SA inflation breaches inflation target in March ’07

March 07 inflation in South Africa: CPIX 6.3% year-on-year

Measuring inflation

Measuring inflation is never easy, and while we have had a few high-profile errors by Stats SA in the last few years, the inflation numbers are probably not that bad. I mentioned some of these difficulties in relation to GDP before.

Inflation and Sean Summers

I remember a story about a lady calling Sean Summers and complaining that inflation was much higher than reported. Apparently (and I heard this from him live over radio on moneyweb radio) he took her credit card details (I would probably trust Mr Summers too) and called up her purchases over the previous year. Based on a like-for-like comparison of products, her “actual inflation” was significantly lower than reported inflation.

Why we spend more

Differences in the basket used (which has to be an average by definition) will give different inflation than an individual experiences. However, there are other factors that influence how much money we spend each day. In an economic expansion, we spend more because we buy more goods and services, not only because the price of good has increased. As everybody spends more, and conspicuously spends more, the normal frequency and standard of eating out increases, the types of cars purchased moves upmarket, more food is bought from Woolies and less from Shoprite.
This means consumers have less money left at the end of the month, but it is not necessarily all attributable to inflation. Inflation that an individual experiences may well be higher than reported – and I don’t deny the possibility that the Stats SA numbers are wrong – but until you take a detailed like-for-like analysis of your own standard basket of goods to calculate your own “experienced inflation” I am not convinced by the community comments below the article on moneyweb.

Monetary Policy Committee decision

Also, the interest rate decision will take into account the nature of inflation (food prices, petrol and possibly future electricity increases) rather than only the crude number. External shocks will result in higher inflation regardless of how much we squeeze consumers and business with higher interest rates.
We may or may not see an increase inspite of the breach. Time to wait and see.

Measures, targets and Alchemy

When a measure becomes a target, it ceases to be a good measure.

I first heard this quote when dealing with performance measurement and remuneration structures for senior management. In that scenario, the danger is that you get exactly what you measure rather than the good behaviours related to or driven by the metrics chosen. The measure starts as Earnings Per Share (EPS) growth, which is generally a good thing. However, once management do the maths, they realise that reducing dividends to zero will boost EPS growth, even if it means pursing projects with a return lower than shareholders’ cost of capital. Measure becomes a target; measure ceases to be useful.
More on that some other time – it is an interesting point itself.

Now on to the magic and mystery, and science and great skill, and analysis and mathematics and theories, and occasional quack and snake-oil salesman – Search Engine Optimisation. Isn’t there an argument to say that, if the aim of search engines with their great yet imperfect algorithms is to reward fresh, relevant and useful content for relevant search terms, then the best long-term strategy would be to continue to write and publish fresh, relevant and useful content? No quick wins, and with less of the alchemy involved SEO companies wouldn’t get as many customers, but why isn’t this the best advice for long term traffic and search engine ranking? Rather than pursuing loopholes and quirks in any particular (temporary) search system, the measure should match something more fundamental – being a useful website. Difficult for that approach to need to be changed when Google uses “nofollow” links or omits duplicate stories or starts recognising your “invisible white on white text”.
Ok, before the backlash begins, there are practical lessons that can help search engines. “Obvious” things like “search engines are not people and therefore will struggle to read text if it is really a picture embedded in a fancy Flash animation”. This is probably a bad example – I expect fresh, useful and relevant content appears less often in glitzy Flash clips.

So isn’t it time to take the difficult medicine, and build a brand and loyalty and readership and customers and repeat business and structure value and goodwill by actually earning it?

Taxes – more than just a cost

Apparently, it was Benjamin Franklin who said “In this world, nothing can be said to be certain, except death and taxes.” Without going into a detailed analysis of whether death is certain, and whether there are tax-haven countries with sufficiently low taxes to stretch the point a little, I have some comments to make on the throw-away use of the word “certain”.

Taxes are not certain. Even if some amount of tax is unavoidable, the actual tax payable is not certain. This is not a massively complex idea, but does require a shift in mindset to consider taxes as something other than merely a cost that must be paid, something that reduces profits and returns to the owners of a business. I’m not even talking about optimising the amount of tax paid through careful tax structuring (which can be a good idea, if it is legal, and if the loophole stays open long enough to be beneficial, and if the extent of structuring makes business and moral sense).

I’m talking about considering the impact that tax has on business strategy, target market selection, business mix choices and competitive advantage.

A current example for me is the taxation of life insurance companies in Lebanon. Corporate tax on profits is 15% in Lebanon. However, for life insurers, the tax authorities have deemed it too difficult to nail down a clear measure of insurer profitability (another point for another blog, but in fairness to the tax authorities, insurers are rather notorious for adjusting actuarial reserves to arrive at the desired financial result …). Thus, insurers are taxed on “assumed profit” which is set to be 5% of revenue (mostly premiums written, which are considered as revenue, and investment income).

Some things to note:

  • The tax calculation is thus simple, which for most business is a good thing.
  • The effective rate of tax is then 15% x 5% x revenue = 0.75% x revenue.
  • If a company can make a higher margin than 5% of revenue, then they will benefit from the simplified tax system. If a company’s margins are thin and their net profit is less than 5% of premiums, they will pay a disproportionately large amount of tax.

The last point is where tax becomes interesting, and this is particularly ironic because in this case tax is more certain than usual (given it depends only on a single factor, revenue, rather than revenue and expenses). I’ll expand in my next posts on two important impacts this has for insurers and the economy as a whole.

