ragarza

[ragarza]

The Myth of Startup Investing

Mad Hatter (Johnny Depp) in Alice in Wonderland

The first question I would ask myself if I see a dude who’s 27 years old and not a self made billionaire writing this would be: why in heaven is he talking about startup investing?

But the truth is that the lie they’ve told us is that nobody has a criterion, that only the self made billionaires or “angel investors” know what they’re talking about.

That’s the biggest lie we’ve heard.

At a time when apps and social media take up most of our attention span, and therefore our energy, we fall into the culture of burnout for doing absolutely nothing. Its as if only by virtue of belonging to this generation we are automatically conditioned to become numb and permissive.

How do people get away with madness nowadays? How do people and leadership get away with insults, single-handed authoritarian actions?

Because we don’t care.

Gone are the days when “going with the flow” or “Gone with the Wind” take us to some acceptable and comfortable haven. Going with the flow nowadays is akin to what before would be called the “Wikipedia black hole” that is, the days when we would go through article after article catalyzed by our own thirst for knowledge.

Nowadays, it seems like, we give in to this cascade of pseudo news on Facebook. Nowadays, we don’t have the attention span to read a full article not to mention the energy!

Burnout by Getty Images

Remember those days when people used to read books? I’m already seeing some eye rolling here as the guy writing this article pretends to be an intellectual or “well-read” person but the author, let me tell you, as any other millennial, knows he falls into this rabbit hole too, quite often mind you.

The resistance to technology has always been the same. What will it do to us? Why meet it with fear as opposed to excitement? And the answer to these questions inevitably borders with ambiguity. To what extent should we embrace technology? - Is met by, what technology is beneficial for what and when?

What I’m advocating for here is not for the return to those days when we would play with rocks and kindle fire on a cave to eat some raw meat, YUMMY 😋! No, what I’m advocating for here is awareness.

Yuck, comes that psychological and boring term, that term these “enlightened” scientists and researchers use in their esoteric papers and articles, which we don’t read anymore! Why? Because we don’t respect studied people anymore. Gone are the days when we respect the intellectual authority as knowledge becomes presumably democratized (thanks Google). Nowadays, nobody knows more than the other because knowledge is no longer proprietary or hardly acquired (see Tesla’s patent giveaway).

Bare with me, it seems like I’m trying to get “somewhere”, to a “conclusion” or to some “value judgment of the human condition”.

But that’s not fun, so don’t hold your breath.

The question we face now is, how are humans adapting to these technologies and how are we deciding to evolve with them?

That brings me to the subject matter.

A few years ago, I predicted a bust. A moment when the world realized the ginormous Ponzi Scheme-like Silicon Valley model. Some people call it the “Pump and Dump” model. That is, you start a company, you make it sexy or popular, then you “raise” (ask for) money at a bigger valuation (overpriced estimation of how much your company is worth) and then you sell it to the highest bidder (the dumbest bidder).

Today, the Wall Street Journal published an article claiming that Soft Bank’s Vision Fund, the visionary (mind the pun) Masayoshi Son’s venture capital fund, is running out of cash. Meaning, this fund, which asks investors for their money to allegedly invest it into the “next big thing” is almost done spreading the money (or the powder as those private equity guys like to call it). The model works only if there’s a higher bidder when they sell their stake (or equity) in these companies. Because let’s be real, these companies (like Uber) don’t plan to make any money any time soon, insofar they continue to raise money from “investors” (I put it in quotations as almost anybody hearing the word investor presumes they are smart. I’ve got news for you, you’ve got $5 dollars in your bank? You can be an investor! See Stash).

“Wall Street Executive Accused of Scheming to Defraud Investors of $95M” (from ABCNews)

But what happens “after the music stops”? As Alan Blinder titles his book on the 2008 crisis. Well, investors will want their money back! But these funds would have to sell their stakes. If there’s a flash sale (end of season sale), suddenly there will be a lot of merchandise out there! Prices fall. What then, what then will these little investors do?

Panic.

And we go on and on and on about these assumptions about the future as if I am some sort of visionary (like Masayoshi 🤣) and knew what the hell I’m talking about.

No, what’s actually happening, in my opinion, is that with the advent of digital globalization, we all know more, we all have access to more, we can all invest in more (see crowdfunding) and therefore we are all the same! But there’s another kick to it: barriers to entry fall (like those Harvard Business School people like to talk 🤓, I went to the University of Illinois in Urbana, I couldn’t tell between a kernel of corn and a book).

Therefore, the biggest myth they told us about startup investing, is that we’ll find the next monopoly (like Facebook, Google, Tinder 😏), myth because, without anymore barriers to entry, there cannot by any more Googles!!

In light of wanting to please and end this article with some sort of conciliatory, heartwarming and cohesive conclusion I will say what follows:

We cannot judge the future by the past because that only makes sense when things don’t change. The truth is that the future will and continue to look much different than the past at a much faster pace. See Andrew McAfee’s Second Machine Age as a framework of how the economy as we know it is inevitably changing, also see Aeon Flux, if anything you’ll get to see Charlize Theron at her best 😍. Gone will be the times when we go to our 9-5pm job, mow our lawn and kiss our wives (or husbands) goodbye. In comes the time when our own sense of validity in the economy will be put into the question as working, in many ways, becomes irrelevant.

Barney’s Beach Party from Barney Wiki

So what do I advocate for? I advocate for people traveling, having fun, meeting other people and drinking coffee by the sea. I advocate for people to embrace the waves of the second machine age, to advance their inner most desires to the benefit of humankind. I advocate for awareness in what we do and why we do it. Because frankly speaking, falling on the victim mentality because we can’t stay away from our phones is just our excuse to shy away from this Brave New World (see Aldous Huxley).

Let’s stop idolizing these investors, billionaires, technologists and instead, start utilizing what they have created to expand our minds in ways previously unimaginable 😲...

[ragarza]

The Perspicacity of Adoring the Unknown

in Masada, Israel, Sep 2018.

Often times, we ask ourselves “is there a G-d?”. We approach this question from a multiplicity of angles. We try to address it from a corporeal perspective: “is there an actual dude overseeing everything we are doing”? to a panatheistic perspective: “is G-d pretty much the universe or cosmos?” or “is G-d the existential tissue holding everything together?”.

But few people nowadays, dare ask this question from a religious perspective…

Thousands of years ago, we witnessed the advent of religion. Religions as institutions and religions as belief systems.

Religions, in a way used to be one and the same with government. At times intertwining and others, at odds. Nonetheless, they persisted.

Religion, mind you, has an ethereal component: its constructed on the basis of community.

As humans, we often strive for company, for community. It’s in our nature, as human beings, to look for company. When the Homo Sapiens, or the Modern Man, defined as a lone wolf with the ability to architect tools encountered the Neanderthal, a social and communal being, the face of the Homo Sapiens would be changed forever. The new species would be both inventive and social, both individual and collective.

Fast forward we witness the advent of societies, cultures and nations. With the slow but ever evolving formation of humanity, we continue to adopt and embrace ideas and common beliefs.

We passed from the eras of rationalism, which bridged Greek philosophers like Plato from antiquity with philosophers of the 16th and 17th century like Kant and Descartes to the Enlightenment and the Industrial Revolution from the 17th to the 18th century, emphasizing intellectual endeavors and manufacturing processes to Romanticism, which emphasized emotion and individuality. From there we went on to Realism with Leo Tolstoy and Dostoyevsky, characterized by their almost depressing but faithful representation of the struggle of reality, to Futurism with Aldous Huxley and his dystopian representation of the future. Then we went to Modernism with Frank Lloyd Wright, Picasso and Matisse to Surrealism with Salvador Dali, Sigmund Freud and the exploration of the subconscious and on to Absurdism, with Albert Camus, Nietzsche and Franz Kafka. The list goes on and on until we come to present times…

Today’s time is not one which can be readily defined, its only in retrospective that we are able to characterize times, movements in relation to the story of our world; the book of humanity.

