Our fundamentals are strong?

Chinese saying: - Lips perish, teeth cold. Meaning - if your lips are destroyed, there are no longer any protection for the teeth.

We live too close to each other. No, not just my neighbouring unit, but the neighbouring countries, and their neighbours, and the neighbours of those neighbours. (What is shortest number of borders one has to pass to go where you are to the furthest country? 3? 4? Other than the landlock ones, most places are just 1 border away by ship) So close in fact, that what they do, affects me, especially when the subject in question is shared, such as food, oil and money.

And so because some people in some far distant neighbourhood got caught playing with money they didnt have (domino numero uno), other neighbourhoods found that they too may be guilty of such, at the very least, in the form of lending to those playing. Now the second (and third and so on) giant domino connected. And the rest is not far away. Well, not all the neighbours are like that. Some are not.

Here, we dont do that kind of playing or lending. And so some people says that we should not be affected. But when some neighbours start losing confidence, retirement benefits, real purchasing power and jobs, they often stop buying new things. When they stop buying things, we have a hard time selling the stuff we produce. If we can sell the stuff we make, we need more warehouses. So the warehouse construction industry is going to save us. No?

We can improve productivity (learn from toyota), ensure high quality, manage the supply chain, cut costs, etc. And see, the bottom line improves because we are now producing more high quality goods at lower costs. After all, our finished goods inventory and other assets are valuable. No? We have to sell it before it becomes real value? Ok, so sell it.

We cant sell? What do you mean we cant sell? They used to buy everything we could make. No one is buying? Why? How can they stop buying? That cant be real! Our fundamentals are strong, our economy is good, we are still growing... They used to buy so many every month. Tell them to continue buying like previously. What do you mean they cant buy?

What do you mean the factory is closing? We are producing very efficiently, high productivity, low costs. What do you mean the employees are retrenched (VSSed or fired, or whatever)? They are working well, just last month the production was record high. We should pay them bonuses for the productivity. What do you mean we have no money? After you sell the products, there will be money. What do you mean there are no buyers?

What do you mean our suppliers are at our doors? Explain to them, this is a temporary situation, come back next week. Did already? Two weeks ago? Go and sell some of the stuff in the warehouse and pay them. What do you mean no one is buying?

What do you mean the banks want to foreclose? We have strong fundamentals, see the factory is so big, so efficient. See the goods in the warehouse? when we sell all of those we can pay the loans plus interest. What do you mean we cant sell?

Perhaps we should rethink what we mean when we say that "our fundamentals are strong". Fundamentals should reflect what is happening at the ground. Taking the manufacturer as an example, let's ask a few naive questions.

1. What does Price and Costs really mean to the bottom line if nothing is sold?

2. Reserves or Cash on hand can only last for so long if you have overheads and expenses. What happens if the prices go up? what is the common way to reduce overheads and expenses? By retrenching, do we improve or reduce our chances for survival?

3. If many are retrenched, how will they buy things? If they dont buy, how do we sell?

4. This one is off-topic - If finished goods consumes raw materials and manpower to produce, shouldnt Finished goods be treated as expenses until someone buys it. If you have finished goods that you think will not be sold and it remains in your balance sheet, is that honest? I know that is what is being practiced. But is it Honest?

I have to say this for the record so that I may be proven right or wrong in the next few months. The whole thing is not going to explode. It has exploded. We are over-reacting in the way typical of the west, by thinking that the explosion is still going on and going to get worse and worse.

Just like the price of oil has no limits from Jan-June 2008, and now (Oct 2008) it is at half the price from July 2008. What I mean is that the worst has happened, it is the aftershocks that we must prepare for. But it aftershocks, not a continuous series explosions.

So we will be down a little, maybe many countries will have recessions. Nevertheless, the world will be all right, perhaps even better because of the cooling down of the overheated economies (especially those driven by trades in non-existent commodities or services).