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Market digest October


October begins with a lot of heat. According to the media, Iceland in on the brink of political collapse and accusing fingers point at the IMF. Crowds gathered before the parliament, eggs have been thrown around and fires lit. More and more are calling for a vote, although a vote now would probably be a complete disaster with a record-low turnout for any or all of these reasons:

  • Voters have completely lost faith in the political system and see no point in voting.

  • Voters are confused whether to vote for the parties that preceded – and so understood to have orchestrated – the economic collapse or those that succeeded it – and so understood to be orchestrating the collapse of the households.

What ignited this bout of protests: “Directors underscored the need to expedite implementation of the framework and improve incentives for debtors to use it by limiting expectations of further debt relief.” Source: IMF

Based on media coverage, the people of Iceland have lost hope and are now rebelling. The scenario could easily lead to a suspicion that the US credit crunch and the shockwave it sent through the global markets is still in progress. After all, when there’s blood on the streets, buy real estate, right? And when is the price right? When it’s at rock bottom as it happens to be just now! So, why not trigger a public reaction by leading people to believe they will be saved and then pull the safety-net from under them. The IMF appears to have done just that and forced the Icelandic government to play along. These are good times for conspiracy theorists, for in the short-term this kind of scenario is entirely plausible.

In the long-term, however, the argument falls apart. The problem we are dealing with has implications of such magnitude that short-term schemes will not work. Claims are that the Icelandic middle class is being systematically destroyed as the gap between upper class deposits and middle class debt increases. We have not seen the actual data backing that claim up, but we do know that household FX-linked deposits have been around 4.5% of total household deposits since 2003 while household FX-linked loans have been around 11.5% of total household loans. The gap increase may therefore be traced to the collapse of the Icelandic krona (ISK) rather than a coordinated effort made to destroy the middle class.

In August 2010, there were 19 corporate insolvencies compared with 12 in August 2009. The largest number of insolvencies was in Construction.” Statistics Iceland

Destruction of the middle class to enrich the few eventually destroys them as well. Were this to happen in Iceland, it would quickly knock out the retail, tourism and ICT sectors as consumption would plummet. In global context, the outcome would an utter disaster. By enriching themselves, these conspirators would eventually find themselves unable to do much of anything. That is not how our modern markets function. The only way to truly increase wealth is to distribute it strategically. The concept of a handful of elites conspiring to own all the wealth is ludicrous as it backfires almost immediately. What is an investor with a significant stake in an ICT firm more likely to say:

  • I want to make my customers poorer and so drive my business into the ground.”

  • I want my customers financially stronger in order to increase my business.”

A financially weak middle class is not a good way to grow wealth. Less consumer spending leads to less bank turnover which leads to economic shrinking. Following the credit crunch, most economies contracted and are still contracting as debt cannot be paid. There is less capital in the system and the capital present has no idea where to flow to. Iceland’s currency restrictions are still in place and create a wide variety of problems. Caution is necessary, however, as the ISK is extremely volatile.

Disposable income of the household sector has decreased by 5.4% in 2009 from the previous year. Disposable income per capita has decreased by 5.3 % from 2008 to 2009 and purchasing power by capita by 15.5%. Households’ total income decreased by 3.2% from 2008 and total expenditure (i.e. property expenditure and current transfers paid) by 0.4% in the same time period.” Statistics Iceland

In this environment, marketers must think strategy. Continuing with the ICT investor, if the company’s target audience are teenagers and young adults, the majority of the workforce should be teenagers and young adults. The reasons are increased target segment spending. Consider this scenario:

ICT A and ICT B both target teenagers and young adults. The companies identical with the exception that 5% of ICT A’s workforce belongs to that age group against ICT B’s 25%. ICT B can offer personnel discounts that extend to their families and save on advertising while ICT A does not have the critical mass needed to effectively penetrate the market using the same method. ICT B has the strategic advantage that it can further exploit in a wide variety of ways without placing a single ad.

Some might say that the advertising sector might collapse, but these methods only work in conjunction with regular marketing activities. The objective is to strengthen the company’s financial position and in order to do so, market share is essential. The cost of getting the target market share, however, does not have to be exorbitant. Continued use of 2006 – 8 methods is potentially dangerous. It only takes a minor event for a sharp contraction in consumption to occur and inventories are risky. These are good times for marketers to hone their skills.

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