But none have been more penchant and pedantic than the religious.

The religious, hold these beliefs for thousands of years and while they adapt to times, something remains constant, something remains ever unchanging.

Us, the cynics, look at religion and say: well, here are these guys acquiescing to this institution, which has repressed them for thousands of years and while we have found out the world is round they still believe in the immortality of the book?

For us, ever changing with times; some remain constant. This delves into the question: what is better, remaining constant or changing? This takes us to the Darwinian discovery of the persistence of evolution which almost reminds me of the Persistence of Time by Dali.  For some, it’s just almost impossible to reconcile religion with human development.

somewhere in the Caribbean, Jan 2019.

If I could speculate, I would say our time will be characterized by the juncture when humans merged with the machines. It will be remembered as the time when adhering to the notion that the brain will always be more powerful than the machine (kind of the creator vs creature corollary: read Frankenstein) will be an axiom no more. A time when we realize that the development of technology, the idea of Singularity, could really springboard us into exponential advancement that could almost narrow our relationship with infinity…

Is it that the religious were wrong? Is it that they weren’t patient enough to experience our own discoveries? Or is it that they were asking a different question altogether?

This is a question I’ve been asking myself and somebody gave me a very clear answer.

A friend who worked at a hospital, told me that people who had a faith, a religion as a tenet to live by, left this world with peace, whereas people without strong convictions or a profound truth left with anxiety. Without further adieu, when I called my uncle to ask how his brother was doing after his daughter’s passing, he told me his brother was at peace, because he was a man of strong faith and his daughter passed with a smile. How the hell does that happen!?

I think, the deeper the questions, the further we reconcile our relationship with the unknown.

The question of death is one we all try to avoid and even some religions dismiss as a negative one to make. But a profound truth is that nobody in history has ever beaten death, although I wouldn’t be completely opposed to the cure for mortality! (I would have my reservations though.)

Maybe the religious are not that close-minded after all. Maybe the religious have discovered a profound truth, that there is a node between life and death or that answers lie in ambiguity: the unknown unknowns. Maybe, just maybe, there is a perspicacity to adoring the unknown…

[ragarza]

The Shape of the Wind

Madame Monet, Woman with a Parasol

Today I had been reflecting on the shape of the wind.

When there’s snow outside, the passage of the wind is often embodied until it grazes over the powder. It moves indiscriminately and with no apparent direction.

This made me reflect on human emotion and how often times we struggle to direct our emotions into specific directions; into linear paths.

Then it got me thinking about this perceived notion of how we are supposed to feel. We are supposed to be happy, joyful and if we are lucky, albeit briefly, ecstatic. But what if emotions behave like the wind? What if fortunes or the lack thereof have no apparent direction and flow indiscriminately?

We would therefore find ourselves vexed in unending cycles of excitements and disappointments. I find, nowadays, this has almost become the status quo in that we accept this binary state of mind as an inescapable aspect of our human condition. We measure our lives by the amount times we meet our expectations and call that success. The more successful we are, the happier we are, the better off we are.

But what if, by extension, success behaved like the wind? What if the amount of times our expectations were met happened the same number of times the wind crossed a reference point?

I remember, having a thought where I imagined that if a drop of water would fall when I expected it to, then I was doing the right thing in my life. Has an idea like this ever crossed your mind? It goes to show for the conditioning we’ve had to measure our welfare as the amount of times we are “right”. But what if being right wasn’t associated with our concept of self-worth?

There was an essay by Albert Camus, which really influenced me in my life, titled: “The Myth of Sisyphus”. In Greek mythology, Sisyphus was a king who was punished to push a boulder atop an unending mountain until eternity. Camus argues that we can imagine Sisyphus being happy. Whereas his expectation was never to be met (getting the boulder on top of the mountain), he nevertheless pursued to push it.

Sisyphus (image from Performance Insight)

From here, a whole school of nihilists emanates arguing for the lack of meaning in life or the concept of absurdism. The idea that life is but a bad joke or an irony.

In that realization, I find relief. Its almost as if we were asking the wrong question the whole time, “what’s my purpose?” is followed by “what am I?” and “what am I?” is followed by nothingness.

Cogito, ergo sum, my twinsie René Descarte was quoted as saying “I think, therefore I am”. This quote had troubled me for a very good number of years until I realized that we are but a fabrication of our own thoughts. You following? How does this relate to the wind? I’m going for a stretch here but what if we are the wind, which we can feel but only really see when there’s snow lying around? What if we only become embodied when we draw powder from externalities? What if like the wind, even when we want to think of ourselves as something more, we are really just free flowing entities?

To try to reach a conclusion or comforting thought (as it relates to meeting expectations) would defeat the whole premise of this article, which is that we exist to exist. That maybe, just maybe, entertaining the idea that there may not be any apparent destination would allow us to flow freely, to adopt and to experience like the wind.

But what if, as a side product, we find purpose?

I often think of the artist, the architect or the musician who while working really hard, their efforts seem, well, effortless. How, while they spend their whole lives mastering their craft, they seem to be enjoying the process?

Forrest Gump, the movie, has a centering thought that stuck with me for a long time. In the movie, the main character, wonders whether we have a destiny in life or if we are just floating freely, like leaves falling from a tree. In the closing scene, when he mourns his late wife, he brings this question up again and in grief, seems to reconcile that maybe we are both. Maybe we both have a destiny and we are also floating around.

In Jewish thought, there’s a central idea about struggle. While other schools of thought like Hindusim, argue for uninterrupted flow, as one of the profound truths Forrest Gump reveals, Judaism then reveals another truth, the idea of struggle as being a part of the human condition. The idea that where there is comfort, there is also struggle.

So what if, in order to stir away from the idea of idolizing wind and maybe create a god out of it, we just contemplate on the idea of purposed flow? The idea that while flow seems random and submitted to the shape of the stream we can actually purpose it?

What if, we can flow and direct our lives at the same time? What if flow, as opposed to an ends in itself just represents the shape of our wake like an acrobatic plane passing by, or a brush of the stroke of Monet or a melody of B.B. King?

What if we can all be artists and flow indiscriminately and yet deliberately? What if we can make the effortful seem effortless and celebrate the idea that joy lies in the process, and not the outcome?

What a thought would that be...

[ragarza]

The Effect of Music on the Confounded and the Careless

When attempting to find the teetering juggernaut of reason in an otherwise loitering mind, the answer comes with the disguise of resignment. The established basis, cloaked by misdirection and misgivings, eludes the Sisyphean efforts of the tireless mind. And yet when we expect nothingness as we stare down the defeated aversion to ambiguity, there it lies, in its simplest and most primal form, as if it was just waiting for us to listen. For how purposeful can life be when the answers we seek don't pose an apparent gargantuan challenge? Could it be that we create the answers by generating the problems? Or is it that we spend life inching to a futile pursuit we call purpose? No, it can't be. It shouldn't be. For isn't there purpose in its own pursuit? Would therefore purpose not lie in the answer but in the question? It therefore could very well be that the strong and courageous are not those who lie in the comfort of the answer but the acrophobia of the question. For it is those who constantly tightrope between the bottomless pit of insanity and the elation of epiphany, that silently watch over the conditioned and fearful minds of the conventional.

[ragarza]

Competitive vs Collaborative Negotiation: A Trade Case

image from blindfiveyearold.com

Today’s political environment, is reminiscing of a time that predated the turn of the 21st century. In the early 2000’s, globalization was akin to progress. Trade and integration was considered the recipe of success. A thriving world economy, somewhat set aback by the 9/11 tragedy and the Dotcom burst, firmly believed that it was together that the world would prevail.