Do you speak word?

Like it or not, MS Word is the most ubiquitous document-creation application out there. There are many other great (many would argue better and certainly cheaper) products as well, but for the moment most of you know Word.

Although my point is that you probably don’t. If you use Word for creating documents of more than a few pages, with a standard format, look and feel, and haven’t heard of the following points, haul out the manuals and the books,help files and the  google  search  results

  • Show formatting marks
  • styles
  • templates
  • cross references
  • Protect Document
  • Custom menus and toolbars
  • Word Count
  • Track Changes
  • Index and Tables
  • Bookmarks
  • Fields
  • Mark formatting inconsistencies

I use all of these with almost every document. If you don’t, you should at least have made the informed decision not to, rather than being unaware of their potential.

Markets, unintended consequences and the spam in the Feudal System

Ok, so the title will only make sense within the context of Blizzard’s hugely popular (and financially successful) World of Warcraft. WoW is, very simply, a multiplayer online game (and by multiplayer we’re not talking of 4 players here, but rather millions of players around the world) where players interact with other players and the virtual world of the game.

A key component of the game is that special items can be purchased. The currency is “gold” and gold can be earned in a variety of ways. The least interesting of which is by performing basic tasks and completing basic quests. These are, in general, not very difficult or challenging, but do still take a fair amount of time. The other piece of the puzzle that is relevant to this post is that gold can be transferred from one player to another.

Without too much difficulty, it should be clear that players with lots of time and little money are incentivised to spend their time earning “in game currency” to sell to time-poor and money-rich players for real world cash (i.e. as in US Dollars). The sale of in-game currency in the real world is a free market, so free-market economics forces act on the allocation of resources (time and money) in a way as to more optimally allocate resources.

Picture if you will the far-eastern sweat-shops manufacturing shoes. Now replace the glue and sewing machines with computers, and replace the shoes with in-game WoW currency. Cheap labour comes to the fore and a business is born. In-game currency is the product, salaries (and a bit of computer, WoW and internet expenses) are the Cost of Sales, and real hard cash from time-poor First World teenagers and adult is the revenue.

Two problems:

  1. Is purchasing vast quantities of in-game gold with real-world currency (presumably earned from applying one’s particular real-world skills and talents in gainful employment) cheating? Is there a moral or ethical angle here? What is it?
  2. How do the “entrepreneurs” boost sales? They advertise! How? By spamming in-game players with messages.

The first point is interesting, and worthy of a blog (and quite likely a UN commission as well). The second point that has seen some recent action from Blizzard, who are suing one of the companies behind the in-game spamming. Will be interesting to see how that develops. Slashdot also picked up the story.
But, understanding how the problem arose is clear with the benefit of hindsight. However, I am quite certain that with some basic analysis of the economic forces in the game, and an understanding of consequences, these problems should have been anticipated by Blizzard. Seems like they have fallen one step behind the spammers, which could also be interpreted as the power of the free market.

Oh, and the Feudal System? The company being sued is “peons4hire”.

Aftermath of 20 May 2007 bomb in Beirut

This is a different sort of post, but given the huge impacts the recent (and not so recent) events all over the Middle East have on people’s lives, countries’ economies and business decisions, it is worthwhile to recognise the very real problems that exist in these markets.
A few photos of the damage and tension after the tragic bomb blast in Ashrafieh, Beirut on Sunday evening, 20 May 2007. Several people were injured and one woman was killed when the force of the explosion caused a wall to collapse on top of her.

Sweeping up broken glass in Ashrafieh, Beirut after explosionLow light photo of Lebanese Army maintaining security near ABC mall after explosion in BeirutGarage door at ABC mall damaged by bomb-blast in BeirutStreet near ABC bomb location in BeirutThe Lebanese Army assisting and protecting at the seen of the 20 May 2007 car-bomb in BeirutBroken window in Ashrafieh near when one woman was killed after carbomb explosion in Beirut

Useful commentary on a useful tool – MySQL

I mostly use MySQL for ad hoc analytical work for specific projects – the sort of work where Microsoft’s Access product just doesn’t cut it because of the size of the data-sets involved. However, this is really just the tip of the ice-berg for MySQL, which powers a large proportion (I don’t really have any idea on the actual stats) of the web’s sites and more.

There are competing products, free and open-source. For some of the analysis that I do, a more specifically oriented statistics package like R or SAS (which is particularly good for large datasets) may also be worthwhile considering.

However, if you’re interested in finding out a little more about MySQL, you can visit their homepage or their developers’ zone. Also, the following two links provide brief pros and cons of using MySQL.

  1. Five Reasons to use MySQL
  2. Eight Reasons not to use MySQL

For those of you who complain that Excel only has 65535 rows (although I hear rumours of more rows in the latest or upcoming version?), perhaps you should consider using the correct tool for the job? Give MySQL a look.

Mbeki points to rand volatility for hurting exports

President Thabo Mbeki made reference to the adverse affect that volatility of the South African Rand has had on South Africa’s export manufacturers. I’ve posted quite a bit about hedging recently, but it seems that the issues just won’t go away.

Volatility hurts planning capabilities. Hedging can restrict the impact of volatility for certain durations. Maybe the exporters need to reconsider the “evil” that is hedging?

With a detailed, technical analysis of the financial and other risks inherent in a business, the appropriate risk management strategies can be defined. Value can be created through the application of these business tools, but only after the application of some sense and knowledge on the damage that volatility can do to a business and sensible measurement of the costs and benefits of alternatives.