Monthly Archives: October 2010

Nationalisation – two questions not one

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Venezuela has just nationalised the local arm of a US bottling company. It shouldn’t be long before this example hits the political spehere in South Africa and enters our own debate on nationalisation.

The debate really has (or needs to have) two quite distinct elements:

  1. Are nationally owned / publicly managed companies and industries better for South Africa and South Africans?
  2. If assets are nationalised, what payment is made to the original owners?

Many South Africans focus mostly on the last point – fearing appropriation of assets without payment, or with only token payment. I’m hoping this isn’t the idea being out forward by the nationalisation supporters.

  • It goes directly against some hefty provisions in our Constitution around property rights (where forced sale at a reasonable price is more palatable)
  • It would completely throw international investors and providers of capital, both indirect and direct investment.
  • A large portion of South Africans (not large enough) have some form of pension savings, which is invested primarily in local listed companies. Any loss of value to public shareholders will hurt a much wider range of South Africans than those with private trading accounts.  This point is often missed, especially when it comes to labour/capital debates, Black Economic Empowerment and taxes.

I haven’t heard the forced appropriate idea being proposed actually.

The first point is the real economic debate – are public or privately owned and run companies better for overall economic health?  The answer here is less clear. A balanced view (ok, my view) is this:

  • Privately run companies are not perfect and the free market doesn’t actually always automatically allocate capital efficiently.
  • Government run companies have track records around the world of being worse.
  • Some goods and services are better provided by government due to economic factors such as externalities, where public goods are involved, where long-term horizons are needed, where balance sheet constraints limit private players, where insufficient services would otherwise be provided to a portion of the population etc.

One danger to this debate is that Venzuela has shown economic improvements since socialst governments took power. That has everything to do with high oil prices and probably nothing (or less) to do with socialist policies, but that won’t stop the Noisemakers.

What gold gets you

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This graph has been carefully lifted from Paul Krugman’s latest blog post

Great Depression recovery related to gold standard - France stuck to the gold standard longest

Great Depression recovery related to gold standard

The message to take from this? Well, France stuck to the gold standard longest during the Great Depression. Still think gold or a gold-standard currency is a good idea?  The basics of monetary policy here seem to have been forgotten. We went through all of this, and learnt about it all in the decades following the Great Depression.  Now everyone has forgotten all those lessons and are parroting the same nonsense from then.

How not to lose money in Make a Million

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I have a clear strategy for how not to lose money playing the Make a Million competition. As I explain it, you may come up with some smart tactics to win the competition and enhance your returns, but you’re on you’re own there.

So, how does one not lose money with the Make a Million competition?

Don’t enter.


You are overwhelmingly like to lose money if you enter this competition. I’ve said this before, and I’ve been right before. I’m right again.

There’s also the little idea that the  structure of the Make a Million competition increases risks of  financial meltdown

Let’s look at some hard statistics to show what I mean.

Telling statistics (what they don’t show)

In the MaM presentation, the organisers include some interesting statistics about number of trades, trading activity and many other metrics.

They don’t show average returns or performance.

So let’s look at some of the numbers:

Raw return data (excluding prize money) based on 2009 MaM competition.

Average Return -11.49%
Expected Loss R 1,149
Median Return -15.06%
Mode Return -9.12%
Probability of breaking even 25.00%
Probability of earning less than 10% 83.00%
Probability of doubling money 1.78%
Probability of winning 0.20%

Suddenly the competition doesn’t look so great, does it?  (This isn’t the first time, here is my analysis of the Comedy and Tragedy that was the 2008 Make a Million competition.) Continue reading →

Rare monopolies

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China is the overwhelmingly major supplier of rare earth minerals to the rest of the world. (South Africa has a tiny share.)

Rare earth minerals (or elements) are critical factors of production of many high technology items such as super-conductors, catalysts, rare earth magnets and batteries of the kind used in hybrids and laptops.

