There are a lot of people who are using the above aphorism very loosely. To me, the same words mean some very different things. Last issue, I talked about how we need to learn about the key differences between the Recession/ Slowdown and Depression, why we need to recognize it early, and how our behavior needs to change for the new paradigm.
Declaimer: This article written was originally in December 2009 and some of the data points may be outdated.
how our economic behavior needs to change for the slowdown
In this issue, we talk a little more in detail about how our economic behavior needs to change for the slowdown we are already in. Firstly, we need to understand the meaning of cash.
Cash has many conceptual meanings, the most important of which is that it is an instrument to facilitate the exchange of human behavior. Think about it…it replaces barter and smoothens the search of a buyer for a seller and vice versa. Without going too deep into the theoretical underpinnings of the economic meaning of cash, let us just interpret it for our limited context. When we say “cash is king”, we mean that the focus is shifting back to the real economy.
In ‘normal’ times, the real economy has two components: one, people buy and sell things to each other to meet basic and other needs, like, you know, toothpaste and the like. With this, they get income, part of which is saved. These Savings are invested, and that interaction creates another segment of the economy. That is, there are some people exclusively engaged in savings and investment. They ALSO get income, which is consumed, saved, then invested, creating a closed spiral. This is often a very profitable part of the economy when you deal with another person’s life savings and your income is a proportion of the life savings of others.
Ok, take a deep breath and think about all this. I can’t make it any simpler, other than to say that you have to sell a lot of potatoes to make enough money to buy a house, and the broker makes a commission on the entire value of the house. Now that is a lot of potatoes….
If you make a mistake in valuing the house, you lose a lot of potatoes. So someone makes a lot of money, and if things go wrong, someone loses a lot of potatoes. If some things happen together, and you get a Depression, then that is a huge lot of potatoes lost….
Now let us talk about wealth versus cash.
Now let us talk about wealth versus cash. Wealth is ‘accumulated sweat’, a.k.a. accumulated cash, which is nothing but accumulated (exchangeable) behavior. Now when too much wealth is lost, all at the same time, what do we do?
I don’t know about you, but I go back to the beginning, i.e. behaving very hard, and exchanging that behavior for a new currency now. The best way to think about this is to think like a Zimbabwean, who just got his Zimbabwean $100 mn note. Now he is learning to think of this like you and I think of a Rs.100 note. Just adjust your glasses to see all Rs.100 as Rs.10 and maybe you will get the idea.
I’ll tell you why all this is seeming so difficult. It is because we are all monkeys, unable to think in anything but nominal terms. Mostly, we are tuned into believing that assets are king, which means that our reference point is the amount of cash an asset will bring in. When it brings more cash, we feel we have ‘made money’, with which we can buy more (human) behavior and so we “feel good”. That helps us to go out and spend some cash, which is ‘earned’ by other people and so we keep each other happy.
If you saw all this a little sensibly, you would feel differently. In 1996, when I bought my flat in Delhi, it companies me 1.5 years’ salary, but this was the salary of a middle manager in a Finance company. In 2006, the said flat still companies me 1.5 years’ salary, but this time, it was the salary of the CFO of one of the biggest companies in India. Assuming that there are fewer such CFOs than there were more middle managers of Finance companies, I assumed that I had come up in life. But it had resulted in no improvement in this critical ratio of valuing wealth, telling me that one of these had to be wrong. That is, either I had NOT come up in life, or these valuations were wrong.
So I did not “feel good” in 2006, which is helping me not to feel too bad just now. That is because I shifted from the ‘nominal thinking’ that we are prone to, and shifted to ‘asset payback’, which is the objective of wealth accumulation. Today, with house prices down 50%, I still have the same salary, which means that I have reason to feel rich now.
In the same way, it will help you to value shares. If you still have the same job, the same salary and share prices have dropped 70%, then find a company that will (someday) go back to the same Dec, ’07 valuations that you are referencing yourself to. That would have to be a co that was not part of the mad rallies of that time, which would mean that it can’t be a realty, banking, or infrastructure company. Keep buying and you might find that you are 3 times richer today than you were then…except that you would have to measure your wealth in no of shares and NOT Rs. lacs.
It works the opposite, of course, if you are in debt. I won’t take long over this, because if you are substantially in debt, and we DO see a global Depression, then you can’t afford this magazine for a little while. If the value of cash you have to pay is fixed, and so is the interest, then you simply have to pay much more ‘accumulated sweat’ in a deflating economy. If there are too many people like you (and it seems that is the situation in the US, but NOT in India, because we have such few BPO fools and so many more babies on the way), then we have a Depression. But we won’t have Depression because of what I just said.
So quickly now, which part of the economy should you invest in, if you still have any savings coming in? You go to that part which is still ‘exchanging behavior’, but not dependent on ‘accumulated sweat’, where the company gets its revenues from someone’s wallet rather than someone’s bank account.
And where should you be working? The same place. I make energy-efficient CFL bulbs for a living, so my salary comes from your wallet, every time you go out and buy a Rs.50 bulb. I hope you will keep doing it because you will need light whether you have a job or not, so I hope to survive the recession unless they can find a cheaper CFO, that is.
And what shares do I buy? Every time you buy Maggi or sugar, I get paid. That also comes from your wallet, and I am hoping you will keep buying sugar whether you have a job or not.
If I do enough of this, I will soon be as rich as I was in Dec, ’07, which is more than I can say about a lot of you. In theory, all this sounds very pat; but there are some assumptions. One, that you will keep buying; two, that I will keep my job…
Notice that there is very little talk about money. That is the meaning of “Cash Is King”. It is back to the basics, about jobs, savings, investment, and so on. Like suddenly seeing one zero go out from the notes in your wallet. If your ‘behavior machine’ is intact, don’t worry about the zero.
All this sounds very obtuse, but these ARE difficult times….