Friday, January 30, 2009

Preparing for the economic storm

On July 18, 2008, I wrote an article called the "Perfect economic storm", in which I said the following six to nine months would be the worst period in Jamaica's economic history. At the time, even though I had indicated from the year before that the US would go into recession, I did not think the global crisis would have been as bad as it is and is expected to become.

Last week, for example, in a single day, listed companies in the US announced over 50,000 layoffs. This is in addition to the hundreds of layoffs at unlisted companies. The unemployment rate in the US is projected to go up to 10 per cent. Countries across the globe are seeing record levels of unemployment and jobless claims. In Jamaica, the Planning Institute of Jamaica (PIOJ) has indicated the economy will decline by over two per cent in 2009/10 and unemployment will rise to 12 per cent. The director-general of the PIOJ is telling us to brace for rough times ahead.

I have even been in contact with business people who are having a very difficult time.

Why are we surprised?
My response is, we should not be surprised. From as early as 2007 I remember espousing the US would go into recession and that it would significantly affect Jamaica because of the significant per cent of our trade with that country. Even while others were saying that we could look to other countries, I cautioned against Europe, Canada, and the UK as I expected them to be affected because of the trade they do with the US also. The fact is that today it seems as if the Eurozone and UK may be in worse shape than the US, hence the strengthening of the US dollar against those currencies.

So I was ridiculed by some for suggesting that Jamaica would see a significant downturn and was told to think positively. Well, I tried, but the logics of technical and fundamental analysis of the markets have not allowed me to think that way, as my brain resisted any thought of irrationality.

So I am sorry for thinking the Jamaican economy into a downturn. And I am going to make an adjustment to my prediction of July 18, 2008, as I was wrong about the following six-to-nine-month period being the worst in our economic history and change that to the 12 to 24 months from today. As I have always been saying - and I see that the PIOJ agrees - the global effects will linger on in Jamaica for at least 12 months after they have ended in the US.

The extent to which the crisis affects us though, will depend on how we prepare for it as a country, companies, and individuals. The fact is that if we prepare correctly there are opportunities available, and some significant ones if we prepare properly. And these opportunities are there for the country, companies, and individuals. I will not go into the specific opportunities, as I have committed to addressing them for two entities in February and would not want to pre-empt that. But suffice it to say that economic activity is like a trade.
For there to be a loser there must be a winner on the other side. What we must do is ensure that we are on the winning side. After all, managing risk is all about having knowledge and how we act. Risk reduces with knowledge, and is the difference between a gamble and a trade for example. A trade is making a decision with research and knowledge of where the probabilities are highest. A gamble is making a decision without proper analysis.
So as a country, and companies, we must decide if we want to make a trade or a gamble.

The threat of inaction
But as I said to Bev Manley last year, my greatest fear for Jamaica, and companies, is not that we do not know, or have the ability to know, what to do. It is that our politics, bureaucracy, and refusal to face reality will drive us to inaction. While the rest of the world has been debating since last year how they intend to, as one team, address the coming (not here yet) eye of the economic storm, Jamaica has been sidelined by distractions around issues that have nothing to do with progress but rather scoring individual points.

The opportunities that can accrue to Jamaica, and companies, can only come through preparation. Gone are the days when anyone could make a prediction about markets and what will happen. In a market where everything was going up that was easy. Try today when most things are going down, and volatility is the order of the day.

Today requires real analysis. An example I have is a situation where someone asked me about my recommendations made on equities, based on the fact that the PE ratio was low. This proved to me that some of the financial advisors have not come to grips with what is happening in markets today, as a cursory look at PE ratios only works when markets are going up, or are fairly stable. What is required now is hard-nosed balance sheet and company analysis. Needless to say, I promptly advised her not to listen to that financial institution again.

As a country we have to face the reality that we do not have the reserves to do what countries like the US and UK can, or even little Trinidad or Barbados. That is a large enough fiscal stimulus package that will create a real positive impact. Let's face the facts that we just do not have the money, as while the world was growing at record levels we squandered the opportunities to capitalise on that. Since 1972, we have grown an average of around 1.8 per cent per annum, and certainly over the last 15 years or so we have averaged less than one per cent per annum.
So now that we have dug ourselves into this deep hole, with what seems like the intention of creating a pathway to hell, we have to approach the crisis in a different manner. When one is in such a deep hole, with no ladder or other implement to help us out, the only way to get to the top is to slowly pile up dirt until it reaches the top. So what we must do to turn the economy around is to carefully put the structures in place to ensure that quality growth takes place in the economic and social environment.

For example, I would have thought that one of the most fundamental things that every company should be looking at immediately, if not done already, is to have a two-day strategic planning session with a view of creating a crystal ball view of the fortunes of the company over the next two years. This way, a decision can be made about what should be done to take advantage of opportunities, stay afloat, or shut down. Not doing so and then wanting to make a decision after everything has failed is mere stupidity to say the least.

As I always say, though, when one is sick we go to doctors. Why then when we need financial and strategic help do we not speak to those who understand what is happening and can make practical forecasts? The power of positive thinking has always, in my view, been a fad that some writers made a lot of money from. Of course, one must have a positive attitude but it must be within a context of the power of "practical thinking".

My advice to the country, companies, and individuals is the worst is yet to come. All we have been seeing thus far is the fallout from the alternative investment schemes. Get professional advice. And the situation is not any better in other parts of the globe, and may be worse in terms of impact, as this is a worldwide economic storm.

