The war of the Isms
by Richard Cluver
The death this month of Britain’s only ever woman prime minister Margaret Thatcher has re-ignited – at least in the public domain – the struggle between the two great isms of the 20th Century; Capitalism and Socialism that among their protagonists still remains largely unresolved.
The intense anger that was evident between adherents of these opposing groupings was very evident in the crowds that turned out to watch the funeral procession. And it was very difficult not to sympathise with both sides for both had quite genuine and deeply-felt reasons for their views.
For the supporters of Capitalism, Margaret Thatcher came to power in the nick of time. Trade Unions had all but crippled the British economy with a succession of strikes that had driven workers wages to such high levels that Britain’s (state owned) coal mining and steel industries had become massively uneconomic and were proving an unsustainable drain upon the economy.
Maggie Thatcher subjected Britain to a tough winter of coal shortages and power outages as she faced down the unions and initiated the closure of coal pits and steel works, arguing that the British taxpayer could no longer afford these industries when both coal and steel could be sourced far more cheaply in the international markets.
Now the long-term reality is that the miners, steel workers etc who were unable to find alternative work when loss-making industries closed down, went onto the dole and thus remained a costly burden upon the State. Thus it is argued with some force by socialist-inclined thinkers that Thatcherism stripped such people of the dignity of work without removing the cost to the taxpayer. And indeed the fact that Britain’s national debt has now climbed to 73.5 percent of that country’s Gross Domestic Product would seem to imply that the socialist argument is correct. But if you pause to consider the graph below, you will note that the national debt fell steadily during the Thatcher years. Most of the subsequent increase can be attributed to the era of Labour Party rule. Thatcher’s Conservative Party came to power in 1979 and her leadership ended in 1990, the year when Britain’s national debt reached its lowest point
One additional reason why the national debt declined under Maggie Thatcher was that she put a cap on the dole. As in this country, beneficiaries were only able to receive the dole in proportion to the years they had contributed to unemployment insurance and, of course this bitterly compounded the division between Socialists and Conservatives. Only under subsequent Labour government was a new unsustainability created which has made it possible for generations of folk to live permanently on the dole…..and as a consequence Britain’s debt on a per-capita basis has soared to become the third highest in the world.
The UK national debt is defined as the total amount of money the British government owes to the private sector and other purchasers of UK gilts. But that is not the entire story. The more telling one is Gross government debt which includes public sector debt plus some government liabilities, social security funds, and local government debt. Adding all of these together has, at the latest count, taken Britain’s gross government debt to £1,412-billion or 90.3% of GDP. And note, that is Britain’s calculation. The CIA has an entirely different figure which puts British total external debt at 400% of GDP or an astounding $144 338 per capita. At that rate, if World Bank estimates of per capita income are correct, if every British resident devoted his or her entire income to repaying the debt it would take four years to pay it off.
In stark contrast South Africa’s total external debt amounts to per capita $1 613 and if every South African were to devote his or her income to paying it off it would take just over one month.
Although 73% of GDP is a lot and 90.3 is a lot more considering the view of many economists that when national debt climbs above approximately 70% it becomes completely unsustainable because the cost of servicing it then exceeds the ability of governments to raise sufficient in taxes, it is worth bearing in mind that other countries have a much bigger problem. Japan for example has by its measure a national debt of 225%, Italy is over 100% while the US national debt is close to 75% of GDP. Also the UK has had much higher national debt in the past. In the late 1940s, UK debt was over 180% of GDP and it had been largely repaid by the end of Maggie Thatcher’s reign.
Ranked below in terms of their total external debt according to America’s CIA, Britains is now among the world’s worst basket cases with total indebtedness equal to 400 percent of GDP. For interest sake, the same agency lists South Africa in position 43 with a total external debt of $80 520 000 000 which is equal to $1 613 per capita.
Now, notwithstanding the relative hardship that ordinary people everywhere have had to endure since the economic crisis began in 2007, there is NO light at the end of the tunnel. In fact the outlook for countries like Britain is worsening by the day because indebted nations are continuing to pile fresh debt upon their already unsustainable mountains of misery as their governments continue to fund their operations with borrowed money. The best they have managed to do to date is reduce the extent to which they have been creating new debt as illustrated by the British example below:
As can be clearly seen above, in only five of the past 38 years has the British Government achieved a budget surplus. In the graph below you can see that the US managed a surplus in four of the past 33 years but, note in both the graphs below and above how massively both governments have swelled their deficits in the past few years.
Now as anyone who has ever been in debt will attest, borrowing is easy but paying back what you borrowed is a long and painful process. And really the only difference between family and government finances is a matter of scale. While debtors can provide convincing arguments about the needs of family members in order to justify getting into debt, governments are just as adept at it.
Thus the divide between Capitalists and Socialists comes down to a simple debate about whether mankind should be collectively held responsible for the welfare of a category of people who, while physically and mentally capable of normal employment, choose not to work. Clearly some degree of public welfare needs to be provided by governments to assist those who through physical or mental incapacity cannot fend for themselves, but surely a line needs to be drawn between how much welfare is affordable and what politicians deem to be vote-winning promises.
