If Michel Audiard never had the chance to experience the golden age of derivative products, the dialoguist was right on target when he wrote that “two intellectuals sitting down go less far than a brute walking”. Applicable to many aspects of our lives, this cult quote from Maurice Biraud in “Taxi to Tobruk” perfectly sums up the situation of treasurers and company managers when it comes to managing foreign exchange risk. And for good reason: the chronic inaction of certain decision-makers has no consequences in times of peace, but it comes at a high price when economic and geopolitical history takes its course.
Post-anesthesia, the awakening is then brutal. But rather than constantly brooding over past mistakes, it is better to learn the necessary lessons and move forward.
The origins of inaction
Deprived of our full freedom to act by the health measures, have we lost the taste for action? Perhaps. But instead of blaming the pandemic for all our ills, let’s admit that human beings have a natural inclination to do nothing.
“Fight, flight or freeze
Our natural instincts are based on three major defense mechanisms: flight, confrontation and… immobility! In the face of danger, fear cuts off our legs, tautens our muscles, freezes our blood and holds our breath. And for good reason, whether it takes on the guise of procrastination or perfectionism, fear has only one objective: to put off the fateful moment of action.
Health crisis, military conflict, inflation, rising interest rates… In such a tense context, the temptation to bury one’s head in the sand and wait for the bad weather to pass by itself is strong. However, sticking your head in the sand and waiting for better days is rarely enough to get you out of trouble when your competitors are getting their act together and rolling up their sleeves. Companies exposed to the EUR/USD pair and not having implemented the appropriate hedging strategies in time can testify to this. With a fall of almost 20% in 12 months, the damage is simply frightening, both in terms of margins and for employees, business partners and investors…
Finding inspiration
Although many companies have been penalized by the fall of the euro and the surge in energy and commodity prices, some have fortunately managed to pull through thanks to the actions of their managers and treasurers. Neither sheep nor superheroes, these professionals simply knew how to take action with pragmatism, without blindly trusting the crystal ball of their bank advisor, nor playing the apprentice trader in search of the perfect timing. Far from the often epidermal and emotional reactions of the financial markets, this reasoned approach to currency hedging has its roots in the economic fundamentals of the company.
While this “peasant’s common sense”, which is sometimes unfairly mocked by the most arrogant, is not the sexiest, it nevertheless allows the company to get through crises with greater serenity, a necessary condition for sustainable growth.
“It is when the sea recedes that we see those who swim naked”, as the investor Warren Buffet likes to say. Today, with the end of accommodative monetary policies and the return of volatility, the sea is receding.
Perhaps it will rise again. Maybe it will stay that way for a while. Or maybe it will sink even lower. Whatever. Trying to make predictions once again is pointless, better to just cover up… and put on your swimsuit! Looking in the rearview mirror is not a way to predict the future, but it does give you an idea of what’s possible.
Taking a step back, the relative stability of the last few years seems in many respects to be an exception, as currencies, raw materials and energy resources have seen their prices fluctuate with history.
Thanks to the reminder received in the first part of the year, companies have the opportunity to wake up before it is too late and to take the necessary actions to get back on track.
Who would have thought that containment would reach such proportions, that Russian military demonstrations would get so out of hand, and that inflation and interest rates would soar so quickly? Very few people.
Gambling with the future of your business on a roll of the dice is not responsible, especially when 30 minutes is all it takes to take control of your risk management.