Category: International

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Current International

Getting the Elephant out of the room.

Investing in recent times has not been for the faint hearted. AI has both thrilled and frightened money managers. Crypto has handed out whiplashes and Donald Trump has made policy certainty a thing of the past. However, the big elephant in the room however is the level of national debt, particularly in the developed world.

The US debt alone is probably going to breach $38 trillion this year. With higher interest rate this means that the US Government will spend more on interest payments than on their National Defense. In-fact the budget deficit has for the past few years been as high as it is during war time.

There are many reasons why the countries have spent more than they earned. For one, while interest rates were almost at 0%, it made sense to issue a lot of debt to fund projects with a high GDP multiplier (how much the GDP would grow in relation to every USD spent). Some money was spent on universal healthcare insurance whole more was spent on pet projects to satisfy the narrow interest of voters. Like with most households, it is always easier to increase spending than to reign in spending.

Therefore, the traditional view is that if the GDP doesn’t grow fast enough, Taxes need to rise (which would probably lead to the GDP to grow even less). Is there nothing else a country like the USA could do? There possibly might.

To understand my idea (and it is just a leftfield idea) one needs a bit of background information. The banking crisis of 1907 led to the creation of the Fed (Federal Reserve Bank of America). It was originally housed in the treasury department, but the Great Depression of 1930 showed the need for the Fed to be autonomous and governed by an independent board of governors. Their main task was to secure financial stability, mostly by controlling the money supply.  This largely worked well, inflation was low, growth was strong and the banking system stable.

There are also lots of rules around the Fed and the Treasury. For example, any profits the Fed makes is paid to the Treasury. This is not a universal accepted practice, some reserve banks do it, some don’t but rather hold it in reserve. These rules were set by politicians, not dictated by the markets.

The Fed’s policies and practices constantly evolve, even though they hardly catch any attention. During the Great Recession of 2009, they tried a relatively new process – by buying government bonds they injected liquidity into the system. The process is called QE. That allowed the US government to issue lot more debt, because they knew that their own Reserve Bank would step in and buy unlimited amounts of bonds should the yield (the interest rate paid on those bonds) increase to uncomfortable high levels. Since the Fed is also in charge of printing the actual money used in the economy, their balance sheet is limitless, and they can never go bankrupt. During this period, inflation was nowhere to be seen.

So, what would happen if the Government issues zero-coupon bonds directly to the Fed, and at the time of maturity they simply don’t pay the Fed back. Alternatively, the zero-coupon bonds could have a maturity of 100 years, so that even with low inflation, the capital amount in 100 years would only be worth a fraction of what it is worth now. And possibly Trump could lean on the Fed to buy the zero-coupon bonds at face value instead of the discounted cash flow value? The government could borrow almost limitless.

Would that not cause inflation though? If the government uses the money to pay for the salaries of police, nurses and teachers, probably not. That’s because by doing that they are unlikely to distort the private business price points. If they use to money to compete directly with private capital, then possibly. The key is to be transparent, since this could easily be turned into money trough for the corrupt and well connected. If done responsibly though, it could work – and it would have a popular side effect. Lower Taxes.    

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Current International

The bookies favorite – Donald Trump

It is hard to believe, but the betting market has one clear US presidential candidate: Donald Trump.

Just a few months ago, the Democrats and their presidential nominee, Kamala Harris were riding on a wave of enthusiasm. Their elder statesman, Joe Biden had just stepped aside. Within a few days, Kamala Harris took the reins and sped out of her starting blocks. She re-invented herself. She looked more confident, argued more assured and got endorsed by almost everyone (it seemed) . Kamala wasted no time and raised more money for her presidential campaign than Donald Trump did. She mobilized a grassroots movement that spread her message of hope and opportunity across the country. She surged in opinion polls, and the presidential elections were hers to win.

Donald Trump’s campaign spluttered. There were two assignation attempts on him, yet he struggled to stay in the news headlines. But then came two hurricanes and he knew how to take advantage of the chaotic aftermath. With misleading statements, false information and deepfake videos in his tailwind, he just sailed past Kamala Harris.

Why would a next Trump presidency be such a concern?

For one, Donald Trump is not in politics because he has deep-rooted fundamental political beliefs. He doesn’t care to protect the freedom of speech, enshrine human rights or defend the liberal freedom of democracies. Infact he would be hard pressed to explain what they mean.

Donald Trump is only concerned about one thing: Power. He will cosy up to autocrats if it makes him look powerful. He will bash businesses if that makes his supporters admire him. He will even break long standing alliances if it strokes his ego.

Therefore, the policies of his administration won’t be developed by him, but rather by those surrounding him. During his first presidency, the republican party made sure that he is (mostly) surrounded by grounded leaders, like generals or veterans of industry. They could slow-walk any braindead programs and advance more reasonable conservative policies. They had more measured approaches and even compromised when needed. This however is not good enough for the Alt-Right movement, which is the backbone of Trumps support. Just to make sure it doesn’t happen again; they spent 4 years preparing for the next presidency. For a glimpse into their thinking, just read through their “project 25” memorandum.