Friday, January 09, 2009

2009 - A year of challenges and opportunities

As we move full speed ahead into 2009 there is no doubt that it will be a very challenging year globally. Some of us had thought for a while that challenging economic times were ahead, and had stated this even in the face of opposition, by not only local commentators but even while persons such as Bernanke, Paulson, and Bush were praising the soundness of the US economy. I remember in March 2007 having a radio conversation with Ralston Hyman where he supported my thought that the US would go into recession by 2008 as the obvious threat to the consumer at the time would significantly slow economic activity. At the time many thought we were speaking rubbish and this denial continued well into 2008.

Even though today everyone admits that Jamaica and the world will have significant economic challenges, there is still an indication that as a country we do not understand what is required to face the challenge. When one reads and listens to the international press on a daily basis and compares it against our own local information it is obvious. In the US, UK, and Europe the main debates taking place are about what needs to be done to save the economy. In Jamaica, however, the main stories have nothing to do with a debate on the economy. Instead we are distracted by other stories, which to me is nothing more than a reflection of our state of poverty as a country.

Bleak global future
As an indication of the challenges that lie ahead, we can look at the main foreign exchange earners of remittances, tourism, and bauxite/alumina. All these earners are being affected negatively by the global economic challenges. Remittances in November 2008 saw a 17.5 per cent decline over the same period in 2007. Tourism saw declines in October and November 2008, and bauxite/alumina has announced that there will be lay-offs coming.

On the global front we have seen where the job losses continue, as Alcoa has announced a 13 per cent cut in their labour force and Marks and Spencer will be laying off thousands. Early earnings warnings from corporate giants such as Alcoa, Intel, Wal-Mart and Time Warner show that there is more pain in store for US equity markets, and thus greater loss of wealth. A technical analysis of the Dow Jones chart shows that it is now trading sideways and could see a move either up or down, but given the earnings warnings and unemployment difficulties ahead, my bet is that it will see further declines.

In fact, a CNBC article ("Early Warnings Signalling an Ugly Earnings Season") state "Analysts expect consumer-sensitive areas such as retail and parts of technology to be among the hardest hit as rising unemployment squelches consumer spending and hurts revenue and earnings. Even President-elect Obama's plan for a massive stimulus package isn't expected to have much impact until later this year." The recent manufacturing indices in a number of countries have shown significant declines and the US jobs number on Friday January 9, 2009, is expected to be significantly worse.

The global situation I think is therefore very bleak and in my view this may be an "L-shaped" recession rather than the previously thought "U-shaped" recession. And if the stimulus plan in the US does not have the intended effect, then some think we could be looking at a state of depression. Whether it gets there or not it is obvious that consumer spending across the globe will be significantly tempered for at least 12 to 24 months. This is important for Jamaica as the three main foreign exchange earners depend to a great degree on consumer spending, which means that we could see earnings significantly affected. I expect also that even after the recession has ended the effects in Jamaica will linger on for at least another 12 months as consumers try to build back the massive wealth they lost in 2008.

Opportunities exist
But while there are many challenges ahead, I believe that there are many opportunities for Jamaica and individuals.

Realising these challenges, however, will depend to a great extent on how we organise as a country and as individuals to meet these challenges. And while the government has announced a welcome stimulus package, and has provided funds for small businesses, I fear that as a country we are not taking the expected challenges serious enough, as we continue to be distracted by other debates. While I do realise that there are other things to be discussed, unless we engage in a serious discussion of the solutions realise we will always be mired in the poverty we have become used to as a country. As an example, the recent discussion in the US not to accept the senatorial appointment by the recently accused Illinois governor has been changed resulting from the need to focus the discussion around the economy.

Even the discussions around the Madoff Ponzi scheme always return to the effect it has on the economy and confidence. I also have little confidence that the bureaucracy will allow us to respond in time to the welcome policy initiatives announced by the government, and that by the time we get around to it the recession may almost be over, and we would have been seriously ravaged. But that is life in "Jamaica, no problem".

In saying this though I believe Jamaica faces many opportunities, primarily in agriculture and outsourced services. Agriculture I think can form the basis for a revitalised local economy and also provides niche export market opportunities. In addition I believe in times of crisis food security is very important. The opportunities in agriculture is something I have been espousing for a while and my discussions with Chris Tufton has shown that he has some well thought out plans for the future of the sector. As a country we must encourage much more debate on this.

While the opportunities are there, however, I believe the fastest approach to get this sector moving is through partnerships between government and the private sector in targeted projects, because the infrastructural problems such as roads, praedial larceny, and funding do not encourage private sector participation. I know of at least one major business person with available lands who is willing to take advantage of this opportunity in partnership with the government. The opportunities in agriculture must not be thought of as only primary production but must be extended to agro-processing plants. Why should we not have mainly Jamaican processed foods in hotels? The supply chain opportunities are immense.

The provision of outsourced services for countries like Jamaica in Information Technology and call centres, for example, are another area of opportunity. Although the potential profits are not as great as the agriculture potential, they are still a source of opportunity.

On an individual, and company basis, I believe there are many opportunities emerging. Anyone who knows of the herd mentality of investors, knows that when fear or greed sets in it always causes an over reaction and creates opportunities. I still think that the herd still has some running to do but opportunities are emerging and soon can be taken.

In the case of the government, companies, and individuals, however, it is very important to engage the services of someone who understands how to assist in the opportunities. In the US, for example, while job losses mount, professions such as accountants, analysts, and information technology are still in high demand, as when businesses seek to get more efficient and prepare for the road ahead they rely on these professions.

The Chinese say that there is opportunity in crisis. but unless we are prepared to meet the oncoming light it could turn out to be a train.