With that background, you can imagine what a problem it is when China unofficially halts export of rare earth minerals to Japan over a disputed arrest of fisherman. Now, after the US has begun to investigate Chinese trade practices, China has unofficially halted exports of these crucial resources to the US as well.

I promise to pay the bearer

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Recently had a discussion around whether government should intervene to influence the exchange rate.

Now, I don’t have fully thought-through views on if and when and how and by how much this should be done. Still thinking it through (and having to reconsider many things about currencies, interest rates, inflation, open market purchases, sovereign wealth funds and most everything from economics as a result).

However, I do take issue with some of the arguments against government intervention in currency markets:

The conversation started with the view that forex traders disagree that the rand is too strong, to which I commented that I wouldn’t trust a forex trader to know where the rand should be for anyone by the forex trader concerned. The response:

A single market actor, or a single bureaucrat, cannot know. There is no “right” price.

Which is true, and I have respect for these kinds of views. However, to imply that Pravin Gordhan was acting as a single individual, a single “bureaucrat” is a little exasperating. Almost as if someone is deliberately creating a strawman to be knocked down. In response, I suggested that a group / committee of economists with experience and skills and some models might have a view more trustworthy than a forex speculator. My view is, and remains, that even if one cannot know for certainty the “right price”, throwing ones hands in the air and saying whatever will be will be is not useful. “Abdicating responsibility” per se is not useful.

You cannot abdicate a responsibility you never had. Bureaucrats should not fix prices, for currencies or anything else.

And here is the crux. The normative “should” in this sentence reflects a libertarian, anti-government view (again, one which much of the time I strongly share). However, in this case, it’s patently ridiculous.

Governments create currency in the first place. They create it through issuing notes and open market transactions. The allow banks to create more of it through reserve requirements. Governments (the “bureaucrats” so to speak) are setting prices for currencies all the time. Monetary policy, interest rates, inflation, central bank reserves, exchange controls and yes, exchange rates, are heavily influenced by government and central bank actions.

Government cannot not impact the exchange rate, so they may as well have a view on what they’re doing and why.

(Just in case anybody jumps up and down, froths at the mouth and starts shrieking about if we were on the gold standard none of this would be true, please read my post on the gold standard currency and what a terrible, terrible idea it is for reasons that have been established over and over again for decades for anyone who bothers to research it.)

Implied Pension Return Assumptions and the Equity Risk Premium

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When companies value pension obligations and required contribution rates, they make assumptions about the expected future investment returns. (Accounting standards require market-based rates reflecting fixed interest returns, but that’s a separate point).

So what assumptions are pension funds making? The WSJ has an interesting article showing that the average US pension fund is assuming future returns of approximately 8%. To put that in perspective, yields on 30 year T-bonds in the US are about 3.9%, 10-year yields are below 3% and inflation is currently about nothing. This is a huge real return and suggests that many of these pension funds may be underfunded.

It’s also interesting to work out what Equity Risk Premiums these valuation assumptions imply. FinanceClippings makes  some educated guesses at likely portfolio construction, and estimates assumed ERPs of nearly 8%. For reasons I’ve described before, an 8% ERP is madness.

My own calculations

FinanceClippings assumes a simple portfolio mix of 50% equities and 50% government bonds in this calculation, and assumes the average yield will be consistent with 30-year assumptions. I would differ slightly here. If we are looking at an overall portfolio, I would expect some investment grade corporate bonds and property in the mix too. These assets could be expected to earn 1% to 2% over risk-free over time (after adjusting for expected default loss on the corporate bonds). These return assumptions may seem low to some, but this is another area where it’s easy to overestimate the possible returns based on inappropriate periods of data. Continue reading →

Interactive house price data (including South Africa)

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The Economist has a brilliant interactive chart showing nominal house price growth across a range of countries, including South Africa.

It’s clear, as we already know, that South African house price increases have been dramatic. Somehow though, seeing it on a graph with a range of other countries brings it into sharper focus. Our property market has been manic.