Author Archives: David Kirk

About David Kirk

David Kirk is an actuary with PricewaterhouseCoopers’ AIMS practice. He leads the AIMS advisory initiative and specialises in shareholder value management, capital management, insurance strategy and specialised asset applications. He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation. Apart from his work in South Africa, he has been involved in significant insurance projects in Lebanon and China. Mr Kirk began his career at Tillinghast – Towers Perrin in 2002 where his work experience included embedded value work in life insurance and reinsurance, life insurance appraisal value calculations, stochastic guarantee pricing, and building and reviewing economic scenario generators. He worked in both the London and Cape Town offices, gaining exposure to the insurance markets, products and regulatory environments in South Africa, the UK and Europe. Mr Kirk is an active member of the ASSA’s Investment and Market Consistent Embedded Value committees and has contributed to the Investment Guarantee Committee in the past. He has lectured parts of undergraduate and postgraduate courses at the University of Cape Town, and is an assessor and instructor for the Institute of Actuaries modelling course and business awareness module. Other professional associations include the Professional Risk Managers International Association. Mr Kirk is a Fellow of the Institute of Actuaries and a Fellow of ASSA. He holds a B.Bus.Sci degree in actuarial science and finance from the University of Cape Town, is a CFA Charterholder, a CAIA Chartholder and a Professional Risk Manager.

I can’t resist making a bit of noise about this

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The second largest Bitcoin exchange is shutting down (possibly to reopen elsewhere).

Bitcoin experienced a rough night on Monday as TradeHill, the second-largest Bitcoin exchange, announced that it was closing its doors. In a statement, CEO Jered Kenna cited regulatory problems and the loss of $100,000 in a dispute with one of its payment processors as major factors in the decision. He has pledged to open a new site once these issues have been resolved.

So apart from the problems with Bitcoins, it turns out the security and marginal attractions of the construct are a little tarnished too.

what a difference several years make

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The laminated card in the seat pocket of the SAA Boeing 737-800 I’m flying in describes how I can use most devices in “flight mode” once in the air.
It’s dated November 2011, but I’m quite sure I’ve still heard cabin crew telling people off for not having their phones off over the last two months. However late, be it several years or several years and two months, the relaxation of the draconian and relatively unique restrictions on the use of electronic devices in the air has been lifted.
So rather than losing 4 hours of my life with every Cape Town – Joburg trip, I now lose more like 2 hours and get to plough through an embarrassingly large list of unattended emails and arrive with a sense of accomplishment, lower stress levels and hopefully fewer irate colleagues waiting on email replies.
Now I can’t wait for a wifi connection so I can retrieve truncated emails and attachments and communicate in real time. And publish the posts I write while on the plane!

Symmetry and savvy

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The DA is quite negative on the new taxes proposed for the mining sector. They seem to argue that higher taxes will discourage employment and investment.

I haven’t analysed the details thoroughly so maybe they are correct. I suspect that it’s more dogmatic following of views from those who don’t understand the pros and cons well enough to change their mind.

For example, if higher taxes are bad for employment and investment, surely lower taxes would be good for employment and investment? I doubt that the DA is arguing that the current level of taxes is exactly optimal, so shouldn’t they have been campaigning more loudly for lower taxes?

The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses. The lower after-tax profit may also push  operations with marginal rates of return to below the required hurdle rate of some investors, reducing total investment in the sector.

This is, of course, true for all taxes. Hopefully there aren’t too many people left who believe that taxes should not exist.

So one real question is whether the tax rate is optimal, given the funds that can be directed towards government revenues in general and to specific employment creation and industrial development programmes specifically.

A second real question is whether the “price” for the permanent removal of natural resources being charged is appropriate (a combination of taxes and royalties) and from a philosophical perspective, who “owns” our country’s natural resources?

This leads to the third question or point that the DA really should be more aware of. Nationalisation, the Freedom Charter, and vast income inequalities are all part of a potent political conversation in South Africa. With nationalisation almost entirely off the table at the moment, being able to demonstrate in some manner that the “riches under the ground” are better being shared with everyone is an important political point to counter the more extreme political views.

The DA, in this instance, is blind to the subtler political benefits of this approach, blind to the definite benefits of increased revenues, blind to the possible benefits of focussed attention on this industry cluster, but completely convinced of the first-year economics free market principle of “tax leads to deadweight loss of consumer and supplier surplus” and thus lower employment and investment.

Greeks going South

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The Greeks are in danger of descending into a disorderly default next month. I’m not surprised. As I’ve mentioned before, the Euro is not working for them, the ECB is not supporting them (they may not be able to according to their mandate) and the Germans are too busy patting themselves on their self-serving backs while scolding the buyers of their goods for having bought their goods with money borrowed from irresponsible lender Germany.

So far my prediction of an increase in Italian bond yields has not been going well, with Italian long bond yields down strong in the last few days and more so over the last month. I’m hopeful (self-servingly, I suppose) that this shock might push them back up.

No nationalisation, more certainty and probably higher taxes

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There are times when I’m impressed with elements of government and the ANC. It took them far too long, they allowed too much debate and uncertainty, but their ultimate conclusions on nationalisation and how to direct additional mineral wealth back into the fiscus, further develop a beneficiation industry around the mining industry are solid.

I always maintained that “nationalisation” isn’t necessarily appropriation of assets without compensation, although the popular views and worst fear-mongering viewed this as the only possibility. It’s refreshing to hear that “nationalisation” was considered on its merits against private operation of firms rather than just as a way to redistribute wealth. (Ok, at least one article wasn’t mad panic.)

The increase in taxes is also basically expected. Although new and changing taxes does add uncertainty, it provides a sense that the rules are being followed.  Tax rates on energy companies in many Middle Eastern countries is high – sometimes near 50%. So the government fiscus does benefit from the energy that belongs to all its citizens.

It’s also a, slightly sneaky, way of re-settting historical land ownership and mineral right royalties and licensing. If “we got it wrong and sold them too cheaply in the past, we can always recoup through higher or new taxes”. Maybe a little cynical but not surprising.

The real free market fanatics will no doubt be in uproar about higher taxes destroying jobs and misallocating resources. There is a debate here, but the free market fanatics all too quickly forget that it’s hard to argue that the value of the minerals under our country have been fairly priced. Those markets can easily be described as “failed markets” with a number of externalities involved.

Even the hardest neoclassical economist will recognise these are very real limitations on Adam Smith’s invisible hand.