Friday 31 October 2014

THE GHOSTLY ECONOMY



Is that it?  Has the bear turned out to nothing more than a cute and cuddly stuffed teddy with a button for a nose and a squeaky tummy?  There’s the All Share index soaring back to 50 000. Last month’s loss of 2.5% seemed to promise that we were in for a good solid October-style walloping. But despite some pretty steep and sharp excursions which must have really scared the day traders, this month’s All Share total return will be pretty much flat; much like the reputation of the pessimistic wing of the investment analyst’s society.  Mind you, the spread between the sectors is huge. The mining indices have been hammered. The Resources index has lost around a fifth of its value in the past three months as the different mining sectors have in turn taken a battering from just about every possible direction including, notoriously, their own government.
Just this week the mines would have been among the major industrial consumers of power who received a call from Eskom instructing them to cut electricity usage by 10%. The magic phrase being thrown about by the utility this time is “outage slips” which is code for “the ratio of engineers to administration staff in this place is way too low”. Naturally the politicians in charge do not appear to have noticed or even remarked on this severe and outlandish impediment to growth.
It also doesn’t help a resource exporter like South Africa that the prices of most commodities both agricultural and mineral are falling. Perhaps the most significant and interesting market at the moment is oil, where a happy and largely unpredicted collision between increasing supply and falling demand has overwhelmed even a powerful producer cartel like OPEC. The oil price is at a four year low in US dollar terms. Since the beginning of the year, oil producers must now sell 30% more barrels of crude oil in order to afford the same amount of gold bullion. Undoubtedly this is having an impact in many decision-making chambers. Pleasingly this is one ratio where SA is on the right side for once. We need less gold to buy the same amount of oil.
We are however not on the right side when it comes to getting people employed The latest official report to reveal this sad and desperate story has and will trigger official reaction and promises “to do more”. These are the same officials and reactions that appeared when the previous report was published and which have had no discernable effect. The sole sensible but rather diffident remarks came from Econometrix, a private sector think tank who suggested that there might be a link between having prescribed minimum wage levels and the number of people being paid those wages. Simple maths, however, is not a strong suite among ideologists.
The postal strike is affording us the opportunity to discover the true cost of getting items delivered. Fees charged by the delighted courier companies offering a replacement service are multiples higher than the price of a stamp. The real debate is not about postal worker’s wages but about the extent to which taxpayers ought to subsidise such a service. It’s a tough one taking place all over the world.
Market forces are indeed savage and indifferent to the needs of an individual or the wishes of a bureaucrat. In the sporting world at the moment there are at least two interesting examples of this. In Formula 1 and in West Indies cricket lethal combinations of regulation and price setting are changing the landscape. This weekend’s Grand Prix in the USA and this summer’s incoming cricket tour are both showing evidence of that.
James Greener
Halloween 2014

