On sustainability

Sustainability is one of those fashionable words, that is often use in a somehow vague concept, void of real meaning. It is usually connoted with a vaguely good intended environmental concern, with little real economic or political meaning. I truly believe this is about to change.

One of the main critics that is being appointed to the US financial system (that is basically now on the verge of something close to a collapse) is it’s short sightness. The major argument is that over the last few years, the investors have been more concerned with the immediate annual (and quarter) results of a company, than with its capacity to achieve its objectives steadily, year after year. That a big revenue in a year would be more important than a substantially lower income, achieved on a more (lets start using the word) sustainable way. This is natural – if a company would show any sign that it would not perform accordingly with our expectancy of a high income, we could shift our investment to another one that would. More importantly, we could scavenge a company of its resources to ensure that annual high income, and then shift our money accordingly to a similar one – and we could do this year after year.

The point is, on a given moment (and it seems this is it), the company’s urgency to ensure the annual figures would implode. That the companies would no longer be able to ensure those high demanded dividend and share price gains, because they had eroded their investment capability, by shifting money from sustainable long-term revenue construction to immediate results and stakeholders profits. This, with the shareholders complacency, shown through huge bonuses and prizes to top management, and regulatory agencies and companies ‘amen’.

I truly believe this is really about to change. At least for the next years, I believe we will all be able to learn from our mistakes on this issue, and build a capitalism that is a lot purer – we all have learnt in college that every share price incorporates not only immediate gains, but also the expectancy of futures gains, through ‘sustainable’ management practices. We have forgotten about that, blinded by the light of huge profits right on the next quarter. But I think we will learn the lesson, that for long-term gains on a limited resources economy (like any), we should put investment on creating real assets first, in order to gain economic sustainability.

On Deco Boycott

It comes to no surprise that Deco (the major Portuguese consumer association) is calling for a boycott on gas, during the next few days. It is a natural reaction, on the face of the latest developments on gas prices (see … for a quick analysis). Still, its effect shall probably be very limited:

- The refered boycott, is scheduled to take place only on Saturday. So it will have a very limited effect on major gas companies’ revenues. The income that will not happen on Saturday will simply move forward to Sunday or anticipated to Friday;

- That comes as, essentially, there is no real alternative to gas in the Portuguese individual transportation market. People move essentially by car, and I would say that 99.9% of all cars have gas as their main source of fuel and power. So, again, if you use it but don’t buy it to restock of fuel, you will simply do it on another day. And consumers can’t expect to extend the protest, because gas is nowadays a first need good so… people will buy it after a (short) while. In the end of the month, this boycott will not affect companies revenues at all;

- And it will not affect the companies, because, they operate essentially in a duopoly. Even if one of the minor competitors launched a price war, trying to enhance on the media attention on it, it would have a limited impact. It is the two big players that count on this war, and we have already seen that they both maximize their profits by shadowing each other moves. So, if Galp doesn’t decrease its prices, then Repsol will not do it neither.

I am not claiming that this will not have an impact on gas prices on the country. Probably, Galp will marginally decrease its prices and Repsol will follow, allowing both sides (gas companies and Deco representing the consumers) can claim victory. But, and again, the only real way to change this comfortable price position from the companies would be to boost competition. And that asks for a clever government intervention, easing fusions between minor players, reconsidering on gas concessions for the two major companies (forcing them to sell stores) or making the market attractive enough for a new player to enter in (not very plausible). If this isn’t done, then the market will keep playing as it is. To maximize revenue and company’s profit by playing at high parity prices.

http://economia.publico.clix.pt/noticia.aspx?id=1343594&idCanal=57

Lender of Last Resort

People are eager to compare the current nowadays economic crisis with the 1929’s Great Depression. Though they are right in a number of issues (but don’t forget, that we are 3 seeing 3 crises interacting together, and not just a ‘bubble implosion’ in the house and stocks market, there is a huge difference in one point.

In the aftermath of the Great Depression, the political power and economic thinkers joined forces, in order to establish a system that would prevent such a huge disaster to happen again. A number of measures were the result of that thinking. And, though the World is facing a very tough moment, it is reassuring to see that this system is really working, and helping us to avoid a major falldown like the one we have seen in the 30’s.