Secondly, Donald Trumps economic understanding is limited, as is his maths. One of the few policies that he is trumpeting aloud is that he wants to impose tariffs on almost everything. The levels of tariffs are arbitrary. The higher the better. However, it will be the US consumer who will have to pay for the additional tax. Trumps reasoning is that all products sold in the USA should be produced in the USA. This only demonstrates his lack of economic understanding.

The USA makes up about 25% of the worlds GDP. Simplistically that means, on average, the US also consumes 25% of all products. Some exports might sell more to America, some less. If the USA only makes up 5% or 10% of your companies’ turnover, you would be less inclined to build a factory in the USA just to capture that market. You would probably spend increased focus on fast growing countries like India. If however, the USA makes up a big slice of your turnover, you would want to heed Trumps dictate and open up a factory in America. Finding workers in an environment with a 4% unemployment rate will be very hard though, unless you pay up. Both scenarios will lead to inflation, which will lead to higher interest rates and once again, it is the US consumer who suffers the most of Trump’s policies.

Thirdly, other autocrats will take advantage of an inward-looking USA. They will stroke Trumps ego with a few small wins for Trump (like ending the war in Ukraine – on Putin’s terms though), but they will take the opportunity of disarray in the West to strike at more target. Putin could invade Moldavia, maybe Georgia possibly Lithuania. China will strike at Taiwan and North Korea might make a more concerted effort to harass South Korea. And what happens in Africa is simply irrelevant to Trumps team.

Under Trump, the USA will neglect its responsibilities as the world superpower and ignore its duties as the leader of the free world. Democracies will seem to be chaotic systems, in stark contrast with the highly regulated but severely curtailed autocratic systems.

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Current International

Is ChatGPT really the holy grail?

A new internet phenomenon has taken the world by storm. ChatGPT has managed to get 100 million subscribers in a far shorter period than any other App ever launched on the internet. The reason is clear. It has revolutionized the search function on the web. ChatGPT uses clever Artificial Intelligence (AI) algorithms to come up with human like answers to any question you might have. You can ask ChatGPT which small car would be the most suitable for yourself. You could also ask for a suggestion on where to spend the next family beach holiday. You can even request something much more complex and comprehensive, such as writing a short story about a topic in the style of Hemingway.

Instead of giving a list of websites which might contain the answer you are looking for, it converses and gives a very authoritative answer.

The applications are plenty, the benefits seem endless (hence the many copycats). Most students probably love it because they spend minutes rather than hours doing their assignments. It will be used to replace call centers (however if you have that unique query you will still be stuck with no answer and no one to ask). I can also imagine that professional fields like law, consulting and medicine can be streamlined using chat bots resembling ChatGPT. Because it uses mathematical formulas to take a set of information to predict the next set of information the technology could be used in the Pharma industry to try and predict new viral outbreaks or even formation of new viruses.

In this excitement of a reimagined search functionality, it is easy to forget about the darker side. Three flaws stand out.

Firstly, a system that can write code could surely be taught how to write its own code for itself to change itself on a constant basis. Imagine regimes like North Korea with their enormous army of programmers. They might use the technology to write destructive computer viruses that constantly change and learn form the way it is being countered. This is an immense destructive force that will cause chaos from anything like airports to power generators.

Secondly, these AI systems rely on the information available. In the case of most search chatbots, it relies on the information available on the internet. If a conversation with your computer chatbot becomes the dominant form of getting information, who will bother to publish new information if that would only be “stolen” by the Chatbots. Regulators should force the internet search companies to cite the pages where the Chatbot got the information used from.

Thirdly and most importantly, the AI revolution has been hailed as a boon for productivity.  That might be so. Countries like the UK are desperately looking for an advantage to make their economy more productive. Integrating these AI functionalities are going to have a similar affect to the introduction of personal computers. The trouble is that even though we have seen some real productivity gains over the past 30 years, it coincided with an increase in the Gini Coefficient worldwide. The real beneficiaries of that gain in efficiency are those with capital. They will get a higher productivity per unit capital deployed.  Yet a stable socio-economic and political environment can only exist with a broad middle class.

The development AI chatbots reminds me of the early days of social media, where the quest to find long lost friends was so strong that any possible shadier sides would be ignored. In Hindsight we were gullible. Very few other inventions have caused more harm to the human race in so many forms as has social media. From a rise in depression among the youth, to online bullying and attacks on the personal integrity – all because of social media. It didn’t stop there though. Fake news caused our societies to be more divided than ever. Governments, like that of Myanmar used social media to co-ordinate attacks of the Rohingya. Minority views were made to seem like the majority view, and majorities thought they were in the minority. Most were afraid to speak out. When Facebook and the likes were created, no one thought that they could cause to harm anyone. Yet they have. So will AI chatbots.  

