H O W T O M A K E I T, H O W T O K E E P I T, H O W T O S P E N D I T
THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA
31 JULY 2009 SOUTH AFRICA EDITION 105
Buyer beware It’s not safe to get back into property yet, page 16
“I read MoneyWeek to pick up all the vital things I’ve missed elsewhere.” Justin Urquart-Stewart, Seven Asset Management
The best way to buy into timber SECTOR
The 1980s can save us from recession 7
OPINION
Michael Winner’s big confession 14
ENTREPRENEURS
20
from the editor 31 JULY 2009 ISSUE 105
As good as it gets
ISSN 1995-4476
South Africa Gareth Stokes – Editor Julie Brownlee – Deputy Editor Annabel Koffman – Publisher Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles Subscriptions and marketing Tel: +27 11 699 6530 Advertising sales Shaun Besarab – Tel: +27 82 725 8355 Paul Vidas – Tel: +27 82 926 3429 MoneyWeek is published in South Africa by Fleet Street Publications (Pty) Ltd, Unit 2, Block B, Northlands Business Park, Newmarket Street, Northriding.
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31 July 2009
Will the Reserve Bank cut interest rates when it meets on the 12th and 13th August 2009? A growing band of local economists believe the current 11% prime lending rate may be as good as it gets. And, if governor Gill Marcus sticks to her inherited inflationtargeting mandate, you could even be on the receiving end of a small rate hike before the year is up. Don’t look so surprised! There’s evidence of inflationary pressure all around you. The biggest bugbear is wage negotiations. Since the April 2009 national election, the country’s trade unions have demanded increases far in excess of consumer price inflation. Construction industry workers settled at 12%, but unions representing mining sector employees (including gold, platinum, coal and diamonds) started negotiations at 15% or higher. The trend repeats in the public sector, with the SA Municipal Workers Union (Samwu) downing tools after its initial 26% demand (subsequently revised to the “benchmark” 15%) was ignored. There’s no question employers will have to settle most of these disputes at rates well in excess of the official inflation rate. Further pressure comes in the form of recovering Brent crude prices. As the per-barrel price settles north of $70, you can look forward to additional hikes in petrol and diesel going forward. It’s no wonder Standard Bank Economics is concerned with the medium-term outlook on inflation. They say the central banks’ inability to offer further interest rate respite will weaken household balance sheets and lead to rising bad debts. We expect the Reserve Bank will be reluctant to make further interest rate
decisions until the Q2 2009 GDP number is released. The number, due at the end of August, will indicate how strongly the recession’s taken hold in South Africa. Any decision to leave interest rates unchanged will have far reaching impacts across broad swathes of the economy. You’ll wait longer for improvements in motor vehicle, credit retail and house price statistics. Of these, house prices probably concern the regular MoneyWeek SA reader most. We invited a group of top real estate commentators to share their views on prospects for one of the country’s most popular asset classes. Proceed to page 16 to find out about likely house price trends through 2010 and beyond. Here, as overseas, the key phrase bandied about by economists is uncertainty! Despite overwhelming odds, local investors have plunged back into equities with renewed vigour. The market shrugged off the negatives associated with strike action and barely hiccupped at loud calls for the nationalisation of private corporate assets. As we write, the JSE All Share Index has gained 8.5% since 1 July, with 14 out of 19 positive trading days. The rand has followed suit, with futures traders suggesting that R7.67/$ is achievable in the near term. It’s beyond belief that locally listed shares (and the rand) can rally so strongly against the backdrop of calls by the ANC Youth League and various trade unions for the nationalisation of mining, manufacturing and financial institutions. Their demands are gaining massive support from South Africa’s poorest citizens. They say the market knows best and that every snippet of bad news is priced in at any given time. Now might be a good time for you to question this convention.
Gareth Stokes Editor, South Africa
In this issue 5 Markets The stock market bulls are back. But for how long?
19 Blogs US bail-outs turn capitalism on its
8 Who’s tipping what
Snap up these insurers – they’re about to surge.
22 Profile Silvio Berlusconi – the ladies love him, but is he good for Italy?
11 Strategy Three ways that charts can help you make money.
24 Cars The Fiat 500 cabriolet – cheap, cheeky and irresistible.
13 Briefing Company directors are still
28 Last word Bill Bonner on how stimulus
filling their boots. Does it matter?
plans are making fools of us all.
head; making money from mattresses.
news SA ecomony
2 out of 5 South Africans are drowning in debt It’s no wonder civil servants are striking. According to a new index launched last week, which measures what sectors of the population are most affected by global financial stress, “the number of civil summonses issued for debt increased by more than 10% in the three months to May, compared with the same period last year”. Created by Unisa’s Bureau of Market Research and the FinMark Trust, the Consumer Financial Vulnerability Index shows consumer fiscal weakness “continues to increase because of the downturn and job losses”. According to I-Net Bridge: “The index revealed South Africans were at higher risk than might be expected. So how does it work? Well, the overall index and sub-indices are based on a ten-point scale. Zero indicates total financial security, while ten indicates total financial vulnerability. “With a score of 5.17, South Africans are at risk, especially when compared with consumers in European countries measured on a similar index: Sweden scores 0.4, Norway 0.9, Denmark 1.3,
Great Britain 3.1 and Ireland 3.4,” explains The Business Times. And this explains why, according to the Financial Mail, “South African council workers went into a fourth day of strikes for higher pay on Thursday in the latest stand-off between President Jacob Zuma and labour unions that helped him to power”. To date, some 150 000 council workers (which include municipal workers) are boycotting – demanding a 15% wage hike. With this section of the economy’s household income standing at around 7.71 on the index (or a rating of “financially very vulnerable”), it’s clear that unless government and unions can come to some sort of agreement, the strikes will continue across multiple sectors throughout the country.
US
Consumers keep their wallets shut “We appear to be moving away from the slowing-rate-of-decline stage and closer to the actual bottom,” said Andrew Leonard on Salon.com. There was encouraging news on the US housing market this week. The Case-Shiller index of national house prices – 32% down from its 2006 peak – showed a 0.5% rise in May, its first monthly gain in over three years. The annual rate of decline slowed for a fourth successive month to 17.1%. But consumer confidence slipped for the second month in a row in July.
What the commentators said It’s too early to sound the all-clear on housing. As Jan Hatzius of Goldman Sachs pointed out, the market has been bolstered by a number of recent moratoria on foreclosures. With the latter still rocketing, distressed sales look set to add to inventories. These are still far too high to permit a sustained upturn in prices. In any case, “there won’t be a meaningful recovery in the US economy until consumers start to spend more freely again”, said Paul Ashworth of Capital Economics. That isn’t likely anytime soon. For one thing, the housing slump has caused the worst episode of household wealth destruction since the 1930s and the loss is “going to weigh on consumers for years to come”, said Mark Vitner of Wells Fargo. Especially given that households accrued debts worth a record 130% of their income in the boom, while the savings rate is only creeping up slowly. Moreover, tax relief for consumers has now expired and personal income is on a downtrend as unemployment has risen. The labour market is in an appalling state too, with unemployment heading for a post-war record above 10.2%. And it won’t recover fast, said David Rosenberg of Gluskin Sheff + Associates. Factoring in a record number of people now in parttime work who would rather be employed full-time, there are an unprecedented eight million people either unemployed or underemployed. Eight million jobs is equivalent to over five years’ supply of labour during a typical recovery. So the
The bottom line
3
£50,000
What 40-year-old estate agent Carole Bohanan will earn a year to live and work as a witch in a Somerset cave. She won a local talent show with 400 entrants to clinch the prize.
$0 How much American
£6,000 The price of the
adventurer, Alex Boylan, paid to circumnavigate the world. Boylan, who relied on the hospitality of the world’s online community, visited 16 countries and four continents in 159 days.
skin-tight Gucci snakeskin outfit worn by Sienna Miller (left) at the Japanese premier of GI Joe: The Rise Of Cobra.
31 July 2009
R130 That’s approximately how much it’ll cost to lather up with the pope. To earmark additional fees for the Vatican, it’s come up with a Pope-on-a-rope soap moulded into the shape of the highest member of the Catholic Church.
£45
The price of an 18cm tall cupcake that feeds 15 people from London bakery Lola’s-kitchen.
R6,000 How much former Gauteng MEC, Nomantu NkomoRalehoko’s, R1m Mercedes Benz sold for in a cross-border hijacking syndicate.
©MASATOSHI OKAUCHI/REX FEATURES
R393,500
The amount a Chicago real estate management company is suing a former tenant for defamation after she complained on Twitter about mould in her apartment.
news outlook for consumption is grim; the trend towards “frugality” is still “in its early stages”. The chance of a V-shaped recovery is “1 in 50”.
Companies
Growing fast food chain gets a caffeine boost Despite consumer spending being close to rock bottom, it seems the fast food industry is still strong. “Famous Brands varies menu with Mugg & Bean,” was just one of the headlines breaking the news of the latest acquisition in the fast food industry. On Monday, Famous Brands (JSE:FBR), which owns the likes of Steers, Wimpy, Debonairs Pizza, FishAways, House of Coffees and Brazilian Café, added another coffee shop to its brand for R104m – this time, the 96 store franchise of Mugg & Bean.
coffee, industry. Others, like Kagiso Asset Management, Abdul Davids, believe “the buy seems pricey”. Davids told Fin24 that: “The deal will be earnings neutral, so Famous Brands will be paying a similar price earning multiple to its own (roughly 12.6 times), which we think is a bit steep in the current market, even taking into account Mugg & Bean’s growth prospects.” Not surprisingly, the market reacted well to the news, with the shares rising 4.99% by the close of trade on Monday.
But it seems others in the industry may be struggling. “Compared to competitors Taste Holdings and Famous Brands, Kingco's (JSE:KNG) brands [which include Bimbo’s, Keg, Saddle and McGinty’s] haven’t been all that well positioned”, informs the Business Report. One of the biggest problems facing Kingco is “the lack of a South African pub culture”, says one retail analyst, who believes the group should consider delisting from the JSE.
And it’s not just Famous Brands making the news lately. AltX share, Taste Holdings (JSE:TAS), has also been racking up the accolades. Owning both the Scooters and the Maxi’s brands, its fast food franchise divisions are currently doing very well. So well, in fact, it’ll open
Yes, there’ll be further pressures on consumer spending in the year ahead, but Kevin Hedderwick, chief operating officer of Famous Brands, believes consumers will target their spending on well-known and trusted brands – like the ones in his stable.
The way we live now “Now even death is no excuse” for missing a birthday or an anniversary, said Roger Waie and Alex Pell in The Sunday Times. A new range of websites, including Letterfrombeyond.com and Youdeparted.com, allow users to send email messages from beyond the grave. Before they die, customers can programme the sites to send posthumous messages on key dates, or let their relatives know where to find details of life insurance policies. Once the website has been alerted to a subscriber’s death, the service goes live. “Death ends a life, not a relationship”, as one website put it.