Things like the separation of both banking systems (the investment one and the safes and loans one) is preventing this crisis to really impact on the money people have trusted their banks as deposits – of course the impact is big in terms of investments in risky assets (like structured funds, stocks,…), but the money people put aside as safe is still there for them.

But the major change is that, from the beginning, the State knew it should get a grip on the Economy. Of course there was resistance at the beginning to interfere in the economy - that is not our economic doctrinal. But, after a certain point, there was a generalized believe (and no discussions based on theory) about what should be done. And that intervention was based on the Central Bank, the economy center of all countries economies, the regulator of financial activity, with a role that was much strengthened by Keynes and others thoughts on the aftermath of 1929.

Besides the responsibility of regulating the banks and financial institutions, the Central Bank as 2 powers that are much in hand in a situation like this: act as an insurer of people’s deposits in financial institutions that go bankrupt (ensuring that, even if one’s bank is gone, is money will not entirely be jeopardized) and the ‘Lender of Last Resort’ role. This, that we have seen in action on the last few weeks in a number of occasions (namely in AIG case), means that the Central Bank of a country (this case, the US Central Reserve) will act to lend money of buy troubled institutions, preventing their bankruptcy, their default in the case of financial obligations to other institutions, and thus, stopping the bankruptcies cascade that could follow the falling down of a major institution.

The crisis is deep, and it will take years to overcome. But, thanks the lessons we have learnt from the past, it may not be as painful as before. Still, the task is huge, and from the actions that will be taken in the next few weeks, it will depend its depth and length.


http://economia.publico.clix.pt/noticia.aspx?id=1343470&idCanal=57

2 is usually a simple number

Especially if you studied economics, this is true. Do you remember how 2 dominant players played on a free, low-growing, undifferentiated market?

On a free market dominated by two players, there is only one way to play – this, of course, considering their objective is to maximize revenue and profits! If such a case, then the way to do it is basically mimicking the moves of each other. Never be too audacious or bold, especially if you don’t have any real differentiator. If one of the 2 players is the strongest, then this should dictate market rules, and the other would simply follow. This way guarantees the stability of the market, and higher revenues, through low investment and balance of market share. It is simple, don’t do radical moves, and we will both endure success on this cash cow.

This is something that seems is escaping the comments on the Portuguese consumer gas prices latest moves. The point is, this market is dominated by two players, Galp and Repsol, which really take the bulk of the market – all other players are considerably smaller, non-organized and don’t really have a nationwide strategy behind their moves. Gas is absolutely undifferentiated, a real commodity, that is even sourced out from the same suppliers (Petrogal refineries in Sines and Leça da Palmeira), and marketing efforts have been put behind more on consolidation of position (ensuring consumer loyalty through cards and points programs) than on trial and market share wins. The only major differentiators in this market are localization and… pricing. Though placing is the only investment that really is capable of generating additional revenue, share and margin improvement, it is pricing that is under the spotlight nowadays. That is because consumers don’t realize why, after severe price increases over the last few weeks, now that oil price is tumbling down, gas prices basically sit the same. But the point is… this is 100% at what we should expect, given the circumstances – theory has predicted it 100% sharp.

When you let two players dominate the market, this is the probable outcome. They will play to increase income, minimize investment and assure larger profits. They will reflect supply price increases on end prices to the fullest, and be shier on price decreases. And the second biggest player will always mimic the biggest, with hours or days of delay. It is the way to maximize profit – and it is 100% legal! They don’t need to do cartelization or unruly agreements to get special advantage positions in the market – the market is theirs by nature of play, since they are only two.

The only way to prevent such a rule on the market is not by setting price boundaries like some suggested. Is increasing competition . A third player would unbalance the market, and ensure price competition. The only issue is where to source this third player from, to compete on a small, no-growth, low revenue margin, on the outskirts of Europe…

Why

The first question that arises to my mind is exactly the one written in the title above. Why? Well, the reason is pretty simple. Though I have already some blogs, I feel that those are on a very different mood of what I intend with this one. One of them is a collection of bad jokes on the same word, another one a sarcastic view of the World and the third about how I get rid of stress every week. But this intends to be different. This is where I want to seriously comment on the news that are coming on the press, about the World, but primarily about Portugal. Don’t doubt, this will be about politics, economics and society. And, especially, about my personal views on those.