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Current International

The Arguments against Cryptocurrencies

Why I would sell any cryptocurrencies now.

As you all know, I am no fan of crypto currencies. I have been proven wrong for long, but I have not changed my mind. The reasons are many, but the urgency to avoid any crypto currencies has only increased. This is not any investment advice but rather my opinion.

The  crypto bubble is shaping up to be the biggest financial bubble ever, probably even exceeding the US housing bubble in 2007/8. Contrary to the housing bubble, when this one blows up there are only shattered dreams and broken promises left behind (the housing bubble still had brick and mortar which was not valued at zero).

Bitcoin, the first and most dominant crypto currency, is everything it pretended not to be. It was supposed to be cheaper to do transactions than through the traditional banking system, but it is very expensive. As usage of Bitcoin increases, the transaction fees are going to increase.  Each transaction also takes an extraordinarily long time to be processed, because of the internal transaction approval process. While Bitcoin approves one transaction, a company like Visa manages to do 10 000.  One of the big critics of “fiat” currencies (or traditional currencies like the Rand, USD, Euro, etc)  was that central banks had the power to print new money, thereby creating money out of nothing. In contrast new Bitcoins are created by solving a mathematical formula with a finite possible solutions. But because of the steep rise in the Bitcoin price, users use their Bitcoins in fractions. The problem is that you can always do an infinite amount of divisions of a number, therefore the real supply of Bitcoin as a medium of exchange is infinite. And by its very nature, the value created by Bitcoins and other cryptocurrencies is out of thin air. There was no more efficient use of capital, it is just a belief that someone else would pay more for one coin tomorrow than you have paid today.

Bitcoin was also heroed as the ultimate safeguard of wealth because every transaction is recorded forever in its blockchain, therefore in theory at least, each coin would always be possible to trace. For such a “safe” asset it is amazing to hear how often they get stolen by hackers attacking and stealing wallets. The blockchain does not seem to discourage the underworld from using it as a means to extract ransoms.

The volatility of Bitcoin is a further failure for it to qualify as a currency. Imagine you are a distributor of imported goods, and all the trade is in Bitcoin. You place the order when one Bitcoin is trading at $15 000, but by the time you receive the goods it is at $25 000, you will be out of business very quickly. That’s why, in general, over a long period, currencies appreciate or depreciate by the inflation differential between two countries plus a bit of country specific risk. Even these small swings put a lot of pressure on the margins of importers and exporters, using a currency that swings wildly is like a death knell.

You might argue that Bitcoin was the first, and therefore has got a few teething problems that are addressed by the 8 000 plus Cryptocoins and Tokens listed today. Some might have tried, but largely failed. The volatility of the value of Bitcoin was addressed by the invention of stable coins. But they are flawed because no stable coin is backed 100% by a single currency. If it is not, it can never move in unison with the currency. If it is backed by a basket of assets, then you have a big allocation risk and possibly a counterparty risk. Both are unsuitable to keep anything stable. Many “stablecoins” are only backed by a fraction of a fiat currency, making them highly volatile especially when it comes to a downturn.

Some Cryptocurrencies do offer an interest rate, so that the holding cost is not purely negative. However, an interest rate above 2% in the USA is hardly achievable, so anything higher than that is doubtful, unless obviously it is issued in its own currency. This leads us to one of the biggest problems with Cryptocurrencies: most issue volumes are entirely at the issuer’s discretion. Whoever invented the cryptocurrency can decide how much to issue, which is precisely what Bitcoin initially tried to avoid.

There have been some remarkable innovations made in the Cryptocraze: the technology of blockchains is a game changing innovation for the safekeeping of documents in a digital world. I could imagine it being used in the title deeds office or in the personal medical fields. Adjustable personal contracts, where a money transaction is coupled with an individual contract that is automatically recorded makes the field of money lending a lot more personal, streamlined and quicker. You would rather want shares in the companies that issue the cryptocurrencies than own the issued currency. Why? Simply put, you are stuck in a legal limbo if you own the currency and expect a return based on the performance of the company. As a shareholder you are the provider of capital and in turn have certain rights and obligations, as a debt provider you have a contractual legal framework to back your claim. It is uncertain if there is any legally enforceable obligation towards Cryptocurrencies issuers. It might just be the cleverest way to finance a new start-up.

The great innovations made are also reasons why central banks all over the world are experimenting with their own virtual currency. They don’t like cash, because it is hard to trace and it is expensive. The blockchain technology addresses both problems. They are surely not going to allow any local rivals and I do expect Central Banks to crack down on many cryptocurrencies. In South Africa, our Reserve bank has already announced that any money taken out of the country via the unregulated Crypto market is seen as an illegal money transfer which bypasses the exchange control regulations, thereby making it a criminal offense. There is another reason Central Banks would want to control the Crypto issuers. An unregulated money supply leads to too much liquidity, which in turn leads to inflation, which is the biggest killer of wealth. Seeing that inflation typically affects poor people more, the Central Banks will have a moral obligation to intervene.

