Years of Poems and Spirits

Song and I wanted to go to a sunny, warm ocean front to escape from the depressing Seattle winter. We settled on Los Cabos over Hawaii because the it is the rainny season in Hawaii and we thought Cabos, being part of Mexico, would be a cheaper option.

Boy, were we wrong about Cabos being cheap! For a while, I thought I made the right choice when looking around at price tags until I found out they were in … U.S. dollars! A three-mile taxi ride costs $12, car rental starts at $70 a day, the cheapest half-day snorkeling trip is over $100 per person … Even a big Mac costs over $8–more than it does in Seattle!

For a moment, I felt we were trapped: we’ve already committed to a week-long stay. But unless we stayed inside hotel eating cookies everyday, we could easily spend $2000 more than budgetted!

Soon, I realized that there was a reason why everything was so expensive and there was a way out of this bind. The key? One word: timeshare.

Yes, timeshare industry attracts thousands of middle class Americans and Canadians with excess income; Timeshare provides good jobs for the locals; Almost every hotel or resort has a timeshare program; Many locals–street vendors, bartenders, restaurant waiters, taxi drivers, tour guides … are timeshare referrers. In short, Los Cabos is built by timeshare, of timeshare and for timeshare.

To entice people to listen to presentations, timeshare vendors offer deep (between 60%-100%) discounts on almost everything. It is like a currency–you can get vouchers for lodging, food, rental, activities and tours. To us, this means that we either have to pay the inflated price on everything or to earn the equivalant by going to sales presentations. What should we do?

A presentation lasts at least two hours. Because a sales rep gets either 10% or nothing for a day’s work, you will be treated with thousands dollar-worth of intensity. If you fail them, you will be cursed behind your back as though you have stolen thousands of dollars from them. Timeshare sales rep is an unique specimen that lives on anticipation, disappointment, ecstacy and anger everyday.

Still, we chose to earn our vacation. The first presentation lasted over four hours; The second two and half . The last, just over two. As we were getting more fluent at how to say No, the conversation got uglier linearly too.

But we have to: the first one gives us $800 off lodging (from an Expedia quoted $1400) and $200 dinning. The second one gives us almost-free tickets to “Swim with Dolphins” (although I am not a circus-goer–either on land or in water, Song is dying to pat those cute creatures, ohhhh …). The third one gives us free deep-sea fishing trip! A $250/person value! And wait there is more …

If anything, we certainly did as Romans when in Rome, so to speak.

1. Los Cabos: a county/region name because having two towns named Cabo (or cave, lands’s end, or army private?): Cabo San Lucas–where we are staying, and San Jose del Cabo.
2. We saw gray whales puffing and leaping out of water from our hotel room! I thought they are not supposed to be here till late Dec? Thanks to global warming I guess … heyhey, not bad.
3. Local economy: STRANGE!
a. The “invitacion” economy. Timeshare sales dominates and fuels tourism: we got a 60% discount on our hotel stay for listening to a presentation. Although I worked for a timeshare company before, I was still green in the handling pressure sale.
b. The dollar economy. When I pay peso, people frawn on me as if I am the only cash user in the Visa commercial.
c. The stratified/tiered pricing. Locals pay different prices, which is perhaps one tenth of what we pay for food and transportation. An average dinner in a so-so restaurant downtown–not even waterfront, just two dishes with a Margarita, cost us $60!
d. Colonialized economy: full of Gringos shopping in/with Walmart, Costco, McDonalds, Harley Davidson, Hummer, etc. More so than any place I have been to.
4. People we met: mostly old and retired. But met a woman who overheard our conversation and spoke Mandarin back. She can write Sanskrit too! And shared with us on how to get out a presentation: “just tell them, we are here for the cash back and the discount. Sorry for your time, but our time is up.” Ha! We will try that tomorrow.

A business school alum sent us a recent article Greenspan wrote: The Roots of the Mortgage Crisis.

The first image came to my mind after reading is a retiring sheriff defending his legacy before the town descending into anarchy. Among all people, Alan Greenspan perhaps did the most damage to the credit situation. Not that he didn’t have good execuses, but he certainly did not put up a fight. Therefore he shouldn’t have it BOTH ways! Just like what Bob Dole said about John Kerry: he can be a war hero or an antiwar hero. But he can’t be both.

Yes, Greenspan is right to point out that recent growth created so much wealth and anticipation that “there was clearly little the world’s central banks could do to temper this most recent surge in human euphoria.” What he didn’t mention explicitly is that the plethora of financial innovations also created higher leverage and liquidity that money supply directly controlled by CB is only part of the liquidity equation.

However, CBs do have the ability to curb the growth of leverage and liquidity by allowing bubbles to burst, by sending speculative wealth back to ether and by maintaining a proper risk-reward perspective. There are many sources of the increased funding liquidity, some are of good faith based on calculated risk management, some are not–subprime mortgage being one of those. Regardless, the common theme is that there is an unrealistic expectation of market performance. When the market finds out one morning that the expectation cannot be sustained by underlying asset values, everyone goes into panic.

The question then becomes how CB should restore confidence and stablize the market? Should CB let the overshooting market recover by itself or should it infuse large sum of money to backup the failed promise? The argument against the former is that there is a risk of economy-wide slowdown. Against the latter is the problem of moral hazard, or unintentionally rewarding bad behavior.

Greenspan ALWAYS weights the former more than the latter (see Grep Ip’s article, “Bernanke Breaks Greenspan Mold” and my earlier comment). He believes that a wounded financial market will drag down the entire economy. Therefore, at every turn, he didn’t hesitate to feed more money to the market: the 1987 market crash, the Mexico bailout in 1995 and LTCM in 1998. So much so that there is a term coined after him: the Greenspan Put, meaning he always covers the market loss, regardless of why.

However, if one can disprove Greenspan’s assumption that a stock market downturn will hurt economy as a whole, then the moral hazard effect of Greenspan Put suddenly becomes so much more prominent. So what happened since the credit crunch began in summer? Let’s see, there is an upward revision of GDP for the 3rd quarter, the employment rate remains historically low, there is some fluctuation of consumer confidence but no clear downward trend, and most importantly, the most recent purchasing manager survey shows an expanding economy. What is more, who are crying wolf of an upcoming recession? The bankers, the financiers, the home owners who don’t live in their homes and the economists surveyed by WSJ but not those by the Economist.

So far, there is not enough historical evidence to suggest a Siamese Twin-like coupling of financial market and the economy. The most telling example is the Great Depression–an event occured some 70 years ago. But there is eneough evidence to get alarmed about the other side of the argument: that bailing out bad investments sends the wrong signal. In fact, the loud cries heard on the Street may be indictive of a collective cognitive shift of what the investors are entitled to. If that were ever the case, we should all look back at who actually started the shift.

Yes, I am pointing at you, Mr. Greenspan.