I know this is an oversimplification in an era when so many would-be workers are unemployed but the sorry fact is that socialist thinking is largely to blame for the fact that global unemployment is a major problem today.
Consider first of all the fact that so much is drained out of the global economy by Western governments in order to fund social benefits that in normal circumstances there would be very little available to fuel entrepreneurship, research and the expansion of manufacturing plants were it not for the fact that central banks are currently printing money as fast as they can in a vain attempt to avoid the probability of a world depression.
Research has repeatedly demonstrated that entrepreneurship and small business are the only really effective creators of sustainable employment. Governments can of course create jobs. The example is often cited of people being employed to dig holes and others being employed to fill them in again; an example that serves to illustrate the fact that civil servants do not create wealth for a country. Indeed in cases like South Africa where per capita our rate of public sector employment is something like twice the average of the Developing World and where salaries are on average 40 percent greater than the private sector average, government can be shown to be depriving the private sector of many of our most skilled people.
While the world’s current problems are wrongly blamed on irresponsible derivative speculation by private banks which came unstuck in the 2007 sub-prime mortgage crisis, the real cause of our global woes is the massive indebtedness of nations of which I have listed a few above. True, the efforts to the US and British governments to rescue banks deemed too big to fail, probably proved to be the final tipping point. But sooner rather than later this massive global government debt was going to push the world into recession/depression regardless of what the private banks did.
Ostensibly the central banks of the major nations are printing money in the hope of stimulating consumer demand which in turn, it is fondly hoped, will inspire the private sector to expand and employ more workers. The truth is a little less palatable: by printing money they are keeping interest rates low which lessens the burden of the interest they have to pay on their borrowings. More to the point, when a nation increases its money supply without simultaneously increasing its asset base, the result is monetary inflation. Simply stated, if inflation erodes the real value of money, nations whose money is so debased will have their sovereign debt effectively reduced in real terms.
The effectiveness of this effort in respect of US borrowings from its biggest creditor, China, is illustrated below. Since the 2007 crisis the US dollar has lost a quarter of its value relative to the Chinese Yuan. Measure that against total US indebtedness and one might argue that US Federal Reserve Governor Ben Bernanke has saved his government some 3.575-trillion dollars.
One can see the average US citizen applauding such action until they pause and reflect upon the fact that their life savings have been decimated on the same scale. The same applies to the average British person – see the graph below – who, having worked hard all their lives and accumulated a nest egg on which they hoped to enjoy a comfortable retirement, have seen their money decimated over the past five years during which the buying power of the Pound fell by a third from 13.94 Yuan to 9.44 Yuan. And the bad news is it will continue falling until such time as Britain has found a way of paying off its monstrous debt.
And it cannot end there. To date these currency devaluations only affect the price that British and US consumers have to pay for goods manufactured in China and imported into their respective countries. But the effect is cumulative and soon it will emerge as a global inflation problem of ever-growing proportions even for those who had nothing to do with the cause of the problem. Take South Africa for example. Initially the money presses did not affect us, but two years ago the Rand began to take strain. So in April 2011 you needed 1.01163 Rands to buy one Chinese Yuan. This month you needed R1.50731 to buy the same value of Chinese goods. That, in round terms, is 50% more than you paid just two years ago.
If you had begun to think those “cheap” Chinese goods in our clothing stores were no longer so cheap as you remembered them, that is the reason!
A century-long experiment with socialism is rapidly coming to an end. Whether it is ethically or morally desirable or not, the collapse of the system is now inevitable. It is simply a matter of time before the world’s monetary system bursts at the seams. Hopefully sanity will prevail before this apocalyptic event ushers in social chaos…the ultimate blood on the streets nightmare
Heard about the Bitcoin?
BITCOIN, the world’s “first decentralised digital currency”, was launched in 2009 by a mysterious person (or persons) known only by the pseudonym Satoshi Nakamoto. It has been in the news this week as the value of an individual Bitcoin, which was just $20 at the beginning of February, hit record highs above $250, before falling abruptly to below $150 on April 11th. What exactly is Bitcoin, and how does it work?
Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21m. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.
The entire network is used to monitor and verify both the creation of new Bitcoins through mining, and the transfer of Bitcoins between users. A log is collectively maintained of all transactions, with every new transaction broadcast across the Bitcoin network. Participating machines communicate to create and agree on updates to the official log. This process, which is computationally intensive, is in fact the process used to mine Bitcoins: roughly every 10 minutes, a user whose updates to the log have been approved by the network is awarded a fixed number (currently 25) of new Bitcoins. This has prompted Bitcoin fans to build powerful computers, or even to hijack other people’s computers, for use in Bitcoin mining.
Bitcoins (or fractions of Bitcoins known as satoshis) can be bought and sold in return for traditional currency on several exchanges, and can also be directly transferred across the internet from one user to another using appropriate software. This makes Bitcoin a potentially attractive currency in which to settle international transactions, without messing around with bank charges or exchange rates. Some internet services (such as web hosting and online gambling) can be paid for using Bitcoin. The complexity and opacity of the system means it also appeals to those with more nefarious purposes in mind, such as money laundering or paying for illegal drugs. But most people will be reluctant to adopt Bitcoin while the software required to use it remains so complex, and the value of an individual Bitcoin is so volatile. Just as BitTorrent was not the first file-sharing service and Skype was not the first voice-over-internet service, it may be that Bitcoin will be a pioneer in the field of virtual currencies, but will be overshadowed by an easier-to-use rival.