The Central Banks are not the only ones looking at the Cryptomarket critically. The Covid-19 epidemic has forced all governments to borrow heavily. Each finance ministry has got big holes in their budgets to fill, and taxing Cryptotrades seems very attractive. That means they are going to investigate much more closely if you hold any cryptocurrencies. If the same tax rules apply as those that apply in share trading, you will have to pay your marginal income tax rate on any profits made on each trade (assuming you hold the currency for less than 3 years). Tax avoidance is a criminal offence.

Lastly, the criminal underworld loves using Cryptos, and therefore the law enforcement agencies hate them. They are upping their game though and have been able to trace a few extortions paid. They are going to put pressure on politicians to come up with laws to control the use of Cryptos.

Dangers that lurk in the Cryptotrade and that the headwinds seem to get stronger, which is why it is a good time to exit any positions.

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Current International

The USA elections and the reflection on the society

While the votes of the elections in the USA are still being counted, one thing is apparent. Donald Trump did surprisingly well. So well that he might even win the elections. No credible predictor or poll suggested that it might be a tight race. Trump was given an outside chance of between 3% and 15% of winning a second term. Now it looks like the odds are even, and the dream of a “blue wave” is shattered.

More worrying than a second term of a Trump presidency is what the election reflects on the society of America. One would have thought that a president who is accused of rape, who talked about groping girls, who paid less income taxes in the last 15 years than a primary school teacher and who blurs the lines of his own businesses and the state should have had a torrid time at the polls. There were so many books written about his chaotic style of management, his impulsive decision making and his love for dictators and kleptocrats, but hardly a word praising him.  He used teargas on innocent peaceful demonstrators for a photo opportunity and called true American heroes of his own party (like John McCain) cowards. Trump has lied too many times to count and seems to be a blatant racist. Instead of defending the ideals of the free world, America has become the laughingstock of the world.

Any president with that track record would have, in normal times, not had a chance to gain any support. Yet, because of the massively increased voter turnout, there are now probably more people who voted for Trump than in the last elections. That is astonishing and worrying. Do voters even care if their leaders have characters to look up to? Why do so many believe his blatant lies? Besides Trump, Majorie Taylor Greene won a seat in Congress. She is a believer and promoter of the QAnon conspiracies which are at best far-right wacky ideas which make the Nazi propaganda of the 1930’s look like a bad b-grade movie. Why do citizens believe in this non-sense and support leaders who clearly have lost the moral high ground? It is a dangerous slope when minorities are being singled out as delinquent, and the leaders viewed as “a messiah sent by God”.  Where is our society heading to?

But then should we be surprised when we live in a world where most do not read content that is longer than 280 characters, never mind a book. We adore stars not because of their acting talents, but because their willingness to expose their private live on TV. Life ambitions are not formed by your family and those you grow up with, but by complete strangers flooding you with posed pictures on Instagram. And your child makes more money in a year investing their pocket money in some arbitrary code called a cryptocurrency than you do working 5 days a week, 9 to 5.

It is a very turbulent world where we need leaders with a strong moral compass. Instead we are voting for clowns, Rambos, reality TV personalities and fools. It is a sad state of affairs.

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Current International

The dark side of online shopping

During the Covid-19 induced lockdown, one industry has been doing particularly well. Online retail. Is this the new holy grail for shopping or are does it come with nasty side effects? Are the costs fully priced in?

Besides offering the convenience of shopping from home, online shopping has two big advantages. The first is that the selection offered is much bigger than a brick and mortar shop. Companies like Amazon have got a vast selection of items to spend cash on. The second advantage is that the products are often cheaper than those bought in a physical store. In times like these, cheaper is exactly what most consumers want. The increased demand of goods bought online during the lockdown was so enormous that the e-commerce giants had to hire thousands of new employees. But it was not only the dominant internet retailers that benefited from the shift to online purchases. Thanks to Shopify, building an e-commerce website was within the reach of almost anyone.

The advantages for companies selling their wares online are obvious. They no longer need to rent expensive shop floor space, but cheaper industrial warehouses are adequate. They also do not need to worry about changing their displays and using expensive shopfront props and designers to make their shops inviting. Now they only need to hire a few whippersnappers to create a few new graphics. The armies of bored sales agents and shop assistants are replaced by a handful of call centre agents, mostly outsourced to the cheapest bidder somewhere in the emerging world. And the stock control is much simpler because there is no need for an internal distribution system. The products go directly from the warehouse to the consumer. And best of all, the consumer saves money and time – in theory at least.

