Volatility, Vulnerability and Vigilance

By J. Walker Smith,

Executive Chairman, The Futures Company

By a different measure of daily movement in the Dow Jones Industrial Average, the month of August 2011 was the tenth most volatile month in the U.S. stock market in the past 75 years.

Volatility has made a comeback as the backdrop to everyday life. The economic meltdown of late 2008 sent the VIX index, a commonly referenced measure of volatility in the U.S. stock market, soaring to a succession of headline-grabbing record highs.

The pattern is the same everywhere.  Since the depths of the financial crisis, stock markets around the world have staged a massive recovery but they have been roiled by huge seesawing swings along the way.  Coupled with roller-coaster prices for oil, food and other commodities, the currency and debt risks plaguing many developed economies, and worries that important developing markets like China and Brazil are bubbles waiting to burst, it is no surprise that many experts, and consumers, too, have come to feel that volatility is the new normal.

The everyday experience of volatility is more than financial, though.  Dread was heard as Hurricane Irene churned up the East Coast of the U.S. during late August 2011, hard on the heels of record summer heat, a rare earthquake in the Mid-Atlantic States the week before, and two winters of record snowfall.  With the storm approaching, people were tweeting and repeating the same refrain, “What’s Next? Locusts?”

The Arab Spring Element

Volatility has become the undercurrent of life for people around the world.  Earlier in August 2011, Germany, Finland, Sweden, Denmark, Latvia and the U.S. took the unprecedented step of issuing travel advisories for the UK, of all places, as riots in London spilled out across the country, raging in fiery mayhem for several nights.

The 2011 Arab Spring uprisings toppled regimes in Tunisia, Egypt and Libya and triggered a rash of official resignations, retirements and dismissals in Lebanon, Oman, Bahrain, Sudan, Kuwait, Iraq and Morocco.  As of this writing, bloody protests still wracked Syria and Yemen.  In Israel, discontent over the high cost of living and other issues like tax reform and affordable housing culminated in two nationwide street protests of 300,000 to 400,000 people each that bracketed the month of August 2011.

During this strife, social media were much criticized for worsening the volatility of these tumultuous situations.  Barely a blip on the radar screen before Facebook and Twitter took off in 2004 and 2006 respectively, social media have amped up recent unrest by empowering people with as many new opportunities for agitation as for connection.

Mexico is suffering through another of its eerily recurrent hundred-year cycles of national violence, with the federal government embroiled in a countrywide shoot-out with several drug cartels that have almost turned Mexico into a 21^st century narco-state and that purportedly control even a desert corridor of U.S. territory stretching from the U.S.-Mexico border to Phoenix, Arizona, the fifth-largest city in America.

The Macroeconomic Factor

While volatility ranges well beyond the economy, macroeconomic factors must not be overlooked.  For example, the global housing market continues to struggle, with half of the 50 countries tracked by London-based real estate firm Knight Frank showing declines in the first quarter of 2011.  Even the Asian housing markets doing well are on the watch list of potential bubbles waiting to burst.

The August 2011 jobs report for the U.S. registered zero growth, the first such stall since 1945.  A large swath of middle-class Americans fall into the half considered ‘financially fragile’ because short of extreme measures, they cannot come up with $2,000 in 30 days to cover an unexpected emergency expense.  Spain’s 21 percent unemployment rate has cut deep into the middle-class.  Middle-class consumers across the OECD face significant reductions in benefits, income support and jobs as major cuts in public sector programs begin to bite.

The financial frailty of the middle-class aggravates the feeling that life has become ever more volatile and capricious.  With the middle-class sapped of buying power and teetering a mere rainy day from financial ruin, people have spilled out into the street in Spain, Greece, France and the UK.  Remedial governmental actions in the U.S. and the EU have been stymied by paralyzing political stalemates.  All the while, emerging economies like China, India and Brazil are nervously eyeing the sagging fortunes of developed markets to see if their exports will continue to find buyers.