Notwithstanding, exacerbating inequality, government failure to hold the provocateurs of the Great Recession accountable and a timid recovery; forced the other side of the coin. Ray Dalio, manager of the biggest hedge fund in the world by AUM, argues that, through business cycles, when inequality is accentuated and paired with slow economic growth, people start becoming frustrated and vociferously attack and stand against entrenched corporate interests and the likes of the elite.

If history served as a lesson, one only has to look at the Great Depression during the early 20th century to understand the rising discontent that comes with corporations and political institutions as the economy glooms and the elite thrives. In good times, as entrepreneurs, businessman and financiers flourish, society remains conforming while sharing in prosperity. On the flipside, when things take a bad turn, tensions build up and create political cataclysms that make countries turn inward and become hostile to trade and the interests of multinationals.

As the title suggests, this precludes the negotiation dynamics of trade. Roger Fisher, late Samuel Williston Professor of Law emeritus at Harvard Law School and director of the Harvard Negotiation Project, pioneered in the study of negotiation, arguing that five different negotiation styles existed: Competitive, Accommodative, Avoiding, Compromising and the superior one, Collaborative. The European Union took years to negotiate and arguably decades to build to but it only took a day to alter its destiny (read Brexit). NAFTA which laid the foundations of the North-American powerhouse that reached USD $1 trillion in trilateral trade five years ago (according to the Congressional Research Service) is at risk of becoming scrapped.

Under Fisher’s analysis, this would qualify as the competitive negotiation style. Under this style, the interested party coerces, blackmails or even lies its way into getting what it wants. While the negative economic climate could persuade the negotiating agent into becoming more hostile it is not necessarily the strategy that would reap the best results; for all. Being collaborative, Fisher argues, takes effort, it demands creative thinking and hard work. This is when summoning the popular saying “Rome wasn’t built in a day” is warranted.

Political forces argue, that if we turn inward, close our trade and immigration borders by applying steep tariffs or passing stringent immigration laws, the local economy will experience a “revival”. This completely ignores David Ricardo’s law of comparative advantage which argues that countries thrive through intertwined supply chains and specialization. It ignores the fact that a substantial number of jobs were created because of global trade in the first place. It ignores the fact that even if a country could platonically become independently self-sustainable forcing the hand on integrated markets, it would set itself for a deep recession; setting prosperity aback.

All the while, the general population perspective isn’t unjustified. The very economic forces that catapulted the world economy into the 21st century, betrayed the trust of its participants. Under their perspective they barely share in the gains (50% of income goes to the top 1% of the population in the US) while they partake in all the losses. When the 2008/2009 Great Recession took place, the initiators were bailed out or left-off with generous compensation packages while the average Joe’s savings virtually disappeared. The government stepped in to rescue faltering banks and corporations, indebting the country further, while the rest of the social pyramid suffered.

It only makes sense that the general population (the other 99%) feels they’ve been cheated. While its easy pointing fingers (Competitive negotiation style) and picking scapegoats, coercing economic agents and demonizing capital, it is not the “best” way out.

A collaborative approach to trade would require both parties on the table, first, to calm down. It would require a friendly exchange in which those who wronged apologized to those who were damaged. Brainstorming, listening and a “trust” environment would be necessary for both parties to arrive to a “win-win” collaborative solution. Working and thinking are both boring and exhausting though and people usually like the easy way out. Therefore, our best hope is electing leaders who are both boring and cool-headed. Leaders who will form coalitions and are capable of compromising, better yet, collaborating. Its arguably fair to say then, that the fate of the world lies between the thrill seekers and those who are capable of seeing through the smokes and mirrors. Let’s hope that the latter prevails…

[ragarza]

Dr. Chaos: Or How I Learned to Stop Worrying and Love the Trump

Image from QuotesVana

Judging from the title. You might think this is just another politically inclined article, attempting to denounce one candidate over the other. Let me tell you something: It is not.

One can’t help but think of Stanley Kubrick’s Dr. Strangelove when observing the current world “order”. I remember watching the film in what turned out to be the most perplexing course I’ve ever taken. The movie was so foreign to me that I had a hard time understanding its underlying message. But then it struck me. It was contextual.

The film was made at a time when the world stood in dread. Cynicism abounded, the United States was in the cusp of the Vietnam War and remained under constant threat of nuclear oblivion. Madness abounded. Social upheaval erupted, which lead to the Hippie movement. The Beatles magnified people’s voice and deep discontent lambasted on the establishment. It seemed as though, it represented the most perilous disconnect between government and its people. Even during the Great Depression, FDR garnered the support of the average American. He spearheaded the New Deal which proved sufficient enough to mend the social fabric of the early 20th century.

As removed as FDR or Dr. Strangelove might be to us, history can’t help but repeat itself. In an attempt to upkeep stability, our faltering diplomatic mechanisms can’t help but ebb to the brink of fracture. The frustrating reality is that we can’t help but always remain a step away from the abyss. An apparently well intentioned act of brinksmanship leads to the death of a US ambassador in Benghazi. A satire magazine in Paris pushes the envelope a bit too far and bloodlusted extremists initiate terrorist cataclysms that reverberated to the most farfetched corners of Europe and even America.

As simplistic a view as I may be trying to portray. The current world stage tells a new story. This time around, the divide is not between the government and its people but between its people and its people. This time around the threat is not a foreign nation or an economic institution but a collision between irreconcilable views and beliefs. This time around, the provocateur doesn’t have a name or a face but an emblem. On one side we have those who still believe in world order and those democratic institutions that humanity so hard-pressed and so selflessly battled to sustain and defend. On the other hand, we have those who have said “enough!” Those who would rather see the world fall into mayhem, albeit, temporarily. To finally cleanse it of its “evils”. Whether it’s the US for ISIS, the political establishment for the West or the European Union for Britain.

I would like to say that I understand, because I do. I would like to say I know who’s right, or who’s wrong but I don’t. What I wish for though, is a world that believes in itself. A world that believes in its people. Yes, this is a war of beliefs and I believe we still have it in us to keep this world together. Since no apparent leader seems to voice the collective, there’s no way out of this but through the foundations of democracy. It will be through dialogues and accountability. Through accords and discords. By remembering that we’re all entitled to our own voice. That and only that, will beget peace.

[ragarza]

Dr. Chaos: Or How I Learned to Stop Worrying and Love the Trump

Image from QuotesVana

Judging from the title. You might think this is just another politically inclined article, attempting to denounce one candidate over the other. Let me tell you something: It is not.

One can’t help but think of Stanley Kubrick’s Dr. Strangelove when observing the current world “order”. I remember watching the film in what turned out to be the most perplexing course I’ve ever taken. The movie was so foreign to me that I had a hard time understanding its underlying message. But then it struck me. It was contextual.

The film was made at a time when the world stood in dread. Cynicism abounded, the United States was in the cusp of the Vietnam War and remained under constant threat of nuclear oblivion. Madness abounded. Social upheaval erupted, which lead to the Hippie movement. The Beatles magnified people’s voice and deep discontent lambasted on the establishment. It seemed as though, it represented the most perilous disconnect between government and its people. Even during the Great Depression, FDR garnered the support of the average American. He spearheaded the New Deal which proved sufficient enough to mend the social fabric of the early 20th century.

As removed as FDR or Dr. Strangelove might be to us, history can’t help but repeat itself. In an attempt to upkeep stability, our faltering diplomatic mechanisms can’t help but ebb to the brink of fracture. The frustrating reality is that we can’t help but always remain a step away from the abyss. An apparently well intentioned act of brinksmanship leads to the death of a US ambassador in Benghazi. A satire magazine in Paris pushes the envelope a bit too far and bloodlusted extremists initiate terrorist cataclysms that reverberated to the most farfetched corners of Europe and even America.