The effect on the business landscape has been dramatic. In the USA, 9 300 brick and mortar shops closed in 2019. That number would surely increase dramatically this year, partly thanks to Covid-19. Bloomberg, a financial data provider, estimates that number of shop closures in the USA will be about 25 000 in 2020. Worldwide we have seen a similar trend, although not as dramatic yet. But that will change. The world is evolving and so should businesses. The intense focus on price and efficiency may seem like an undisputed benefit to customers and therefore society, but is that so? Are we counting the full costs of the changes?

Although our capitalistic system has been the greatest driver of innovation, sometime the change did not incorporate all the costs though. Cheap coal fired power stations bring down the cost of electricity by ignoring the costs of the air pollution. Similarly, cheap flights are only possible by not including the costs of the harm of the exhaust fumes. The growing appetite for cheap red meat is partly to blame for the deforestation of the Amazon rain forest. The impact of the deforestation has not been included in the cost calculations because, like the examples above and so many other instances, the costs are external or social costs. It is difficult to allocate the cost to an individual. The cost might not even be borne by a specific country, but by the whole world society. It is not hard to determine who originated the costs, but it is hard to determine who the money should be paid to. So how does the shift to online retail fall within this category?

Simply put, there are few factors not currently considered that count against online retail. For one, it is not an even playing field. An online retailer reach is unconstrained by geography. They can operate across borders and even across different continents. As such, their headquarters can conveniently be located it in a Tax haven. The value of intangibles, such as their brand is also hard to quantify, and they would be able to structure their company in such a way that most of the profits are made in the most least taxed country. That is very hard to do with brick and mortar shops. They typically pay their Taxes where they operate, and as such contribute to the fiscus of their host government.

A second problem is that shopping centres normally have at least one, sometimes more anchor tenants. They might be a big grocery shop, pharmacy, hardware store or department store (although they are going our of fashion fast). The idea is that those well-known shops draw a lot of customers, who need to do their regular shopping there. The small shops surrounding the anchor tenant are line shops and might be anything from mom-and-pop shops to boutique fashion stores, bookstores, delis, food outlets or hobby shops. These are small businesses, owned by an individual, families or small companies. They rely on the foot traffic going past their shopfront. If the big anchor tenants close because they face unprecedented pressure from big online retailers, the small line shops would surely not survive. The evidence can be seen in the USA which is littered by abandoned shopping centres.

The third point is more philosophical. We, the human race are social creatures. We crave human interaction. Solitude leads to destitute. While it is easier to order your groceries from the comfort of your own home, it takes away one more crucial point of human interaction. We also forgo the subtle knowledge we get from talking to our local butcher about the best cuts, or from the advice we get at our local DIY store. We would not act on the recommendations of the in-store beautician, but rather on computer or AI generated suggestions.

Not only do brick and mortar shop employ more people from our community, spend more Taxes in our community but they serve as meeting points, places where we exchange ideas and do what we need to do most – interact with other people. Those are big costs not included in online purchases.

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Current International

This time it is different

As the impact of the Covid-19 disaster unfolds, the politicians and central bankers did not want to be caught napping. They unleashed a stimulus package that makes the 2008 Global Financial Crisis look like a b-rated warm-up act. But will there be unintended consequences?

Historically, Central Banks used the adjustment of interest rates as the main lever to stimulate the economy. As the economy grows too fast, and fears of inflation were emerging, central banks put the brakes on by increasing interest rates. And when the economy falters, they released the brakes again by reducing interest rates. That worked to some degree. Lower interest rates encourages companies to borrow money and invest it, while higher interest rates did the opposite. Central banks are not the only ones able to stimulate the economies, politicians can do it too. However, politicians generally have a noticeably shorter time horizon. Central bankers could afford to act independent and look at the long term.

Policies before the 2008 financial crisis were primarily focused on keeping inflation low. Inflation destroyed a recovering Germany in the early 1920’s and wreaked havoc across the world in the 1970’s. From the 1980’s onward most developed countries and more and more emerging countries began to control inflation by a combined effort of fiscal prudence and monetary restraint.

The war on inflation was seemingly a fading memory by the time the 2008 global financial crisis hit. But since the political response to the crisis was underwhelming, it was up to Central Bankers to come to the rescue. They lowered the interest rate to almost 0%, and where then seemingly running out of ammunition. That’s when the Fed Chairman Ben Benencke announced that the Fed will use their balance sheet, which in US Dollar terms is essentially unlimited, to buy US government bonds across the yield curve.

This would help in two ways. Firstly, the interest rate would stay low and the government can borrow as much as they want at low rates. Secondly, since they would buy bonds on the secondary markets ie from investors like banks and insurance companies, they would inject a lot of cash into the system. The cash could be used to invest in other projects.

Some investors with good memories were wary. Surely the increase in money supply would cause inflation? Not so. Since 2008, most developed markets were struggling to avoid deflation. Inflation is like red wine. You would want a glass a day, but a bottle is detrimental to your health. Economies do well when inflation is at about 2%, poorly when it is when it is below 0% and even worse if it is above 10%. It is the fastest way to lose the value of money, just ask any Zimbabwean.