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Bitcoin May Be the Global Economy’s Last Safe Haven
By Paul Ford
One of the oddest bits of news to emerge from the economic collapse of Cyprus is a corresponding rise in the value of Bitcoin, the Internet’s favorite, media-friendly, anarchist crypto-currency. In Spain, Google searches for “Bitcoin” and downloads of Bitcoin apps soared. The value of a Bitcoin went up to $78. Someone put out a press release promising a Bitcoin ATM in Cyprus. Far away, in Canada, a man said he’d sell his house for BTC5,362.
Bitcoin was created in 2009 by a pseudonymous hacker who calls him or herself Satoshi Nakamoto (and who might be several people). It’s a form of virtual cash used to buy goods and services online. Even by Web standards, it’s a strange and supergeeky phenomenon. This is what happens when software and networks meet the concept of currency, when you take peer-to-peer networks and advanced cryptography and ask, “How can I make a new economy?”
There are 10,952,975 Bitcoins in circulation. (With a digital currency you can be specific.) Bitcoin isn’t about to replace hard currency—with a market cap of $864 million, all of it is worth less than what Facebook paid for Instagram—but it’s bigger than anyone expected. And many people will tell you that the emergence of a virtual global money supply beyond the reach and control of any government is very real and that it’s time we take it seriously. As long as the Internet remains turned on, Bitcoin will be there—to its adherents, it’s the Platonic currency.
A dollar bill has a serial number and travels from buyer to seller. A Bitcoin’s not so much a thing as an understanding, a balance in a decentralized general ledger, or “account log.” Bitcoins are created as the side effect of a great deal of meaningless computational work. That is, the computer could be working on protein-folding, or processing images, or doing something else with its time, but instead it’s being used to “mine” Bitcoins—searching for mathematical needles in a networked haystack. Once the needle is found, a “block” of Bitcoins is born. Bitcoins live in a bit of software known as your “wallet.”
How did they get there? Perhaps you minted them by mining, or bought them on an exchange, or received them as part of a barter transaction. Now those Bitcoins are burning a bithole in your bitpocket, and you want to buy something. How do you spend them? Clicking around your wallet app, you set up a payment and put in the Bitcoin address of the recipient—something memorable and fun, like 1Ns17iag9jJgTHD1VXjvLCEnZuQ3rJDE9L. A few minutes later, after the peer-to-peer network has authorized the transaction as legitimate, the recipient’s wallet, wherever it is, will show that you’ve paid up.
How is this different from PayPal? In theory anyone could run his own version of PayPal on a server and use that to transfer funds between parties. But he’d also need to handle world currencies, deal with security, and handle regulations. Similarly, physical banks promise protections above and beyond stuffing cash in a mattress or dropping it off in paper bags. Financial institutions commodify trust—it’s not their money, after all. It’s yours. Yet you trust them more than you trust yourself.
Bitcoin shrugs all this off. It’s not pegged to anything, and there are no regulations. It’s a supercomputer-size chore to counterfeit. The key thing to understand is that there’s no bank, no Federal Reserve, in the middle. It’s not unlike an exchange-traded fund (for example, FORX, from Pimco)—a mix of non-U.S. currencies—designed as a hedge against the dollar. Bitcoin is a hedge against the entire global currency system. And no exchange is needed, unless you want to convert your Bitcoin into an actual hard currency.
Bitcoin is no more arbitrary than derivatives or credit default swaps. Given that regular folks, if they’re nerdy and interested in Bitcoins, can use the currency for all manner of things, including illegal things, it’s arguably a far less arbitrary instrument.
Maybe Bitcoin’s devotees are right, and it’s the currency of the future. Or perhaps it’s a ridiculous joke—a speculative, hilarious enterprise taken to its most insane conclusion. Given that the founder is nowhere to be found, it feels like a hoax, a parody of the global economy. That the technology used to implement it has, so far, shown itself to be impeccable and completely functional, and that it’s actually being exchanged, just makes it a better joke. The truth is, it doesn’t much matter if it’s a joke or not. It works.
The Internet is a big fan of the worst-possible-thing. Many people thought Twitter was the worst possible way for people to communicate, little more than discourse abbreviated into tiny little chunks; Facebook was a horrible way to experience human relationships, commodifying them into a list of friends whom one pokes. The Arab Spring changed the story somewhat. (BuzzFeed is another example—let them eat cat pictures.) One recipe for Internet success seems to be this: Start at the bottom, at the most awful, ridiculous, essential idea, and own it. Promote it breathlessly, until you’re acquired or you take over the world. Bitcoin is playing out in a similar way. It asks its users to forget about central banking in the same way Steve Jobs asked iPhone users to forget about the mouse.