As simplistic a view as I may be trying to portray. The current world stage tells a new story. This time around, the divide is not between the government and its people but between its people and its people. This time around the threat is not a foreign nation or an economic institution but a collision between irreconcilable views and beliefs. This time around, the provocateur doesn’t have a name or a face but an emblem. On one side we have those who still believe in world order and those democratic institutions that humanity so hard-pressed and so selflessly battled to sustain and defend. On the other hand, we have those who have said “enough!” Those who would rather see the world fall into mayhem, albeit, temporarily. To finally cleanse it of its “evils”. Whether it’s the US for ISIS, the political establishment for the West or the European Union for Britain.

I would like to say that I understand, because I do. I would like to say I know who’s right, or who’s wrong but I don’t. What I wish for though, is a world that believes in itself. A world that believes in its people. Yes, this is a war of beliefs and I believe we still have it in us to keep this world together. Since no apparent leader seems to voice the collective, there’s no way out of this but through the foundations of democracy. It will be through dialogues and accountability. Through accords and discords. By remembering that we’re all entitled to our own voice. That and only that, will beget peace.

[ragarza]

A New Debt Crisis

The world economy has fallen into a quasi unknown territory. The rules that governed international finance have seemed to cease to apply to its full extent in the current economic environment.

Business cycles which are supposed to outline the nature of growth, having booms and busts as a common place, may have ceased to follow historical patterns. If history was a proxy of what will happen in the future then we would be for sure walking into contractive territory if not into a recession. The Latin American debt crisis in the 80’s followed the US savings and loans crisis in 89, which followed the Asian contagion in 97, the Dotcom bubble in 2001, which followed the Subprime crisis in 2008. All in all, crisis seem to happen every 7 years or so. We’re in 2016, no world recession has taken place yet. So the question we pose ourselves is: Is a world recession imminent?

Let’s think about it.

What happened after the world financial crisis of 2008 was unprecedented. central banks around the world explored new monetary tools to counteract what’s natural and inevitable in a capitalistic free market world. They decided to effectively print money to counteract the credit crunch, incentivize investment, create inflation and therefore save the world from falling into a deflationary spiral. They did everything in their power to boost the world economy and still are. Just as Mario Draghi, ECB’s (European Central Bank) central banker, said in Davos he’ll do whatever is necessary to raise consumer prices. But the effects are yet to be seen, we haven’t seen significant growth and prices stickiness has held inflation back.

More importantly though, should central bankers play such a central role? Two issues arise: 1  By giving so much power and influence to central bankers we’re effectively turning to “big state” policies where we expect government to play a central role in the world economy and 2 we’re creating imbalances and inefficiencies in the world economy by directing money to specific sectors.

On the first issue, the world is contradicting itself. As it strives to promote free markets and Adam Smith’s “invisible hand”, where investments are optimized by individuals’ pursuit of their utility, we’re giving significant leverage to an institution under the assumption that it “knows better” than all the world’s decision makers combined. Who’s to say that Janet Yellen or Mario Draghi and their boards know where the optimal place to allocate hundreds of billions of dollars is? No wonder why Milton Freidman advocated for a world without central banks. Crazy right? Maybe not...

On the second issue, as mentioned above, the central banks are creating disastrous imbalances in the world economy. First, the bailouts and bailins of too big to fail banks and corporations like Bank of America or General Motors among other, has left inefficient and uninnovative corporations afloat whereas new, innovative companies could have taken their place to ignite growth and development. By central banks deciding who’s to be rescued and who’s not they trumped (literally), the whole “cleansing” process, the “panic” process (as the WSJ reported on its true meaning) that would allow for creative destruction. The irony is that central banks have de facto been cooking the next financial crisis while they were trying to prevent the last one. This time around, the world debt crisis...

Extended periods of low interest rates, even negative ones, have incentivized the flow of credit (good thing!) BUT when these periods extend to much, companies and countries become highly leveraged, to marginal levels of profitability, that any significant increase in interest rates would lead companies and maybe even countries to default. What’s more is that the debt crisis reaches the most promising factor in a world economy, which is the young skilled worked force. Low interest rates incentivized students to take on debt in order to go to school, but the excessive availability of credit affected a big proportion of the educated workforce. A combination of high pay grade expectations with the availability of loans, gave students the peace of mind to take on ever more debt. The problem arises when the economy doesn’t pick up steam as expected and when interest rates are expected to rise.

An even bigger issue arises though, when the central bank money pumping doesn’t translate itself into inflation or productivity growth as the money is immediately channeled into bonds, the stock market and even Silicon Valley promises. In short, having a big player pumping money into the world (effectively like China pumping money into its slowing economy) creates all sorts of asset bubbles. Therefore, after seven years of expansionary monetary policy we have asset bubbles in the tech sector, the stock market and most importantly as aforementioned, the bond market. Bond prices have a negative correlation with interest rates, so as the expectation for low and negative interest rates is sustained, investors felt the incentive of buying treasury bonds, paradoxically sending more money to the government than it originally “intended” to give back to the economy. So, was the government attempting to finance the world with its money printing strategies or to finance itself? Moving on…

The real mess comes though, when these individual big players diverge in their policies. The Fed pushed aggressive expansionary policies before the ECB or even the BOJ (Bank of Japan), the effects are therefore lagged. While the Fed is slowly (but surely) increasing interest rates, the ECB delves into further monetary stimulus just as Japan announced today it’ll cut interest rates into negative territory! So what is really going on? Economic theory tells us that as US interest rise relative to other currencies the dollar appreciates. It also means that US assets become more attractive as international assets depreciate (relative to the US), this exacerbates the capital flight from emerging and developed economies alike into the US further appreciating the dollar. This is important! The US being the de facto reserve world currency (as opposed to gold before) means that most debt was acquired in dollars. If the dollar appreciates relative to the host country and US interest rates rise, then it makes debt payments all the harder if not impossible! So what will happen?

Assuming free markets, capitalism playing it’s role, no one messing with it (central banks?), then corporations and countries will begin to default on their debt. Will the US care? Well, central banks are traditionally mandated to work towards price stability but how much does the world really influence the US and vice versa? A lot, as global supply chains are ever more integrated, everybody is poised to hurt! So what options will the US have? Cut interest rates again and attempt to depreciate the dollar? Let the crisis fall its course? Whatever it may be, the hope is the following: Having a world where individual preferences and decision makers are favored over big “independent” institutions, where we’re all accountable for our decisions and competition can run its course to let the inefficient and the redundant fall behind to open the way for innovators, entrepreneurs and visionaries. If we’re going to favor an entrepreneurial society we’ve gotta make a decision: are we all in or not?

[ragarza]

TPP: One Flew Over the Cuckoo’s Nest?

or “Why the TPP Could Be the Answer”, by Rene A. Garza

Portrayal of the hindsight bias...

In recent events, we’ve seen the world financial markets go astray. For the first time the bond market, which has historically been considered a safe haven for investors, is becoming ever more volatile, inflated and well, a defacto ticking bomb. As the first corporations start defaulting on their debt, investors are going to become ever more risk averse and find no safe ground for their money, they’re probably going to pursue the classic gold ingot or developed countries sovereign debt as the parking lot. We don’t want it to happen too fast though, as a flight from corporate and emerging country debt markets would effectively send global growth to a halt as corporations and countries find trouble in refinancing their debt and as such put investments to a complete halt, that’s a scary picture, potentially summoning the unnamed Voldemort of international finance, the infamous deflationary spirals…

As we discussed in an earlier article, extended periods of low interest rates have created all sorts of imbalances in the world financial markets. Corporations borrowing in dollar denominated debt have taken advantage of historic-low interest rates leveraging themselves to marginal levels of profitability where the smallest increment in interest rates might send them to immediate bankruptcy protection. No surprise then why the Fed has been so wary of interest rate hikes. It really does want to see the world pick a little bit more steam before increasing rates so that the gains outweigh the costs. Hopefully, we’ll see the central banking authority take the risk on December, not October though, too early.

