Episode 12: How a Consultant Foresaw the 2015 Commodities Crash

Tracy Alloway (0:05)

Welcome to another episode of Odd Lots. I'm Tracy Alloway, executive editor of Bloomberg Markets.

And listeners, you're going to be sad to hear that we've lost my co-host, Joe Weisenthal, to the global elite, that is. As of recording time, Joe is still at the World Economic Forum meeting in Davos, mingling with people like Kevin Spacey and Joe Biden and whoever else. But I'm happy to say that here with me now is Luke Kawa, who is Bloomberg Markets reporter and semi-famous Canadian. Luke, we're both Davos rejects today, right?

Luke Kawa (0:38)

Yes, Tracy, they tend not to let riffraff like us in there.

Tracy Alloway (0:41)

Yes, this is very sad. Well, on that note, Luke, I thought for this week's podcast, it might be fun to go back to five Davos' ago, by which I mean 2011, when an analyst at a consultancy called Oliver Wyman published a report while at the meeting in Switzerland.

And the report was called The Financial Crisis of 2015, An Avoidable History.

Luke Kawa (1:06)

What did I miss? I don't think we had a banking crisis in 2015

Tracy Alloway (1:11)

We definitely didn't, and we're going to talk some more about that. But I think what the report was really, really good at was kind of predicting the commodities crash and the idea that banks could have losses from bad energy loans. And in fact, we just got through a bank earning season where we did see a whole bunch of them setting aside more money to cover these sorts of things.

Luke Kawa (1:34)

Can you whet my appetite a little, give me a little sample of that?

Tracy Alloway (1:37)

Yeah, I've got the report right here.

Bear in mind once again, this is five years old now. Here's one thing it said. Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess money supply, and commodities rich emerging economies were the main beneficiaries. So pretty prescient, right?

Luke Kawa (2:12)

This was written in 2011 and not a week ago.

Tracy Alloway (2:15)

Yeah, yeah. So I don't want to give the impression that everything in this report has happened. There are some things that it does get wrong, but it's looking pretty good. And I want to bring in the author of the report, who is a partner at Oliver Wyman. His name is Barry Wilkinson, and he is the one who wrote this very prescient thing some five years ago in another Snowy Davos meeting.

Hi Barry, welcome to the show. Just give us a bit of background about who you are and what you do at Oliver Wyman.

Barrie Wilkinson (2:47)

I'm currently the co-head of Oliver Wyman's Finance and Risk Practice, so I guess my specialty is risk management. I've been working at the company for 22 years, so I've kind of got deep specialties in a number of risk management topics, credit risk, market risk. I work mainly with the big investment banks at the moment, so I've kind of got some specialties around the trading risk management side of things as well.

Tracy Alloway (3:11)

All right, so take us back to January 2011, and you published this report to coincide with Davos. What made you decide to do this?

Barrie Wilkinson (3:21)

Yeah, well, I think, I guess the main purpose of the report was to encourage banks to focus more on stress testing. And I think we've seen since then a large wave of work around CCAR, EBA, ECB type stress testing.

I actually have a background, and go back to my university days, I used to be sitting in the lab building bridges, testing, stress testing, heavy load, lateral wind, you know, trying to twist the bridge. And it basically boiled down to, you know, could the bridge withstand a certain level of stress. That was kind of what the whole point of the exercise was.

Luke Kawa (3:59)

And was there any special reason why you chose to release it at Davos?

Barrie Wilkinson (4:04)

Yeah, well, I mean, I guess we write these annual reports. You may have seen we just released another report, more around the FinTech one this year.

I think it was a, you know, we were in the post-crisis environment. The feeling I had at the time was, you know, there were still lessons to be learned from the previous crisis. And, you know, my sentiment was, you know, being in risk management for such a long period, I'd seen lots of crises come and go. And my worry was that we were very quickly going to lose the lessons learned from the previous crisis. And I wanted to really get out there, this idea that we should constantly be thinking ahead. It's not about thinking about chances of being another crisis. Actually, there will be another crisis, you know, in the next three or four or five years.