Twenty Third Floor
Technical Business Advantage

It’s clear some people just don’t get that deflation is catastrophic from an economic perspective. You would have though that Japan’s lost decade (is it still only a decade?) would be sufficient warning.

Michael Pento from Euro Pacific capital writes about the options open Bernanke to stimulate the US economy through open market purchases given that interest rates are up against the zero bound.

He’s right about the options, but horribly misguided when it comes to wishing for deflation:

By keeping prices from falling more that they would have naturally, Fed intervention has created a burden.

The US public (and private) debt is such a significant portion of GDP, the correct answer cannot be to increase it as a percentage of GDP by deflating prices and keeping the nominal value of outstanding debt the same. Moreover, what the US needs is economic activity; encouraging everyone to leave their money in the bank because it increase in value every day and “nobody else is spending so deflation will continue” doesn’t sound like a success story to me. Downward price stickiness, particularly with wages (yes, even in the US) would add to the catastrophe.

Pent also raises the risk of hyperinflation:

…investors would be forced to once again abandon savings and chase runaway prices.

I don’t know how we went from fears of deflation to “runaway prices”. The challenge with this policy is to credibly promise moderate inflation for several years (depending on how strong your Ricardian views are).

Runaway prices are much easier to control than deflation. With inflation, we actually have a range of tools to use.

It’s unreal how many people have views on the economy that aren’t rooted in any economic theory at all.

According to a Fin24 story this morning, the FSB is probing smaller unit trusts.

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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Sharemax appears to be spiralling to its doom. Multiple stories today report that they are late on dividend payments to investors and may not be able to pay dividends in the forseeable future.

Cash has run out. The overvalued, over-geared properties cannot support the income stream that was demanded from them.

No surprises here then.

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Lightstone have a trick up their sleeves. Their raison d’être is collecting, analysing, understanding and packaging data for themselves and others to use to understand past, current and future property valuations.

Their housing price index is more robust (and more independent) than those of the banks based off their own data and target markets. Rather than consider only the average price of houses sold in that particular month (which is a function of house price growth / decline but also how the type, condition, size and location of the houses sold that month differ from the prior month and year) they consider repeat sales where the same property has been bought and sold more than once.

This data is combined or “chain-linked” to provide a continuous measure of house price inflation over time.

House Price Inflation 2010 source: lightstone.co.za

The result of all of this data, best-in-class methodology and analysis? When Lightstone says “opportunities abound in local market” I actually listen. Since their business model is to sell information, I’m more likely to trust what they say.

Tyler Reed blogs about entrepreneurs having to make decisions with limited information.

It’s almost all unknown

I don’t disagree.  It’s just that almost every meaningful decision ever made is made without all the information.

Unknowns can be categorised a hundred different ways. One way is to think about:

1. Unknown past information
2. Uncertainty around the current situation or position
3. Unknown future outcomes

Even a game like chess, where the past history of the game is easily known by good players, the current position is clearly visible and all the possible moves are knowable, it is not possible have all the information about how your opponent will react to your move.

How to deal with decision making under uncertainty – part 1

Tyler suggests that gut-based decision making can be effective much of the time – and it can. It there genuinely is no time for anything more than an instinctive reaction, you probably are best going with your gut.

Even if you have plenty of time, listening to your guy to formulate an idea is a great idea. Insight comes partly from experience and the reinforced neural pathways of our learning brain. If you stop with the gut though, you are missing out. There is a tremendous amount of research showing how ridiculously badly our instincts perform in many areas, particularly those relating to uncertainty and complexity! (more…)

I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.

1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. (more…)

The FT has an article (Banks win battle to tone down Basel III) describing how the proposed new rules for banking capital requirements might have some of the new requirements around liquidity removed or weakened.

Key amongst these new considerations is the limitation of mismatches between the term of assets and liabilities, which would limit the danger of a removal of deposits and wholesale funding in a crisis scenario. The problem is that this has been fundamental to the business model of banks for decades. Short-term assets (call, overnight, 30 day deposits) have been used to finance long-term liabilities (vehicle loans, home loans, business loans).

Retail deposits, even those technically call deposits, are generally quite sticky. This is in spite of the easily recallable image of queues of depositors wanting to get their money back. Typically, this is still a small fraction of total depositors (certainly in countries with retail deposit protection). Further, other banks have usually pulled or tried to pull their short-term funding (or simply not renewed overnight lending) well before the public even gets wind that there might be risks. As banks rely increasingly on wholesale finance, the risks of a liquidity and credit crisis are amplified as this money is teflon-coated and greased in terms of stickiness.

The banks argue there are other ways of managing the risk. It’s understandable that regulators around the world have had their confidence in banks’ risk management ability dented.

The real danger of overregulation of banks is not “too safe banks”, but rather an increase in the cost of providing banking and credit services to the economy (individual countries as well as the global economy) which could make limit economic growth and the replacement of jobs lost during the recession.

It’s going to be interesting to see how this develops.

Any company, person or country looking to invest in Africa must read Michela Wrong’s book, “In the Footsteps of Mr. Kurtz: Living on the Brink of Disaster in Mobutu’s Congo” .

The book details the history of the Democratic Republic of the Congo from its pre-Stanley (yes, that Stanley) days before east African Muslim traders were replaced by European explorers through to the eventual downfall of Mobuto Sese Seko and the arrival of Laurent Kabila in the mid-90s.

The “Congo Free State” became the personal possession of King Leopold II of Belgium, the only monarch to actually own a colony. Even against the backdrop of typical colonial abuses, it seems King Leopold was a particularly nasty character, taking his Belgian subjects along for the ride even as he pillaged the depths of Africa.

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