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.

I’m continually disappointed that Moneyweb continues to partner with this distraction.

As I’ve done in the past, I’ve analysed very quickly some of the results of the most recent competition. As background to that, the basic rules are:

1. Put up R20,000 of your own money
2. Trade over three months in currencies, commodities single stock futures and some index trackers.
3. Whoever has the most at the end wins a million rand
4. Everyone keeps what is left of their initial “investment”

So let’s be clear, there are no long-term investment learnings here.

The winner did return 165.5% over 3 months, which is not an impressive performance even though it might look like it.  The point is, given the volatility of the investment universe available for the competition and the encouragement towards rampant risk-taking, it’s entirely pedestrian performance.  It’s very likely an individual’s performance will be good given the wide range of possible outcomes.

Let’s look at some other statistics

These are not performance statistics of which to be proud. They are similar to the losses incurred in prior competitions.

So in short, the competition cost the entrants in total just over a million rand. Losing a million rand is a great way to Make a Million.

Critically, and potentially most informatively of all, the game measures success by inflation being within target and low volatility alone. No mention of economic stability or unemployment. Very much like the real thing.

It’s worth reading the entire article, but the main message is that we cannot use the dream or story or fairy tale of imminent migration into space and other planets as an excuse not to deal with the very real problems we have on Earth right now. The misconceptions, Hollywood induced and otherwise, about the ease of space travel or even the extent of our current capabilities, are massive.

As with so many things, the stories that fill our society can be very different from the harsh reality.

As Nassim Taleb would say though, that doesn’t necessarily mean he has skill or insight. He could just have been lucky. Most people lost money in that market; it would be almost impossible if nobody had the opposite positions and made large amounts of money.

I’m also not saying Paulson doesn’t have skills or insight.

But I am saying that there is no reason to listen to hedge fund managers as a guide to the economy.

Paulson’s hedge funds are in total down significantly this year.  He got it right and now he got it wrong.

Nevertheless, S&P did downgrade. Why? I don’t think it is primarily to do with a materially increased estimated probability of default. It has more to do with a change in the payoffs in a ‘game’ (as in game theory) S&P is playíng.

Consider the quadrant of options. S&P downgrades or doesn’t and the US defaults or doesn’t. I’ve constructed totally hypothetically, but perhaps plausible scenarios below, for the S&P’s potential assessment of losses under each possibility given their views and external perceptions of them before and after 2008.

Before 2008, the fallout that would come from downgrading the US and the US not defaulting would be significant and cries of “un-American” might be heard again. Even if the US were downgraded, default would still be a blow for S&P since anything above a BBB rating really shouldn’t ever default if there models are “correct”. I’ve thrown in another hypothetical, a 0.01% probability of default – in other words very low, and as you’ll see in the next scenario, not necessarily higher now for S&P to change their view.

Now, either on a traditional minimax (minimizing the maximum cost) or an expected value basis, before 20008 S&P wouldn’t downgrade the US. This is an important calibration, since S&P didn’t downgrade the US.

After 2008, even if we leave the assessed probability of default unchanged, the world is different and therefore we have different costs.  If S&P doesn’t downgrade the US – even if the US doesn’t default, there will be a cost to S&P since might share the view that the US could default now. The dent in credibility since 2008 means that S&P has to try harder to convince the skeptics that they don’t rate risky instruments as AAA. Along with this goes a massive hit if the US does default and S&P hasn’t downgraded the US. The good news is that at least now a downgrade is viewed more with more understanding even if the US doesn’t default (although be sure Obama’s White House is not happy at the moment).

After 2008, even if the assessed probability of default is unchanged, the minimax and expected value rules both suggested a downgrade is the better option for S&P.

It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.

TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.

Some of the issues may have merit, but this struck me as particularly troubling:

According to the act, it is unfair when a consumer is discriminated against on the grounds of age.

Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.

Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.

Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums

This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.

Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable

This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.

Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.

All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.

This begs the questions:

1. What business plans were used in determining investment on our airports?
2. How did actual experience compare to those budgets?
3. What can we and ACSA learn from the difference between expectations and actual?
4. Did the marketing benefit of the World Cup more than offset the de-marketing impact of higher costs of travel to (and inside) South Africa?
5. Have these “investment expenditures” been capitalised on ACSA’s balance sheet and has the resultant asset been impaired or not?
6. Have these additional costs been added to the official costs for the World Cup (and why not?)

Who am I kidding -  huge sums of money were spent on the gut feel that it was a good idea and because spending other people’s money is easy and it’s self-glorifying to build grand airports.

Andrew Canter (of Future Growth) makes some strong statements about the “phone and dealer” approach to the South African bond market. When one of the arguments against Andrew’s preferred centralised, electronic order book is “we like the information we get from deal flow” I have to say I agree with Andrew.

and part 2 (which also includes some discussion of Covered Bonds with the clear links to Basel and indirect links to Solvency II and SAM)

Anything that makes it easier to determine an objective market price for valuation purposes, provides more information and transparency on an equal basis rather than advantaging a few select players sounds good.

The arguments that Primary Dealers are only viable through the information they gain from deal flow is a typical example of unfortunate cross subsidies between different, barely related economic activities which almost invariably drives inefficiencies.

Given the debate around recognising illiquidity premiums for IFRS and Solvency II / SAM purposes, a more liquid, more transparent market in bonds, particularly corporate and quasi-government bonds, would be immensely useful and would surely decrease illiquidity premiums and thus decrease the cost of raising debt financing for corporates.

Richard Thaler presents some of the common perception problems with annuities in this article in the NY Times. The basic message is still as it has been for decades. Individuals are reluctant to pay a large portion (often the majority) of their life savings to an insurer with the risk that they will die in a few years and “not have got their money back”. The peace of mind that should come to the policyholder turns into a matter of stress.

The bequeath motive is strong – and amplified by a lack of understanding of exactly how long we’re likely to live in retirement these days and how much money will be required. Those to whom many plan to bequeath may ultimately become the source of support when the income draw-down products are depleted with no longevity guarantee to boost the funds available.

It’s a good explanation although he doesn’t break much new ground. He also doesn’t talk about the concerns some potential policyholders have, in some countries at least, of whether the insurance company who sells the annuity will definitely be around over the next 40 years come what may.  This is more common in developing markets with weaker regulation (probably a good reason to have concerns) and less history of annuities (a cultural bias that will probably disappear over time).

Mr Thaler doesn’t propose any solutions for the insurers in boosting sales – a common “fix” is to combine a traditional pay-until-death annuity with a guaranteed minimum period or a death benefit (either for a limited term or at any point).  These adjustments reduce the “risk” of “making the wrong decision but purchasing an annuity but only living for a short period”.

There’s no free lunch.  In the same way that cash-back bonuses on short-term insurance products actually increase the average cost of insurance and reduce the risk-transfer from insured to insurer, these guarantee periods increase the cost of annuities.