So why might the TPP (Trans-Pacific Partnership) be the answer? Yes, syndicates and environment lovers (I consider myself one, go green!) hate it and want to see the talks fade away but are they on the right?

According to the Peterson Institute for International Economics the TPP “could yield annual income gains of $295 billion…with potential gains of $1.9 trillion.” That is a lot! To put it into perspective the potential gains are roughly the size of Brazil’s annual GDP, which is the world’s 8th largest economy!

So what is the TPP anyway?

The TPP is a potential trade agreement that would open further trade barriers between 12 nations that represent 2/5ths of the world GDP (excluding China, deliberately). The talks have been ongoing since 2008 and tonight 6pm ET we might learn that the talks have ended successfully, hopefully. It would still need to pass through congress, which is much divided but hopefully a humble, bold Boehner would help it pass through as he leaves his influential seat. The countries included in the deal, hence Trans-Pacific, are the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. In competitive terms, increased trade between the negotiating nations could push China into better trade terms further adding on global trade and growth.

In a new world of low growth, emerging market slow-down and of uncertainty over China’s decelerating GDP growth, we have to be bold and find new pathways and alternatives over a seemingly inevitable global growth slump. Yes, we might have argued in a previous article that we have to pop some bubbles before they grow so big that after doing it themselves, it sends the world into a deep crisis but we also have to take the world economy into our own hands. We have to use the visible hand to open evermore pathways for the invisible one. The TPP might be the answer to a brewing crisis, as we would untap ever more trade and growth from markets alternative to China, from markets that already fully believe in free trade, comparative advantage and competition. That might push China to accelerate their reforms into a more market friendly economy.

Therefore, we do want the TPP agreement, nay, we need it! Let’s start talking business and push for what could be our way out of a brewing crisis and in turn, revamp trade and global growth. Passing it would require a great act of brinksmanship, both in Atlanta and Capitol Hill, and of course, would require taking on risks, but what is worse? Locking on imperfect trade terms or wondering what could have been if we had opened the trade borders further into more globalized, integrated world supply chains? That’s for authorities to decide but something tells me that their very well aware that after the traditional countercyclical resources are exhausted (fiscal and monetary policy), trade policy is the only thing that’s left.

Let’s take a chance!

[ragarza]

The Great Stagnation

After the 2008 financial crisis, central banks around the world, led by the Fed, took extraordinary measures to contain the damage. Central banks and officials attempted to rein in the financial system to keep it from collapsing. Bulge bracket banks were either rescued or acquired, with the exception of Lehman Brothers and the quantitative easing programs started. It was as if officials would do anything in their power from preventing the Great Depression II to swap it for a Great Recession.

The problem is that in a globalized free market, business cycles are inevitable. In fact, they’re natural. Booms and busts are commonplace and allow for Schumpeter’s “Creative Destruction”, only the best survive, serving as a global cleansing from the inefficient and the redundant.

Officials wouldn’t have it. They would rescue banks and corporations at all costs creating moral hazard by avoiding accountability and sending a message to the world that if you were systematically big enough, you’d be rescued by all means. That is not the message that we wanted to send. In fact, not only were banks rescued but countries too. Greece is bound for yet another bailout of over 80 billion euros, which it will not be able to pay out. So what’s wrong with officials? The problem is not the officials’ intellectual capabilities but rather the fact that another bail out is inevitable.

In an interconnected world where corporations don’t have a nationality anymore and the financial systems are so interconnected business cycles become generalized and the world becomes a gigantic ship. Wherever there’s leakage, the whole ship is in risk of sinking. As World Bank chief economist Kaushik Basu put it in January “the global economy is running on a single engine, …the American one”

America has been showing consistent signs of recovery, posing strong job growth, a sustained unemployment rate but slack in wage growth. The Fed to this day ever since the financial crisis, hasn’t increased interest rates and is bound to increase them in September according to nearly every prediction probably by a meager 0.3%. The question is, whether America can keep the world economy afloat. Nearly every emerging market’s currency has fiercely devalued in face of the dollar, same with the Euro and almost every other currency. Even China has willingly devalued its currency for the first time, signaling more alignment with the markets in its currency valuations.

Several countries like Mexico have let its currencies take the full hit without offering any support through rate hikes. Countries are using the devaluations as an opportunity to increase their exports. The euro is basically at parity with the dollar and the pound is getting close. These “deliberate” devaluations have sparked currency wars, according to Nouriel Roubini the MIT economist who predicted the housing crisis. China’s move may very well set off a wave of further devaluations and capital flights from emerging markets prompting further financial volatility.

Zero interest rates cannot be sustained, capital needs to start settling to keep prices on check but authorities are silently weary of what could be the needle that makes the bubble burst. It’s clear that a bubble has been in formation for several years now. Zero interest rates push investors into looking for alternative sources of return. If the bank isn’t giving them any money, if demand is depressed in the world and commodities’ prices keep falling, the only thing they have left to invest in is stocks or even worse, in promises…

Silicon Valley hadn’t attracted that much investor fever since the Dotcom Bubble. Uber, a company that’s only 6 years old is already worth $50 billion dollars. That’s more than FedEx, leading global courier delivery services company, which has been around since 1971. Companies in California are absorbing insurmountable amounts of money from investors that are desperate for the returns that their banks are unwilling to offer, courtesy of the Federal Reserve. The difference, according to Mark Cuban, world-class entrepreneur and billionaire angel investor who made his money by foreseeing the Dotcom Crisis, is “Back then the companies the general public was investing in were public companies…investors had liquidity to sell their stocks. The bubble today comes from private investors who are investing in apps and small tech companies.” The risk here being, that when this bubble pops, investors are not going to be able to sell their assets, their money instead is just going to disappear with the idea that attracted it in the first place.

So how does this tie up to the Fed and interest rates? A perfect storm would be one where investors simultaneously find out that they’ve been financing empty promises and that government bonds and bank deposits are suddenly becoming more attractive. Here then, investors would pull their money out of California, unsuccessful startups would die out from the lack of capital, investors would start to become nervous and weary by the lack of delivery from startups and the capital glut in California would turn into a capital flight. Then again we would be back in square one and another financial crisis will set loose.

So what other signals are there of an incoming financial crisis? Well, there’s a weak global demand lead by the Eurozone. With the lack of affinity between monetary policy and fiscal policies, all sorts of imbalances are created in Europe and the only choice becomes stagnation, saving the world financial system from another default through international bailouts. Oil prices, a measure of world demand, have remained consistently depressed and are not expected to pick up in the foreseeable future, but rather to drop further. Emerging markets have slowed down led by China and Latin America due to structural issues. China slows down because world demand for its products is weak, and commodity exporting countries like Chile and Brazil are in the brink of contracting due to low commodity prices and weaker Chinese demand.

So what are we to expect in the coming year then? It will be interesting to see how much further can the American “economic recovery” be sustained with weak global demand. It will also be interesting to see how capital flights from emerging markets affects different countries after the Fed increases interest rates and how America performs with yet a stronger dollar, hurting its exports. It will also be interesting to see how investors react when they start seeing they’re investments go wrong in Silicon Valley, where risky investments have become the norm rather than the exception.

So are we in the edge of yet another financial crisis? Chances are we are and officials know it but instead they’re dribbling with the idea of pushing for a Great Stagnation. The risk of postponing interest rate hikes further is of exacerbating the size of the bubble. We’ll have to see if current Fed Chair Janet Yellen finally decides to poke the bubble before its too late in order to contain the damage. After all, ex-Fed Chair Alan Greenspan’s refusal to burst the housing bubble in the years leading to 2008 is exactly what led to the greatest financial crisis the world had ever seen since the Great Depression...

