Sunday, September 2, 2012

Profit and Cash. Opinions and Facts. Chapter III. And the way we were…

Dear SAP Banking community members.

Last weeks, we commented some topics about assets valuation.

Assets valuation, from some perspective, is just a beacon for attracting resources.

For instance, if the government of a big country like China (or any big economic player), decides to incentive the building of railways in front of highways, that will have an impact on the value of the cars, car manufacturers shares, etc; and same story with resources related to the trains industry.

On my last post I commented that the bubbles are just one side effect of the lack of correlation between the price of the limited natural resources and their long term value. By implementing Fiscal and Economical policies, voluntarily or involuntarily the economic agents make some assets more attractive than others, those assets get resources and become even more attractive, in a cycle (maybe vicious, maybe not) which inflates the bubble.

Economic bubbles have very bad reputation because they’re recognized when they burst. Until that happens they make the economy grow, and everybody is happy with economic growth.

Of course, it’s an exaggeration/oversimplification, but the capitalist system, especially after the Bretton Woods agreements and until the oil crisis of the 70s have build economic bubbles (or in more politically correct terms, implemented expansion fiscal policies) to feed the economic growth.

The difficulty comes when we see that the resources are limited, so the asset becomes less attractive as past profits are not maintainable in the future, the bubble burst, economy falls into recession, and we close the loop of the economic cycle. Let me comment that I’m not saying this is good or bad, I’m just saying that in my opinion, that’s the way it works.

Or more exactly, that’s the way it worked. After the real estate bubble burst on the US, UK, Ireland, etc in 2007 and the Financial Crisis of 2008 was visible, the economic agents tried to stimulate the economy by inflating a new bubble of public debt, but recovery didn’t arrive… The main reason, natural resources are limited and oil price remind us that more stimulus would bring hyperinflation and stagflation.

John Maynard Keynes was a genius, and his recommendations took the world out of the 30’s depression (together with the reconstruction of Europe after the second world war, which has probably been the biggest stimulus plan of the history), but at that time the peak oil was still far, far away.

So, if we cannot grow by stimulating consumption, we’ll have to find a new way. Knowledge is the new resource and the new economy will be based on increasing efficiency. But moving from an industrial economy based on consumption to a knowledge based economy is a systemic change. As we’re in a Capitalist System, the Financial Services Industry is the main agent for driving the change, so the Financial Services Industry is going to change, but we’ll talk about it another week.

Whenever we remember, the way we were...

Looking forward to read your opinions.

Kindest Regards.

Ferran.

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