Inflation has been the least of most economist concerns for years. During the early 2000 the rise of China because of their low cost of production has been a counterweight to stagnant wages in America and rising living expenses across much of the developed world. After the financial crisis, the excess spare available production capacity coupled with the efficiencies gained by better use of the internet and an ever better integration of high tech in normal production (like using robots in car assembly and drones to detect crops that need more attention for a higher yield) has kept a lid on inflation.

In effect of the Covid-19 crisis was truly unprecedented. In the last week of March, the weekly jobless claim was 6.8 million. Previously the weekly jobless claims in the USA reached about 600 000 during times of crisis. The US Federal Reserve Banks response has been equally dramatic. They started buying bonds again at an extraordinary pace. The effect on their balance sheet has been 3 times larger than during the global financial crisis of 2008. This has been met with the responses of the European Central Bank, the Japanese Central Bank and even some emerging market central banks. The politicians have also been much quicker to respond. Altogether, the response to the crisis has been more than 9 trillion US Dollars.

The difference to the financial crisis though is that this enormous injection of cash has not been met with a corresponding destruction in capital. During the global financial crisis of 2008, home prices collapsed and many property developments across the globe were abandoned because the developers went bankrupt. The glut of homes on the market meant that prices stayed low for long and investment bank in the USA had to raise about U$ 300bl to fill the holes one their balance sheets.

This time it is a crisis in the lack of income, because so many economies were shut down. It has (not yet) led to a destruction of capital. Even though we probably won’t see the same record profits generated this year, the global total wealth (capital and income) has increased by the stimulus packages and therefore we could see a consistent upward pressure on inflation, maybe not now but probably in 3 years’ time.

While it is right to focus on retaining the livelihoods of everyone affected by the epidemic, it is prudent to keep an eye out for potential unintended consequences, especially when one of those is inflation.

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Current International

Let’s hope we got this right

This post was originally published in early May

To fight the Covid-19 epidemic though, decisions had to be made. Now, a few months in, the cost of the measures become clear. It is devastating, but according to the politicians and scientists this is the only way to prevent more deaths. Let us hope they are right.

Never before have so many US citizens filed jobless claims so quickly. At the beginning of February the US unemployment rate was near a historic low, but by the end of March, the weekly jobless claims figures were 10 times higher than the peak during the world financial crisis of 2008. Some countries, especially those in emerging markets have performed worse.  Being jobless is devastating. Unemployed become despaired, depressed and suicides go up. Those who managed to keep their jobs are often forced to take a pay cut or unpaid leave. Small business owners must make very tough decisions if they want to survive. Many of their corporate clients have not paid their invoices, at least not in full, in order to preserve their own cash. During the second half of March the Federal Reserve Bank had to quickly step in and provide extra liquidity as many medium to large companies drew all their credit lines available to them. The US Dollar strengthened while emerging currencies collapsed, making it much more expensive for the needy to import medical equipment and supplies. Closer to home, many industries were brought down to their knees. The whole film industry is standing idle, affecting thousands of freelance artists and artisans. Restaurants were ordered to close, many will never re-open. The tourism sector is decimated and is unlikely to recover until travellers have got the confidence that they will not get infected. The side effects of the fight against the Covid-19 virus are brutal, but all policies had one goal in mind, to save lives.

The Covid-19 coronavirus was spreading fast and is killing people.

Experts reminded us of two previous Corona Virus epidemies, the Middle East Respiratory Syndrome (MERS) and the Bird Flu, both of which had remarkably high fatality rates. It was estimated that at least 2 million would die in the USA, and worldwide the figure would be in the tens of millions. Here in South Africa, it was estimated on the 23rd of March that up to 1 million lives would be at risk within the following 40 days. As the fatality models were updated with more accurate data, the mortality came down significantly. It is not clear how accurate the models would be, because the most important measure to epidemiologists, the percentage of the population that has been infected, has not been determined. Instead everybody relied on tests confirming if a patient currently has the virus. That might be useful to doctors (even though there is no medicine for the disease), but not for epidemiologist. Very few ever questioned the models used, as no one wanted to be responsible for thousands of deaths. Let’s hope we used the right models to predict the development of the epidemic.

When the Covid-19 epidemy started in China, the response from the Chinese government was remarkable and quick. The city of Wuhan was locked down, extra hospitals were built in a week, school kids were sent home and the whole economy was shut down. These stories made us wary of this deadly disease. And our suspicions were confirmed when it spread quickly to the northern parts of Italy, where hospitals resembled war zones. Politicians were scrambling for ways to stop the spread of the virus. Even though personal hygiene, including frequent washing of hands and not touching the face has been the gold standard to prevent respiratory virus infections, governments decided to go further. Their response was modelled on the same draconian measures that China took. Schools were closed, factories were shut down, Mines were ordered to stop mining and businesses asked their employees to work from home. Disturbingly though, no extra special measures were put in place to protect those who were clearly the most at risk of dying – those in the old age homes. All the measures helped to flatten the curve of infection.