[ragarza]

The Latin American Boomerang

Chile is the top copper producing country in the world, producing almost fourfold what China (2nd) does.

After a decade of sustained high-level growth, the region squanders. Two of the most dynamic economies, Chile and Peru, are set to grow 2% and 3% respectively when they had been growing by almost double in the past years. Last decade proved to be merely a seasonal effect on Latam (Latin America), we experienced a commodity boom powered by China’s fantastic double-digit growth, benefiting mainly the commodity-based economies of the southern cone.

But with China slowing down to growth levels of around 7%, the effect is felt in the region. The regional power, Brazil, is set to have null growth this year and merely 1% in 2015. Dilma’s microeconomic management undermined what seemed to be the takeoff of Latin America´s giant after Lula. Excessive meddling in the private industry deterred investment and big-state policies of excessive public spending messed with public finances posing a fiscal deficit of 4%, the highest since November 2009 (shortly after the recession), of 4.17%.

Chile’s economy, which was perceived as Latam’s most dynamic and advanced, has sharply slowed down. Although considered since the summer of 2013 as a developed high-income country, is highly focused on commodities exports, having metals and ore taking on 61% of their total merchandise exports. This severely impacts the southern economy with commodities prices falling to their lowest levels since 2009 recession levels.

It seems as though Latam enjoyed the benefits of a seasonal commodities boom but didn’t lay down foundational structural reforms to cope with changing global economic conditions and transforming its countries into more self-sufficient economies posing stronger internal markets. It may be that the region hasn’t found the sweet spot between the Chicago School’s liberal economics and the likes of Prebisch’s ISI (Import-Substitution Industrialization). In Brazil, the country has focused more, since Lula, in incentivizing industry formation over higher quality, cheaper imports.  This has come at great cost, Brazil’s productivity has stagnated and it’s been debated whether Brazil is experiencing a premature de-industrialization due to these economic policies. Tariffs on car imports are set at 30% showing even higher levies for IT equipment and electronics, creating friction, from countries like Japan, in the WTO (World Trade Organization) which is ironically run by Roberto Azevêdo, a Brazilian.

From these policies, the government hoped automotive companies and tech giants would set up shop in Brazil. In turn though, even after having car companies manufacture cars in-house and taking on Foxconn (Apple IPhone’s manufacturer) car prices are still extremely high. The Toyota Camry sells for R$150,600 (about $60K USD at R$2.52 per $1 USD, 11/22/14) compared to $22,970 USD in the U.S. whereas the contract-free 16-GB IPhone 5s sells for R$2,799 ($1,111 USD)  compared to $549 USD.

The reason for these outstanding prices is that productivity and efficiency get compromised by cornering multinationals into setting up shop nationally in order to get a piece of such a big and attractive middle-class market as Brazil’s. This meddles with efficient-markets where under open economies; companies maximize their profits by manufacturing in low-cost locations like China, in turn, selling more products at lower prices, increasing their gains. This makes several products oddly expensive in Brazil but when these products become tools for business making it increases the companies’ costs stalling productivity and emptying Brazilians’ pockets further.

A post commodities boom in Latam exposes the region’s vulnerabilities. From 2003 to 2010 the region grew on average 5%, whereas it’s expected to grow merely 1.3% this year. Some countries have taken on their internal structural problems like Mexico. The country passed 11 reforms that would benefit the business environment and untapped such coveted markets as the oil and telecom one. Investment is expected to flow in, AT&T is set to acquire Iusacell (the nations third biggest carrier by users) for $2.5 Billion USD, to compete against its former partner, the behemoth, America Movil. But even after passing the constitutional amendments that would expose PEMEX (the sprawling national oil company) to competition and break Slim’s telecom empire (America Movil), there’s still the issue of governability and rule of law that could deter investment confidence due to increased risks.

Another issue for Latin America is the expected normalization of U.S. monetary policy, which recently ended its QE (Quantitative Easing) program which consisted on buying foreign government bonds, injecting money into emerging markets and keeping interest rates at near-zero levels. These favored higher interest (though riskier) markets as Latam’s, receiving a substantial influx of FDI (foreign-direct investment) through investor appetite. But the Fed (U.S. Federal Reserve) is expected to start increasing interest rates after encouraging employment numbers (at 5.8%, the lowest since 2008’s 6%) and positive industry figures. This in turn, could cause a significant drop of FDI in Latam, especially in commodity exporting nations. In fact, we can see that FDI in these countries is already experiencing this drop. It’s important to note that FDI reflects investors’ confidence in the long-term growth and development of nations. Consequently, this drop reflects the slow down of these recently dynamic and thriving economies.

One’s loss is another one’s gain…

Nevertheless, Europe has failed to pick up yet. The country that has championed the European recovery efforts, Germany, is bound to grow a meager 0.1% in this quarter after contracting by the same amount in the last one. Even though it’s widely argued that the government needs to stimulate the economy in order to increase demand due to deflationary risks, Berlin refuses to take action due to excessive budgetary balance orthodoxy. Even though Greece is dipping out of its recession along Spain and Ireland, which is showing strong growth figures, the Eurozone isn’t showing signs of a pronounced recovery (0.6% growth in the third quarter at an annualized rate). In turn, the ECB (European Central Bank) head Mario Draghi, announced the beginning of a stimulus program (QE) while maintaining near-zero level interest rates.

Similarly Japan, which has been trapped in stagnation, recently announced a massive expansion of its already significant stimulus program. The value of the assets the BOJ (Bank of Japan) has bought represents 57% of its GDP whereas the Fed and the ECB have acquired assets valued at 26% and 21% of their GDPs respectively. Japan is dumping Japanese assets for foreign assets in order to weaken the yen, favoring exports and increasing inflation.

The actions The ECB and the BOJ are taking are good news for Latam. It counters the normalization of U.S. monetary policy and gives the developing region some extra time to tackle structural issues. China, on the other hand, just recently cut interest rates for the first time in two years; this could decrease borrowing costs, increase inflation and stimulate the economy. In turn, China could begin sucking in more commodities from the Andean region while increasing value added imports from the more industrialized Latam nations. This could also favor world commodity prices, albeit a little, having a positive impact on the commodity dependent economies.

The current deceleration trend in Latam proves that the region has further things to do in order to take on the path of sustained growth and development. The end of the commodities boom reveals the structural issues the region is yet to address. Latam countries should focus on strengthening their internal markets, integrating supply-chains and focusing on developing value-added production rather than depending on commodities exports. Mexico is a great example of the kind of reforms than need to be made in order to aspire for sustained growth. Notwithstanding, the country’s recent security and political scandals reveal that it’s not an easy task to transform stubborn, cyclic and sometimes regressive economies as Latam’s. There are serious talks of the European Union possibly falling into a “triple-deep” recession. The QE battles between the ECB and the BOJ to further their competing exports, pose a risk of generating an outburst of inflation or creating a new financial bubble. Although this hasn’t materialized, it is worth for Latam heads to ask themselves: Is it worth waiting for another crisis to take on structural reform? The truth is, if there were another financial crisis, some of them might not even survive it…

[ragarza]

The Brazilian Paradox

Last Thursday, the Verdeamarela kicked-off the opening match of the World Cup at the Arena Corinthians in Sao Paulo, Brazil. Beating Croatia 3-1 after a controversial penalty-kick call from the Japanese referee Yuichi Nishimura. Hosting the World Cup in Brazil goes back to 2003 when the FIFA announced that the bidding country to be the host of the 2014 World Cup would be the South American giant, being a second winner as it also got the bid to host the 2016 Olympics.  What was supposed to be an event that projected the Latin American giant into the developed world club has turned into a mere window of the country’s countless social and economic issues.