Friday 24 October 2014

GONE WEST



A chart of the various JSE sector indices for October so far, resembles a bowl of spaghetti with no emerging trends after the sharp decline last month. Despite the mild panic that broke out last month, it is interesting to note that very few prices have lost more than their gains since April this year. Real bears can wipe out years of work. We have yet to learn if this is a real bear.
Although it is customary to wail about the weak rand, the fact is that our currency is presently at just about its best levels this year against all the major currencies. But not of course against the US dollar which continues to be the beneficiary of some form of “flight to safety”. It’s fair to assume that the dollar’s strength is a consequence of the end of the Federal Reserve’s policy of flooding the market with crisp new notes. In the meantime the foreigner’s cash, after being converted to US dollars, is being loaned to the US government, a conclusion that can be drawn from the rather steep fall in bond yields in that country. Investors now have to be content with a 10 year interest rate of less than 2.25%. It’s hard being a saver in this world.
For some unknown reason, what should be a rather simple and low key mid-year update of the fiscal scorecard has blossomed into a grand event that requires the Finance Minister to buy a new tie and plonk down a 63-page “thud report” (plus annexures) on the parliamentary podium. The main Budget speech is only 4 months away so it seems all quite unnecessary. Only the saddest of economics wonks will wade through this tome which Minister Nene promised was full of strategic frameworks and road maps. The fact is that if the numbers can be trusted, out of every R100 that the government collects it spends about R114. The difference is obviously covered by borrowing and if nothing changes the total debt gets ever larger and people begin to notice and point fingers. The worst fingers belong to the ratings agencies who can at the jab of a keyboard alert the world to what’s going on and cause lenders to be more demanding.
A great deal of airtime and newsprint has been sacrificed on the news that the Minister feels he has no option but to make pips squeak all round. Taxes up and state spending down is the message. Very interesting is the threat to cut off at the knees many of the appallingly run parastatals and even sell off the family silver. The Post Office strike may seem like a picnic when the public service unions get the gist of this one.
Strangely, little seems to be made of the fact that while expenditure is increasing at around 8% pa, the revenue figure is showing almost 11%pa growth, so given time (about 7 years) the gap should close anyway. Presumably real economists have reasons for discarding such a simplistic yet optimistic sum. Nevertheless any attempt to curtail state expenditure – particularly the suspected massive sums lost to corruption and inefficiency -- must be welcomed, and we shall all watch Minister Nene’s new career with interest.
Here in Durban a dozen years ago it was decided that ratepayers, residents and anyone wanting to find their way around the city needed to be punished and seriously inconvenienced for their alleged previous crimes against humanity. The street names of most of the important thoroughfares were changed. While the significance of the new names (like indeed the old ones) is generally unknown to anyone except students of local politics, the nominees probably deserve their recognition. However, a wise authority would have allocated them to new developments and not thrust them onto the existing network. Further, it should be expected that the promoters of the new names will take care to get the details of their heroes correct. But Durban’s main city boulevard now requires yet another set of even longer street signs. Research and custom has revealed that Dr Pixley kaSeme Street should correctly be Dr Pixley ka-Isaka Seme Street. Can’t we just find the old West Street signs? Nobody now recalls if it is named after a local worthy or a merely a compass direction. It really is not offensive and is easy to remember.
I think I can safely wear my Lions cap for the Currie Cup final tomorrow.

James Greener
24th October 2014

BEARING DOWN



The 8% lost by the JSE All Share index is a good start and already there are some who are impatient to be buying again. Be wary though. This bear is probably not nearly finished with us yet. For the JSE market to return to the sort of valuation levels last observed in 2008 or even 2003, the All Share needs to shed at least a further 30% or so, which would take the index to below 35 000. Bears with longer memories can dredge up even harsher events. The market collapse in the mid 1960s took more than a decade to regain the former levels. That these days the markets are so very different is true but not, of course, a guarantee that the unthinkable could not reoccur.
The US Federal Reserve's program of injecting freshly minted cash into the American economy is drawing to a close. Those who managed to reap the biggest benefits from this process (principally the banks) are naturally downcast. However, the individual consumer in the shopping mall and worker in the office or factory hasn’t enjoyed anywhere near all the upside that the keen promoters of this program had predicted. Wal-Mart, that nation’s biggest employer and shopping chain with a turnover that rivals the SA GDP, was this week busy curtailing employee benefits. The technology revolution is conferring prosperity on far fewer people than expected and for most of the planet, living standards are not improving as the politicians and their economic advisors promised. The declining oil price is a very interesting development, which draws attention to the falling demand for many commodities and the resulting price weaknesses. This isn’t at all what was supposed to happen. Expect more and more strident cries for governments to do something. Unfortunately they probably will.
A group of concerned South Africans feel that Number One is doing a really good job and ought not to be pestered with mundane and trivial issues like arranging payment for the multimillion Rand upgrades to his personal home. Accordingly they are going to make the payment for him. National Treasury must be delighted by this news. Firstly, if the muttering of the uncharitable curmudgeons is true, then a possible source of this largesse could be from the earlier overpayments by the state to gravy train passengers. Secondly, monetary gifts to JZ, or indeed anybody, in excess of R100 000 per annum will attract donations tax at a rate of 20%. The national revenue fund is a winner twice over.
A number of people, including deputy president Ramaphosa, who really should know better, have been talking about starting a “State Bank” which will finance projects and people that they, the politicians, think are worthy causes. This is necessary, they say, because the usual lenders, the banks, are reluctant to take on clients selected by politicians in search of a vote. Most of us, including even the fabulously wealthy deputy president have a preference for getting our money back and we are perfectly entitled not to share his view of who or what represents a worthy cause and a good credit risk. Therefore in order to fund itself before lending to its clients, the proposed State Bank will probably have to resort to extracting money with menaces (i.e. taxation). The major benefit of this technique is that it complexly removes all the messy business of managing a liability portfolio and the obligation to pay anything back to depositors and share and bond holders.
It's just as well I ignored medical advice and watched the bokke beat the All Blacks last weekend. The result of that glorious game was undoubtedly superior medicine. As usual the forthcoming final weekend of scheduled Currie Cup games is always prefaced with a blizzard of conditional clauses. Only those skilled in logic can detail the conditions precedent for a Sharks home semi-final. I think they should have just simply lost fewer games earlier in the competition.
James Greener
Friday 10th October 2014.