Vital numbers % change
FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$
*4547.53 **-0.27 10113.24 3.27 975.15 -0.12 1967.76 -0.30 3365.62 -0.24 5270.32 0.44 21246.00 -1.53 23589.00 -1.36 11.10 1.91 12.92 1.04 7.89 1.82 *29 July ** since 23 July
©LEE WHITE/CORBIS
Speaking to the Business Day, Coronation Fund Manager analyst, Quinton Ivan said: “Mugg & Bean is the number one brand in the coffee category in SA, so [Famous Brands’] acquisition is in line with their strategy of owning the number one or two brands in the quick service categories in which they operate.” Despite being well positioned, the news came as a bit of a surprise to analysts – many of whom believed the cautionary proceeding the announcement related to a move into the chicken, and not the
Best and worst-performing shares Winners
% change Price
31 July 2009
Losers
% change Price
Cenmag (CMG)
68.42%
160c
IFA (IFH)
-20.00%
120c
S.Ocean (SOH)
26.67%
152c
Sentula (SNU)
-18.51%
383c
AfPrefInv (AFP)
20.00%
600c
Angloplat CCP (AMSP)
-17.78%
11100c
Platmin (PLN)
18.18%
910
Metrofile (MFL)
-12.73%
96c
Shoprit 5%P (SHP2)
17.00%
117c
IPSA (IPS)
-10.71%
125c
Hulamin (HLM)
16.67%
1400c
SovFood (SOV)
-9.91%
1000c
Pergrin (PGR)
16.13%
900c
Decillion (DEC)
-9.00%
182c
Net1UEPS (NT1)
13.74%
12500c
Wesizwe (WEZ)
-8.61%
223c
Iliad (ILA)
12.88%
745c
AME (AME)
-7.69%
2400c
Wits Gold (WGR)
11.11%
6500c
PallingHT( PGL)
-7.17%
440c
Weekly change to JSE stocks as 29 July 2009
4
its hundredth Scooters’ store before September.
the markets
A rally in wishful thinking “It’s pretty amazing S&P 500 estimates for earnings growth in Q2 (%) 0 what passes for good S&P 100 index news these days,” says Barry Ritholtz on -10% Ritholtz.com. The Dow has risen by 12% in two -20% weeks, its best fortnight in nine years. The FTSE 100 has climbed for 11 -30% days on the trot, matching a record -40% established in 2004. It’s Jan Feb Mar Apr May Jun Jul all because analysts, Source: Thomson Reuters/Datastream/ft.com. having consistently overestimated US earnings inched up but revenues slid by earnings in past quarters, had drastically 14%, while Caterpillar, despite hiking its slashed second-quarter estimates, which full-year earnings outlook, reported a many firms are now beating. There was, 41% fall in revenue. Meanwhile, for example, an outbreak of good cheer Microsoft announced its first dip in fullwhen Goldman Sachs, Intel and year sales since it went public in 1986, Caterpillar exceeded their forecasts. undermining hopes of a recovery in IT spending, notes Lex in the FT. But a closer look at recent results shows it’s far too soon to crack open the A rise in spending by US businesses and bubbly. “The bottom line of this consumers that would boost revenue earnings season is that the top lines are “doesn’t look imminent”, as Robert coming in rather light,” says Barron’s. Cyran points out on Breakingviews.com. So far just over half of the S&P 500 has A recent survey shows businesses are reported, according to David Rosenberg planning further staff and capital of Gluskin Sheff. While 61% have spending cuts, while consumers are beaten their “low-balled” profit “squirreling away” cash. What’s more, estimates, this is being driven by their incomes are dropping, aggressive cost-cutting. That isn’t unemployment is soaring and even the sustainable. Long-term earnings growth fiscal stimulus, now set to be withdrawn, depends on revenue growth, but has had scant impact on retail sales, says revenues are down by 10.1% year on Rosenberg. So you shouldn’t expect a year. The final figure is likely to be consumer recovery anytime soon. Yet worse since retailers and housebuilders analysts are still pencilling in a V-shaped have yet to report. When the 2001 recovery. They expect the S&P’s earnings recession ended, sales growth was to jump by 25% next year. This is “a running at an annual –1%, ten times faith-based rally, pure and simple”. better than the current figure. Yahoo’s
Contrarians will warm to a sector where there is “an absence of enthusiasm of any kind”, says Tim Price of PFP Wealth Management. Enter Europe: as Barry Norris of Argonaut Capital Partners points out, net flows into European equity funds have been negative for the past two years. Morgan Stanley notes that at a recent conference, just 19% of investors chose Europe as their favourite investment region while 42% plumped for the US. On top of that, Europe is also trading at close to a 35-year low relative to US equities in terms of a composite valuation measure including the price/book-value ratio and dividend yields. Citigroup says that panEurope’s price/book is close to mid-1990s levels. So European stocks, having lagged behind the US since March, may be set to outperform. Short-term risks abound, but as Warren Buffett says, “the time to get interested is when no one else is”.
Does FTSE rally spell start of new bull? Good news for FTSE bulls, says the Financial Times’s Neil Hume. According to stockmarket historian David Schwartz, there have been 23 occasions when the FTSE rose for at least ten successive days, and each time this occurred, stocks were in a bull market. But there is also “the lesson of Japan”, says Lex in the FT. Developed markets halved between late 2007 and March 2009, and have now rallied for five months. After the Nikkei halved in 1990, it also rebounded for five months – and then spent 19 years halving again.
Viewpoint
The big picture: Peru pulls ahead of the Brics
“It’s going to take assets a number of years to get back to the old highs. All of the growth in the 1980s and 1990s was fuelled by borrowing and that’s got to be paid off. The outlook for economic growth is pretty anaemic, particularly in the West, because we have to pay for the excesses of the last two decades.”
The Bric (Brazil, Russia, India Peru's Lima General index and China) markets may be hogging the headlines, but the 2000 best-performing stockmarket of 2009 so far is Peru, up 106% in 1500 dollar terms. The Lima General index has shrugged off civil 1000 unrest, and low inflation is helping matters, notes Lex in 50 the FT. But it’s largely a 2008 2009 commodities story: Peru is the world’s largest miner of silver and the third-largest copper, zinc and tin producer, and the index is dominated by natural resource companies. That makes it vulnerable to a renewed slide in prices; last year’s, which resulted in a fall of 60%, left it at the bottom of the Latin American league table.
Edward Bonham Carter of Jupiter, The Sunday Telegraph
5
Neglected European stocks set to soar
31 July 2009
the markets
Emerging markets are booming again – but can the good times last? If you take a close look at the charts of 40 stockmarkets around the world, “a very clear story” emerges, says Robin Griffiths, Cazenove’s technical strategist. The secular, or long-term, trend in the developed world is down, with most markets around 50% below 2000 levels. But emerging markets are typically up by around 400% on 2000 when global stocks last bottomed. So they are in secular bull markets.
The Shanghai index is already on 37 times earnings. That’s well off the 50 it hit in November 2007, but the fundamentals are worse this time, as Ren Chengde of Galaxy Securities points out. During the last bubble economic and earnings growth reached a peak. This year, though, the economy has only just begun to improve and mainland firms’ profits are still expected to finish the year 10% down. So we’re “already in a bubble”, says Qian Qimin of Shenyin & Wanguo. Clearly, some of the liquidity created by the 35% year-on-year surge in bank lending that is fuelling the economy is finding its way into asset markets.
©CHINAFOTOPRESS/GETTY IMAGES
Emerging markets are doing particularly well at present. Risk appetite has returned, with the improving outlook in China the key catalyst, says David Oakley in the FT. Developing markets began to find their feet late last year after China’s stimulus package was launched. This year China remains tied to the West alone the MSCI emerging markets index Meanwhile, the lending surge mandated by is up by 50%, while America’s S&P 500 the government poses a potential threat to index has climbed a mere 8%. India and the banking system. The lending flood Russia have gained a respective 55% and “will lead to a huge pile of bad debt”, says China’s rise: is it more than just hot air? 60%. China leads the pack, with the Vitaliy Katsenelson in Foreign Policy. domestic market – the Shanghai Composite index – 89% “Forced lending is bad lending… don’t confuse fast growth with ahead this year and up over 100% since October. Meanwhile, sustainable growth”. Moreover, the stimulus will have to be the H-shares index of mainland companies listed in Hong withdrawn at some point as worries over inflation mount, says Kong has advanced by 50%. Saxo Bank. The broader problem for Chinese and emerging market investors, as Griffiths points out, is that China remains “an export machine”. As such it is linked to “Western Signs of speculative fervour economies and their problems, and especially the US economy But the worry now is that the domestic market – driven by retail and its problems”. Decoupling is still some way off, which investors as it is largely off limits to foreigners – is heading into means the market is “ahead of events”. bubble territory again. It rose fivefold in 2006/2007 before slumping by 65% last year. Signs of speculative fervour abound. With Western demand likely to be subdued for years, it’s hard to Daily trading volume in Shanghai and Shenzen is close to the see exports underpinning strong growth in China once the peak levels of 2007. Individual investors opened 484,800 stimulus ends. And mounting evidence that the global recovery accounts in China last week, the most since January 2008 and will be lacklustre is a threat to all emerging markets. “China is five times January 2009 levels. And, following a ten-month not out of the woods yet,” says Nigel Rendell of RBC Capital moratorium, this week’s first initial public offering in Shanghai, Markets, “and neither is the rest of the emerging world.” Sichuan Expressway, quadrupled on its first day of trading.
Natural gas prices head south Oil may have more than doubled over the past six months, but natural gas prices have gone south. US futures are down 36% for the year to $3.5 per million British thermal units, leaving the oil/gas ratio (the oil price divided by the gas price) at a record 18 to one – compared with a typical ratio of nine to one. Yet it’s hard to see that gap closing via rising gas prices anytime soon. “The fundamental picture isn’t positive, to say the least,” says Gene McGillian of Tradition Energy. Industrial demand has withered during the recession and shows scant sign of rebounding. Meanwhile, forecasts of an unusually cool summer in the eastern US are hardly helping sentiment. On the supply side, inventories are near record highs and could reach a record 3.8 trillion cubic feet by the start of the cold weather season. And that means storage capacity will be pretty much full. We can’t even count on the hurricane season to give gas a boost, as increased supplies from shale fields have rendered the Gulf of Mexico far less significant as a source of supply, says Christine Buurma in Barron’s. Unless there’s a major change in the fundamentals, prices look set to stagnate, or fall further, over the next few months. 6
31 July 2009
Gold watch The yellow metal climbed early on to a six-week high over $950 an ounce as the dollar slipped and global risk appetites rose. But a firmer greenback and falling oil prices – which reduce gold’s appeal as an inflation hedge – caused a correction. “The dollar plus oil remain the major force behind the gold market”, according to John Nadler of Kitco Metals. But over five years, with all currencies looking unappealing, given towering public debt, gold should rise to $1,500-$2,000, says Stefan Keitel of Credit Suisse.
sector of the week
Timber can withstand ill economic winds last century. That seems to have been forgotten by investors pushing up the price of more exciting stocks over the past five months. Timber is relatively undervalued along with other defensive stocks. Yet it is the ultimate crisis-friendly investment.
by Eoin Gleeson
©BLOOMBERG
“This is the most positive housing report in ages,” crowed Patrick Newport of market analysts IHS Global Insight. He was referring to news that sales of single family homes in the US leapt 11% in June – analysts had expected just 2.3%. Stocks in housebuilders surged as the news lit a fire under Wall Street. No sector had been more impatient for this news than timber companies. The collapse in home construction has been devastating for much of the industry, with planks piling up in mills as homebuilders went to the wall. And with no furniture companies calling in orders, pulp mills across northwest America have been abandoned. Shame this isn’t the revival they’ve been waiting for. Most of the demand for new houses is coming from first-time buyers, says Gerry Shih in The New York Times. And that is largely thanks to Barack Obama’s temporary 10% tax credit on the purchase price of a home. That credit expires on 1 December. Any uptick in housing demand will die with it. The futures market seems to agree. Futures traders paid little or no heed to the housing starts numbers – with lumber prices falling to a four-month low the same day they were announced. That’s because it’s the foreclosure rates that really matter, says RBC Capital Market analyst Paul Quinn. Those numbers are dire. About one in every 16 homes is foreclosed in Arizona. The rate for
Timber has a good record of growing in recessions California is one in 34. And with a huge backlog of houses already on the market – about 9.4 months worth of supply – there is very little sign of demand picking up for lumber and logging groups. That’s not true of everyone in the industry though. Forestry groups have been able to rest easy during this recession. The beauty of owning a forest is that if you don’t like the look of prevailing timber prices, you can just leave the timber to grow on the stump. And the longer you leave the trees to grow, the more valuable they become. For around the first 15 years a pine tree, for example, is good for cheap pulp. But after 20-27 years it is useful for telephone poles or plywood, and fetches far more. That’s why timber has such a great record of performance during recessions – rising during three out of the four big ones this
Forestry groups have certainly been busy buying up trees from Asia to Latin America. China is trying foster forest plantations of its own after Russia, its main exporter, decided to raise taxes on exported Russian logs. Meanwhile eucalyptus plantations are springing up across Uruguay and Brazil as they open up to private forestry groups. The trees may be harvested after six years for burning as biofuel. Or they can be left to grow for 20 years for use as sawtimber. Overall, Latin pulp capacity will grow by nearly 40% between now and 2015, accounting for nearly 35% of the global market, says Kurt Akers of Global Forest Partners. In the box at the bottom of the page we have a look at the best ways to benefit from investing in timber.
An update on NetApp Our data storage tip NetApp is now up 66% since we tipped it in February. And while I am a firm believer in the importance of data storage as we move to utility computing, the 43% drop in quarterly earnings reported by rival EMC makes me think there may be a better time to buy in. Take profits.
The best bets in the sector Many investors play timber by stocking up on the Claymore and S&P Global Timber index exchange-traded funds. But both carry too much exposure to paper, wood manufacturing and distribution. We prefer single stocks such as Canadian forestry group Sino-Forest (Toronto: TRE). The firm owns vast tracts of forest in China and has little debt on its books. It is up 32% since we tipped it at Christmas.