I have an intense memory from the early 1990s, when I was just out of college. I was seated alone in a diner. Suddenly a loud man behind me pronounced, “Internet time is like regular time but seven times faster.” I turned around to see a well-dressed adult, a serious person. I was mystified. How could he believe something so facile and arbitrary? On and on he went, expounding on the magical number seven.
Having been through one or two bubbles, I’ve learned that people can believe exactly what they want to believe. That’s one of the privileges of being a human with money to spend. When you compound utopian wishfulness with the anxiety of being left behind, you’ll have a bubble. Then again, we may be at the forefront of the coming Bitcoin revolution. There’s no way to be sure. I’ll admit to having run the Bitcoin mining software a few years ago for a week until I became convinced it was a poor use of limited computer resources. I had work to do. I expected Bitcoins to remain in the background with all of the other anarchist crypto-chatter that makes up an essential substratum of modern network thinking.
But Bitcoins didn’t go away. And I’m increasingly convinced there’s one thing that Bitcoins do that’s genuinely interesting. They decentralize trust. Trust is hard to earn; verifying transactions is a brutal problem, which is why PayPal locks down your account when there’s too much money flowing into it. Creating trust is traditionally the work of federal governments and branding agencies. Trust is also an easy thing to squander. Just close a beloved service, à la Google Reader. Or allow your banks to fail, causing an entire country to suddenly realize that the value of their deposits, the fundamental integrity of their financial selves, was arbitrary all along.
Along comes Bitcoin, a currency in which every transaction is stored by the entire network and every coin has its own story. There’s nothing to trust but math. Suddenly an idea that sounded terrible—a totally decentralized currency without a central authority, where semi-anonymous parties exchange meaningless tokens—becomes almost comforting, a source of power and authority.
That’s where Bitcoin thrives: where people would prefer to throw in their lot with anonymous strangers instead of the world economy. It’s gold-bug thinking reinvented for an age of fluid transparency and instantaneous transactions. And as such it’s an excellent indicator of anxiety. Where you see Bitcoins in action you find a weird and heady mix of speculative angst, a fear of being left behind, and people who appear to have lost faith in institutions, who feel most left behind. These are people who’ll trade in purely arbitrary tokens, willing to forgo the comfort of banking systems for the weight of mathematics and the Internet behind it.
Bitcoin isn’t tied to any commodity—besides trust. As a statement on the global economy, Bitcoin is hilarious. As a currency for the disenfranchised and distrustful, it’s as serious as can be.
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THE 10-Minute Millionaire
By Richard Cluver
Tailoring an investment plan to your personal needs
Month by month in this column I have detailed the case for choosing shares in “Investment Grade” companies as the optimum method of building an investment portfolio.
I define investment grade companies as those which year-by-year over a minimum period of five successive years have achieved steadily-increasing corporate earnings and, more importantly, have been loyal to their shareholders by providing them with steadily increasing dividend pay-outs over the years.
In recent issues of The Investor I have explained how such companies might be classified into six distinct categories ranging up in risk from the safest “Grand Old Favourites” which are ideally suited to the investment needs of pensioners, widows and orphans who require the safest possible investment. At the other end of the scale lie the Rising Stars and the Maverick Market Leaders; categories of companies which are usually vigorously-growing but are often young start-ups that lack the depth of management skills and capital resources of the big old blue chips. So, before you can start choosing shares for an investment portfolio, you need a clear understanding of your own investment needs.
A brief explanation is necessary here. Consider, on one hand the requirements of a young person who is just starting out in life and is seeking to achieve a capital sum with which to fund the eventual purchase of a home and, in the far distant future ensure a comfortable retirement. He can afford to take considerable risk in the search for high gains because a nest egg loss at this stage can relatively easily be replaced with patient saving. Contrast this with a relatively elderly person who is retired with an inadequate pension and a small lump sum from the sale of his home. His need is to grow his investment income as rapidly as possible but without taking any risks for it would be extremely difficult for him to rebuild his capital should he suffer a major loss.
Clearly there is a vast chasm between these two individuals just as there is between the cash-strapped pensioner I have just mentioned and the wealthy retiree whose income is vastly greater than his physical needs and who can accordingly afford to commit some of his capital to risk for the sheer fun of being involved. I dealt in some detail with these issues in pages 143 to 156 of my book The Philosophy of Wealth ISBN No 0 9583067 6 1 and do not intend to re-visit the issue so extensively here.
Clearly however, some categories of investors require high degrees of investment security in return for which they are prepared to accept lower than average market returns while, at the other end of the spectrum there are others whose overwhelming priority is to grow their wealth and who are both able and prepared to shoulder far greater degrees of risk in order to obtain this objective. Somewhere between these extremes lies every single investor and if you are intending to go it alone as an investor you need to make an accurate assessment of your position on this risk/reward scale. Furthermore you need to make regular annual assessments of this position as you progress through life lest you unthinkingly at age 60 take the same sorts of risks that you did at 20 and as a result find yourself suddenly staring bankruptcy in the face with little or no means of rebuilding your fortunes in the few active working years left to you.