Friday 3 October 2014

THE RAT CATCHER’S RETURN



This bear is growing up rapidly. Just a couple of weeks old and already he is inflicting some terrible damage and has clawed 7% out of the JSE’s All Share. Furthermore he has brothers who are ripping apart other markets including bonds and commodities both here and overseas. The reasons being offered for this change in attitude by investors are as numerous as they are inventive. A particularly interesting one is the sudden fall from grace of a man who managed the world’s largest bond fund in the US. Somewhat inevitably his market timing luck eventually ran out and the departure of both him and very many investors from that fund is said to be weakening the bond markets globally. Less easy to explain is why the dollar price of gold is weakening so swiftly.
In its current mood the market treats just about every published data point as bearish, no matter that a few weeks ago that same number might have been hailed as wonderful news. Against this trend however was the reaction to the news that almost 61 000 new vehicles were sold last month. Intriguingly rental companies absorbed almost a quarter of them. If they are seeing customer growth why can’t our national airline make money flying people to places to rent those cars?
Probably a number of those new vehicles were minibus taxis being delivered to the Western Cape. In that province fines for traffic related offences, such as unroadworthy vehicles have been raised very substantially. Naturally there has been an outcry about this, with claims that the fines will “cripple” the industry. The method that taxi drivers can use to avoid this painful outcome is obvious. However the news that the province has yet to collect R3bn in unpaid fines suggests that most tickets are utterly ignored anyway.
The slew of data this week included the government’s cash flow numbers which revealed that there is still absolutely no attempt being made to trim expenditure and that out of every R100 the state spends, R17 of that has to be borrowed. While on a personal scale that seems rather uncomfortable, economists have a variety of techniques for disguising this fiscal deficit so that it doesn’t appear all that bad. Great store is put on the fact that the government (unlike the rest of us) has no difficulty repaying loans because if needs be it can simply print the interest and capital money – provided of course they are in rands. Foreign loans are far trickier 
Another data point which was definitely worrisome concerned the so-called trade balance. The good news is that the nation’s appetite for imported goods has stabilised a bit, but the income received for exports has contracted. In aggregate over the past 12 months we received about R187bn less than the imports cost and this figure too is growing steadily. It would be so refreshing if for once politicians joined the dots and noted that their interventions are not working and that it was time to try something different. Like not telling everyone what to do and how to do it.
There are many aspects to the news that Johannesburg wants to introduce owls into areas of their World Class African City to try and control the exploding rat infestation. The first is that the rats must be particularly nasty and unpalatable for if they were not, the owls would long ago have moved in all on their own. Secondly it is disgraceful that the authorities are delinquent in executing this core responsibility of keeping the city clean and free of rubbish. Municipal service is undeniably humdrum and mundane but it is essential which is why the rest of us agree to pay rates and employ someone to do those jobs.
I am so glad I ignored medical advice and watched the final 20 minutes of the Wallaby game last weekend. I’m not sure if there will be an equivalent opportunity to switch on the All Black match tomorrow.
James Greener
World Smile Day 2014