1.2
Phaunos Timber Fund
1.1
Figures in dollars
1.0 0.9 0.8 0.7 0.6 Jan 2008
UK listed timber fund Phaunos Timber (LSE: PTF) looks even better value. Phaunos is a Guernsey-based, closed-end
7
31 July 2009
investment company and owns forests in 13 countries. These range from teak plantations in Brazil to poplar farms in Oregon. It had invested $150m by the turn of the year, but it still had about $400m in cash.
Recently, Phaunos has been very busy picking up land in South America – Jan 2009 including a $21m commitment in Uruguay. The fund charges an annual fee of 1.5% and trades at $0.68, down 16% since we tipped it at Christmas. At a 45% discount to its net asset value of $0.99, it looks good to us.
who’s tipping what Julie Brownlee, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.
Two insurers set to boost your portfolio Tip of the week: “Shake out for the better” – Finweek With financial stocks in particular being the focus of the market crash, it’s unusual to come across a company that’s shrugged off the chaos, let alone falling under one of the culprit sectors. And, as Shaun Harris highlights in Finweek, Glenrand MIB Limited (JSE: GMB) has done just that. “Glenrand MIB has gained more than 60% over the past six months and is down 13% for the past year.” Not a performance to be laughed at. According to Glenrand’s website, it provides “expert insurance broking and risk assurance services to a portfolio of local and international clients”. And it prides itself on providing “service beyond expectation”. Having once been
a Glenrand client myself, I have to agree with that statement. I experienced fantastic customer service during my two and half year stint with them. With a strong southern African presence, it has offices in Botswana, Zimbabwe, Mozambique, Swaziland and Namibia, along with its South African operations. Glancing through its most recently released interim financial results, to end December 2008, the company seems to be on track. It’s turned around earnings per share from a loss of 20.7c to positive 9.6c. Broking revenue improved 16.8%. One of its largest undertakings this year has been the liquidation of its Benefits Service subsidiary. This leaves the company more focused on what it’s known as – a short-term insurance broker. It will be interesting to see what its full year results to end June 2009 hold – but you’ll have to wait a couple of months for its release.
Gamble of the week: Old Mutual Plc (JSE: OML) To keep with our insurance theme in this week’s Who’s tipping what, Old Mutual wasn’t as fortunate as Glenrand to survive the storm. The share price was completely decimated. After hitting a high of 2496c at the end of October 2007, coinciding with the market crash, the share began its descent to a low of 480c, which it reached at the beginning of March this year. But since then, the share’s only been going one way – straight up! It’s slowly, but surely, clawing its way back up.
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The liquidation of this subsidiary didn’t go without bad press for the company. But, the market welcomed the change with open arms. In addition, directors have lately been very active in the market buying up shares – a positive indication of what the future holds for Glenrand. The company doesn’t pay a dividend as it stands, but Glenrand is planning on paying a dividend once it’s practical to do so. So, if you’re considering investing in Glenrand, you’re primarily looking for capital gain. Shaun Harris rates the share a buy “on a
Old Mutual has had its fair share of rumour mongering recently. A British newspaper leaked the story, albeit completely false, that Old Mutual was selling its massive 53% stake in Nedbank. This brought the share crashing down 12% on the news. It was later shown that Old Mutual was actually increasing its stake. Just goes to show what damage rumours can cause! Old Mutual has been around since 1845 – originally named the Mutual Life Assurance Society of the Cape of Good Hope. John Fairburn founded the company with the capital earned from the first 166 policyholders. Now, the company is a massive multinational operation – and with that, a trustworthy reputation. So what caused the share price to get caught up in a landslide? Insurance companies are valued according to their assets – so
who’s tipping what value basis”, and we at MoneyWeek agree. The share carries some risk related to its history, but you have to admire a company that’s survived the downturn so well and is blasting higher as the year continues. At 94c a share, Glenrand is worth building up a holding in. And, hopefully in time, you will be rewarded with dividends too. Buy. Recommendation: BUY at 94c Market capitalisation: R274.601m
Turkey of the week: “An industry in crisis,” says the Financial Mail As we’re all more than aware, one of the biggest casualties during the global economic meltdown, car manufacturing, was walloped. We saw the US government scrambling to run to the assistance of General Motors, and it hasn’t been the only victim. Obviously, if you’re in the business of supplying parts for the car industry, the experience is becoming equally painful.
scrambling to adapt its cost structures to the shrunken market”. Of course, what Metair needs is a complete about turn in the economy and things getting back to the good old days of a couple of years ago. For those with Metair in their portfolios, recently there hasn’t lately been much reward for holding the share. The company last paid a dividend in 2008. And, until there’s a marked change in the local and global economy, that’s not going to change. On 14 July 2009, Metair announced that it’s expecting a massive drop in headline earnings per share for the half year ending June 2009. It’s pencilled in to plummet from between 103% and 123%, which equates to headline losses per share of between 1.4c and 12c. But, this isn’t surprising when you factor in the situation over the past year or two. So, the recovery of Metair is paired with
This brings us to this week’s turkey, Metair Investments (JSE: MTA). Metair hold a portfolio of companies who manufacture and distribute products for the auto industry. Its primary focus is in the manufacturing of new vehicles, which, of course, has been hit the hardest. Products include shock absorbers, batteries, plastic mouldings and springs. So what’s it going to take to put a spring back into Metair’s step? As Jamie Carr notes in his Diamonds and Dogs column in the Financial Mail, “urgent cost cutting is underway and the company is
when the market crashed, it took Old Mutual’s assets with it. Had you been savvy enough to pick it up in mid March, you’d be grinning now. The share has rallied with the market 160% since then! Now that’s not a bad return on your money in five months! But the share still has plenty of room left for recovery. Albeit, the recovery may not be as swift as those lucky shareholders who bought at its low in March, there’s still scope to make a healthy profit over the medium-term. For your money, you’re gaining a stake in Nedbank and Mutual & Federal, along with its
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the recovery of global markets. Once people start buying new cars in their droves, the knock on effect to the auto parts’ industry will be welcomed by Metair. But, with cheap parts becoming part and parcel of the export industry in the East, namely China, things might not all be plain sailing. Price competition will provide an added challenge to Metair once consumers and businesses alike start to spend more. So what should an investor do? Metair could prove to be an excellent flutter in terms of buying it while the price has been battered down and holding for the longer-term – long after conditions improve. But, you’ll have to wait and see, if and when, you’d be rewarded for your patience, bearing in mind Metair’s no longer paying a dividend. The share hit over 1300c a share at the beginning of 2008, and has fallen 70% since then. Tread cautiously with this one. It might be worth a look later on in the year once we have more confirmation on the direction of the global economy. Avoid for now. Recommendation: Avoid Market capitalisation: R593.349m
other operations. And to put Old Mutual’s scale into perspective – its funds under management are nearly four times that of Sanlam! Results aren’t out until August and these might offer some more clarity on the share, but it’s definitely worth a look now. As long as the stock market recovery remains on track, Old Mutual looks set to rise steadily. Worth stocking up on at its current 1254c a share. Buy.
Recommendation: BUY at 1254c Market capitalisation R69.153bn
best of the financial columnists
Ambrose EvansPritchard The Daily Telegraph
Ditch this dangerous tax rise Matthew Sinclair Guardian.co.uk
Job losses are worse than they appear Roger Lowenstein The New York Times
We need a Marshall Plan for Africa Glenn Hubbard Financial Times
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Is Iceland the “scarecrow exhibit” of what happens to a small country “without the shield of euro membership”? No, it is proof of why it is better not to have it, says Ambrose Evans-Pritchard. The krona has halved against the euro since Landsbanki, Glitnir and Kaupthing collapsed, but lower prices have tempted the “euro-youth” back to spend in Reykjavik’s nightclubs. Meanwhile, cheaper aluminium and fish have helped Iceland to “eke out” an 11% rise in exports over the past year. “You take your punishment early with devaluation”, but it’s worth it. “It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation and deeper social damage.” Look at Spain and Latvia, where youth unemployment is 34% and 28%. And talk of dropping Iceland’s debt to junk is odd. It should emerge with public debt of 80% to 100% of GDP – much like Britain. Yet Iceland also has the world’s best-funded pension pot, at 120% of GDP. “It is the two together that counts.” If the new 50p UK tax rate is introduced, those with the “temerity” to earn, save and invest their money in a company and pass it on to their children will pay a top marginal rate of 92%, according to the UK Taxpayers’ Alliance, says Matthew Sinclair. This isn’t just bad news for entrepreneurs, but bad news for us all. Entrepreneurs take huge risks in starting new firms, and they will only continue to take those risks if the potential rewards are great. That “massive” tax bill means fewer people will start new firms and more higher earners could move abroad. Both will lose the Treasury revenue. All the political parties are trying to encourage employment and billions have been spent on the Regional Development Agencies in the mistaken belief that a quango with cash to grant is the best way of encouraging entrepreneurs. It isn’t. Low taxes are. It was “utterly irresponsible” for the British government to engage in a “political stunt” that risks reducing jobs during a recession. This tax rise should be abandoned. The US economy is not only shedding jobs at a record rate, it is shedding more jobs than the decline in output would suggest, says Roger Lowenstein. The economy has already lost 6.5 million jobs (nearly 5% of the total) and the Federal Reserve now expects it to surpass 10%. Why? Perhaps companies panicked and have cut their payrolls to the bone. Or maybe firms don’t want to hire. During the recession of 2001, hires fell to seven per 100 already on the payroll, and that percentage then failed to rise to pre-2001 levels. During this recession, it has fallen to six per 100. “In terms of its impact on society, a dearth of hiring is far more troubling than an excess of layoffs.” It suggests declining dynamism. Ultimately, each new job depends on the boss’s confidence that enough work will materialise and no government can force a company to hire. The government’s “tilt towards so-called sustainable new jobs” suggests it knows what is at stake. Whether its plans will bear fruit is another matter. This week, the UN reported that the recession has created a $4.8bn shortfall in its 2009 aid programmes – more than half the $9.5bn it seeks, says Glenn Hubbard. This is clearly bad news, but it may at least force the UN to rethink its approach to economic development. Instead of helping local businesses in poor countries, the UN continues to fund government and non-governmental organisations to run development projects. But that is not how to end poverty, as evidenced by the “spectacular failure” of the past 40 years of development aid. The UN could do worse than look to the Marshall Plan of 1948 to 1951, which helped impoverished Europe catch up with rich post-war America. “The Marshall Plan made loans to European companies, which repaid them to their governments, which then spent the funds on infrastructure.” To qualify, countries had to enact certain pro-business policies to ensure that their local businesses could use the loans well. To tackle poverty in sub-Saharan Africa, the mechanisms of funding need to be looked at in a similar light.
Money talk
©CHARLES SYKES/REX FEATURES
Iceland shows it’s best to be out of euro
“I don’t know why I haven’t gone off the rails. I don’t have time. I’m working too hard to be the rebellious teenager.” Harry Potter star Emma Watson (pictured), quoted on Sky News “Except for con men borrowing money they shouldn’t get and widows visiting handsome young men in the trust department, no sane person ever enjoys visiting a bank.” Author Martin Mayer on Thepriceofeverything. typepad.com “Anyone who lives within their means suffers from lack of imagination.” Oscar Wilde, quoted in The Dallas Morning News “One thing we are learning in this recession is that models are not as reliable as they usually are.” Director Martin Weale of the National Institute of Economic and Social Research, which last month said that the recession probably ended in March “The engine which drives Enterprise is not Thrift, but Profit.” John Maynard Keynes, quoted on Chartoftheday.com
investment strategy
Can charts help you navigate markets? by Tim Bennett Few things divide investor opinion more than charting – the use of past trends and patterns to decide when to trade shares. John Mauldin of Millenium Wave Securities is sceptical: “It means nothing until it means something, and we don’t know what that something is for some time.” But former star fund manager Anthony Bolton finds charts “very useful… especially for timing”. He reckons that if “the technicals [charts] support the fundamentals [key ratios such as price/earnings]”, investors should act. So, what do the charts say about stocks right now?
FTSE 100 Index
Golden Cross
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“The simplest rules in charting are the most reliable”
Charting jargon – ‘head and shoulders’, ‘Fibonacci sequences’, ‘flags and pennants’ – can be daunting. But as Josephine Moulds notes in The Daily Telegraph, beginners can ignore most of this. “The simplest rules in charting tend to be the most reliable.” Chartists believe the past is the best guide to a share’s future behaviour. To them, share prices reflect everything known about a stock, so there is no point trying to find value in the form of mispriced firms. Instead, you should look for repeating patterns that suggest big buyers and sellers are about to take a share up, down or sideways, then follow the trend. A chart usually plots closing prices against time. But a chart line built on ‘spot’ data has one big drawback – a oneoff price spike or dip can hide the underlying trend. So a common substitute is the moving average. Say a share closes at these daily prices: R30, R35, R45, R34, R31. The five-day average ‘mean’ is R35 (add the values and divide by five). If on day six the closing price is R35, the new five-day average becomes R36. This reduces the impact of a spike (which in this case was to R45) and reveals a flat underlying trend. Armed with these
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basics, here are three chart signals that can help you make money.
