MAPping the Future
Cash no longer the king?
By Aurelio O. Angeles
Philippine Daily Inquirer
First Posted 23:55:00 05/11/2008
MANILA, Philippines--These are portents of things to come: rising costs of oil, steel and other metals, rice, corn, wheat, soybeans. More hyperinflation in the world market!
The value of money is going down across the globe; inflation is eating the wealth of the super rich; central banks are at a loss on the cause; not knowing the cause, they are failing to give a cure.
Cash is no longer king.
Prescription
How must we in the production and marketing sectors respond to this situation?
So long as interest rates are within the same range as we have now, here is my prescription for those in business in the real economy:
1. Keep stocks of fast moving items in a high level.
2. We must keep on selling our products even if the items we sell must be replenished at a higher price as a result of inflation.
3. Let's listen closely to the heartbeat of our suppliers.
Know what their fears are and what they intend to do with whatever stocks they have. This knowledge will be our guide for what we have to do with our business.
The most important question to answer is this: Will our suppliers continue to sell their stocks even if prices are increasing?
Let us know that they too will be selective in their dealings. It is our aim to get into their list of priority customers.
4. If the answer to the above question on supply is "no," let us forget Item 2 and sell only what we need to pay for operating expenses.
Let us keep our wealth in inventory, not in cash or in net operating income that cannot be converted easily to stocks.
5. If the answer is "yes," the guide for net selling prices is competition and our customer's ability to pay.
a. If we have no competition, let us sell at a price that the market can absorb.
For many, the temptation to make agreements among competitors will be strong to control price and profit uncertainties.
b. If there is competition, let us match their price and fight for the remaining excellent customers.
c. Let us go for selective marketing.
Let us know that in a period of hyperinflation, buyers will strive to buy on credit and take hold of stocks as much as they can, irrespective of their ability to pay or their cash flow.
Under such a condition, what will our terms of payment be?
d. Let's be cautious about having long-term supply contracts on products that are susceptible to hyperinflation.
Will we be able to supply our long-term contracts at the cost we thought we could supply these products?
Are we providing enough profit margin and contingencies to take care of hyperinflation?
Will our long-term customer, who makes use of our products as a component for his final product be able to absorb inflation, still make money in his business and keep afloat by the time he sells and collects from his own customers?
Rising interest rates
Now what if interest rates are no longer in the same range as now and are going up? What are we to do?
1. If the cost of money is lower than the inflation rate affecting our products and will remain that way for at least a year, then it is wise for us to keep our strategy above.
2. If the cost of money turns up higher or will be raised to a level higher than the inflation rate on our products, then we must stop hoarding and start selling our stocks.
At this time, we are back to the old adage that grandpa taught us: Cash is king! Definitely!
3. If central banks use their monetary policies to raise interest rates as a means to check inflation, then we have no choice but to pay our loans and interest-bearing borrowing. Or, at least negotiate with our banks for interest rates fixed for at least a year.
4. If central banks raise interest rates, then, we would have to reverse the suggestions above and say: get rid of our stocks, sell, sell, sell and pay up all our loans!
Once we have reduced our loans to a manageable level, only then should we build up our stocks.
5. Watch for developments in the market of your products. If it is still there, alleluia!
If not, let us be nimble, resolute and entrepreneurial: Look for new markets, new products, new opportunities.
As the Chinese say, there is opportunity in every crisis.
What is the probability that central banks in the next 12 months will trigger an increase in interest rates?
Here is a wild guess and take it for what it is--a guess.
Not knowing what is causing the crisis, central banks will engage in a long-drawn fight among themselves and focus on interest rates as their principal weapon.
Those who represent economies with large investments in financial markets will opt for an increase in rates to prevent further loss of their money's value in financial markets resulting from inflation.
But they will be bitterly opposed by those of their own kind who will claim that increasing interest rates will kill yield and growth of financial markets.
Which are these economies? Here is a suggestion to identify them.
Determine from 2006 IMF statistics the value of GDPs in US dollar of the top 31 advance countries..
For the same countries, determine from World Federation of Exchanges 2006 statistics the total values of transactions in US dollars of their respective financial markets: Equity markets, fixed income markets and derivative markets.
Note that derivatives markets have the following sub-classifications: Stock options, stock futures, stock index options, stock index futures, short term interest rate options, short term interest rate futures, currency options, currency futures, commodity options and commodity futures. Each has a value that confounds imagination!
(If you think you are an expert in International Investment and Finance, here is an opportunity to hone your skills by looking at the big picture.)
See which among these economies have financial market transactions greater than the value of their GDP. You will be surprised to know the facts.
If an economy is deriving four times more volume of business from financial markets than from the production of real goods and services (GDP), you can be sure the central banks of these economies will protect their financial markets more than they will protect their markets for real goods and services, when squeeze turns to crush. You would too, if you were in their shoes.
On the other hand, central banks which represent economies more focused on the growth of their real economy-GDP and Current Account Balance-than growth and yield in their financial markets, will stick to an increase in interest rates just high enough to prevent speculative fever in commodities and goods but low enough to prevent closure of factories, unemployment and recession.
The trouble they will encounter in the now global economy, like China and Japan, is this: Whatever they do, they will be soaked up by movements in the global economy unless they tighten their regulation of investment flows particularly of hedge and mutual funds.
Who will win in this clash of directions?
Whatever you do, do not ask your favorite stock broker.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is the author of the books, "The Peso Exchange Rate: Why Are We So Poor?" and the newly released "The Philippine Economy: Do Our Leaders Have A Clue?" Feedback at map@globelines.com.ph. For previous articles, please visit .)
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