With oil in January 2008 selling at about $US 85 per barrel, you might have been very smart and predicted that it would go to a record high of $US 140 or more - as it did in June. I remember some people telling us then to prepare for life at $US 200 (was that really only seven months ago?). But how many people told you last January that the price would drop below $US 50 again before the end of the year? Well, we know what has happened since: as I write, the price is almost exactly $US 100 below its peak - here's a chart showing the average monthly oil price since 1946, both nominal and in 2008 dollars.
In the last four months, we've also seen one of the largest financial markets meltdowns in history - certainly the most traumatic since 1931-32 - and the largest ever co-ordinated loosening of monetary policy. This chart on Wikipedia shows movements in the US Federal Funds Rate over the last half century, which reveals an uncanny symmetry between 1954 and today with a 'pivot' in about 1982. But, what hit me the hardest and highlighted the significance of what has happened is this table from the Bank of England, which records the Bank Rate from October 1694 (sic, I have not transposed the digits), when the Rate was set at 6.00%. It reached its historical low of 2.00% in April 1852, and on a few subsequent occasions, including 1932, 1939 and December 2008. But, unless I have missed something, the Rate has never been lower than that... until last week, 8 January 2009, when it dropped to 1.50% - for the first time in more than three hundred years.
I'm no Economic Historian nor an expert in Central Banking. But I am old enough to know that central banks have spent most of the last thirty years using the few tools they have - mainly the setting of interest rates - to keep inflation low but positive, in order to provide a sound platform for the sustained economic growth that the planet has experienced over the last twenty years.
Who knows where this dramatically-loosened monetary policy will take us? Will we see a resurgence in global inflation in the next twelve months, leading to a fresh cycle of unprecedented tightening in order to stop prices running out of control; or will even these drastic cuts in interest rates (effectively to zero) fail to prevent a spiral into deflation, which none of us has experienced before? Or neither of these extremes?
I have no idea where this recession will lead, or how bad or long it will be. I'm certainly not going to try to forecast.
As a board member, my big lesson from the last twelve months is that we need to prepare ourselves NOT for a $US 200 oil price, nor a New Zealand dollar exchange rate of $US 0.40, nor for a specific price for any commodity (money, gold, milk powder...). No, what I think we need to be ready for is continued volatility, where we learn to live with - and take advantage of - the unpredictability and lack of clear price trends. This calls for greater risk awareness from all board members - not necessarily risk aversion - and a real understanding of our strategic risks and opportunities. (When did your board last ask - and try to answer - questions like 'What could actually put us out of business?' and 'Where does our money really come from?')
We all need to think carefully about what our real business is, and our own unique value proposition, since we can no longer lean on sustained economic growth or continued price inflation to cushion our poor strategic decisions.
So there we are - back on deck for another year of challenge and excitement... as the late Sir Peter Blake used to ask, 'If it was easy, why would you bother doing it?'
And, if I'm completely wrong and 2009 is a year of unprecedented calm and stability in prices, then this time next year I'll probably write about the volatility of everything, including volatility.