Announcement of the 2014 World Cup host at the FIFA headquarters in Zurich, Switzerland on October 30, 2007.

In 2006, Lula announced the discovery of the Tupi Oil Field (now Lula Oil Field), the world’s fifth largest off-shore oil field containing 6.5 billion barrels of recoverable oil, enough to cover the world supply for three months at 85 million barrels per day in 2008 levels. Everything about Brazil’s future seemed colorful and promising. Last year when the government opened an auction for the Libra oil field, another deep water pre-sal (beneath a thick layer of salt under the ocean bed) oil field that represented 2013’s most important oil prospect, only one consortium bid for it, which included state oil firm Petrobras. The national oil company is forced by the government to buy a 30% stake of every winning pre-sal bid. This means that Petrobras has to agree with the price, terms and conditions negotiated between the government and the winning consortium. Petrobras has to disregard other projects with higher returns to develop the high-risk, resource-intensive pre-sal oil fields.

Between 2010 and 2011 Brazil averaged a GDP growth of 5.1% a year, the Latin American heavyweight could have challenged the wealthiest nations if it sustained its growth. In the 2012/2013 crop year, Brazil surpassed the U.S., albeit for a brief moment, as the top corn exporter in the world, exporting 22 million tonnes of corn while the U.S. exported 18.58 million. Brazil is also the top coffee producer and exporter and the second soybean exporter in the world behind the US.

With all of these statistics, Brazilians were hyped and forward looking, although inflation picked up to its highest level in 2011 to 6.6%, averaging 6.1% between 2011 and 2013, forcing the Central Bank to set interest rates at double digits. What many politicians didn’t realize was that the observed 2010/2011 growth was but the last glimpse of a commodities boom caused by Chinese demand that helped Brazil grow 4.8% a year on average from 2004 until 2008. It was also sustained by a strong internal consumption market caused by a growing middle class (lifting 40 million people out of poverty in the last decade) powered by the several poverty relief programs, like Fernando Henrique Cardoso’s Bolsa Escola which was later packed by Lula, along with Bolsa Alimentaçao and Cartao Alimentaçao into the popular Bolsa Familia.

Nevertheless, reality bites, China’s (Brazil’s main trading partner) substantial demand for commodities couldn’t be sustained for long and as such, Brazilian growth followed-suit. Inflation wasn’t contained in time either and in turn tightened Brazilian’s pockets, slowing  consumption. Meanwhile, looking forward to the World Cup, the government surpassed its budget for stadium building while failing to meet its investment goals for basic infrastructure projects, shelving key projects such as the high-speed train between Rio de Janeiro and Sao Paolo. This lavish expenditure were the government built 12 stadiums when it could have done with 8, according to FIFA officials, spending $11.5 billion dollars, shoot inflation to ever higher levels which wasn’t accompanied with growth that comes with investment in infrastructure. Brazil grew 1.6% on average between 2012 and 2013 a year and the current growth forecast for 2014 is 1.5% according to the World Bank.

World Bank president, Jim Kim, cuts global growth forecast to 2.8% from 3.2%, with the developing world showing a sub-5% growth outlook for a third year in a row in Washington DC, U.S. on June 10, 2014.

In 2009 the Economist published a special report on Brazil, where Christ the Redeemer appeared shooting-off like a rocket, with the title “Brazil takes off”. In September 2013, the influential British magazine published yet another one with the title “Grounded”, where it reports on the aftermath of the 2010/2011 boom. It gives recommendations on what Brazil should do to kick-start its apparently stalled economy again.

With the World Cup in town and presidential elections coming up in October this year didn’t seem like the time to cut on expenses to Dilma’s administration. Not the least, apply austerity policies that would affect growth in the short-term but cut on inflation to stimulate internal consumption, Brazil’s main growth engine. Brazil’s fate seems uncertain in the short-run but with ever more educated people, being Latin America’s leader in higher-education, Brazilians have proved effective when demanding their rights (after last summer’s protests Dilma announced that oil revenues from the Libra field would go to education and healthcare). It’s only a matter of time until this generation occupies the upper and lower house’s seats. Perhaps the best lesson this generation can take from 2010/2011 is this: In times of abundance it’s better to save (invest) for unpredictable times of scarcity.

[ragarza]

Quid pro quo: Short-term growth vs. structural reforms in Mexico

El Angel, Mexico City

Mexico's anemic growth forecast is yet another sign of a country of "promise" that has chronically failed to deliver. This morning the Undersecretary of Finance Fernando Aportela, announced the secretariat's reduction of Mexico's growth forecast from 3.9% to 2.7%, the biggest reduction in the secretariat's forecasts in Pena Nietos term. This adjustment came as the INEGI (Instituto Nacional de Estadistica y Geografia), the National Statistics Institute, published an estimated 1.8% GDP growth year-on-year this morning. 

The secretariat blames USA's bad weather, which in fact was the 9th snowiest winter in 122 years, that slowed down USA's industrial output having a weaker demand for Mexican primary and secondary products. It also blames a decline in private investment and the recently approved tax-reform which charges a premium for high sugar and calorie content products like sodas and snacks and sets-up a progressive income tax, while normalizing the value added tax rate to 16% at the border from 11% to 16%, among other changes in the fiscal landscape of the country.

Between 2010 and 2012, Mexico had an average growth rate of 4.3% which is very close to its true potential while in 2013 it dropped to a meager 1.1%. This year the country is bound to grow 2.7% as previously stated but it contracted 0.8% in March, calling for a technical recession. It is difficult to wonder how a country, which is expected to eventually surpass Brazil, as stated by Nemura Securities, could change its game that quickly and that bad. It is evident though that public spending last year contracted dramatically, affecting the construction sector even further, having a 10% contraction in public spending in the beginning of Pena Nieto's term, compared to a 3% and 6% increase in in the two previous administrations.

Presentation of the Energy Reform

The rhetoric in the last year and half has all been about how the structural reforms will bring a 5% GDP growth in the second half of Pena's term, but the beginning is just as important as the end. The energy reform is bound to bring 1-2 extra percentile points to GDP growth but if we build on our actual growth rate of 1.8% that would, in actuality bring GDP growth to something between 2.8% and 3.8%, nothing exceptional. Of course, there are positive signs of recovery now having better private investment prospects and better US industrial output expectations as well that could in fact turn tides for Mexico and eventually deliver the so promised 5% GDP growth but as we stated before the country has chronically failed to deliver.

Violence is still an unending cancer in the states of Tamaulipas and Michoacan, where the so called Self Defense groups were born. Recently several public servants such as police men have been killed in public places starting a wave of attacks on officials that the government hasn't been able to stall. In Tamaulipas businesses are closing because of fear of falling victims to extortion and organized crime. The government though has captured several cartel heads being Joaquin "El Chapo" Guzman the most heard of. Nevertheless, violence persists affecting small and medium sized business further in violent-torn states.

The government promises a lot with the structural reforms but the first year and a half of Pena Nieto's administration has been all but exceptional. A dramatic drop in GDP growth following the creation of self defense groups calls for fast government action. The Secretary of Finance dramatically reactivated its spending on January while the Secretary of State sent 8,000 troops and special forces to Michoacan towards the end of March after the state couldn't contain its own violence. This is a moment of uncertainty for Mexico, where the voting for the secondary legislation of the energy reform was pushed to mid-June to coincide with the World Cup and avoid opposition. This coming semester will serve as proof of whether the government is more about deliveries than promises. Let's hope that the former one is true...

[ragarza]

America and Europe

In my experience as an industrial engineering student at one of America's top engineering schools I've gotten to know the country better than ever before. I would describe Americans as curious and accepting people. For me it was just impressing to see the collaborative culture that you can find here. 