Users of the ShareFinder computer programme have a built in Portfolio Builder which takes into account the very different needs of the young investor who is just starting out on the road to wealth creation, the pensioner who needs security and a reliable income growth rate, the middle-aged entrepreneur with loads of cash who would like to plan an early retirement and many other variations in between. I will return to the subject of matching portfolios to your needs at a later stage in this series. Meanwhile, however, for those who want to go it alone, it is important for us to now concentrate upon the issues of security versus capital growth versus income growth.
Traditionally the safest investment of all is termed “Sovereign Debt,” borrowings by sovereign states with which to fund major infrastructure developments. Thus, for example, there can be no safer investment in South Africa than a debt guaranteed by the fiscus; in other words by all South African taxpayers. However, it is an issue that has recently come into sharp focus because of the deep indebtedness of many governments and the very real concerns of world-acclaimed economists that even some of the leading nations like Britain and America could be headed for a situation where the sum of all their tax revenue might be insufficient to meet the interest payments upon their debts.
However inconceivable it might seem, many world-renowned economists are in fact warning that Sovereign Debt might no longer be the safest investment or all and this has already proved to be the case in respect of debts raised by the Greek government.
But surely such concerns cannot be raised about the borrowings of the world’s great nations like the USA, Britain, France and Germany? Well let us consider the American example currently. The sovereign debt of the USA, that is the Federal debt expressed as a share of the nation’s income, has varied down the years and with it the “risk premium” required by lenders. Historically, the US has run up deficits during wars and recessions, but the debt has subsequently declined. For example, in 1945 debt as a share of the economy peaked just after World War II at 112.7% of US gross domestic product (GDP). Subsequently it fell to a low of 30 percent in the late 1970s as the US Government gradually repaid its debts.
In recent years, however, sharp increases in deficits and the resulting increases in debt have led to heightened concern about the long-term sustainability of the federal government’s fiscal policies. As of March 2012, debt held by the public was $10.85 trillion or approximately 70% of GDP, while the intragovernmental debt was $4.74 trillion or approximately 30% of GDP. These two amounts comprise the national debt of $15.6 trillion, roughly 100% of GDP.
The public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010. As of February 2012, $5.1 trillion or approximately 50% of the debt held by the public was owned by foreign investors, the largest of which were China and Japan at just over $1 trillion each. Economists, moreover, argue that this figure is considerably undercounted because it ignores an actuarial measurement of the future cost of such items as the US national health service and state welfare costs which, if correctly counted, could take the ratio to nearly 200 percent.
Similar concerns have been raised about Britain and a number of other leading nations where weak governments have successively given in to the demands of their electorate for steadily-increasing levels of welfare spending which have been funded by borrowing rather than from annual tax revenue. These concerns have led to the rise of the ratings agencies, organisations committed to the task of judging the ability of borrowers to meet their debt obligations. The big three agencies are Fitch, Moody’s and Standard & Poors. What they do is assess how likely a borrower is to be able to repay its debts and help those trading debt contracts in the secondary market such as Treasury Bonds to assess a fair price.
It is thus a supreme irony that by contrast with the US, South Africa’s total borrowings represent just 35.6 percent of our GDP, a level of indebtedness that we share with Australia. Ironically then the US ratings agency Moodys rates South African sovereign debt as A3, and the outlook as “Negative” while it rates the US as Aaa and outlook negative, the same as deeply troubled Italy. But the crunch comes when you enter the marketplace to buy a long-dated US treasury bond. An investment in a US long-bond would at the time of writing yield you interest of just 1.86 percent while South Africa’s equivalent RSA 157 long bond would yield you a three and as half times greater 6.365 percent.
All other South African borrowing rates are a reflection of this difference. Thus in South Africa the Reserve Bank sets the scale of all interest charges by declaring a Repo Rate of 5.5 percent, the rate at which it lends money as a last resort to the commercial banks. The interest rate that commercial banks charge their most creditworthy customers is always considerably higher than the Repo rate and is currently 9 percent. In contrast the US prime lending rate is less than a third of our prime rate at just 3.25 percent and the implication of all of this is that, notwithstanding our very good indebtedness situation relative to that of the USA, foreign investors seemingly consider South Africa a far greater lending risk than the US.
How does one make sense of that? Well the core reason is South Africa’s relatively greater inflation rate and the impact of that upon the Rand/Dollar exchange rate. If you lend money to a country experiencing relatively high inflation rates whose currency is consequently weakening over time, you obviously need to recognise that you face the risk of being repaid a lesser amount than you originally loaned…unless of course the debt was raised in US Dollars or British Pounds as if often the case when South Africa seeks to borrow money overseas.
However, taking the example of a US investor who sends his money to this country to buy local bonds, we need to note that inflation in the US is currently running at 2.7 percent while the South African rate is 6 percent and the average for the past 20 years has been 10 percent. That is why the Rand has over the same period been losing value relative to the US Dollar at a compound annual average rate of 5.1 percent as depicted by the red line on my graph.
It is easy to understand then that a US investor buying a South African long bond would want to receive at least as much as he would from a US long bond, namely 1.86 percent plus the current inflation rate of 6 percent giving a required yield of 7.86 percent. Now compare that with the current actual yield of 6.365 and you will understand that the bond market has seemingly recognised the reality of the relatively lower risk of buying a South African bond…even if the ratings agencies have not.