As the countries are opening their economies up again, it is a good time to reflect. Not to appoint blame, but to determine if the measures taken have the desired impact? A repeat of the hospital scenes of Italy were seen at the Elmhurst hospital in New York. Completely overrun and stretched on all kinds of resources the health workers did a remarkable job with the tools they had. The NHS in the UK was also getting busy, as did some of the hospitals in Spain. But non were as overrun as those in northern Italy or New York, not even those in the southern parts of Italy. We have not heard of shortages of beds in Germany, Netherlands or Australia. Even the developing world did not show any of those chaotic scenes. Here in South Africa, the Life Healthcare Group reported that their hospitals have an average occupancy of 40%, and that their losses amount to a few hundred million already.

 As virus tracers in the Netherlands and Iceland have not found a single transmission from child to parent, we must ask if it is the right policy to keep the schools closed as log as possible. They are facing an ever-daunting task in trying to catch up on the lost schooldays, or more likely redo the whole school year, since anything learned at the beginning of the year will be forgotten by now. Children from richer families would possibly have had some lessons on-line, via Zoom or Microsoft Teams, but it is once again the children from the poor communities that will suffer more. Let us hope the closing of the schools brought more relief than it will cause pain.

Now, 40 days on from when president Ramaphosa was advised that up to 1 million citizens could be at risk, we have only had 6 336 confirmed cases and 123 deaths. The strict lockdown surely had something to do with it, but such a huge variance could also indicate that the models used were wrong. And a flat curve does not matter to the starving and hungry, who cue for kilometres in the hope of getting a food parcel. It also does not matter to the immigrants around the world who are at best ignored and in many cases excluded from any relief efforts. For the people in need this crisis is just about survival, about living or dying. After all, flattening the curve does not mean that people do not get it. The same amount of people get the virus, just over a longer time period, giving the hospitals a chance to cope. Are we better off because of the lockdown? Perhaps, but at an increasing social cost.

As the Covid-19 death toll in the USA surpass that of the 2017-2018 death toll of the seasonal influenza (when 61 000 died according to the CDC), it is obvious that Covid-19 is a very deadly disease. But possibly not as bad as was first expected. Recent antibody tests (which determine if a person has had Covid-19) in the USA suggest that the estimated infected population is between 50 and 80 times higher than first assumed. It might thus be that we are experiencing the tail end of the outbreak, and the only reasons we find increased cases is because every nation is increasing their testing ability. The more you test, the more you will find. These are theories which still must be proven. As with much else about Covid-19, much is uncertain. The economic suffering though is not uncertain. Numbers out this week will show the damage done.

UNICEF has warned that because of the intense focus on Covid-19, 4 million children will miss out getting vaccinated against polio, measles, diphtheria and hepatitis. The World Health Organisation has cautioned that the estimated deaths of Malaria will go up by 300 000 to reach 700 000. Let hope we have the right Covid-19 strategy, knowing that every one of those extra Malaria deaths is because it saved millions from dying from Covid-19. Let us hope we have got this right.

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Current International

How bad is the Covid19 epidemic?

The true severity of the crisis is only unfolding as I am writing this. Currently there are 1.7 million confirmed cases, 108 862 deaths and 404 236 patients have recovered. This equates to a death rate of about 6.4%. The figure though is misleading.

The problem with this strain of the corona virus is that it is transmitted incredibly quickly, and that many patients experience just mild symptoms, some none at all. And since the symptoms are very similar to the seasonal flue, many would have mistaken the signs for those of the flu, thereby did not bother to go to the doctors to get tested.

To get a better understanding of the severity of the epidemic, we would need 100% of a population (or the statistical representation thereof) to get tested for two things: 1) if they currently have the corona virus and 2) if they have had previously had been infected by the covid19 virus. While the first test would only paint the picture of a snapshot in time, the latter test (called an antibody or serological test) would reflect how much of the population has already been affected. Since most public health facilities are currently under severe strain, the antibody test has not yet been rolled out.

Most countries started testing for present Covid19 infections, but because of the relative cumbersome test, most have only tested 0.8% of their population. Outperformers like Germany have manged to test 1.5%. One country stands out though. Iceland has tested almost 10% of their population. Their results paint a more complete picture.

4.87% of the Icelandic population sample tested positive, but alarmingly half of those infected showed no symptoms at all, thus were asymptomatic. 0.65% of the infections turned out to be serious and the Icelandic death rate is 0.47%. But even those figures could be misleading because we don’t know how many were infected by the virus. It could have been that at that population has already gotten to the magical 70% infection rates, where the heard immunisation cause a natural slowdown to further infections as the virus can’t find enough new hosts to spread to. If Iceland is at that point the death rate would fall to 0.003% well below that of the seasonal flue at about 0.1%.