Monterrey, Mexico

My hometown is in Monterrey, Mexico. Just two and a half hours away from the border with Texas. Monterrey is the industrial capital of Mexico where many of the big companies are housed. Companies like CEMEX, Vitro, FEMSA, ALFA and Frisa are headquartered in Monterrey. People back at home are known to be straightforward and tough hardworking people. That is a perspective on regios (people from Monterrey) that I pride myself on. In my opinion this is a quality that I believe we share with American's, the straightforwardness. Maybe that's why it didn't take long for me to empathize with Americans. A difference that I experienced though, and a very big one, was when I noticed a clear collaborative culture. Here in the States, whenever you walk towards a door people hold the door for you expecting nothing in return, not even a thank you. If you accidentally bump into somebody the general response is "I'm sorry", even if it wasn't their fault. People respect you for who you are and what you do because they believe that anyone is entitled to do whatever they want if it doesn't bother anybody else. They would selflessly defend somebody else's right of free speech because this is one of the values on which the country was founded.

I'd say the quality that I respect the most about American's is their honesty. I believe from observation that this is the most cherished and practiced value in America. Honesty makes communication smooth and seamless. Even if somebody tells you something displeasing you're actually better off knowing his/her thoughts beforehand, than hanging there with higher expectations. It's also easier to make friends through honesty because you know right off the bat if you're going to understand each other or not. Also, the fact that American's practice honesty everyday makes them strong enough to bear disappointing news.

But America is not all perfect. I've also been fortunate enough to have my fair share of travels around the world in North and South America, in Europe and the Middle East. If you go to Europe you'll be amazed how a country like Switzerland works literally like a Swiss watch. The transportation system is amazing. I traveled there for three weeks and even as a foreigner I didn't have trouble traveling and moving around cities like Interlaken, Basel, Bern, Lucerne and Lausanne. The reason being that they have one of the most efficient transportation systems in the world. You can get anywhere in the city or the country by interconnecting buses and trains that don't delay by literally more that 30 seconds from their scheduled time and they have buses and trains departing every 10 and 30 minutes. You could buy a card with which you could travel as much as you want for a given amount of days. Moving around the country I also noticed how everything was perfectly maintained, even in the outskirts of the city or in the rural areas houses were perfectly neat and painted it seemed as if the quality of life didn't change much or at all if you were in the metro area or in a cow farm. If you put your feet on top of the train couch somebody from the staff would politely ask you to put them down or at least to take your shoes off beforehand. I looked around and noticed how the train was perfectly neat but it wasn't because workers cleaned the trains constantly. You could observe how Swiss felt entitled and owners of these public services. In one of the tours, I don't remember which city it was I think it was Lucerne, I listened to the lady talking over the recording (the tours where self paced and perfectly working, it was amazing) where she said that a certain fountain in front of me had to go through a city referendum before being built there! Could democracy go any further? Swiss count every single Swiss Franc that goes into government expenditures, this is a real representative democracy. The people really run the government. 

This is not something that we could say for America. In the US big corporations are the ones that actually run the government, through heavy lobbying these corporation prompt congressmen to exert policies that favors them, not necessarily the masses. These kind of policies makes it nearly impossible for the government to build trains and efficient public transportation in rural and urban areas, mainly because auto-makers want to keep people running on gas. This, in effect, not only creates big pollution issues but also makes people less healthy. If you go to Europe you'll find it rare to see overweight individuals. People take on the streets walking and even riding bicycles, they not only understand the health benefits of walking or using the bike but the government supports it. In the old continent people don't care much about the trending brand, expensive cars or expensive dining. They care more about a healthy and simple life style. They favor quality over quantity and a good run or a mountain hike over body building. 

In order to understand this cultural divergence we have to go a little bit back. Edward Bernays, the father of public relations and nephew of Sigmund Freud, attempted to apply his uncle's theories to the masses. He understood that people reacted to products and goods not only through an objective or reasonable standpoint but through a subconscious and emotional too. He is credited for being the person who finally got women to smoke in public, overcoming a predating taboo. What he did was that he got a group of women models to light Lucky Strike cigarettes in the middle of the 1929 Easter Parade in New York City. This cigarettes, subconsciously, represented "Torches of Freedom", in consequence he made millions of dollars to tobacco companies by finally acquiring the female market. In the same fashion he worked for Procter & Gamble, CBS, General Electric and the Dodge Company. With the latter one he would device advertising campaigns where women would appear holding the wheel of the career and subtly moaning, this way people would associate buying the car with sex. 

These kind of advertising strategies in the US tailored a population to have consumption behaviors that would only favor the big enterprises. Favoring big cars over public transportation, big meals over healthy paninis and Coca Cola over sparkling water. 

America is strong and its people are determined and witty but it also lets its corporations grow too strong and too big. Having successful enterprises and companies would definitely affect the GDP growth in a positive way and it helps unemployment. Nevertheless, its important to observe how excessive deregulation and lenient anti-monopolistic laws may have some adverse effects on the general public. First off, inequality has been a growing issue in the past decade and not to mention the 2008 housing crisis that was a product of financial deregulation under Reagan. But the US has responded smoothly, the Volcker Rule, devised by former Federal Reserve chairman, Paul Volcker, looks to limit commercial bank's speculative power so that they're not able to speculate with their clients deposits on the bank's account. This he argues, was an important cause to the 2007-2010 financial crisis. This happened while in Europe there was no clear accountability from banks and no significant penalties coming from the union. 

It's difficult to compare the United States and Europe. The old continent has been, for a long time, seen as the "developed world model" for up-and-coming nations and emerging markets. The European Union was, for a long time, perceived as the big success and the future in international trade. But even now Europeans themselves are starting to question the benefits of their own union, England that doesn't even form part of the monetary union is threatening of pulling out if the European Union doesn't reduce itself to just some kind of basic trade union. Germany blames Greece of lavish pre-crisis spending although it was German banks themselves that provided these cheap loans to Greece that made irresponsible spending possible in the first place. Spain, although not in recession anymore has an unemployment rate of approximately 25%. On top of this there are no signs of significant future growth and reduction of unemployment in Europe in general. Being under the same currency limits the European central bank to exert monetary policy that benefits moderately the EU members but doesn't benefit any single country significantly because of the need for consensus in a region with so many different social and economic realities. Maybe Europe would have been better off maintaining all their policies but dismantling the monetary union and using, the dollar, the reserve currency, for their transactions. 

All in all we can argue that maybe Europeans have a higher quality of life but it seems as though it's not getting any better any time soon. Whereas Europe is destined to show sub-par growth and relatively high unemployment in the coming years, US unemployment is already at a 7-year low based on the number of people who filed for unemployment benefits. While America is a capitalist economy where high inequality is inevitable, Europe has more of socialist economy where inequality is significantly low. 

Stockholm, Sweden

More successful within Europe are the Nordic countries (Denmark, Iceland, Finland, Sweden and Norway). These countries pride themselves on being proponents of free-trade and resistors of government intervention to protect even the most sensible industries while offering top educational and healthcare services to their citizens for free. This comes, of course, over heavy tax-burdens that represent among the biggest in the world just below 50% of their GDP's. Sweden for example shows a two-step progressive tax-burden where municipal income-tax starts at 30% and charges an additional high-income tax of 20-25% when reaching the 320,000 SEK mark a year. Poverty rates before tax transfers are 24.4% in Denmark, 32.3% in Finland, 21% in Iceland, 25.7% in Norway, and 27.8% in Sweden, and after tax-transfers they are 6%, 7.3%, 6.4%, 7.5%, and 9.1% in each country respectively.

All in all, probably the bigger question when comparing America with Europe, specifically with Nordic countries, is the following "Are we better off having less super-rich but with a bigger and healthier state-supported middle class or are we better off having the opportunity to become richer beyond our dreams at the expense of the poor?"