How charting works
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1 Resistance levels Chartists try to spot when a share or index is struggling to rise above a ‘ceiling’ price or is being propped up by a ‘floor’ price. In the absence of new information these ‘resistance’ and ‘support’ points tend to hold; so a chartist would sell as the market rises close to a resistance point and buy when it hits a floor. As the chart above shows, while strong corporate earnings have helped push the FTSE 100 up by about a third since March, the index has struggled to break decisively through 4,600 to beat its high for the year that was set in January. Some say it’s a matter of time – a majority of investors think the market is set to rise further, with bulls outnumbering bears by 8%, according to the Investment Management Association. But Model Investor’s James Ferguson warns that a further uplift won’t last – this sort of rise isn’t unusual in a long-term bear market. There were nine rallies in Japan of at least 20% magnitude during the first decade of the bear market and a dozen in the US between 1929 and 1940. 2 The Golden, or Black, Cross Another signal is when a short-term
moving average, such as the 50-day, crosses a longer-term line, such as the 200-day. A cut through from below is bullish – the ‘golden’ cross – while from above it is the opposite, a ‘black’, or even ‘death’ cross. The S&P 500, the Nasdaq, and the FTSE 100 have all seen recent Golden Crosses. But what does it mean? Michael Stokes on Istockanalyst.com points out that since 1957 the pattern has signalled a subsequent bull run 75% of the time. Michael Kahn in Barron’s adds that “there have been no failures since 1998”. Time to pile in? Maybe not.
The Golden Cross backfired five out of six times between 1928 and 1941, which given the scale of the current economic slump is the most comparable historic period. Robin Griffiths at Cazenove also warns the FT that “if the slope of the 200-day moving average is itself rising, then it is unequivocally clear that it is a bull market”. But as the chart shows, this isn’t yet the case for the FTSE. 3 The Relative Strength Index (RSI) This captures if a rally is running out of gas (‘overbought’) or a fall has gone too far (‘oversold’). In its simplest form, it takes a fixed period and divides the total points gained on up days (say 150) by the total points lost and gained (say 400), and multiplies this by 100 (37.5%). A reading above 70% is unusual, indicating the market has risen fast and may now turn. The FTSE 100 and S&P 500 are hovering close to that level. On the other hand, a reading below 30% suggests it’s time to buy – this was the case back in February, just before March’s big bull run. So if the FTSE 100 breaks above 4,600 sharply, the bull run could keep going – even to 5,100, Ferguson suggests. But with the rally based on thin summer volumes, and the threat of more bad news to come, the scene, he says, remains set for “an spring sell-off”.
personal view
A global economic outlook requires a more defensive stance What I would invest in now
This week, Shoaib Vayej, equity analyst and portfolio manager at Sanlam Investment Management tells MoneyWeek where he would put his money.
The global economic outlook has stabilised for the first time since the start of the crisis. This was inevitable given base effects; extraordinary monetary and fiscal stimulus provided by governments; and some level of restocking in the developing world. However, asset price deflation and the associated negative wealth effects are likely to dampen the outlook for growth relative to previous trends post the current downturn. Commodity prices have been a good leading indicator of this global recovery, but the current price rally speaks to more than prevailing supply demand dynamics. The first factor is a lack of confidence in America’s fiscal position and a challenge to the dollar’s reserve currency status, which has resulted in a hunger for “hard assets”. The second factor has been China’s aggressive accumulation of commodity stocks, well in excess of underlying demand. This stock overhang threatens to dampen prices in the second half of 2009. Lastly, markets have recovered from extreme levels of risk aversion, as systemic risk in the financial system has receded to the benefit of “risk assets”, such as commodities. This sober outlook lends itself to a more defensive investment stance, firmly based on quality counters. That’s why my top picks are Mondi, AECI and Anglo American. Mondi (JSE:MNP) has attractive business fundamentals: A competitive cost position; strong market positions in Europe; exposure to emerging market demand growth; and a degree of vertical integration. The company hasn’t been given credit for these attributes by the market because of the current economic recession and poor sentiment towards the sector. The discount to tangible net asset value
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(TNAV) demonstrates the potential value offered by the counter, with Mondi currently trading at a 25% discount to its TNAV. AECI (JSE:AFE) provides exposure to Chemical Services Ltd, a specialty chemical business with an excellent track record. Over several decades, the business has maintained superior growth through a strong customer offering and selective acquisitions, outpacing the growth in SA’s domestic product (GDP) and JSE All Share earnings. “Chemserve” has demonstrated its pricing power with very consistent profit margins, despite challenging economic conditions and turbulent business cycles. At the current share price, you’re paying fair value for Chemserve, but little else for the remaining businesses, Mining Solutions (AEL) and Heartland Properties. This upside is likely to be unlocked by a recovery in industrial production, a turnaround in the AEL’s initiating systems business, and resurgence in property activity in the Johannesburg and Cape metropoles. Anglo American (JSE:AGL) is a diversified mining company, with unique exposure and leading market positions in the platinum and diamond industries. This exposure offers strong underlying demand and high barriers to entry, a recipe for sustainable value creation and growth, as witnessed in the recent commodities boom. More recently, the group’s underperformed thanks to the illtimed MMX acquisition, and resulting balance sheet strain and poor operational performance of certain assets. This underperformance has made Anglo American an attractive target to its peers.
The shares Shoaib likes: Mondi AECI Anglo American
12mth high 12mth low Now R48.00 R17.51 R32.10 R68.50 R40.05 R50.87 R439.50 R134.20 R235.99 * Share prices as at 29 July 2009
investment briefing
Executive pay: is it really excessive? Executive pay and perks seem to be racing ahead regardless of the recession. Why? And does it matter? David Stevenson reports. Whose pay packet is in the news now? That of Porsche chief executive Wendelin Wiedeking. Top dog at the car maker since 1993, he has also been Europe’s highest paid CEO, with an annual salary of $100m+, according to BusinessWeek. But many blame him for lumbering Porsche with huge debts and a diving share price after a troubled attempt to take over VW. He’s leaving the group with an estimated €50m retirement “golden parachute”.
worst recessions in living memory, says a recent management pay survey by Income Data Services. Although salary rises for FTSE 350 index company directors slowed in 2008 compared to 2007, according to business advisory firm Deloitte, the median increase was still 6.2%. That was still around 2% higher than increases in Retail Price Index inflation and average earnings, says Carol Arrowsmith, head of the Deloitte remuneration team.
Is Porsche a one-off?
Why is CEO pay still so high?
Far from it. Executive pay and perks have It’s partly down to the way wages are set. long operated in a parallel universe to Remuneration committees are tasked with everyone else’s. America set the tone – setting and vetting pay and other benefits 50 years ago the median pay of top US before approval by shareholders at an executives was 30 times an average annual meeting (AGM). But these are worker’s salary; by 2005, the ratio was usually staffed by well-paid non-executives nearly 110 times. Meanwhile, although top who were once executive directors. British bosses used to be paid a much lower Porsche CEO Mr Wiedeking leaves with €50m That’s one bunch of turkeys who will multiple of ‘shop floor’ salaries, they’ve never vote for Christmas. Shareholders are been “catching up” over the last 15 years, according to Vincente pretty toothless too. Several FTSE 100 firms have recently met Cunat at the London School of Economics. The average pay with resistance. BT Group saw a 17% protest vote, including package for the CEO of a UK FTSE 100 company rose by “active abstentions”, while some 40% of investors at Cable and 287% over that period. Wireless either voted against directors’ pay packages or abstained. Yet such votes are only advisory, “and appear to have been largely brushed aside by the low-profile non-executive Don’t CEOs deserve their pay cheques? remuneration committee members”, says Bowers. The standard arguments are that being a CEO is a tough job and to attract and retain the best you have to pay top dollar, The other issue is what City minister Lord Myners described as particularly in a globalised economy. If British companies, for “the ownerless corporation”, where quoted firms do more or example, were to cap pay and perks, the best directors would less what they want regardless of shareholders’ wishes. Part of simply walk into jobs overseas. And as a CEO’s shelf-life can be the problem here is that a focus on short-term performance very short if they are dumped for not performing, remuneration means big fund managers don’t act like long-term owners. has to be high to compensate. But apart from the obvious If they don’t like the direction in which a firm’s heading, their argument that comparatively low-paid people such as nurses, first instinct is to sell the shares rather than promote reform. teachers and army recruits also do tough jobs, there’s the fact There’s also the sneaking suspicion that fund managers don’t that their pay packets seem to bear no resemblance to want to kick up a fuss about corporate bosses for fear of performance. If a CEO adds £100m in profit to a firm over five drawing attention to their own pay packets. years, no one would begrudge them a pretty hefty slice of it. But all too often “golden parachute” deals ensure CEOs are paid whether they succeed or Is paying directors in shares a better option? fail. The 287% rise in British Previous reports have suggested pay noted above, for example, that shares, or options, are reflects a period when the better than pure salary because Will the latest reform proposals help? FTSE 100 has fallen, not risen. they link a director’s pay to the A report by City grandee Sir David Walker on banking share price. But unless awards governance recommended measures including delaying are made over a long (say bonuses for three to five years, beefing up the role of nonHas the recession made a minimum five year) period they executives, and revealing the pay of a wider range of staff in the difference? encourage short-termism and annual report. He “has given investors the weapons to control Not much. “The boardroom risk taking. That explains the bonus culture is still booming,” boardroom pay”, says The Guardian’s Nils Pratley, and “turned pre-crunch debt bubble: high says The Guardian’s Simon the spotlight on City institutional shareholders”. But will it work? gearing boosted short-term Bowers. Britain’s directors are The trouble is, “pension fund trustees set the terms on which profits, lifting share prices and still receiving almost a third of they wish their money to be managed”. If they don’t throw their directors’ pay. Better to pay a their salaries in performanceweight behind reform, “the result probably will be drift and decent bonus based on longrelated bonuses, despite inaction”. It’s still a big leap “to believe fund managers would term performance. Share awards tumbling stockmarkets, have the gumption to vote out the chairman of a big bank”. alone guarantee nothing. shrinking profits and one of the 13
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opinion
It’s not the Thirties but the Eighties we must turn to if we are to pull out of recession There are plenty of lessons in that for Britain today. Right now, it has cheap money and rising taxes. Chances are this won’t do much good. There’s already evidence that the tax rises needed to fund Gordon Brown’s so-called ‘stimulus’ will stunt the recovery instead. A report from The Taxpayers’ Alliance this week showed that money would effectively be taxed at 92% before entrepreneurs had a chance to invest it. “Politicians are promoting a huge range of schemes to try and hold down unemployment but they aren’t paying nearly enough attention to how their policies affect entrepreneurs, who create the vast majority of new jobs,” argues research director Matthew Sinclair.
There are plenty of things from the early 1980s we’d rather not revive; no one wants to drive around in a Ford Sierra or watch Dynasty. But there is one thing from 25 Matthew Lynn years ago that is worth resurrecting: Reaganomics. In the UK, there is a stultifying consensus among economists and pundits that all the lessons we need to learn come from the 1930s. They need massive government spending and money printing, we’re told. But the decade this country should really be learning from is the 1980s. In the early 1980s, the US faced a global recession. Unemployment was rising fast, as was inflation. Output was falling. The government budget deficit was out of control. Nobody appeared to have a clue how to pull the country out of what looked like a severe economic downturn. The conventional response, pushed by Keynesian economists, was to raise government spending on public works, let taxes rise to keep the deficit under control and get the Federal Reserve to cut interest rates to make money cheaper. Sound familiar? It’s about the same mix the UK is following today. In response to a global recession, the budget deficit is being allowed to soar. The Bank of England is keeping interest rates at alltime lows and printing money. A crossparty consensus is emerging that taxes will have to rise. All the Conservative Party can promise is that it will raise them a bit less. From next year, the British top rate of tax will rise to 50%, one of the highest in Europe. Many other tax rises are likely to follow. Ronald Reagan’s genius was his ability to rip up consensus views and try something radically different. That’s precisely what he did on the economy. Ignoring the Keynesian consensus in academia and on Wall Street, he slashed tax rates. The Economic Recovery Tax 14
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©EVERETT COLLECTION/REX FEATURES
Market view
Not everything from the 1980s was a good idea
Act of 1981 pushed down average income-tax rates by a quarter: the top rate fell from 70% to 50%, while the bottom rate fell from 14% to 11%. Allowances were legally tied to inflation and capital-gains taxes slashed. But to make sure all those tax cuts didn’t spark inflation, the then Fed chairman, Paul Volcker, pushed up interest rates. From 11% in 1979, US rates rose all the way to a peak of 21.5% in 1982. Most of the economic and business establishment thought Reagan was crazy. It was precisely the ‘voodoo economics’ that his vice-president George Bush had complained of on the campaign trail. But he turned out to be right. Within a few years, not only had the US pulled out of recession, it had laid the foundations for what turned out to be a quarter-century of growth, new jobs and rising prosperity. What Reagan had done was create what supply-side economists call an ‘enterprise recovery’. The tax cuts stimulated entrepreneurs, while higher interest rates encouraged saving, allowing the deficit to be funded, and creating wealth for businesses to draw upon. Over the next decade, the US economy was rebuilt. Sure, there was some pain involved, but the policy was a resounding success.