Sadly it is not that simple. Professional investors are always alert to the impact of inflation and so, when comparing the merits of one bond investment with another they always look at the “real” return. That is the current bond yield minus the inflation rate. Subtract South Africa’s 6 percent inflation rate from the 6.365 percent yield on the R157 long bond and you get a real return of just 0.365. In contrast, subtract the US inflation rate of 2.7 percent from the 1.87 yield of a ten-year US treasury bond and you get a negative -0.83. So it appears that on a relative real yield basis, the investment markets, nomatter how unfairly, confirm the relative risk rating laid upon this country by the ratings agencies.
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Ambush at the Comex Corral
Darryl Robert Schoon
Central Banks collude with investment banks to force down the price of gold
Prediction is an art. Heisenberg?s Uncertainty Principle is as operative in the realms of the unknown as well as in the known. But, sometimes, predictions are a slam-dunk such as the large number of put options placed on United and American Airlines in the days prior to 9/11 through Alex Brown Deutsche Bank, an investment unit with close ties to the CIA’s Buzz Krongard.
Note: Alex.Brown’s former Chairman, Buzz Krongard, was appointed Director of the CIA in 2011. Buzz Krongard’s successor, Mayo Shattuck III, who oversaw the purchases of the 9/11 puts resigned from Alex Brown Deutsche Bank on 9/12. For the story of the 9/11 puts, see Mark H. Gaffney’s series in the Foreign Policy Journal, Black 9/11: A Walk on the Dark Side.
In January 2013, analysts at Goldman Sachs predicted gold would fall to $1200. That Goldman Sachs would make such an apparently lucky out-of-the money prediction given the recent ambush of gold at COMEX wasn’t luck at all. Like 9/11, the COMEX ambush was planned and executed with military precision.
In his article at Sharps Pixley, Gold Crushed by 400 Tonnes of $20 billion of Selling on COMEX, former gold trader at NM Rothschilds & Sons and Credit Suisse, Ross Norman, describes how the ambush was carried out:
The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract (see below) in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.
Two hours later the initial selling, rumoured to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading.
This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.
The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak following gold’s non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data. The assault to the short side was essentially saying “you are long… and wrong”.
Futures trading is performed on a margined basis – that is to say you have to stump up about 5% of the actual cost of the gold itself making futures trades a highly geared ‘opportunity’ of about 20:1 – easy profit and also loss! Futures trading is not a product for widows and orphans. The CME’s 10% reduction in the required gold margins in November 2012 from $9133/contract to just $7425/contract made the market more accessible to those wishing both to go long or as it transpired, to go short.
Soon after we saw the first serious assault to the downside in Dec 2012, followed by further bouts in January 2013 – modest in size compared to the recent shorting but effective – it laid the ground for what was to follow. One fund in particular, based in Stamford Connecticut, was identified as the previous shorter of gold and has a history of being caught on the wrong side of the law on a few occasions. As badies go – they fit the bill nicely.
GOLD STOCKS AVAILABLE FOR DELIVERY WERE FALLING
In an interview with King’s News on April 15th, precious metals trader Andrew Maguire said plunging gold stockpiles necessitated the attack on gold:
Gold and silver only have this type of selling when there are extreme shortages of the physical metal. I am totally aware that before this takedown occurred there was an imminent LBMA [London Bullion Market Association] default.
We had already seen COMEX inventories plunging. In 90 days COMEX inventories saw an incredible decline. So immediately available physical gold was disappearing. People around the world don’t understand what has been happening since Cyprus….
Entities went to the LBMA and said, “We don’t trust anybody anymore. We want our physical metal.” They were told they would be cash settled instead by a bullion bank. The Western governments have been trying to plug holes, and the reason for it has to do with the default that was taking place at the LBMA.
This is why this smash has been orchestrated because of the run that has been taking place on physical metal. So Western governments had to do this because of an imminent run on the unallocated LBMA system. The LBMA bullion banks had become so mismatched at one point on their trading positions vs real world demand that they had to orchestrate this smash.
This orchestrated smash in gold and silver was nothing short of a bailout for the bullion banks. So there is a run on physical gold that is taking place and the Ponzi scheme the West is running is being threatened because of it.
Maguire also added: We are nearing the end of this decline. Physical demand is already beginning to catch up with leveraged paper. If gold were to trade into the low $1,300s it would be unsustainable for very long.
THE USUAL SUSPECT: GOLDMAN SACHS
While the fund in Stamford Connecticut may have placed the $20 billion worth of gold shorts but, if they did, it is far more likely they acted as the agent of far-larger entity such as Goldman Sachs which had months before predicted gold would fall to $1200.
Goldman Sach’s January prediction of the fall of gold reminded me of an after-dinner conversation I had a few years ago in Europe. The conversation was with a gold trader at a major European bank and the topic of conversation was gold.
Gold had been falling for several days and I remember his excusing himself the previous evening and saying quietly, ?I think it?s time to buy gold?. The next morning the price of gold began moving higher.
