Twenty Third Floor
Technical Business Advantage

The Automobile Associate seems to think someone should care what their view on petrol prices is.

photo credit: Daquella manera

Taxes on fuel are like other taxes – a way of financing government expenditure and a distortion of an otherwise free market. The difference is that the free market does not price in externalities such as pollution. Most of our roads are “public goods” that we don’t pay to use. Annual vehicle licence fees are not enought to allocate the cost of building and maintaing roads to those who use them.

The time wasted by millions of citizens each day as they are stuck in congestion is a real economic cost.

The good news is that an increase in fuel prices is a reasonably efficient tax (difficult to be avoided), promotes the use of fuel efficient vehicles (in the long run) and car-pooling, allocates the costs of road construction to those who use them most (fuel consumption is directly related to vehicle weight and thus impact on roads), helps us to reduce emissions and reduces our import of foreign oil which affects our current account.

Higher fuel taxes increase the price of goods. This is true. But so does an increase in VAT. An increase in income tax increases the cost of all goods relative to after tax income. However, fuel taxes have many desirable side effects. We don’t need lower fuel prices and we don’t need to argue against increases in tariffs and fuel taxes. We need higher fuel prices.

In my previous post I discussed some of the risks to various currencies.

Now what happens if your local currency is pegged to the US Dollar as it is in Lebanon? Speaking to Lebanese bankers and insurers there seems to be a devout belief  that the peg is rock solid.  This is surprising given the history of the Lebanese Pound (LBP) over the last 30 years. Decades of civil war and hyperinflation decimate a currency.

photo credit: austinevan

Now if you offer insurance policies denominated in USD or LBP, accepting premiums and paying benefit in currencies assumed always to be pegged at a fixed  rate you might want to consider what assets you have backing those policies. USD policies backed with assets in LBP (and LBP policies backed with USD assets) are a massive currency risk. The probability of a break in the peg may be small, but the result could be catastrophic.

Unfortunately, it is arguably worse. Even if the USD policies are backed with USD deposits and bonds at Lebanese banks, how will the banks fare if the currency is devalued? How about if the USD does plummet on the back of inflation concerns in the US economy and the LBP is forced to be revalued upwards? Unless the banks are managing this currency risk themselves and are appropriate matched the contagion of currency problems will flow through banks and straight to insurance companies.

Now is not the time to assume that artificial links will remain no matter what happens to the global economy. This is a massive currency risk.

Currencies aren’t what they used to be. The US Dollar can no longer be viewed as a safe bet as Obama and Bernanke spend their way out of a crisis partly fueled by too much spending. Inflation will come, it’s just a matter of time. Warren Buffet thinks so too. The current relative strength of the USD is a short-term reaction to the money flowing back into the US. It won’t last.

photo credit: plenty.r.

The Swiss are acting in the market to weaken the Swiss Franc to protect the economy. Given the problems Swiss banks have been having as a result of the credit crisis and pressure on banking secrecy rules out the franc.

The South African Rand? South Africa has a huge current account deficit, significant political risk, serious government spending and a decline in exports and production in our base metals economy.

The Pound Sterling is teetering on the back of a meltdown of the financial system – long the heart of the London and UK economy. I hear Ireland is in horrible shape too.

Some are suggesting the Norwegian Krone. It’s one of the world’s top ten traded currencies, which provides liquidity. Significant oil wealth has been accumulated and diversified in a “pension fund for the country”. However, currencies can be driven for extended multi-year period purely based on fashion. I don’t know that I want to risk being in a currency that simply goes out of favour.

The Japanese Yen has to deal with the worst economic declines in nearly 40 years. The Chinese Yuan is subject to state manipulation, usually pushing to keep it low to sustain an export-driven economy. Not sure I like my eggs  fried in that basket either.

The argument typically turns to Gold. The shiny metal that has been a store of value for several hundred years. Only problem is that gold arguably has less intrinsic value than steel or wheat or oil. The price is driven by demand – demand that is driven by assumed future demand. Flows into Gold ETFs have been strong, and significantly responsible for the current prices. Getting in now at around $900 per ounce might not be smart if everyone else is already in and looking for a time to sell.

