Category Archives: insight

Worrying signs of renewed credit crunch

The last month hasn’t been pretty for economic performance, credit or retail sales. Everyone from Richemont to Mr Price has taken a beating.  Woolies is down about 13% in the last month.

And now both Capitec and African Bank are reporting worse default experience (respectively through temporary strike-blips or through a cyclical downwards trend) and are pulling back on credit extension.

I think I buy African Bank’s more pessimistic view than Capitec’s “blip from the strike and growth will slow”. The reality is economic growth has been very low for several years and much of the consumption over this period has been through a reinflating credit “bud”.  It’s not at bubble proportions, but when that bud starts slowing in growth the true impact of several years of poor economic and basically non-existent employment growth will be felt.

I still need to update 2013 predictions, but so far I’m not feeling particularly optimistic about being a credit retailer and certainly not enough to justify the still-high PE multiples.


Different types of predictions

As part of the run-up to my overview of my own predictions for 2012, I thought i should highlight why I bother at all.
Most predictions, most of the time, will be wrong. Crystal balls aside, it is nearly impossible to reliably, accurately predict future complex events. However, the process of rigorously considering what might happen, what could go wrong, what the drivers of change are – all of those are really useful.
But why then bother making ultimate predictions if the “process” is where the value is? As it turns out, making the final prediction is part of the process. Paying poker without money at stake is a pointless exercise; there are no consequences to poor play (be it luck or skill that was lacking).
Making that firm and final prediction is important to ensure the process was rigorous and not an off the cuff guess.
Finally, evaluating part performance can’t suggest whether the predictions are improving, whether they are consistently biased or whether the system is working.
So, most predictions are wrong, but some are useful.

Kings, constitution and SAM legislation

I haven’t posted in ages – plenty happening on the work front, which is mostly good news. I also don’t really have time to comment properly on this article but Wits academic, Robert Vivian, but it’s interesting reading all the same.

Read Vivian’s letter first and then come back to my comments.

I can’t help but feel Vivian doesn’t actually understand the rationale for the proposed system and therefore gets a little frothy at the mouth about how awful it is. That’s not to say his criticisms shouldn’t be taken seriously – there are flaws in the proposed approach but it’s not clear to me that these are worse than a system that moves at the pace of continental drift because of exceptionally slow Parliamentary processes.

This maybe reflects a imperfectly functioning legislative process, which is a separate issue to discuss entirely.

It also reflects the reality that very few in Parliament (our country and most others I would imagine) have the time or technical knowledge to influence many of these laws anyway. Requiring a parliamentary process may not actually change the law-making function.

The final point here is that there is precedent here from a European perspective, so we’re not totally out on a limb in South Africa.

Maybe Vivian could rather suggest some tweaks that put his mind at ease about sentencing individuals to death by law without returning us to a stagnating world of too-slow legislative changes?

IBM knew

HP and Dell are both struggling enormously to make money.

Consider this: Since Apple Inc. shifted the direction of computing with the release of the iPhone in June 2007, HP’s market value has plunged by 60 percent to $35 billion. During that time, HP has spent more than $40 billion on dozens of acquisitions that have largely turned out to be duds so far

The latest reminder of HP’s ineptitude came last week when the company reported an $8.9 billion quarterly loss, the largest in the company’s history

Read the whole article – it’s fascinating. The key thing that I started thinking about when I heard the headline is that IBM saw all this in 2005. They sold their ThinkPad brand to Lenovo.

Spotting the big trends and making bold decisions is sometimes less risky than not.

Insurance, Tech and People

Aviva is trialling a smartphone App that will assess driving style. Using the phone’s built-in accelerometer, the app will measure acceleration, braking and cornering.

In many ways this is no different from other permanently installed tracking systems increasingly used for underwriting and assessing risk. Differences include:

  • Since it utilises the policyholder’s existing phone, no installation is necessary and no additional hardware costs are incurred
  • the App can be updated remotely quite easily and uninstalled by the policyholder at any point. A range of issues arise from this, including potentially greater acceptability to policyholders since they have the control. On the flip side, insurers will have to decide what it means if the driver is driving without the app installed and running. The rules can’t be too draconian here since battery life issues and others mean it won’t always be practical to have the app running.
  • Interestingly, the way Aviva side-steps this issue is by requiring the app to run for a 200 mile test period only. Of course this adds any number of additional issues. How representative is that 200 mile sample? How easily can thus be gamed by policyholders who are prepared to drive like model citizens for 200 miles but no further?
  • The simplest way to test this would be do both. Use the app for 200 miles on a sample who also have a gps tracker. Double blind requirements aside (which may be dangerous while driving) this would provide the data necessary to evaluate the predictive power of the app for the tracks. A way around the behaviour monitoring nature of the tracker is to run the get on some people who aren’t aware of the tracker. With policyholders this is almost definitely going to be unethical under every imaginable scenario, but with employees or test participants there may be a way to do it.

So a range if interesting questions in need of answers. Whatever the answer, this is clearly part of the new phase of tech and data supporting motor underwriting around the world.

The next interesting observation for me was the comments of people on hearing abut this specific system. Many were directed at telematics in general, which suggests this still isn’t widely known or accepted. Insurers will always have an uphill communication battle, and while sophisticated new rating systems may improve underwriting, it only makes this “people” challenge more difficult.

Income inequality over average income

In South Africa we have a major income inequality problem. It’s historical (accumulated wealth, accumulated skills) and current (disastrous public education) and isn’t going away any time soon.

The free market argument here is to forget about income inequality per se and focus on economy friendly, business friendly policies that will grow the entire economy and have the benefits trickle down to all South Africans. If we can only raise GDP enough, all our problems will be solved.

Which is patently absurd of course.

Market liberalisation and economic growth sometimes go hand in hand, but so does increased gearing and increased risk and increased income inequality. Just look at the US, where although GDP per capita has increase over the last two decades, the real incomes of middle class Americans have hardly budged. This is not the solution that SA needs.

But more than the argument that increase average incomes alone isn’t sufficient to increase lower income householder incomes, there is another view entirely.

Increasing country incomes doesn’t make us happier. As all boats rise with the tide, everyone’s expectations and comparatives change as well. Look at the old Eastern Block and now China – people don’t report being any happier even with a four-fold increase in average incomes.

It’s income inequality that matters first, and average incomes a distant second.