What he told me during that evening?s conversation bears repeating, especially after what has happened. He said that he had been watching gold?s movements in real time when a highly anomalous event caught his attention, the bid price of gold had been followed not by an equal or higher ask price but by a lower ask price and, as he watched, the price of gold began to fall.
He said he began watching for this anomalous trade and discovered when it occurred, it was always followed by lower ask prices which meant gold was being driven lower. The source of the anomalous lower gold ask price was always J. Aron & Co., the commodities trading arm of Goldman Sachs.
Note: Lloyd Blankfein, Goldman Sach’s CEO, worked as a precious metals salesman at J. Aron’s London offices before going to Goldman Sachs in New York.
TIME OF THE VULTURE GOLD STAGE III
In 2007, in my book, Time of the Vulture: How to Survive the Crisis and Prosper in the Process, I wrote:
GOLD
AN ECONOMIC INSURANCE POLICY
FOR A COLLAPSING ECONOMY
THE TIME OF THE VULTURE
AND THE FIVE STAGES OF GOLD
STAGE 1: THE SUPPRESSION OF THE PRICE OF GOLD Central Banks collude with investment banks and gold mining companies to force down the price of gold.
STAGE 2: THE PRICE OF GOLD MOVES UPWARD Gold begins to rise, doubling in price even as Central Banks fight its rise.
STAGE 3: THE PRICE OF GOLD BECOMES INCREASINGLY VOLATILE The price of gold is subject to increasing highs and lows as large investment funds move in and out of gold as global economic uncertainties wax and wane, a sign that gold is increasingly a haven in uncertain times.
STAGE 4: EXPLOSIVE ASCENT IN THE PRICE OF GOLD A crisis results in a monetary breakdown which drives the price of gold to never-before-seen highs. Investment capital floods towards the safety of gold. Central Banks capitulate.
STAGE 5: THE PRICE OF GOLD STABILIZES The crisis recedes and order begins to return to the markets. Though losses are substantial, a new order based on new realities slowly begins to emerge.
.
The recent 20% fall in the price of gold indicates we are currently still in STAGE 3. STAGE 4 with its EXPLOSIVE ASCENT IN THE PRICE OF GOLD is next. When STAGE 4 happens is anyone?s guess as prediction is always an uncertain art unless, of course, you’re Goldman Sachs.Buy gold, buy silver, have faith.Darryl Robert Schoon
www.survivethecrisis.com
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By Invitation –
Dr Cees Bruggemans
Following the IMF Spring Conference and G20 meeting last week, our Minister of Finance had some grim news.He reportedly did not see meaningfully faster SA growth these next three years, fingering labour instability, electricity supply shortages and repressed business and consumer confidence.
Also, European recession remains a key suppressant for our exports not yet fully neutralised by our shifting trade emphasis towards fast-growing Africa.
This tale is borne out by company reports, too, with in many instances mention made of growth being achieved OUTSIDE the local home market.The SARB leading indicator has risen these past nine months, but at 133.3 is now back at the level it was in early 2011. Two years have gone by during which we have been treading water, suggesting very slow growth.The consumer gives the impression of having grinded to a near standstill. There is nominal income growth, but it has not risen. If anything it has lost a few decimals.
The real problem is higher inflation eroding real income and apparent slowing in the flexible types of incomes. Dividends have been plucked by the 15% withholding tax, bonuses have suffered in places because of non-performance and formal jobs are not visibly expanding (and are being lost in key sectors). An important prop underneath consumer spending is credit, and its nature has changed towards unsecured lending, but there we also find a slowing underway as credit quality has apparently suffered.
Though there is no shortage of strategic plans, public fixed investment expansion is being held up by not having enough trained technical manpower. More seriously, ongoing building projects (Medupi and others) are being slowed down by labour troubles.
In the private sector, one would expect mining to have cut back expansion due to lower commodity prices and lost output affecting cash flows negatively. Elsewhere in the economy it is too little growth and adequate supply capacity that keeps things back.
A light point is manufacturing capacity utilisation whose slow rising suggest somewhat faster fixed investment by next year, confirmed by BER opinion surveys. Also building plans passed and building contractor confidence suggest slightly more activity.
Together with pared inventory accumulation and stagnant export volumes, it grants us only very slow GDP growth in the 2%-2.5% range.
The Rand is considerably weaker today than a year ago, although on trade-weighted it is less dramatic. Still, any Rand weakness helps our producers. Even so, the Minister noted that the exceptional liquid global conditions keep appetite for our financial assets alive, in the process for now supporting the Rand.
The country could do with a weaker currency in support of growth, except that global liquidity will probably prevent it. Then again, down the road as and when especially the Americans are ready to start tapering their QE effort, nobody really knows what will happen.Our policymakers are clearly concerned about possible financial disorderliness when that American moment comes. It may still be a year (or two) out but when the process starts it may mean less capital flow towards us, or even outflows while our balance of payments on current account is still stuck at 6% of GDP (over R200bn annually), going by the Minister’s February Budget estimates?
