SPRING 2008: THE ECONOMY?

8 April 2008

Dear Friends,

I’m back. Consider us armchair philosophers exchanging ideas. I’m here to comment on the state of a pair of economies, as seen through the eyes of.... ... ...

As so many, I have been reading the reams of commentary on the US economy. I read what this economist says, and then that one, all the while thinking, no kidding, economics really is a dismal science. And not any too lucid.

The upshot of all this reading, so far anyway, is that there may or may not be a recession but, if there is, in all likelihood it will recede by or during the summer. All this ambiguous language derives of course from the fact that a recession, per se, means very specific economic conditions, the final assessment of which may not be definitive until some point, months from now and the prognostications of which can’t help but wreak havoc.

Meanwhile, here in Nicaragua, exports have grown by 40%, over the past year. Big players are moving steadily forward, the like of Seaside Mariana Spa & Golf Resort are launching with a drop-dead campaign including full-page ads in La Prensa, no less. The industry is hoping/expecting tourism in Nicaragua this year to start growing again after a somewhat lackluster year just past. 

What does it all MEAN? 

I don’t know, I really don’t; and as far as I can tell nobody does. 

All I can do is fall back on my understanding of Business Cycles 101. Setting aside the whole is it a recession or is it a slow-down or is it a correction argument, I ask myself what do I know about the worst of those two cases and is it time to go carry a cocktail into San Juan bay?

One of Latin-America’s most overused clichés is, ‘The Chronicle of a _____ Foretold’. All apologies to Garcia Márquez, to indulge the cliché, then, surely these many months have been the chronicle of a recession foretold...  incessantly. 

What glory it is to have so many 24-hour cable news channels and, maybe, an hour of actual news. (Please see attached.) I am not really suggesting that there are no underlying financial weaknesses, just that had there not been something soon Lou Dobbs’ head would have exploded. 

In light of the fact that there have only been two US recessions in the last twenty-five years, I suppose some hyperventilating should be forgiven but, honestly, it is the turning of an inevitable cycle, is it not? Have we not all been hearing about the extraordinarily lengthy expansion? Does it not follow that if it was extraordinarily lengthy that a contraction still one day would arrive?

Please, don’t think me sanguine about what is at best a period of upheaval, the exact consequences of which cannot be known but, at least to me, there is also the relief of the dropping of the other shoe. Without minimizing the effects of what I hope and expect will be a brief period of adjustment, I am only speaking about our collective investments. 

Piedras y Olas is becoming thoroughly established, the management team is working even better than we had hoped, the last of Phase 2 is well underway, and we have not yet launched Marea Alta. From the perspective of our narrow financial interests, we could hardly have chosen a more advantageous time for this ultimately unavoidable, overdue, and, to the best of my understanding, needed correction. 

A chief concern, naturally, is the unknowable duration of this financial house-cleaning. A retrospective argument is made that it seems it may have started in November or December. By definition, the most optimistic scenario is for a six-month adjustment, or the beginning of a recovery during the second quarter; others say to look for it in the fall. 

Since the mid-eighties and the dawn of the era of increasingly global markets, financial cycles have softened, with milder and less frequent recessions. For what its worth, since the beginning of this period, which economists have dubbed ‘The Great Moderation’, recessions have been more shallow and their average length just eight months. 

I am reluctant to jinx anything but, so far, even after the latest jobs numbers unemployment is still low in historical terms. According to a new poll, 70% of US workers are not afraid of losing their job, encouraging considering the huge role consumer confidence plays in the rapidity of the recovery. 

I know that you may know all of this already but I feel I have a responsibility to give some basis for my interpretation of our current circumstances. Although we are substantially encouraged by the experts’ assurances that, thus far at least, Latin-American markets are not contaminated, our primary market is North America.

I think that those Latin-American economists’ reasoning is illustrative of another point, by the way. Their argument, very simply related, is that it was to Latin-America’s advantage that her institutional investors had relatively low exposure to some of the more volatile new financial instruments. This, in turn, reminds me that it is not the entire US economy that is shaky, but very specific sectors and, critically for the duration and scope of this down-turn, credit is still available to business.

Meanwhile, US exports are strong and set to strengthen further on the back of a weakened dollar, thus addressing to some extent anyway long-term trade imbalances. Again, I am not auditioning for the part of Rosie Scenario, but isn’t all this what is supposed to happen? 

Not everyone will be affected by this downturn in the same way. In a recession, of course, to some extent most people functioning in the economy are or will be affected but clearly, as in the tech bubble, some will suffer greater affects than the economy at large. If we were selling a mass-consumer product, we would be substantially more concerned than we are thus far. 

