We’re coming in for a hard landing on the economy – sadly it isn’t external events, such as the drop in the price of oil. It is our ingrained habits, learnt over the past decades and difficult to change.
Martin Seligman, a psychiatrist whom I have written about before, coined the term "learnt helplessness". Basically, his analysis started with an experiment in which two groups of dogs were subjected to pain.
One set could stop the pain simply by moving from one area to another. The other set were subjected to pain regardless of what they did. In the end, the latter group simply gave up, lay down and did nothing.
I believe that we suffer from learnt hopefulness. Whatever happens we, unlike Mr Seligman’s subjects, have been rewarded.
Well, not we. Some of us. Rewarded how? Through massive liquidity injections into the economy or huge infrastructure projects by governments. The economists’ phrase for this is “moral hazard”. I prefer the Seligman derivative of learnt hopefulness because I do not believe that our problem is a moral one.
At least not this particular problem. It is simply an expectation that the government will generate business for us so that we may make a profit. The second piece of this story is that businesses, especially family businesses, have a strategy of being short gamma.
The quick definition of gamma is that it is the second derivative of the price of one asset with respect to the price of another asset, and being short gamma means that the more prices change the more you lose.
A more useful description is this – if you buy low and sell high then you are long gamma, while if you sell low and buy high then you are short gamma. With this explanation it becomes immediately clear that the intelligent strategy is to be long gamma. So why am I saying that businesses in the region are short gamma? The answer is, once again, psychology. It is why asset bubbles happen. Your typical chief executive is sitting there, minding his own business, running the company. Suddenly the market picks up.
He doesn’t feel that it warrants capital investment to expand capacity, but one of his competitors panics or gets greedy and does expand. Our chief executive is now under pressure from his board for not expanding as well.
So as prices are going up, he expands. This cycle continues until the bubble bursts. So what happens now that prices are rock bottom? Our chief executive downsizes and sells at a loss. Witness the banks.
This is completely the wrong way around. As prices move up, the smart strategy is to build up cash reserves, not investment. As prices move down, then it makes sense to investigate investing to grab market share from overextended competitors.
Back to learnt hopefulness. The best example is the backlash by some to Saudi’s Vision 2030, spearheaded by deputy crown prince Mohammed bin Salman.
Why do I use the word backlash instead of criticism? Well, both have in common the identification of potential issues. Criticism, however, offers viable alternatives. Complaints that do not offer viable alternatives are simply attacks, driven by a mentality of entitlement. The learnt hopefulness goes as follows – I had a certain quality of life, therefore you are responsible to ensure that it stays the same.
Sorry, we are adults, we are responsible for our own welfare. The sooner we do that, the better.
One last thing. The Statistics Centre Abu Dhabi has an interesting infographic. It shows that the contribution to GDP by bank services is minus 4.4 per cent in 2013 and an estimated minus 5.1 per cent in 2014. The banks, when oil was over US$100 per barrel, actually decreased our GDP significantly.
That is what happens when you bail them out with cheap deposits and allow the inhumane practice of criminalising post-dated security cheques. I wonder how much the banks are taxing our GDP now that the oil price has halved? I wonder how many lives have been destroyed by PDCs?
No amount of financial charity contribution will earn you forgiveness for that.
Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com
business@thenational.ae
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