Similar statistics are available from the cruise ship the Diamond Princess where after the outbreak was not being contained, everybody was tested. Of those who tested positive, just more than half showed no symptoms and about 18% would go on to never show any symptoms at all. All this would substantiate that the epidemic has spread much quicker and much further than anybody assumed. This is confirmed by a case of the tragic death of a 15-year-old boy from one of the remote tribes in northern Brazil. They practically have no contact with anybody else, but the virus has announced itself in the most remote regions of the world.  This death also questioned another feature which was established in China.

Practically no Chinese children suffered from the infections of the Covid19 virus. This held true for most parts, but besides the death of the 15-year-old Brazilian, complications of Corona virus infection of the youth are increasingly reported in the UK and the USA. I see a strong correlation between the countries where Tuberculosis (TB) vaccination is mandatory and those were it is not. China tried to introduce the vaccination program in the 1940’s but they were too expensive for most Chinese. After the Communist Party came to power though, they eventually rolled the program out nationwide, and since somewhere in the 1960’s it was mandatory. Some countries used to have a mandatory TB vaccination programs, some don’t have them anymore. Others, mostly African, East Asian and South American still have a mandatory TB vaccination program. The infection levels seem to be very low in those countries. Interestingly, the countries who have not had a TB vaccination program for long, if ever include Italy, Spain, UK and the USA.

Given the wide range of possible scenarios it is right for the governments to proceed meticulous and cautiously, even if the economic impact is very severe. But because of the risk of losing livelihoods, it is important to paint a full picture of the severity of the epidemic, something that can only be done with the antibody tests.

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Current International

The case against share buy-back schemes

Shareholders invest their savings in companies to gain some return on their investment. The norm used to be in the form of dividends, but over time companies have rather been buying back their own shares and assumed that this would increase the value of each share. They reasoned that it is Tax efficiency. It should be discouraged.

One of the great characteristics of a free and vibrant capitalistic economy is that there are many companies who are listed on the various stock exchanges and anybody has the ability to purchase shares in those companies and thereby get their share of the fortunes generated by the companies they invested in. This is non-discriminate allows anybody, no matter what their background is, to participate in corporations’ fortunes by investing in them. Everyone can be part owners without the need of actually establishing a business oneself, something that is much more difficult, stressful and often disappointing than it seems in theory. As a return the companies us the profits twofold. They use part of the profit to invest in future projects that should enhance the future of the company. The rest of the profit is returned to their shareholders in the form of dividends. That has changed over time, and recently many companies preferred to return most of the money due to shareholders by buying back the companies own shares. The reasoning given is that it is a more Tax efficient way of returning money to shareholders, because it would not attract withholding tax but only the much lower capital gains tax, if any at all. There are three reasons why this should be illegal.

Firstly, it muddles the true performance of the company. Management use the capital, that could have been returned to shareholders in form of dividends to pay for shares, and thereby increase the earnings per share (EPS), without increasing the revenue line at all. It suits them, as most of their performance is measured by the EPS, but it shifts more risk onto the shareholder because they now need to time the sale of their shares to realise their value of the apparent increased profitability. But, as it is obvious in the current Covid19 crises, even shares with increased EPS fall in a crash. But is also makes the live of an investment analyst much harder. The timing and the pricing of the bought back shares plays a crucial part of the valuation and the determination of the return on shareholders capital.

Secondly, managers of companies have a very poor record of determining what a fair value is. Anglo American bought billions of their own shares back at the hight of the 2008 commodity bubble. Back then, the share price was approaching R550, which was never to be seen again. The most laymen equity Investor could not have done a worse job themselves. Managers often struggle to unlock value by buying companies, just think of the massive write downs at Woolworths after their disastrous decision to spend half their market capitalisation on a department store in Australia, while there is a worldwide trend away from department stores. Or look at EOH, where the previous management had a never-ending appetite for acquisitions. That worked well when the share price raced to R150, but now at R3.40 their market capitalisation is much smaller than many of their acquisitions. If they have such trouble allocating capital efficiently in their own field of expertise, how would you expect them to judge their own share price realistically and unbiased?

The third reason is the most important though. If the companies always pay out a share of the profits in the form of dividends, it gives the investor the ability to decide themselves what to do with the cash inflow. If they feel that the company is undervalued, they might just buy more shares themselves. But they also can spend the income on anything else they might desire, not necessarily in the investment world. They might use the money to pay towards their next car or might use it pay for their next holiday. Clearly this has got a much wider and a more positive impact on the economy.

In a world where we are once again talking about Taxpayers bailing out big companies, it is important to understand that should the companies just resort to buying back their own shares when they return to profitability, thanks to Taxpayers money, the wider economic impact will be very limited. The main beneficiaries are the managers, followed by the shareholders. The wider society, who are the sole reason for their survival will have limited benefits. Paying out dividends in cash will broaden the impact substantially.