments of ATCA and The Philanthropia friends who have shared their experiences have also been much appreciated.

The grounding of thousands of air flights for almost a week demonstrates again the fragility of our closely timed global economies. All of today’s modern life, particularly in the commercial arenas, is now operated following the advanced operating concept of “just-in-time”. For the normal routine to continue smoothly, an enormous complex of interrelated actions and events must work together cohesively within at least hours if not minutes to avoid massive disruptions. Such is our current interdependence on others.

When nature interjects its overwhelming influence in our lives, we are reduced to our basic human talents for resilience to adversity and practical adaptation to reality. The winners make these transitions well, but many fail who leave no margins for error either in time, money or interests.

In addition to the excellent thoughts by others on lessons learned during this unique interruption in our modern lives, we frequent travellers internationally smile by knowing that we have both work and reading material with us that will always exceed our expected available time. We also promptly look for action options and rarely simply sit and wait impatiently for instructions. We also use this unexpected gift of unscheduled time to reflect on the intrigues of human nature now crowded around us and give more thought to what is really important in our lives for which we need continuously to be thankful.

On the technical side, airlines and airplane manufacturers have new priorities now for their research and design staffs. Within the coming years we should expect new developments to emerge that will protect aircraft skins and windshields from the possible damages of not only volcanic ash but other substances that unpredictable nature may throw into our paths. Also we will likely see imaginative and innovation forms of filters or protective flows of diverting air from airplane engines that will isolate them from flying debris of all kinds including the highly dangerous and frequent encounters of passenger aircraft with migrating flocks of birds.

Looking even further ahead, these technical developments will soon be imperative for safe and successful space travel. The accumulating litters of debris in the vast beyond will pose increasing dangers for vehicles and individual protective coverings that are not immune to these likely collisions.

As with most set-backs in life, the momentary exorbitant costs and inconveniences may ultimately prove to be beneficial for our global society. The lessons we learn and the new initiatives now launched should make our lives ahead even more capable to support our individual efforts in the pursuit of happiness however we choose to define it.

- Alonzo McDonald, Chairman and CEO, Avenir Group; Former US Ambassador and Acting Cabinet Officer for Trade, White House Staff Director and Assistant to the President, Firm Managing Director of McKinsey & Company, and entrepreneur/investor/philanthropist - Birmingham, Michigan, US

Re: Is Government a Concierge Service?

In the light of Robert McNally’s thoughtful words, one observation of note is the usual series of complaints from frustrated citizens demanding government action and assistance with their travel arrangements.

The nature of the relationship between government and citizen is ever evolving, but to look at some of the reports on the BBC news in the past 48 hours one might be mistaken for thinking that Her Majesty's Government is a concierge service with unlimited patience and funding. Is it really the duty of a national government to send naval vessels to “rescue” its citizens who have had to spend a bit longer on holiday in Spain than planned?

It seems to me that, for the individual, the essence of Mr McNally’s list of 21st century desiderata is:

. Maturity
. Independence
. Serenity

To the extent that we cannot develop these three traits we can hardly demand that the government steps in.

- Matthew Gilpin, Group Chief Executive, EMAP Capital - London, UK

Re: Long Term Consequences

1. Our Fragility

Our globalised interconnected world, and therefore its socioeconomic equilibrium, hang from many threads, some quite strong, but some very weak. The Internet, the cellular networks, and intercontinental jetliners are among the latter ones. At present we are putting air travel into stress tests. But what if, at a moment in time, these three threads break? Let's imagine that the first disruption has a natural cause, like a major earthquake or volcano eruption. This would put the affected area under the serious threat that some evil people or nations may try to provoke the collapse of other weak threads, and threaten our fragile civilisation.

2. Need for Resilience

Violent eruptions are occasionally predictable in the short term for concrete volcanoes under surveillance. But, even in this short term, nobody can even roughly predict if we are going to have a violent volcano erupting in Europe again in the coming lustrum. That means there's a long way to go, and a lot of scientific work, before we can evolve from stochastic research towards determinism. Intercontinental air travel is nowadays an irreplaceable tool for our civilisation. Other faster transport systems, like magnetic centred vacuum pipe wagons, are still in the territory of science fiction.

a. Modern jetliners, need to be able to fly over, under, or through clouds of particles, up to a certain density, and up to a certain size and composition.
b. Modern jet engines, have to be classified into different types, following the capacity to fly through certain density, size and composition of air suspended particles.
c. Approval entities should create specifications for the above.
d. The possibility of jetliners capable of flying at much higher altitudes, like 45,000 to 60,000 feet, should be carefully considered.

3. Contingency Planning for Improbables

Had we told an executive officer in an aviation company, a few weeks ago, about the possibility of Eyjafjallajökull's eruption, and all the actual air travel mess, the answer would have been "This is so improbable we shan't care for it"! A similar disruption can be caused by another highly improbable circumstance: the impact of a meteorite. This being improbable, doesn't mean there shouldn't be any contingency plan.

4. Some PIIGS Need to Look Ahead

I have friends locked up in different places due to Eyjafjallajökull's eruption. The worst case is a friend stuck in Glasgow for five days whose family is in Barcelona. I say it's the worst case because Scotland could be the last area where restrictions may be fully cleared. She's trying to get to Barcelona by train. She can get a Eurostar seat for next Monday, but from Paris to Barcelona the journey time is very, very long. Spain and the south of France have an underdeveloped train network. An example: The train from Barcelona to Puigcerda (on the French border) takes three and a half hour to cover 150 kilometres!

At present, we are seeing how solid and important a high quality and efficient train network may be!

- Miguel Quetglas, CEO, Compumatic - Barcelona, Spain

Re: Incredible Complexity and Interdependencies

The events in the financial markets of the past three years and the recent impact of the Icelandic Volcano have demonstrated that we as a global society are increasing designing systems of incredible complexity and frequently with unexpressed interdependencies. The comments of Robert McNally in the last briefing reflect the benefits of “living lightly” in a world where the increasing complexity is going to mean that black swans occur more frequently.

With this in mind we need to consider how as a global community we pay for the consequences of these events. The moral and economic challenge is to understand and agree how we cover these costs as a global society where we have seen individual business look to off load these externalities typically on to the individual either directly or through governments and taxation (as the insurer of last resort).

The announcements overnight of the IMF proposing charges and taxes on banking processes is one possible step in this direction, the question is how proactively to identify these threats in organisations that wish to exploit the ability to off load risk as part of their business model. Yet, also balance this against consumers who wish to have rock bottom prices on banking or airfares while maintaining the risk mitigation of a full fare service and a life without the negative impacts of the real world and limited finances.

We also need to be able express the complexity of the systems we are creating, from the world of web2.0 we are creating “mash-ups” that are great while they work, but how many people really appreciate the complexity of systems that support a typical location based app on their iPhone. When I tested this in a discussion a few months ago, the conversation was more around the wonder of how it allowed them to communicate than celebrate the ingenuity of people of technology that supported it, let alone the fragility of those systems, that included the US Department of Defense funding cuts on GPS maintenance...

So in the mean time we need to follow the advice of Robert McNally to live light and live generously. I might take a GPS but I don’t forget to pack a map and compass.>

- Richard Baker, Security Architect, BT - London, UK

[ENDS]

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