The Blog of Ariel E. Meilij

Market regulation and the GSIT

I have been reading The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris, a great book I picked up at the Orlando airport for a miserable 4.99.

The book was written in 2007, forecasting the big economic crisis ahead, and not only does it make great reading, it also confirms a thesis of mine: no economical crisis is new, but rather a continuation of a one which had similar symptoms and where the entities in charge did not address correctly, or did not address at all.

For example, subprime mortgages had been a headache in 1994. But instead of correcting the problem, the US government decided to salvage the industry and fix the problem with liquidity, which was not so uncommon back in ’94.

I don’t want to dwell deep into the book, as I am saving that for next week’s blog, but I do want to touch into the issue of market regulation. Most conservatives are against the regulation of markets based on the principles of free market and capitalism. These are economic principles. I am in favor of market regulation, but not because of political or economical reasons. My thesis is rooted on the general theory of systems.

Allow me to explain.

Back in my beginning college days, and as I was tackling Epistemology, I came upon the concept of positive and negative feedback, and how it affects a system. The idea came sort of odd to me, since positive feedback was negative and negative feedback was positive for the system. But UBA professor Bunge gave an excellent explanation on these two.

When a child eats candy and chocolate all day, and his parents say nothing on the issue, the child will get stomachaches, cavities, high blood sugar, and overweight. The positive feedback (“eat candy, you like it, and us parents are all for it”) gives no incentive for the boy to stop his gluttony, usually with nefarious effects to his health.

Instead, if the child decides to pick-up a kettle from a stove with his bare hands, he will get a nasty burn. Yes, it is painful, and this negative feedback will build into his brain one solid idea: picking-up things from the stove with your bare hands is bad for you. Next time he will either use a kitchen glove or stay away from the kitchen furnace.

And thus negative feedback sets boundaries for the system as to what limits it can traverse and which it should keep in range of, unless it risks falling off balance (or the principle of homeostasis.)

A popular saying in Latin America says it very well: whoever gets burn by hot milk, sees a cow and runs…

I bet that nowadays whoever betted on packaged collateral-backed mortgage securities, will see any thing remotely related to the market and run. It turns out saving your money underneath the coach wasn’t such a bad idea after all.

If we follow the classical theory of systems, the lack of regulatory measures made the system grow out of balance and fall. Not fall because it stopped working, but rather because the system balanced itself again. The unsustainable path of making money securitizing toxic assets was an unsustainable one, and thus the system crashed.

Regulation is good for two things. One, it is the source of negative feedback that keeps the system in check, i.e. “no Mr. Maddof, you can’t promote your Ponzi scheme as AAA rated investment…” For seconds, we need to be sincere and admit that in such a greedy and corrupted field of play as the financial market, a little policing is not a bad idea. And a lot of policing wouldn’t hurt either.

Since history tends to repeat itself, the tulip bulb bubble was a foreteller to the dot com bubble, I suspect no one will pay attention to my thesis, not even after I do get my Ph.D. They will rather pay attention to whatever thesis promises more money, no less.

But I am almost sure that it will take only a couple of years after we ride the crisis for financial markets to invent some other new, exotic, and intricate security element to peddle among investors, promising great returns, and delicately poised in a system of unsustainable balance. The crisis will hit, rest assure, but then those who speculated first will have made immoral amounts of money and moved to some forgotten island in the Caribbean before CNN starts to unravel the story.

Don’t you wonder is mattress-deposits can be securitized?

The Appreciation of the Colombian Peso

Up until now, I had seen the risk of negotiating in foreign exchange and suffering the ups and downs of currencies as something that would affect both negatively and positively my budget, but never in an acute way.

I had once seen the negative effects in full. I was a product line manager at that time working at Kraft Foods, and another PLM had taken advantage of the low parity of the Mexican peso against the dollar to stock-up on Kool-Aid. While the profit per unit rose, too much Kool-Aid meant terrible problems at the warehouse, including lack of space. With time, some of the Kool-Aid began to harden and had to be thrown away, a task fast more costly than simply giving the product to kids for free.

When the time came to replenish Kool-Aid, the Mexican peso had appreciated and the cost of the product was a little more expensive than expected.