Ironically, that is the moment we can expect a (much) weaker Rand, favouring many of our producers, but that might also mean higher inflation and even interest rates (penalising our consumers). No clear win-win for growth.Still, one would expect only a very slow US or European or Japanese normalisation and as a consequence a slow central bank normalisation.As things stand, the betting is that the Japanese will still be going full blast with their QE for at least two years (or more), providing cover for the Americans to start their tapering off, as and when.
Bottom line is to hold fire. Central bank withdrawal will start to affect us and others some day, but probably not close as yet. Even so, we cannot be sure when and how, for which reason the worrying by our policymakers and many investors.Also, any global policy reversal will presumably occur at a time when global growth is recovering, restoring the baton to the market economy. Such upbeat prospects should remain good for risky assets, but time will learn.
These concerns are future worries. For the time being we have another year or two (or three) to bridge.
Locally, it would be helpful if we could have fewer own goals by way of disruptive labour and infrastructure disruption keeping our capacity shortfalls in being and keeping confidence subdued.
This may well not happen. Is there anything else to be done? So far policy has given the impression that it has done all it could, with interest rates at 35 year lows and the budget deficit last year over 5% of GDP and tax revenue struggling to get ahead.
And yet.
The global argument in favour of fiscal austerity has overnight lost much of its pungency, except in Germany. Whether this creates a greater willingness here too to reduce the budget deficit more slowly remains to be seen.
Foreign debt ratings is one concern, but the bigger one may be the balance of payments current account deficit and that approaching moment where leading central banks start tapering and eventually reversing their QE actions, with as yet unpredictable consequences for global capital flows. This encourages haste being made with getting our own fiscal and balance of payments house in order.
The same considerations will probably also make the SARB more hesitant, especially concerning Rand risk in times of global policy reversal. But that problem may not arise for some time yet.
With China not likely to fall out of bed either, global growth remains supported, commodities can stabilise and Rand weakness is for now perhaps not quite the risk it is made out to be.
With inflation possibly not humping as much as feared before returning inside the 3%-6% target range, yet growth being as weak as it is (and still to weaken?), the case for some more interest rate easing grows stronger, provided labour unrest this winter does not blow out the candles and change the playing field (weakening the Rand much more than now foreseen).
It is a good bet that SARB will wait until past key labour negotiations and strikes. If we are then still a going concern, enough time to cut interest rates in 3Q2013 and 4Q2013 with inflation on an easing trend.
The effect on the economy would probably be minor, but at least policymakers will be shown to have acted.
It remains a difficult play and call for all concerned, not least private employers and investors having to plan in these kinds of unfriendly circumstances.
New York Viewpoint
by John Mauldin
It is a common trope in science fiction novels. Economic transactions are handled seamlessly with a wave of a card or a physically imbedded chip, and whatever the author imagines money to be is transferred, far removed from the archaic confines of ancient physical monies. If you Google “cashless society” you get about 600,000 references in under a second, and 20 pages into the references there are still articles on a future world where physical cash is no longer needed. Some see it as a sign of the “end times,” some as a capitalist plot, some as a frightening vision of socialists and ever-bigger governments, and some as a logical step in the evolution of a technologically driven international commerce.
And some of the “cashless society” references are showcase articles for the latest innovation that turns your phone or smart card into a functional wallet. I can attest it is quite possible to go for days without needing actual cash (as long as there are no kids around). The Bitcoin phenomenon (28 million sources on Google!) is a libertarian enthusiast’s dream of not just a cashless society but a society with no need for fiat money and central banks.
Today we’ll look at research suggesting that cashless future might be farther off than we either fear or hope. Not only is a cashless society farther away than some think, we are actually seeing an increase in the use of cash all over the world (and this is not just a US phenomenon). We will look at some interesting factoids that in themselves make for thought-provoking discussions, but when we couple them with research on the rise of the unreported economy (aka the underground economy) and the number of people who get some form of government assistance, we may find problematic consequences resulting from hidden incentives that work in unintended ways.
The Underground Recovery
In a recent New Yorker article entitled, “The Underground Economy,” writer James Surowiecki explores the import of a study by University of Wisconsin economist and professor emeritus Edgar Feige, who for many years has done research on the amount of actual cash in the US. Feige has recently updated his work.
What prompted me to follow up and then finally to discuss his work personally with a remarkably accessible Feige was his rather well-documented refutation of a common assertion I have long believed: that at least 2/3 of physical, printed US cash circulates outside the borders of the country. Indeed, you can find research on this topic at the San Francisco Fed and in serious economic journals, so this was not just some anecdotal belief I held from observing the impressively large number of dollars in use wherever I travel in the world. But no, this factoid was something “everyone” simply “knew.” Well, everyone but a few people like Feige and evidently some people at the New York Fed.
And we are not talking about a small difference between perception and reality here. Feige asserts convincingly that only 23% of physical US dollars are outside our borders. The difference is $400-500 billion, not a small sum. He vigorously (and I think conclusively) dissects the assumptions in the research that has generated and promoted the larger number. (You can read his 28-page paper here. Let’s look at some of the more interesting parts of his research. (Emphasis mine, of course. This is an academic paper, after all, and polite academics do not use boldface for emphasis.)
The rapid growth