And not only entrepreneurs are deterred; ordinary consumers are nervous of future tax rises. That will dampen both consumer and business confidence, vital ingredients for any recovery. At the same time, interest rates are so low it is almost pointless to save. And any money that is saved will be sucked up immediately by the government’s vast borrowing. If Britain wants to change direction, it should follow Reagan’s example: 1. Cut taxes dramatically: A country with Swedish tax rates and Zimbabwean-style public services won’t be able to compete. With the state consuming 50% of GDP, there is no chance of sustained recovery. In the short-term the deficit will rise even higher. But if tax cuts are part of an enterprise recovery, tax revenues will come along in due course to start paying off debt, as they did for Reagan. 2. Let interest rates rise: Once taxes are cut, monetary policy will have to be tightened to stop inflation running out of control. And the UK needs to restore a savings culture – the only way to do that is to start rewarding thrift again. Tight money and low taxes, contrary to what the Keynesians will tell you, are natural bedfellows, creating sustainable, noninflationary growth. For the UK economy to recover, it needs to save more, work harder, and create new industries. Reagan understood that was the only lasting recipe for economic success – and at some point, the British will need to relearn it as well.
investing in property
5 reasons property prices will fall further by Gary Booysen “It seems the worst is behind us,” says Nicholas Leeming of Propertyfinder.com, “Confidence in the housing market is at its highest since the recession began.” Harvey Jones on Lovemoney.com is even clearer, claiming “the house-price crash is over”. Even Obama has come out and said: “We may be seeing the beginning of the end of the recession." With the FNB Residential Property Barometer survey reporting “a mild recovery in residential property demand from late last year is continuing”, the optimists seem to have a point. But dig below the surface and the outlook’s much less rosy. Here are five reasons why house prices are set to slide – maybe a lot – further. 1. Home loan conditions are still very tight – Although our banks have faired well compared to their global counterparts, it isn’t good news for property prices. The National Credit Act and stricter lending controls may have helped stave off the need for government bailouts but, according to Elma Kloppers, from Fin24, the “strict lending criteria are strangling the housing market”. Luthando Vutula, managing director at Absa home loans, has held firm in the face of pressure and Absa still requires a 15% deposit from its customers and a 30% deposit from other clients. Standard Bank, on the other hand, requires a whopping 20% deposit on loans over R2.5m. 2. Many borrowers’ mortgage bills have tumbled as Tito Mboweni cut interest rates by 4.5% since last December. The commonly held view is that interest rates look forward about six months but, as yet, there’s been no change in declining property values. Absa claims “house price deflation is expected to continue for the rest of 2009” with middle-segment housing down around 4.4% year-on-year. Both the FNB and Standard Bank indices for June showed house prices are falling faster than ever.
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CPI has come in at 6.9%, only marginally above the 3%-6% target. And considering the aggressive cuts so far, it appears the deflationary conditions are more powerful than expected. 3. Job losses keep rising. “Number of disillusioned job seekers surges to 1.5m” is the headline of Wednesday’s Business Report, while Miriam Isa, Economics Editor, for Business Day says: “The economy shed 267,000 jobs in the second quarter while recession forced another 302,000 people already jobless to stop seeking work.” South Africa’s unemployment rate has risen to 23.6%. (To put this in perspective, when unemployment was at its worst during the Great Depression in the US, unemployment stood at 25%.) This is likely to create a wave of forced selling as the newly unemployed lose their homes. And this will hit prices hard. 4. Finweek reports that mortgage advances have slowed to a “snail’s pace”. The Reserve Bank indicate that growth in the value of total mortgage loans in June
slowed 1.2% to 8.2%. Jacques du Toit, senior property analyst at Absa's home loan division says: "This was the slowest annual growth since the 8.4% in July 2000.” With fewer loans being made, there’s less capital chasing the same amount of property and so, house values must fall further. 5. Finally, affordability. “Estate agents believe that financial stress selling may have worsened in the second quarter, helping to sustain an oversupply of property on the market," said John Loos, FNB’s Home Loans strategist. According to a survey done by FNB, about 34% of sellers where selling, in order to downgrade thanks to financial pressure. The conclusion? Asset values must come down after the inflated values of the boom times. Jon Bell at Shore Capital, says that “during past downturns in Britain, Japan and the Nordic countries, gains made during the bubble periods were entirely lost in real terms”. If history repeats itself, “house prices could more than halve from here”.
MoneyWeek’s Roundtable
Where next for residential property? South Africa’s major property indices confirm that house prices are trapped in a downward trend. MoneyWeek SA asked some of the country’s top property economists and commentators when the market was likely to enter a recovery phase. GS: But the gradual recovery doesn’t mean rising real prices does it?
Gareth Stokes: Property analysts have been trying to “call” the bottom of the current house price cycle for some time. Where are we in the cycle and when do you expect the residential property market to turn?
JD: Absolutely not! The negative growth – if you can call it that – will probably start to slow down towards December, but the decline in property prices could continue into the early stages of next year. We expect very low price growth through 2010. Our forecast is for prices to decrease by around 3.5% this year, with low nominal growth of around 2% in 2010.
John Loos: There are three different aspects to the residential property cycle: Demand, supply and price (which results from the interaction of demand and supply). I think we’ve probably bottomed out in terms of demand. The estate agents are saying there’s rising activity, which usually reflects in home loans and deed office numbers down the line. But there is still considerable oversupply in the market. Up to 34% of sellers are selling to downscale due to financial pressure, the average time on the market is rising and there’s no decline in the number of sellers having to drop their asking price to make a sale. This oversupply has to be mopped up before price inflation can resume. I suspect that’s not going to happen this year on a national basis. You should expect further price deflation in the second half with price inflation creeping in at some stage in 2010.
© C.J. BURTON/CORBIS
Jacques du Toit: The residential property market is driven by the broader, highlevel economic cycle too. We expect the economy will bottom later this year and then start a gradual recovery. Residential property prices will continue along the current declining trend for the remainder of 2009. We expect prices will bottom towards the end of this year and recover gradually through 2010.
Saul Geffen: The market has been decreasing since May 2007, which is when the NCA was introduced. We saw a 50 basis point interest rate increase at the beginning of June 2007, which signalled the peak of the market. Property prices and residential sales numbers have been decreasing for well over two years. A stabilisation (or increase) in the number of unit sales and in property prices will
Is the lifeline in sight yet? 16
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signal the bottom. Estate agencies across the board are reporting an increase in residential sales numbers this year over last, but we certainly haven’t seen increases in property prices yet. Erwin Rode: In order to answer this question we have to decide what is meant by the terms “turning point” and “bottom”. In real terms, after stripping out building cost inflation, we are many years from the bottom. In nominal terms, there is some anecdotal evidence that the worst is over. There is even some evidence nominal prices will bottom soon. That said, I remain cautions about calling the bottom, and my best guess is that we will have to wait till the first half of 2010 (with an outside chance of the first quarter) to reach that point. GS: A recent Rode & Associates release Continued overleaf
MoneyWeek’s Roundtable Continued from previous page
suggests the recovery will be a drawn out affair. Is there any chance we will see a return to the boom times growth of 2003 to 2007? ER: No – we’re not going to see that kind of growth. The boom we experienced occurs only once in every 15 or 20 years. House prices in that period represent an extraordinary situation and it’s a pity that so many people try to represent such growth as the norm. The property market will follow the same track as the global economy in a slow and hard fought recovery. GS: One of the statistics the house price indices gloss over is the volume of housing transactions. Do you track this data and how bad is the situation on the ground? JD: We can assess the levels of activity by looking at our own business, but these numbers are of a strategic nature and not published. None of the big banks that publish house price indices reveal volume data. Of course, we have to acknowledge that the volumes of business flows have tapered off quite substantially over the last 18 to 24 months. SG: We’ve been tracking unit transactions and property values across a group of residential estate agencies for eight years now. We use this data as a proxy for residential property activity. That data is independent of the oobarometer, which is effectively an analysis of statistics directly from the loans that we’ve been originating. Property sales volumes are up to 60% down over the last couple of years.
there’s lots of anecdotal evidence that the number of sales has probably bottomed out already. A word of caution is that there’s a big difference between the worst of the panic being over and the market booming again. It’s not like we’re entering another golden period!
Our panel predicts where house prices are heading Jacques du Toit Sectoral analyst – secured lending, Absa Retail Bank
GS: Standard Bank Economics recently noted that we are caught in the throes of a pressured mortgage market, with the housing market hard pressed amid weak household balance sheets and rising bad debt. Is the consumer really under this much pressure?
Saul Geffen Chief executive officer, Ooba
JD: The consumer feels the effect of lower interest rates in his pocket in terms of much lower debt repayments. But he cannot go on a spending spree because he is concerned about other issues, such as the broader economic environment and the employment environment. And there wasn’t much positive news on this front from the Q2 2009 Labour Statistics Survey released by Statistics SA earlier this week. JL: The best predictor of consumer defaults on home loans is the debt service ratio – the cost of servicing debt as a percentage of disposable income. The ratio peaked at just over 15%, falling to around 14.4% at the end of the first quarter. But this ratio has improved because of interest rate cuts and not because of a decline in debt to disposable income!
John Loos Property strategist, FNB Commercial
Erwin Rode Chief executive officer, Rode & Associates
and when interest payments catch up. The problem is consumers are not making any progress at the moment in reducing household indebtedness relative to household income. Should interest rates rise at any time in the future, and we sit at current levels of debt, then we will quickly return to historic high levels of bad debt.
“Property prices and residential sales numbers have been decreasing for well over two years”
JL: It’s also possible to use deeds office data. It’s a bit rough, but one can do it. I agree that over the last few years, the numbers of transactions have declined substantially. ER: We do track these numbers but, with the long lag, it becomes kind of meaningless. The problem with deeds office numbers is that a house that is sold today, might only make it to the deeds office in six month’s time. So it’s backward looking data. I agree that 17
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GS: Do you think the interest rate cutting cycle has ended – and what will that mean for house prices going forward?
