Twenty Third Floor
Technical Business Advantage

The ongoing public sector strike has raised several interesting points.

Not least of which is what teachers actually earn. A full-page advert in newspapers last weekend gave some very respectable figures  for teacher salaries.  A teacher just starting out, with a 4 year qualification has a total cost to employer of around R229,000 per year. This includes 13th check, pension, medical aid and housing allowance, but is a surprisingly high number. It also included the then-proposed 7% increase (versus CPI at 3.7% at the moment).

The offer was increased to 7.5% since the original advert, but the numbers below are the unadjusted numbers in the advert. These are annual basic packages excluding benefits. (It’s unclear whether the before Total Cost to Employer columns include or exclude the 13th check, which is definitely included in the TCE column).

This advert prompted an immediate outcry from teachers writing to complain that they earn nothing close to that figure. This was followed up by government affirming that the figures are correct, noting that many teachers may not add up all the non-cash benefits. (more…)

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.

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…)

In researching my previous post on accurately measuring the risks associated with vehicle crimes based  on colour, I stumbled across another colour related risk measure.

Red cars, supposedly, attract more than their fair share of traffic fines.

Turns out this is incorrect.  Snopes.com has (as usual) an excellent article on red cars, including references to research showing red cars are not more likely to be fined than other vehicles. Unfortunately, the underlying research isn’t available online (as far as I could find).

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.

Moneyweb has an interview with Eskom CFO. For me, the point made about the reasons for differences between retail and industrial tariffs is worth highlighting. This is another example of where common perception is off.

(Incidentally, Eskom tariffs are currently 68 cents for residential, 28 cents for big industrial)

From the moneyweb interview:

PAUL O’FLAHERTY: What is one of the myths of this industry is that the key industrial user does subsidise the residential user – that’s a fact. And the reason for it, even though it seems on the tariff that you quoted, that can’t be – it is true because the cost of delivering electricity to someone living out in the sticks is a lot more than delivering it to a transmission station right next to a mine, for example. So there’s a significant cost differential in actually getting electricity out there, and therefore the key industrial users do actually subsidise the residential users.

May 6 2010.  Dow falls more than 1,000 points intraday, including a drop of P&G from around $60 to (according to some accounts) below $40. The Dow recovered most of the falls quickly, but these trades are now part of the historical time series.

Banks and others using risk management tools often back-test their models against historical data to see how whether the models capture past market movements in estimating potential future market movements. This blip may appear as an anomaly in these tests for some time.

(It’s more typical for the tests to use only closing prices rather than intra-day prices. However, this actually reflects a weakness in the typical models and is only a fortunate escape from today’s problems)

In a previous post, Mumbling in the Dark, I argued that too much attention was being paid to Eskom’s proposed increased charges and too little at 5 separate points, the first being their actual cost of production.

It seems that NERSA has been looking at this and has discovered some areas where Eskom was incorrectly estimating their future costs. The numbers are large, but not so large in the greater budget of Eskom. This is more like a snowflake on an iceberg than anything meaningful, but it does show the value of looking at the real issues.