Even in dynamic developing markets, the middle-class has yet to secure its position.  It is almost an article of faith that a booming middle-class in emerging markets like China and India is a foregone conclusion.  The OECD has projected that as soon as 2030, two-thirds of the global middle-class (66 percent) will be in the Asia Pacific region, compared to 28 percent today.  Europe, which currently has the largest share at 36 percent, will have just 14 percent by 2030.

No doubt, a major shift in the geography of middle-class marketing is at hand, if for no other reason than the demographic momentum of population growth.  But the ultimate size and potential of this demographic shift depends upon the ability of emerging markets to negotiate the middle-income transition ahead of them.  This should not be taken for granted.

As Nobel Prize-winning economist Michael Spence has pointed out in his recent book, the middle-income transition requires a wholesale reinvention of a country’s economy.  As developing markets grow, personal income rises, making labor more expensive, thus erasing the competitive edge that powered growth to begin with.  With low-wage jobs shifting elsewhere, developing countries must abandon low-wage industries and complete the transition to value-added industries rooted in capital, human capital and knowledge.  This is difficult to do.  Incumbent companies and people with jobs at risk make the politics difficult.  It takes time, patience and sustained will, which is why most countries that have faced this transition in the past have failed to make it through, a point Spence punctuates with ominous emphasis.

Middle-class Consumerism

Spending by middle-class consumers is the bedrock foundation of every successful, vibrant marketplace.  Nearly all products and services depend upon middle-class consumers for the bulk of their sales.  What marketers have long sold are products and services that can be mass marketed to a vast cohort of consumers with similar tastes rooted in shared middle-class lifestyles.  This is not to gloss over the sophisticated targeting and segmentation that underpins most brands.  It is simply to make note of the fact that the overwhelming majority of this targeting and segmentation concerns middle-class consumers.  To put it bluntly, marketers will fail in the absence of a confident middle-class, ready and able to spend extra for innovative products that raise the quality of life.  Unfortunately, this is exactly what is vulnerable to the volatility created by the on-going complex of macroeconomic trends.

Of course, economies have never been free of ups and downs.  But before the economic upheaval of 2008 it was widely believed that the sorts of volatility and insecurity now worrying people had been tamed, particularly in the realm of macroeconomics.  The best-known expression of this belief came from U.S. Federal Reserve chairman Ben Bernanke in a 2004 speech in which he triumphantly summed up the consensus opinion of economists with his much-cited characterization of the preceding twenty-year-plus period as the Great Moderation.

Perhaps the biggest impact of the Great Moderation was the moderating, confidence-inspiring context it provided for everything else.  After all, it’s not as if this two-plus decade period of the Great Moderation was free of worrisome events.  Yet, as challenging as this period was, it was met with an underlying sense of confidence that solutions were at hand, as exemplified by the resilience and stability of the global economy, something that leading economists believed modern economic theory, known colloquially as the Washington Consensus, had engineered to last.

Nowadays, with volatility amped up, consumers feel much more vulnerable and are acting accordingly.  In developed and developing economies alike, vulnerable consumers make for difficult markets.  The marketplace feels threatening to consumers everywhere.  In developed markets, consumers feel threatened by the loss of status in declining economies.  In emerging markets, consumers feel threatened by a relentless push into an unknown future because of rapidly growing economies.

Businesses and brands prefer stable markets and confident consumers.  Instead, for the near-term if not longer, marketers will find a much more vigilant consumer afoot in the marketplace.  Yet, volatile situations and vulnerable consumers also point to opportunities.  Vulnerable consumers are on the lookout for products and services that address their need for vigilance.  The challenge, though, is that the whole pyramid of engaging consumers about higher-order (premium-priced) needs will first require a firmer foundation in security.

In both developed and developing markets, middle-class consumers want reassurance, guidance and encouragement.  Information is useful and appreciated but does little to alleviate anxiety and relieve stress.  Inspiration is needed to give consumers confidence they can cope and succeed.  This is what marketers must do – inspire consumers to act.  Rousing consumers to action is what’s needed most nowadays, both in markets that are struggling and in markets that are exploding.  Giving consumers reasons to believe, to hope and to dream – exactly what The Futures Company helps it clients do – will keep future momentum from lagging as the global economy resettles into a new structure of growth and innovation.

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