GS: Clearly consumers are still in trouble! JL: Income growth has come down faster than household credit growth due to the severity of this recession. In other words, household indebtedness is not declining. Meanwhile, household sector credit growth is still positive because banks are lending substantial amounts. But the reason for the growth is the considerable lag between when new loans are incurred
JL: We don’t expect interest rates to go up from here. We might see another half a percent cut, but it’s more likely we’ll have a sideways movement for most of next year. Ideally, what you want to see is the debt service ratio coming down, not because of interest rate cuts, but because of declining household indebtedness. Continued overleaf
MoneyWeek’s Roundtable Continued from previous page
That’s not happening at this stage – and the reason house prices remain under pressure has more to do with the recession (and its impact on the consumer) than interest rates. JD: There will be little (if any) interest rate relief in the current cycle. Our official view is for rates to remain at current levels well into 2010. Although interest rates have come down quite a lot over the past seven months – 450 basis points since December 2008 – the full effect of these rate cuts has not worked through to the economy and the property market as yet. But there are other factors that are impacting the property market at this time. We cannot rely on lower interest rates to revive the property market! ER: The outlook for interest rates is best assessed with a view on inflation. I’m one of the inflation sceptics at the moment, given what has happened with electricity prices and considering governments’ grandiose social plans that will push taxes higher and hit the man in the street hard. These inflationary pressures mean there is not much scope for further declines in interest rates. Fundamentally speaking, one shouldn’t bargain on any interest rate declines as they simply won’t be sustainable. Another short-term trend is despite the substantial nominal declines in prime rates, there hasn’t been much relief for the borrower. Banks have changed their spreads. I don’t think interest rates will be a driver for house prices going forward, but rather economic forces and consumer confidence.
could throw at it. Is this the case, or is this sector also under the cosh? JD: In difficult times, people tend to shift their focus to more affordable properties. The affordable housing market, right at the lower end, did not perform too badly until the middle of 2009. The affordable housing segment (comprising houses from 40m² to 79m² valued up to R430 000) showed positive nominal year-on-year growth of 1.5% in the second quarter. That is low, but still positive. Although you expect this sector to outperform when times get tough, these households come under pressure very quickly when things turn bad. JL: The affordable housing segment is cause for concern as it lags the cycle. What happened in the first half of the cycle, earlier in the decade, was that demand shifted upwards because interest rates came down massively. Everybody could afford a better house than they previously could. The top end of the market peaked early – in 2003/2004 – with the lower segments following according to value. The affordable segment was the buzzword until 2006/2007 because the people involved in that sector said demand was shifting down in search of better value for money.
the value in their property – and the people that are selling at lower values are most often distressed sellers who have been impacted by the economic situation. We were also shielded from the subprime mortgage crisis. The reason is that there were more stringent lending criteria applied in the domestic market. Potential borrowers were correctly assessed in terms of their ability to repay and banks refrained from issuing balloon payment mortgages. The result – there are less people being forced to sell and less supply to push prices down. JD: South African residential house price growth was very strong in recent years, especially up to 2005/2006. The cycle in our house price growth probably peaked in 2004 and was already on a downward trend when problems started to emerge in other property markets, most notably the US. The US started to see real problems in terms of price trends in the middle of 2006, by which time our price growth cycle had been on downward trend for almost two years. US prices increased from much higher levels. The US also encountered a lot of problems in their financial sector linked to the property market. We didn’t see that in South Africa.
“Inflationary pressures mean there is not much scope for further declines in interest rates”
SG: Our sense is that whether interest rates are slightly down or stable, ultimately consumers are still borrowing at an incredibly low rate. With the prime rate at 11% and concession of anywhere between 0.5% and 1.5%, consumers are borrowing as low as 9.5% to 10.5%. The real issue now is around the economic recovery, consumer sentiment and banks’ opening up the taps from a lending perspective. Bank deposit requirement have had, and continue to have, a significant dampening effect. GS: Everyone thought affordable housing would survive the worst the economy 18
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That downward shift is probably over now and prices in the segment have already adjusted to interest rate cuts. Another problem is the constraint on first time buyers. We don’t have job creation on a net basis and deposit requirements are onerous. On top of that, the manufacturing and the mining sectors, which traditionally employ buyers in this segment, have been hit very hard by the recession. GS: Why do you think the South African residential property market has held up better than those in the US and UK? SG: I think it comes down to supply and demand factors. South Africans believe in
One must also take into account that the structure of our economy, especially our housing market, is different from other countries. We have a growing middle class, which creates a structure underpin that does not exist in more mature markets.
ER: The extent of the housing market collapse in the US caught everyone by surprise. Apart from the mid-1930s’ situation, there’s nothing in history that compares. The bottom line is, our banks didn’t sin as badly as American banks. And our banks aren’t saddled with nearly as many properties in possession – foreclosures. The level of foreclosures is a key to any collapse in house prices. Rising foreclosures send demand and supply out of kilter and property prices nose dive. The difference between South Africa and the US is that our banks were more cautious. We didn’t escape recession, but we sure avoided subprime.
the best blogs What the bloggers are saying
What the Romans did for us blogs.ft.com/gapperblog “Colonial occupiers do not get a good press,” says Stanford economist Paul Romer. But it’s time we brought back some of the benefits – infrastructure and the rule of law, for example – “without the nasty aspects”. Just as the Romans brought aqueducts, roads, education and wine to their colonies, developing countries today could benefit by partnering with developed economies. Special economic zones – or “charter cities” – could then be Colonialists deserve a better pwess established. Hong Kong – run for a time by the British and then assimilated into China – is a perfect example of what could be achieved. The city-state’s free-market system, independent courts and efficient administration became a model for economic development across China. “Britain inadvertently through its actions in Hong Kong did more to reduce world poverty than all the aid programmes we have seen throughout the world,” says Romer. His first suggestion for a zone which could be developed now is Guantanamo Bay. Cuba could charter Canada to develop the island on its behalf, “assuming it would not want the United States to do so”.
US is turning capitalism on its head business.theatlantic.com All those big firms deemed “too big to fail” by the US government are “reaping the benefits”, says David Indiviglio. Indeed, such firms will have their borrowing costs reduced “by billions”. Take Citigroup and General Electric – they will save around $24bn in borrowing costs over the next three years according to The Wall Street Journal. This is rotten news for the rest of us – for two reasons. First, it exacerbates the whole “too big to fail” problem. With cheaper borrowing
costs, these firms will be able to eliminate even more competition, grow even larger, and become “even more important to save” if they make poor decisions again. Second, it rewards bad behaviour. Those firms who played by the rules and made good decisions are suddenly facing higher borrowing costs than the firms that screwed up. In fact, the government is doing nothing less than turning capitalism on its head. It’s presiding over a scheme that props up the bad “at the expense of the good”.
©EVERETT COLLECTION/REX FEATURES
The Goldman code rick.bookstaber.com “There is a funny attempt at logic going around in trying to explain Goldman’s high earnings,” says Rick Bookstaber. Regulators seem to be linking the fact that a Goldman employee was arrested last month for stealing top-secret code with the fact that Goldman made tons of money last quarter. The code is said to be the key to unlocking Goldman’s high frequency trading and therefore its mega-profits. But is that likely? Too many other banks could have easily done the same given the low barriers to entry. Indeed, the furore only serves to show that no one really knows how Goldman makes money. More worrying, the regulators “have no clue either”. While the current crisis was unfolding on bank trading floors, no regulator thought to stop by to do a routine check of how the bank was making its money. For example, “were organisations such as Goldmans making money from cutting corners in terms of risk and compliance”? Having “missed out on that one”, it’s time to learn some lessons from the past and begin asking some questions of the banks as part of the supervisory process. “Banks have plenty of ways to make money through questionable means and through imprudent risk taking.” Come to think about it, so do hedge funds, where some degree of regulation is overdue. It’s high time we started pointing the finger less at Goldman Sachs’s programmes and more at the Fed’s Division of Bank Supervision.
Cuba’s mattress shortage Cuba has a new hot commodity, says Annie Lowrey – the mattress. The 60,000 beds that the government-controlled mattress-maker turns out each year are falling a long way short of the country’s demand for decent bedding. That’s thanks to many of them going straight to hotels, the armed forces or even overseas. So the genuine article from state-controlled Dujo Copo Flex now costs upwards of 5,352 pesos – much more than the average annual salary. No wonder a thriving black market of threadbare, stolen and straw alternatives has sprung up. “Freelance merchants” improvise springs, covers and filings out of any easily available materials. And mattresses are now passed down within families like precious heirlooms. But there’s hope for sleepless Cubans. With the
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© DANIEL LECLAIR/REUTERS
blog.foreignpolicy.com
launch of Revolico.com, the Cuban answer to Craigslist, illegal entrepreneurs can get their hands on refurbished mattresses. However, some Cubans may be distracted by other items on Revolico: “Fake marriage and ticket to America anyone?”
entrepreneurs
How I made it in the movie business gave him a “moderately good” six-picture deal. “It started at around £50,000 a picture and it rose in the early 1970s, when I was doing films with Charlie Bronson, to $300,000 to $400,000 a picture.” By 1974, after hit film Death Wish, he had £1m in the bank.
Michael Winner, 73, has a confession to make. “I used to steal money as a child.” While boarding at St Christopher’s in Hertfordshire, “I would go around the boys’ pockets at school and steal all their money”, says the film director, who has made a bigger name for himself in recent years as the caustic food critic of The Sunday Times. He felt so guilty that he even tried to give it back years later, via a newspaper advert. But nobody replied. “Which shows you what idiots I was in school with. One boy wrote in who wasn’t at the school at all. But at least he had a brain. ‘Some arsehole is handing out money, I might as well have it.’” Born into a Jewish family of Russian and Polish origin, Winner was brought up in one of three apartments in a Queen Anne-style mansion in London’s Holland Park. “It was good but it was not grand.” His father became a successful property developer, but because of post-war austerity and his mother’s chronic gambling – his Bar Mitzvah doubled as a poker party – he never had money lavished on him. Hence the stealing. At 14 he made his first honest wage: Five shillings for an interview with actor Max Bygraves in the Hornsey Journal. He went on to study law at Cambridge, then got a job as a talent agent in 1955. The money wasn’t great – £10 a week, when his secretary earned £12.50. But he had the chance to meet stars such as Richard
©DAVID FISHER/REX FEATURES
by Jody Clarke
MY FIRST MILLION Michael Winner Attenborough and he slowly sold a few scripts and worked his way into movies. He wrote, produced and directed a series of 20 to 30-minute films for the cinema circuits. They didn’t pay “anything remotely serious”, he says. “If you got £100, you did very well.” But it was a start. By 1963, he was making full-length features including West 11 and, in 1967, The Jokers, starring Michael Crawford and Oliver Reed. “By that time I was making money.” In 1966, United Artists
In some ways, investing his money has been a more difficult process than making it. In 1969, he invested £60,000 with a private bank, which put his cash into a Japanese wholesaler that fell from £5.80 a share to 12p. “I lost a great deal of money,” he says. But it taught him a valuable lesson. Financial advisers “are all total morons. They’re dishonest, and only interested in getting their commission.” His most successful investments, it turns out, have been those he bought for fun, such as the original Winnie the Pooh illustrations and 178 saucy seaside postcards by Donald McGill. “I bought the originals for about £20 each and sold them two years ago. They grossed a quarter of a million.” It’s a small addition to the £35m he has stashed away in Guernsey. So as a man with an enormous house, three Rolls-Royces and “all the toys I need”, what’s the secret of happiness? “It’s not to seek perfection. You can want perfection, but don’t be disappointed if life is not perfect. You must look at the overall situation, and if that is good, then keep smiling. Because nobody gives a shit if you don’t.”
The MoneyWeek audit: Grant Bovey
© ITV/REX FEATURES
• What happened to his fortune? At the peak of the property market, Grant Bovey said he and wife Anthea Turner were worth £100m thanks to his property firm Imagine Homes, which sold and managed buy-to-lets. Over two years, the couple paid themselves more than £4.3m. When rumours started in April 2008 that Imagine was in trouble, Bovey threatened to sue anyone who said so. But just six months later the company went into administration with debts of £50m, according to The Sunday Times, most of it owed to HBOS. • Is this the first time he’s gone from boom to bust? Far from it. Several of his previous businesses have failed,
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including Watershed Pictures, a video production company, which collapsed in 1998 owing a total of £2m to 130 creditors. Yet he has now set up another property company that buys and sells ‘distressed’ properties. Bovey has never been personally bankrupt, although bailiffs served papers on him earlier this month, reportedly relating to mortgage arrears on his previous property, an £11.5m mansion.
• What does this mean for his charitable contributions? Bovey often talks about his charity work, but the annual charity ball he and Turner used to host at their home had to be cancelled last year. He claimed that his 2007 ball raised nearly £500,000. But a look into the charity’s accounts reveals that he actually handed over just £112,984 – the ball itself raised £942,000 but it cost £829,000 to stage. At a separate event where Turner was manning a charity raffle she pulled out her husband’s ticket, winning him a holiday worth £10,000. Rather than auction the prize off, Bovey gave the charity £1,000, and kept the holiday.
personal finance
Finance and divorce: 3 tips to get you through with your funds intact by Karin Iten
discussions so you have legal recourse if the other party doesn’t stick to the agreement.
“No one gets married expecting to get divorced anymore than they go to Egypt expecting to see the pyramids crumble into the sand. Nevertheless, the pyramids are eroding and divorce rates have been increasingly steadily,” says prominent financial journalist Andrew Beattie. And he’s right. Divorce has gone through the roof. According to StatsSA, most marriages only last, on average, 15 years – and that’s if they last the first 12 months when divorce rates are at their peak. As unromantic as it sounds, you need to be prepared. It’s one of those cases of “rather safe, than sorry”. So this week, we’re looking at how divorce affects your financial situation and how you can make this process easier on your pocket.