So, where’s the safe?

The Fed joins Bank of England and Bank of Japan in repurchasing government bonds.

photo credit: amber.kennedy

This actions (quantitative easing) increases the prices of bonds (more demand, diminishing supply) pushing down long-term yields.

Great if you own bonds, not so great if you are an insurer with imperfectly matched long-term liabilities. Given how difficult it is to find assets of sufficiently long term to back long-dated annuities, many insurers may find themselves with assets of shorter duration than liabiltiies. More losses for insurers could follow.

Insurers have started using swaps to match their annuity portfolios, or to simply increase the duration of their assets such that the sensitivity of assets and liabilities to overall changes in the level of the yield curve has a limited effect. This solves part of the problem. When short term interest rates are affected  by desperate monetary policy and longer term yields are set by a perfect storm of future inflationary expectations, recession fears and now central bank intervention in the markets, matching key durations is a minimum requirement not to have large swings in surplus assets.

And this doesn’t even consinder the impact on Guaranteed Annuity Options and Variable Annuities in the US. More fun.

I can’t remember whether it was Castle or Lion, local South African beers that had the marketing disaster of New Coke. South African Breweries (before the Miller transaction) updated the label on the beer only to see sales plummet. They even engaged in an advertisign campaign with the specific message that “the beer hasn’t changed, just the label”.

So this blog has a new look. But hopefully if you notice any changes in content they are all for the better.

Socially responsible investing, according to wikipedia, “describes an investment strategy which seeks to maximize both financial returns and social good.” This typically includes not investing in tobacco, breweries, defence  contractors, gaming companies, those with poor environmental records  or operations in countries known for human rights abuses and so on. There are clear similarities with many of the requirements of Sharia’ investing.

The first interesting thing about this definition is that maximising two criteria is only very rarely possible. With two criteria there is usually a trade-off and one needs an objective function to determine the optimal combination of the two. I sometimes wonder whether it’s not often the case that the maximum social good would come from the donation of 100% of the invested  capital. (more…)

photo credit: richardmasoner

It’s been widely reported that the Competition Commission has been proving an alledged bicycle cartel. Retailers alledgedly agreed to increase prices to improve margins. This is not a strongly competitive market, which makes it quite an attractive market and good margins and profits should be available.

photo credit: shareski

Vodacom  and Cell C have joined MTN in offering discounted calls in a pre-paid price war. The was the result expected from Virgin with their rather unsuccessful foray into our market, with promises of shaking up the industry and cutting prices. I don’t know how much credit they deserve, but this shows that strong competition is brewing in this market.

Cellphone penetration in South Africa is very high by any standard. Thus the market growth from here on out will be moderate. With increasing competition, decreasing margins, limited growth prospects, the significant barriers to entry don’t seem like enough to keep strong returns to this sector.

As an aside, Vodacom  reported increased spend per subscriber on their prepaid book, but more cautious spending on the postpaid or contract base. It will be interesting to see how this develops over time as our market characteristics change.

So, in spite of regular complaints from forum posters (not this website) that cellphone companies (along with banks and motor distributors) aren’t competitive, it seems there is at least some clear evidence of intense competition in the mobile telephone market.

photo credit: pablo/T

Chavez is promising to take over rice processing plants in Venezuela because they have been refusing to sell rice at the price set by government.

Hyperinflation is starting to show it’s head, as a function of government policies around money supply. The article I referenced claimed that that is the reason for supply shortages and queues, although I don’t quite understand the direct link. Chavez’s response is to impose price controls to ensure citizens can purchase staples such as rice at an affordable price.

What, like price restrictions haven’t been analytically and empirically proven to increase shortages? Chavez is just another in a line of South American leaders to draf their countries into poverty and economic malaise. For all his popular support, he will ruin Venezuela.