We have sold out all of our homes in all of Piedras y Olas. At full build-out Marea Alta may have eighty homes and we are very aware of the need to hit one out of the park. What I am seeing tells me that we are about to deliver a grand-slam; wholly original and highly marketable new product. 

We are working with an interdisciplinary team, including architectural designers, architects, engineers, interior designers, landscape architects, garden designers, lighting designers, habitat experts, to re-imagine the Marea Alta homes to deliver a new level of indoor-outdoor flow. I cannot wait to get this on the market, not least because I think it is strong enough to hold up, even in a soft market.

Admittedly, the challenge is not only to sell these properties but also to run them thereafter, a soft economy can slow down tourism and in some ways this could be a greater concern. I have to tell you that as impatient as I ordinarily am to see our tourism market grow, this is one time when I am glad to be in a niche market. 

We still have a small, somewhat more cosmopolitan market than so many of the big destinations, people are not casual about their motivation to visit San Juan del Sur. There cannot be many who see their choices as a Caribbean all-inclusive, a Vegas stay-and-play package, or a week at Piedras y Olas. 

Few stumble across us here: they have reasons to seek us out. We live in a competitive environment to be sure, but our market also is motivated by the specific idea of coming to San Juan and Nicaragua. And I am glad we are not running 500 identical rooms, right next to a row of other, likewise interchangeable, properties. 

You probably know better than I what makes the world go ‘round and have your own perceptions of the current economy. Let me move the focus to our corner of the world. First of course, this is Nicaragua and there are weeks when it is difficult to see where we are on the Two-Steps Forward, One-Step Back Tango. As you are all well aware.

It has to be said, however, that for all we can see the government remains committed to tourism. That is not to say that they always act in a way we understand but, these occasional digressions notwithstanding, they are trying to keep tourism on track for growth. It is important to their plans and they know it, they have to deliver jobs and we are job makers. 

The government is, moreover, periodically distracted by going after its own. The running turf battles between the Sandinista mayor of Managua and the Ortega-Murillo hardcore are exposing some serious intra-party fault lines. At this point, it seems as though the O-M hardcore are developing the CPC cadres as an in-party machine, thus far mainly deployed to consolidate power within the party. Not entirely to the delight of longstanding party regulars. 

Meanwhile the president seems determined to maintain his policy of breathing fire at street meetings and striking deals behind closed doors. At this point the IMF continues to function as combination whipping boy and convenient excuse for minimal fiscal restraint. Our inflation is too high and I am not entirely convinced that they can get it down as fast as the government insist they will, they still don’t have an energy plan, education and health care are a mess. Wait a minute, which country am I talking about, again?

No, I am not honestly comparing Nicaragua to the US, not really, but we have many if not most of the same problems. Some countries have more resources in dealing with them, or buying time, and some countries have a more orderly and consistent process, but it is remarkable how many of the same conversations are going on in both places. I try to remember that when I get exasperated by the local news.

And we take baby steps. We have always taken the long view, our projects last years after all, so when necessary we try to hold steady into the wind. Plus, these days, we have a lot more company.

As you know, I don’t have McKinsey on retainer, so I keep an eye on the guys who can afford to hire economic and market analysts. I take some comfort when I open the newspaper and see a full page photo of some great looking bananas, announcing the coming launch of Seaside Mariana Spa & Golf Resort. And they aren’t alone. I’m lucky to sit beside Lori Estrada of MonteCristo with its designer golf course and development advancing apace as well as Mike Cobb of Gran Pacifica, the largest development in northern Nicaragua, in our developer’s forum. All of us share this enthusiasm.

I know there were reports of people fainting in hotel lobbies and airports at the sight of Seaside Mariana’s golf course designer, some old duffer named Nicklaus. But never mind all that, I have seen La Prensa’s rate card and if they are buying full-page ads, they aren’t kidding.

I have heard a few envious comments regarding the resources being poured into Seaside Mariana. Not me. I absolutely love it. Every dollar they bring to the table, every dollar their research tells them is safe here helps me sleep just a little better and, thank heaven, they are not alone. 

We will be watching every twist and turn like hawks but, for now anyway, life is going on, houses are being built, tourists are arriving and we are about to unveil a terrific new project. And so are others. Every step we all take adds to critical mass, the ads reach further, the web pages are clicked and Nicaragua’s tourist industry is just that much more established, with every passing day.

With spirit, hope and in line with our continuing vision,

Chris