Tip #1: Know what you have Right from the get go, it’s important to know what you and your spouse own. Since one of the most devious, and common, things partners will do to each other in the event of a divorce is conceal assets (like property or investments) so they aren’t included in the settlement process. How do you avoid this? Well, the best thing to do is collate all the documents in your house into one file for transparency. Also keep valuations in the file so you know exactly what every item is worth – and remember to get them valued annually. (This step is also hugely helpful with keeping your insurance policy up to date.) Should you find your marriage teetering on the brink, start photocopying every financial statement in there – including tax returns, bank statements, insurance policies, till slips for appliances, etc. And the best thing is, doing this won’t only help in the event of a divorce, it’ll also mean your documents are all together should either you or your partner pass away. (This is especially important if you or your partner don’t work or only work part-time.)
Tip #2: Make lists Remember, prolonged litigation isn’t easy on you, or your pocket. Often, couples
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Tip #3: It all comes down to making a change The sad fact of the matter is, once the terms of your divorce are settled, you’ll be poorer than you were. But there is an upside: You’ll know exactly where you stand financially and what you need to do to get back on track.
who engage in long, drawn out court battles find that the objects under contention are worth much less than the emotional and financial strain it puts them under. To get around this, make a list of everything you’d like to keep. Then compare lists with your soon-to-be exspouse. If any item appears on both lists, then these are the items you both need to come to an agreement on. If you aren’t able to agree on what to do with all the items that don’t appear on either list, then you’ll probably be better off (financially and emotionally) selling them and splitting the cash equally between you. Remember, it’s important to have a divorce mediator sit in on these
Here are a few things you’ll need to consider: • Cancel joint accounts and joint credit cards. • Change the terms of your life insurance, will and any other policies you may own. • Downsize – this is the best survival method out there. Remember, since you’re no longer dependent on anyone to help you with your money issues, your lifestyle will need to change for you to stay afloat. • Check your credit limit and your credit rating. Now that you’re on your own, you may not be able to maintain (and pay off) the level of credit you previously could. As such, should you default on any payments, your credit rating will be affected – so speak to your bank about having this amended to a more reasonable amount.
Tax tip of the week You can deduct the cost of physically moving your assets The wear-and-tear allowance in Section 11(e) of the Income Tax Act gives you a deduction for certain business assets, such as plant and machinery, used in your trade. SARS has always valued these assets at their acquisition cost (excluding financing costs). Paragraph (v) of the proviso to Section 11(e) states that you can increase this deductible value by the amount it costs you to move the asset from one location to another, as long as you can prove these costs, e.g. with invoices and transportation contracts. You should write off these moving costs over the remaining estimated useful life of the asset. For example, if you’re writing off the asset over five years and you incur moving costs in year four, the costs will be deductable in years four and five. If the asset has already been written off in full, deduct the moving costs in the year of assessment in which you incur them! Matsika Vengesa, TaxConsulting, matsika@taxconsulting.co.za
profile This week: Silvio Berlusconi
Politician, media mogul, musician, buffoon, womaniser: the many faces of Italy’s premier
While foreigners may see him as an ageing, gaffe-prone buffoon, many Italians love him, says Sarah Vine in The Times. He has been elected prime minister three times, in 1994, 2001 and 2008, in spite of “serious questions about his performance” each time. His stranglehold over the media – he owns 90% of commercial TV channels – may have helped. According to Censis, 73% of Italians based their votes in the last election on television coverage. Born in Milan in 1936, the son of a bank official, Berlusconi funded his university
studies by working as a pianist and singer aboard cruise ships. He made his first fortune from property in the 1960s and ’70s, says Ed Vulliamy in The Observer, in spite of having no experience in construction. He expanded into media and his empire, under the umbrella of Fininvest, grew to comprise some of Italy’s most important companies including Mediaset (Italy’s biggest private entertainment firm) and AC Milan football club. In 1992, he got his chance in politics as the Christian Democrat government was blown apart by a bribery scandal in Milan. Claiming he wanted to “save the country from the Communists” and clean up Italy (in reality Fininvest was under threat from the Italian Left), he launched a new party, Forza Italia. He sold himself as an outsider who could “whip Italy’s inefficient bureaucracy into shape”, says Alexander Stille in his book about the controversial politician, The Sack of Rome. He won the 1994 election, but his government fell apart in seven months amid coalition squabbles. He staged a comeback in 2001, serving for five years. His ability to unite Italy’s chaotic political system is in little doubt, but voters’ hopes that his entrepreneurial magic would rub off on the country have proved misplaced. Berlusconi has introduced tough measures on crime and
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There are signs that Silvio Berlusconi, Italy’s “libidinous” prime minister, is ready to play the penitent, says Nick Pisa in The Times, with plans to keep away from his infamous Sardinian villa (see box) to oversee construction in the earthquake-struck region of Abruzzo. A pilgrimage to the shrine of one of Italy’s most revered stigmatics, St Pio of Petrelcina, has also been mooted. But critics believe he is only a little chastened. The 72-year-old media tycoon, listed by Forbes as the 70th richest man in the world, has been dubbed the “Houdini of European politics”. He has a long record of criminal allegations – but has so far avoided conviction. Last year his government passed a law granting the prime minister immunity from prosecution while in office.
immigration, but largely failed on managing the economy. His first government “achieved nothing”. His second was “notable mainly for its failure to introduce the liberalising reforms that Italy desperately needs to make itself competitive”; and he is now “presiding over a slump” that the IMF thinks may make Italy the only eurozone country to experience three years of recession from 2008-10, says Tony Barber in the Financial Times. Worst of all, Italy’s public debt is set to soar to 116% of GDP by 2010. That is his “real sin”.
Berlusconi’s women
Since then there has been a drip feed of revelations about his private life, culminating with the “sex tapes” of a 42year-old escort girl, Patrizia D’Addario, who claims she
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recorded bedroom chats between her and the prime minister at his Rome townhouse on her mobile phone. D’Addario is the latest of many women linked to Berlusconi. In April 2007, Oggi magazine published photos of parties at his Sardinian villa, including shots of Berlusconi with his hand inside a female guest’s shirt, says John Follain in The Sunday Times. An investigation into the alleged recruitment of female guests for parties at Berlusconi’s homes is under way in Bari. Does any of this matter? Of course, says Daniel Finkelstein in The Times. It speaks volumes about his character: “Berlusconi is in receipt of state secrets. He is the dominant Italian politician of the era… the parties, the girls, the gifts – they are issues of state.”
©AFP/GETTY IMAGES
Polls suggest the public is wearying of Berlusconi’s exploits, but until now his womanising has done little but enhance his reputation. As one male journalist put it, “Berlusconi represents hope that all men will be f***ing in their 70s”. The scandal began in May when Veronica Lario, his wife and mother of three of his children, demanded a divorce. The final straw was the news that Berlusconi had attended the 18th birthday party of aspiring starlet Noemi Letizia (pictured) and given her a gold necklace.
Spending it Travel
Spain’s world-class golfing getaway By Kevin Cook-Fielding If you’re looking for world-class golfing, luxury accommodation and great weather, you can’t do better than Finca Cortesin resort in Spain. With Gibraltar airport now accepting civilian flights, the resort’s location, just a 25-minute drive north of Gibraltar, makes it the ideal destination for a golf getaway. Unlike many golf resorts, Finca Cortesin has been developed in a sympathetic manner and looks like it’s been here for the past 200 years, even though it was only built in 2008. The gardens look especially mature, thanks to 20 specially imported 300-year-old olive trees. This feat certainly wasn’t cheap (the gardens cost €7m [R77m] to construct), but it was definitely worth it, as it gives the hotel a sense of belonging to the countryside it sits in. Other features, such as the Moorish interior courtyards and fountains, also bring a sense of the area’s history to the hotel. But most visitors don’t come to Finca Cortesin for the history – they come for the world-class golf course. Golf fans won’t be disappointed. The course has a fantastic lay-out and several holes offer spectacular views of the countryside. Further evidence of its high quality is
that the PGA European Tour’s Volvo Match Play Championships will be held here later this year. Non-golfers can relax in the hotel’s two outdoor swimming pools or the spa. You can easily lose a few hours here relaxing in the hammam (rooms of varying temperatures), which includes Spain’s only snow room.
Newly built Finca Cortesin golf resort looks like it’s been here for 200 years
If you tire of golfing or lounging around, then the fishing port of Estepona is just a ten-minute drive away. It offers a good range of bars and restaurants that specialise in the local cuisine. And, unlike much of the Costa del Sol, Estepona has managed to keep the number of nightclubs down to a bare minimum. So you are left with a quiet, relaxed coastal resort free of British lager louts.
the resort’s own El Jardin restaurant. It’s run by executive chef Schilo Van Coevorden, whose seven-course menu is a delight. Highlights include sweetcorn cappuccino mousse with lobster; tender barbecue fillet of beef with Japanese mushrooms; and a chocolate olive tree for dessert. Altogether a meal will cost around €95 (R1,000) a head.
If it’s a great meal you’re looking for, you don’t have to venture further than
Rooms cost from €275 (R3,000). Contact: www.fincacortesin.com.
Wine of the week: Can you imagine marketing 6 different Chardonnays? De Wetshof Finesse 2008 R58 at most retailers Danie De Wet, up in Robertson, won the Diner’s Club Winemaker of the year award in 1993 for his Chardonnay. And he deserved it. He’s spent the last 30 years experimenting with different styles and now produces six completely unique wines, from the highly acclaimed by Marilyn Cooper Bateleur and D’Honneur, which has seen new French oak ageing, down to the Bon Vallon, which was, in fact, South Africa’s fist unwooded Chardonnay. Can you believe there are now more than 50 unwooded Chardonnays made in South Africa?
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Personally, I prefer the Finesse for everyday consumption. Very lightly oaked, with gentle vanilla, citrus aromas and flavours, it allows you to enjoy all the wonderful natural characteristics of Chardonnay, without the full body of the more wooded styles. That’s not to say you can’t enjoy this wine with food – any poultry dish will work, while pasta and line fish are also great. For something different, try tripe in a creamy onion sauce. It’ll be lightened by the crispness of this delightful wine.
Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.
cars
It’s impossible not to love Fiat’s 500 cabrio “The Fiat 500 has it all – loveable looks, retro roots and an affordable price tag – and now there’s an open-top variant to broaden its appeal further,” says AutoExpress. In a homage to the 1957 original, the cabrio model, the 500C, features “an innovative electric soft-top that peels back rather than stowing away completely”. This means the car’s structure isn’t compromised, so you get the same “go-kart handling, safety levels and interior space” as the hardtop. You get the same range of options as with the hardtop, says Ben Whitworth in Car, so you can choose from 69bhp 1.2-litre and 100bhp 1.4-litre petrol and 75bhp diesel engines, five- and six-speed
manual boxes, “as well as the familiar Pop and Lounge trim levels”. But whichever model you choose, it’s “impossible to not like this car”. Its “sheer vitality and brio is central to its charming appeal, turning even the most mundane of commutes into something far more attractive, a journey to be savoured, rather than endured”.
charm” – you may only be going at “pedestrian” speeds through the corners, but the “gutsy grip” will mean you “can’t help but grin”. The car has its faults, including the ludicrously small boot and poor rear legroom, but it has so much character you just won’t care. “Quite simply, the 500C is irresistible.”
It’s not going to win any prizes when it comes to performance, says Vicki ButlerHenderson in The Sunday Times. She drove the 1.2 Pop model, which “has even less power than some two-seater Smart cars”. It will take you 13 seconds to reach 100km/h. But what it lacks in performance it makes up for in “plucky The cabin is colourful, with matching metal strips along the dash and colour-coordinated seat trim, says Vicki Butler-Henderson in The Sunday Times. It’s also gimmick-free, with straightforward controls.
