Cedric Wilson, Contributor
Recently, Ricardo Azan, the central figure behind an exclusive private-investment club admitted to the approximately 180 club members that the scheme had crashed. Mr. Azan's club, which required from new entrants a minimum investment of US$25,000, is said to have paid out monthly returns of 40-60 per cent.
Over the last couple of years, these investment clubs have been springing up everywhere. Indeed, these clubs, which operate outside the ambit of the financial regulatory authorities, offer astonishingly high returns to investors. Jamaicans starved of decent real savings rates by the established banking sector seem unable to resist the pull o investment schemes ('alt-schemes'). All the evidence suggests that at least up until the last quarter of 2007, the country was experiencing a bubble.
It is estimated that there are 25 such clubs operating in Jamaica now, and according to a study done by the Caribbean Policy Research Institute (CaPRI), Jamaicans have put approximately $200 billion in them. This is no small change, considering it is more than 30 per cent of the country's annual GDP.
But, the predicament of the people in Mr. Azan's club is not the only one of its kind. Actually, the trouble started back in July last year, when Swiss Cash, a company operating from a website outside of Jamaica, vanished into thin air, leaving investors in tears.
Unable to honour payments
Later, Cash Plus, in November, ran into problems when several banks refused to honour its cheques. Subsequently, Cash Plus, which is believed to have about 46.5 per cent of all funds invested i in Jamaica, has been unable to honour its payments to club members. There are sceptics who argue that the banks' action may have triggered a run on it, but, given the nature of Cash Plus' business, it cannot generate sufficiently high returns to pay the minimum 10 per cent monthly interest to its members over the long term.
Cash Plus apparently pooled the money from its investors and has acquired a range of businesses. These include real estate, telecommunications, shipping and hospitality. Many club members are furious with the banks, but there is no doubt the jitters have set in.
The question, therefore, is, what created th bubble? Undoubtedly, the prospect of making more than 100 per cent returns in a year is extremely attractive, especially in the context of single-digit savings rates and double-digit inflation.
Making these investments is, therefore, not a sign of irrationality. In most cases, people enter with the intention of making a quick killing in the short term, then pulling out. As such, if people in general, stick to this initial objective, chances are either they end up being better off financially, or the scheme collapses earlier.
Herd instinct of investors
What drives the bubble is the herd instinct of investors. Greed and the fear of being left behind are powerful forces capable of setting off a speculative mania. Whenever this occurs, sound decision making evaporates and objectivity surrenders to the instinct of following what everybody else is doing. Buffaloes can be driven over a cliff in a stampede. In a state of panic, the natural instinct of the buffalo is not to raise his head and see where he is going. The primordial force that propels him is the urge to follow the heels of the buffaloes ahead of him. Some Jamaicans over the last year seem to have been caught up in a frenzy o investment.
Another factor which drives the bubble is the illusion of the past. As a guide to the future, human beings tend to assign considerable importance to the past, particularly to the recent past. However, the past is not always a good road map to the future.
Most people are risk averse but there are always a few pioneers. The risk-preferring investors are those who always joi first. But, like any other business have a life cycle: birth, growth, maturity, decline and death.
The risk-preferring pioneers are those who double and triple their investments in a couple of years. The risk-averse players are those who sit back, then, after seeing the experience of the pioneers, are enticed to invest. The mindset is: People have made a fortune in the past, so it will continue in the future. But this is when the scheme has matured, just before it faces decline and death.
This is the illusion of the past and, generally, it is the risk-averse investors that suffer the most. "The gods", it is said "are on the side of the brave." That is if they are not greedy. Look at the fallout among alt-schemes. The biggest losers are those who enter last and the investor who keeps on rolling over his or her investment.
Shored up consumer confidence
Make no mistake about it, thes have, over the last year, shored up consumer confidence. It is amazing what the idea of being wealthy does to people - they spend more, which leads to economic growth. So, even when the stock market was in a deep slumber, the Jamaica Chamber of Commerce's consumer confidence index registered its highest level in 2007. Furthermore, despite a hurricane hit in August, and the price of fuel soaring to unprecedented levels, the economy still grew.
So, has th bubble burst? The latest consumer confidence index shows a fall from the 2007 mid-year level of 163 points to 147.7 points - a nine per cent reduction. Yes, the bubble has contracted but has not been punctured.
Footnote: In my last article (December 16, 2007), I incorrectly stated that T. D. Jakes was the author of The Purpose Driven Life. It is, in fact, Rick Warren. Thanks to my many readers who graciously pointed it out.
Cedric Wilson is an economics consultant who specialises in market regulations. Send your comments to: conoswil@hotmail.com.
