MONEY and the YOU Factor
May 26th 2008 02:00
Yup, it's got to be... YOU!
To elucidate, let us go back to the latter end of 2007. The setting was an auditorium in a campus inside the Global City in Makati, Philippines where I and some 37 other participants (which include employees of Thomson Financials, lawyers, brokers, and a whole gamut of other professionals) were attending a seminar.
The lecturer is a renowned economics professor who teaches in the country’s leading institutions. At this particular instance, he was talking about macro-economics and the discussion went from the Subprime mess in the U.S. to OFW remittances and the weakening U.S. dollar.
He spent a good portion of his time talking about the reasons why the value of the U.S. Dollar is falling vis-à-vis the Philippine Peso and other currencies and why this is good for the real estate sector of the country.
He was so convinced of the gathering strength of the Philippine currency that he suggested that if any of the participants has a substantial dollar based holdings, that participant should start considering converting that asset into something else – preferably, Philippine Peso based.
From P56 to $1 sometime in 2006, the peso has already appreciated to about P44 to $1 at this time. Big US financial institutions, even the UK’s HSBC were projecting the Peso to breach P40 = $1 exchange rate. That, plus the fact that the U.S. Federal Reserve was highly anticipated to cut down rates to fight an impending U.S. economic recession, convinced everyone that it was indeed a good time to think of divesting U.S. Dollar based assets. At least, lighten up the load.
The presentation was so compelling that nobody dared to question his facts. Everybody was intently listening and to a point, hanging by his every word. He already has everyone’s attention, but perhaps to make the discussion even more fascinating, he posed one tricky question, he asked: “If your company has a long term US Dollar loan, given the present economic trends, will you borrow Philippine money to pay-off your long term dollar loan or will you just continue to service the loan until it matures?”
If you are a mathematical genius, or an economist, or a Harvard business graduate or whatever kind of higher form of animal that eats, drinks, dreams and breaths numbers, it will probably be easy to be confident about giving your answer. No wonder, nobody even squeaked.
Noticing that all the participants became very silent, the professor presumed that everyone was in agreement with him. Then, he said: “Exactly! Who in his right mind would think of retiring a long term dollar denominated loan at this point?” Well, apparently, nobody. Except for one guy who didn’t quite get that part where the economic professor referred to “his right mind.”
So, just as the professor was finishing his statement, in a very silent auditorium, this moronic guy blurted out, “I WOULD!” And it was rather loud, too.
The professor was, naturally, aghast at the gall of the participant who obviously does not know anything about economics but had the temerity to oppose his views. He was walking towards the other direction while he was speaking, so he turned around to see where the offending voice came from…
Without wishing for it, the guy was suddenly the focus of everyone’s attention! “Please mister, tell us why you would do that,” the professor asked. (The guy has an answer. He wasn’t really sure how low the dollar will fall against the peso, and if it did fall really low, he is not sure how long it will stay that low. The loan is long term, after all.)
But blushing profusely (after realizing that the question was actually negative – he thought the question was only: “who among you would retire a long term dollar denominated loan at this point?”), the guy mumbled in response some incoherent words that only seemed to prove his ignorance of the current economic conditions.
All of the participants paid dearly to attend that seminar so, after proving to all and sundry that he is still the one in control of the discussion, the professor let the guy off the hook immediately.
But the guy still looked so stupid because everybody at that time thinks that the peso will appreciate to about P38=$1.
Back in his office, this guy imparted to his superiors what he had just learned. He recommended to them to lessen their dollar loads and to perhaps go a bit heavier on the Euro.
As most recommendations go, his went unheeded and the dollar, over time, went down to P39=$1. As 2008 ushers in, the most senior of his superiors who was present during that office discussion was complaining that he already lost the equivalent amount of a decent brand new car because of the strengthening peso.
By this time, however, he can no longer follow the recommendation because he already lost a lot. He figured that his best bet would be to keep the dollar, let it sit for as long as it takes, so he can recover some of its lost value. He knew he cannot recoup all the losses, and he knew he will lose some more on the cost of keeping his money idle and maybe a few more cents on the dollar that will be eaten by inflation, but at least he will still have some recovery.
And true enough, by around April of this year (2008) the US Dollar is already inching on the way to recovery. It still has not gotten back to where it was in 2006, and it probably will not recover fully to that level, but the senior officer is already feeling good that just a few days ago the dollar has rebounded back to P43=$1.
What did this make of the “moronic guy” then? Well, none of his co-participants will probably realize it, or even remember of the incident, but had he decided to pay the dollar denominated loan at the time that he said he would, he’d possibly ended up paying it at the point where the exchange rate was at P39=$1 and he would have saved his company a lot of money.
If you summarize this story, you would notice that both the “moronic guy” and his most senior superior received the same advice. The guy was given the “advice” not to pay the “loan” because the dollar was going down, and the superior was given the “advice” to lessen his dollar portfolio.
Both of them acted as they see fit; both of them were wrong and yet, in the end, both of them were right.
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Comment by Louie
Climate Red
randomthoughts
Phil's Wellness Tips
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
But somehow, it depends on what you do to make that money. Some people make their money because they are smart. Some lose a lot of money because they are too smart. I think the Subprime mess is a result of the latter. Those guys who invented those collateralized debt obligations are so smart they are able to create a monster that's about to devour them all.
In the meantime, there's this guy in our province who didn't even finish second grade in elementary school, who have not heard about CDOs, who is just lounging around enjoying his wealth.
Comment by Fobzy
Fobz
And Newbie, I guess it is me, but how's the market, like the lift, I think.......GOING DOWN!
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
Enjoy the ride, or watch on the sidelines. Keep your eyes open for the hidden gems and snatch a handful of them the moment they hit the floor. That's what Buffet means when he said "fluctuations is your friend..."
In the stock market, sometimes gravity works in reverse: "Everything that comes down must go up!" Here's a true example. I have these mining shares that shed almost 50% of its price the past few months that the stock market is taking a deep dive. From P16 a piece it went down to about P9. Where's it at now? Just a few more ticks from its old glory.
Patience buddy, you just got yourself a Rolls. It's not like you need that money for your next meal.
Here's hoping though that you made the right choices when you bought your stocks.
Comment by Louie
Climate Red
randomthoughts
Phil's Wellness Tips
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
Many of the not so good guys always ending up in front. I"d be happy to know though (since they are the ones who invented it) if a large chunk of those mega bonuses were reinvested and used to buy CDO's and SIVs and now being written-off as well
Comment by Louie
Climate Red
randomthoughts
Phil's Wellness Tips
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
I mean, I know some drug pushers don't take drugs. But at least, they aren't the ones who invented them.