Two alternatives you could have for similar money At £11,300 (R144,000), the cheapest Fiat 500C 1.2 Pop cabriolet (see above) is good value, says Richard Hammond on Mirror.co.uk. For £15,995 (R200,000), you could have a Mini Cooper instead. That’s “serious money”, but for that, you get a “real convertible” as opposed to a cabrio, and the
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31 July 2009
Mini is “stylish and well made”. It provides all the open-top driving thrills you could possibly ask for, says What Car, and residual values are “exceptional”. Cheaper than both the Mini and the Fiat, however, is the Mitsubishi 1.5 CZC1 – an “eccentric-looking little funster that has a folding hard top”, says Hammond. “It’s the right
money, too” at £10,199 (R130,000). The ride is a little unsettled over poor surfaces, says What Car, but performance is brisk, the body stiff and it comes with a decent level of kit as standard, including air-conditioning, electric windows and full safety kit.
blowing it
Artist icon who launched a petty rebellion honeymoon they commissioned Max Ernst to paint their portrait, riding on horseback down the Bois de Boulogne. When the Nazis invaded France, the two fled Paris for Houston, where the de Menils did a fantastic job of upsetting conservative Texan society. Before he died recently of a drug They regularly invited black overdose at the age of 27, he guests to dinner during the era made quite a name for himself. of segregation. And they His shocking pictures were caused a huge upset when they displayed in prominent galleries tried to give one of their around the world and collected sculptures, called the Broken by the likes of Charles Saatchi. Obelisk, to the city – on And according to Francesca condition it be dedicated to Gavin in The Guardian, he was Martin Luther King. Houston something of an idol for today’s youth. “There aren’t many icons Bohemian New York artist Dash Snow’s (left) work fed on extreme living refused. John de Menil is even rumoured to have used his around these days. But Dash wealth to smuggle rifles, grenades, began after he stole a camera to take Snow perhaps deserves the title.” landmines and missiles into Cuba in pictures of the places he had been when 1960, helping to bring Castro to power. he was drunk. “Snow’s work fed on his Snow came from the de Menil family, one When he died, his funeral was attended extreme living,” says Gavin. He soon of America’s richest and most prominent by a local contingent from the Black became famous for his graphic pictures art-collecting dynasties. His greatPanther Party. of the bohemian lives of the people in grandmother Dominique Schlumberger downtown New York. The trouble is – was an heiress to a Houston oil fortune. That’s quite a life. And it shows that you sad as his story may be – it all seems like His mother, Taya Thurman, is don’t need to rebel against money to be rather petty rebellion to me. All I see in Hollywood actress Uma Thurman’s sister, truly subversive – in fact, if you really the graphic sex and drug photos that and recently gained attention for charging want to upset people, having a pile of made Snow’s reputation is a young man the highest rent on record at the money is the best kind of head-start. It’s trying to shock his parents. Hamptons – $750,000 for a single a pity the young Snow – as an idol for summer season. today’s youth – won’t grow old enough If Snow had really wanted to rebel, he to realise that himself. could have done worse than take a Snow was a rebellious child and at the lesson from his own family’s history. age of 13 was sent to reform school in Schlumberger met Snow’s greatGeorgia by his parents. He never grandfather John de Menil at a ball at returned to the family home, setting off Versailles. The French aristocrats for the streets of lower Manhattan at the married in 1931 and on their Moroccan age of 15. He boasted that his career ©CHAD BUCHANAN/GETTY IMAGES
I was intrigued by the story of a young American artist named Dash Snow this week. Born into one of New York’s most esteemed families, it seems Mr Snow spent his life rebelling against his family’s wealth.
Tabloid money… lend us your helicopters
©TONY LARKIN/REX FEATURES
■ There is one quick solution to the British helicopter shortage in Afghanistan, says Jeremy Clarkson in The Sun. It needs a repeat of Dunkirk, when the government called on boat owners to head to France and help evacuate Allied soldiers. Nowadays, plenty of rich people in the UK own their own helicopters. “Could they not be called upon in these difficult times to use a car instead and let the British military borrow their machines?”
25
■ Jordan (pictured) – otherwise known as Katie Price – could do well in Hollywood, says Carole Malone in the News of The World. The former glamour model has had plenty of acting experience. “Judging by her recent performance on Piers Morgan’s show – those well-timed tears and the sharp intakes of breath as she sold the story of her miscarriage for £100,000 (R1.27m) – I think she actually can act.”
31 July 2009
■ UK interest rates on mortgages are so high that “it smacks of desperate profiteering” by the banks, says Mark Austin in the Sunday Mirror. What makes it worse is that the highest rates are being charged by the banks that have been bailed out by the British taxpayer. They were given that money and told to use it to start lending to the public again. Instead, “it seems hundreds of millions of pounds are being stashed away to build up the fortunes of the institutions themselves”. It’s time the British government put pressure on the banks to get lending. “If they don’t, give the money back, and if the bank or building society goes bust then tough luck.”
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
PUNTS Company
Media
Reason
Current price
Insimbi (ISB) AltX
Financial Mail
Jamie Carr, in the Financial Mail, almost gave Goldman Sachs the prize for swiftest comeback just to mitigate the fact that it was called "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" by Rolling Stone, but instead awards it to Insimbi. It’s had a stellar first half, while the recession made itself felt in the third and fourth. It has adapted quickly and he rates this a buy. Buy.
70c
“If you have a look at the value attributes – here I specifically refer to price to earnings ratio, dividend yield, price to book and price to sales – it comes out with glowing scores on those metrics,” says Michael Levin of Canon Asset Managers. This is a strong business which is well positioned to grow for the next year or so. Buy.
110c
Revenue and profit is up to such an extent that AdvTech has decided to declare a dividend. If anything, during a downturn, peoples drive to succeed increases. Fear of retrenchment and failure is a real motivator and, with its wide range of qualifications, AdvTech is cleaning up. Larry Claasen in Financial Mail says that with a PE of 11 and a share price of R4.40 it’s a buy. Buy.
450c
Wescoal makes it into Finweek’s dirty dozen. “This is arguably the most attractive coal play on the JSE,” says Marc Hasenfuss. Wescoal’s been taking advantage of the lower coal prices to make acquisitions. It’s brought Khanyisa Mine in Mpumalanga under its banner and will be keeping an eye out for more opportunities. “Its augmenting its merchant services with a well-timed entry into mining,” says Hasenfuss and with a PE of 5.56 Finweek rates this a buy. Buy.
79c
It recently announced the unwinding of its black economic empowerment deal. It expects diluted headline earnings per share to be 20%-30% higher that last June. Its balanced portfolio has compensated for the adverse trading conditions. With a PE of 6.21 it’s a buy. Buy.
3470c
Winhold (WNH) Industrial
AdvTech (ADH) Education
Wescoal (WSL) AltX - Commodities
Group Five (GRF) Construction
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Summit TV Michael Levin, Cannon Asset Managers
Financial Mail
Finweek
Financial Mail
Racec (RAC) AltX
Finweek
Racec has strong rail and electrical niches that have recently attracted a strategic black empowerment investor. With a PE of 5 and a with a market R83,214,470, Finweek rates this a buy. Buy. 80c
PSV Holdings (PSV) AltX
Finweek
A nicely diversified engineering business PSG Holdings has caught the eye of Marc Hasenfuss. He says, “with a strong order books and sizable chunks of recurring business” PSV is a solid choice. With a PE of 4.96 it’s a buy. Buy.
31 July 2009
37c
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
Company
Media
Brait (BAT) Investment Bank
Summit TV Rudi van der Merwe, Standard Financial Markets
Reason
Current price
Rudi van der Merwe reckons now is the time to stay conservative with your share selections. He says, “I think the market has run well ahead of the fundamentals at the moment.” This share will give you a dividend of over 5%. He thinks, with the likelihood of a weakening rand, Brait will benefit. With a dividend yield of 10.46 and sitting on a PE of 10.89, this share is a buy. Buy. 1710c
DOGS Company
Media
Anglo Platinum (AMS) Platinum
Finweek
Reason
Current price
The demand for new cars has plummeted. Earnings per share (EPS) were forecast 65%-75% lower than last June. The group had higher sales, but the stronger rand has wiped out much of its value. It’s currently trading at a PE of 24.81. Avoid.
54990c
Reason
Current price
WATCHLIST Company
Media Financial Mail
Absa (ASA) Banks
Truworths International (TRU) Retailers – Soft goods
Finweek
With the announcement of Gill Marcus as the Governor of the Reserve Bank, we’ve seen her step down as the chair of Absa Group and Absa Bank. The Financial Mail’s, Andrew McNulty, says that often it takes months to find a replacement. The usually quick process is exacerbated by the strict selection processes that banks are required to go through. In the mean time, the fate of Absa rests in the safe and accomplished hands of Dave Brink. It’s currently sitting on a PE of 7.76 and has a dividend yield of 5.23. Hold.
11581c
Truworth’s International is facing growing expectations with an anticipated growth in headline earnings per share for 2009. This is despite adverse trading conditions. It’s announced that it’s hoping for between 10%-15% increase in earnings for the year to 28 June. Its results will be announced on the 19 August. In the mean time, it’s made, what Reuben Beelders, a portfolio manager at Gryphon Asset Management, describes as “aggressive growth”. It’s opened 43 new stores during this recessionary period and grabbed 12% market share. This will either position it very well to take advantage of an upswing or be a complete failure should the recession bite deeper. Hold.
3810c
**Closing prices as at 29 July 2009
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31 July 2009
last word
We are all Jackasses now Feds miss the point completely set up new households – reducing demand for new houses.
For whatever reason, the French newspaper Liberation recalled a grim event last week. On 4 February 1912, Franz Reichelt, also known as the ‘flying tailor’, put on a homemade outfit designed to work like a parachute. He went up to the first observation level of the Eiffel Tower, hesitated... then, he stepped over the rail and jumped. Alas, he did not fly. Nor even float. He fell “like a stone”, the paper reported.
Bill Bonner
On the evidence, stimulus programmes aren’t working. Where they are tried the most, they work the least. For proof, we go to Stimulation Nation itself. From America last week came news that new house sales had finally turned up, rising 11% in June. That was the monthly figure. On an annual basis, they were down 21% – the second lowest since they began counting in 1963. Since the population is much bigger now than 52 years ago, it was relatively the worst June ever for new house sales. And now that the economy is in a slump, the rate of new household formation has fallen in half. Lower incomes and worsening job prospects mean people are less eager to 28
31 July 2009
Keynes probably got the idea of a counter-cyclical stimulus in Bible class. And a good idea it was. Simple, intuitively correct, practically demonstrated and theoretically sound. But he and his followers still managed to screw it up. First, Keynes’s General Theory is no theory at all – at least not in the scientific sense. It can’t be tested. The results aren’t reproducible. Instead, it’s merely an idea about how things should work, based on an Old Testament story. Pharaoh dreamt he saw seven fat cows devoured by seven scrawny, misbegotten cows. He didn’t know what the dream meant. So he called for a young Hebrew man who had interpreted dreams for his master. Joseph told Pharaoh Egypt was to enjoy seven years of abundance followed by seven years of famine and that he should store all the grain he could from the fat years, so he could pass it out when the going got tough.
©PARAMOUNT/EVERETT/REX FEATURES
Immortality was achieved, but not in the way he’d hoped. His stunt was captured by the motion picture technology of the time. That silent film inspired the popular Jackass videos, which show people engaged in reckless acts of mischief. But we don’t have to go to YouTube to enjoy the genre. We have only to read the financial pages. All over the world, the authorities are strapping on their absurd parachutes and climbing to very high places. In Europe, banks borrowed €442bn last month from the European Central Bank. Much of it is lent back to European governments. In America, stimulus funds are used to fix public toilets as well as to repair Wall Street’s balance sheets. Trillions of dollars have been put at risk – $23trn in the US alone. Yet, despite the most daring experiment in stimulus ever, by the end of June, the British economy was 5.6% smaller than a year before, paralleling the decline that followed the crash of 1929.
Unemployment shows no sign of improving, either. The stimulus programme was supposed to cap joblessness at 8%. Officially, the rate is now 9.5%. Economist David Rosenberg puts the real rate at almost twice that. And businesses are cutting jobs even faster than expected. Economist Arthur Okun suggested a rule of thumb for predicting unemployment levels in a
Now that the facts are out of the way, we end our critique of stimulus and turn to laugh at the stimulators. “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back,” wrote John Maynard Keynes. Now it’s Keynes’s voice they hear. “We are all Keynesians now,” said Richard Nixon as he strapped on a crash helmet.
And for my next stunt, a $23trn stimulus fund downturn. But firms are not only laying off redundant workers; they are laying off workers who would normally be spared. What’s more, those who are left are working the shortest weeks ever recorded. In the past, workers were quick to follow the jobs. The Sun Belt usually bounced back first. But Florida, California, Arizona and Nevada have been flattened even more than the rest of the nation by record foreclosures, government cutbacks and bankruptcies. Now, the jobless stay put, and unemployed. Currently, the excess capacity in the US is staggering – both in labour and capital. Capacity utilisation is only 65%; in theory, output can grow 35% before any new capital investments are made. Recovery? “Forget it,” says Rosenberg.
This is a story we all know. It’s easy to tell and to understand. But modern economists twisted it as though it were an inflation statistic. They maintain that when the business cycle turns down, it’s just like a drought. They can counteract the effect of the drought by giving the economy stimulus – liquidity – from the public sector. The trouble is, they missed the point completely. Do you recall any public official urging the public to stop spending so much in the bubble years? Instead, they encouraged people to eat their grain. Governments ran deficits even during the bubble years. Now they have no real grain to offer. So they turn to a reckless, disaster-defying stunt. Future generations will watch the video and laugh until their stomachs hurt. To read Bill’s thoughts, sign up to the Money Morning free email at www.moneymorning.co.za.