I am now living a similar experience with point of purchase material production in Colombia. All the savings we procured by a smart system of local fabrication seem to have vanished as the Colombia peso appreciated. When we started negotiations, the parity COP:USD was of 2,400:1. At the time of signing the contract, the parity was of 2,000:1, which meant my USD bought 17% less materials in comparison.
The effect of the peso appreciation hit me home with my new apartment in Colombia. I was making down payments having forecasted that the peso would stay around the 2,400 ranges. Now that the peso appreciated, and I can only get exchange for 2,000 pesos on the dollar, the deal is not so comfortable, nor the price I paid so attractive.

What does this mean for the Colombia economy? Exporters know very well what it means. The price of commodities from Colombia rises unexpectedly, and on commodities, a 17% difference is a lot. Exporter unions are already complaining to the president that the central bank needs to intercede and devaluate the peso, else losing on the exports side.

Analyst from the central bank elucidate that the sudden drop of the dollar is in part due to the effects of large exports. Exporters sold a lot due to the excellent local prices, and thus a large quantity of US dollars entered the economy, diminishing the forex rate. In a catch-22 situation, exporters holler back that unless a correction takes place, exports will fall, and the country could face a lack of the US currency with prices jumping far more than the previous 2,400 ceiling.

I recall that the appreciation of the Argentina peso had at one point calamitous consequences when the country loss what could have been its best soybean crop. Yes, it was not all due to exchange currencies, but the key here is that once a market is lost, it’s hard to take back. Argentina was the number one provider of soybean, and one nefarious year was all it took to loss the control of the category.

Coffee bean prices have not been advantageous this year, but Colombia can still trade to positive effects if the US dollar falls back into place. The central bank suggestion that travel is much cheaper now won’t do any good if jobs lost to export failure worsen the economy. Those wealthy enough to travel can do so at any time, but what the country needs today, is to reactivate its industrial might as soon as possible.

The minister of state already accepts Colombia, after two consecutive periods of negative GDP growth, could be in technical recession. With a forecast of scantly 1.5% growth for 2009, devaluation of the currency is the best insurance against further unemployment and deceleration of the economy.

Algo hicimos mal by Oscar Arias

A great speech by Costa Rican president Oscar Arias, given at the Trinidad and Tobago summit last month

How to (correctly) implement a sale (part 3)

I had a superior whose father had thought him valuable lessons on how to implement a sale. Maybe these can not be applied to every market, but they sure made a lot of sense in the Panama environment back then.
For example, they would not clean the shop during sales. They would let the floors get [...]

How to (correctly) implement a sale (part 2)

The second step towards implementing a sale is defining a time frame.

This is not a scientific answer but I usually favor sales which range from 2 to 3 days maximum. Some might think that this is a rather constrained, but you want to keep the sales as short as possible. I have several reasons [...]

How to (correctly) implement a sale

Lately, in the retail environment I continually travel – which includes Colombia, Venezuela and most of Central America – I have seen a trend towards sales. I understand the year’s end sales were not exactly the best, so I can understand that retailers would be interested come January on getting rid of old inventory. What [...]

Google’s double standards on monopoly

When Google accuses Microsoft of monopoly, I get the impression they are not necessarily the best people to talk about the topic…

Managers in denial

Everyone knows we are in a crisis, that budgets are tight, and that we might need to try a new approach to consumer marketing. Then why are so many big name company marketing managers in denial?

Futurecast: Book Review (and lots of thoughts…)

Hardcover: 368 pages
Publisher: St. Martin’s Press (April 1, 2008)
Language: English
ISBN-10: 0312352425
ISBN-13: 978-0312352424
Product Dimensions: 9.3 x 6.2 x 1.5 inches
I would like to start this book review by quoting some interesting comments from very well know people.
FUTURECAST was chosen by the US Chamber of Commerce as one of the 10 “Books that Drive the [...]

Towards a simple door optimization method within strategic spaces

Introduction

Last week someone threw me an interesting challenge: how many doors is the optimum number of doors inside a strategic retail location, such as an important mall?

For some this question will be nonsense, as you can never have too many customers. But for upscale brands, the question of remaining premium while maximizing sales at the same time can be daunting. Too many doors, and the products lose the exclusivity that usually leads to retailers engaging themselves in costly price wars. Too little doors and your sales might not be the number you expected. There is a direct relationship between space and sales, but the human factor also plays an important role. A door too many and that nervous retailer could decide to drop your brand or decrease your space and purchases, leaving you cold back in square one.