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7 AUGUST 2009 SOUTH AFRICA EDITION 106

Who’s getting rich now?

Cash in on the rise of emerging market giants, page 16

“MoneyWeek is packed with enlightening views for informed investing.”

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The best way to make money from the water shortage SECTOR

A cheap timber stock to buy now 7

WHO’S TIPPING WHAT

Not even the US consumer can cheat time 8

LAST WORD

28

from the editor 7 AUGUST 2009 ISSUE 106

The JSE storms higher flouting dire prospects

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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Last week, we pondered whether the sentiment fuelling the domestic equity market was misplaced. This week, we’re almost sure it is.

Even as Absa Bank announced unimpressive half-year results, the JSE All Share Index powered ahead 547 points. The euphoria is so complete that Monday’s 24 806 close is the index’s best level since September 2008. What you need to decide – given poor earnings expectations across the board – is if local shares are “fair” value at just 25% below their all-time highs?

There’s no doubt more companies will follow Absa’s example when they report earnings for 2009 and 2010. The banking giant posted a 19% dip in headline earnings to R3.8bn, while earnings at its retail banking division slipped 31%. Absa Capital could only chip in with R129m after absorbing a write-down of R1.1bn on “accidental” futures positions in Pinnacle Point Group, Blue Financial Services, Sekunjalo and IT firm ConvergeNet. And the group is still wrestling an unprecedented surge in bad debts. Would you believe investors added to their holdings and sent the counter 1.87% higher on the day?

South African investors are a forgiving lot.

Instead of punishing the executive for poor decisions, they reward them for any manner of corporate shenanigans. We’d love to know who (at Absa) will be held accountable for the R1.1bn “slip” just mentioned. It’s a lot of shareholder value to so nonchalantly write off. And there are other big corporations with similar “shareholder be damned” attitudes.

MTN’s announcement on 31 July 2009 – at which time it promised further details on the proposed Bharti Airtel merger – was simply that talks would continue for another

Will the much hyped “green shoots of recovery” take hold by then? If you follow the international economic data, you may have spotted some signals to support recent market improvements. Commodity prices have been on the up for some time and are significantly above recent lows. And some analysts believe the US may even confirm the end of its recession at the end of the third quarter 2009.

But, the one thing the financial crisis has taught us is, the world is about much more than America. The East will be the driving force behind any long-term sustainable recovery. The fortunes of the 21st century will be made in China and India, not in the developed world. In this week’s feature, Jody Clarke concludes that the West’s domination is coming to an end. Turn to page 16 to find out more about the next big investment opportunities.

On the domestic front, June’s inflation number was much better than expected.

Activity in the bond market – which is priced for perfection – suggests 4.5% inflation is possible. MoneyWeek greeted that prediction with an incredulous snort; but apparently the bond market never lies! The number local economists will pounce on is July 2009 New Car Sales, due out in a couple of days. This statistic will probably confirm the stark contrast between the household and business consumer. While the domestic consumer is showing signs of a slow recovery, corporations are coming under the cosh.

Latest insolvency statistics show that small and medium enterprises are closing their doors as households remain frugal despite repeated rate cuts. It’s going to take time for the recovery to filter through to all areas of the real economy.

Gareth Stokes Editor, South Africa

In this issue 3 News SA falls deeper into deficit territory 13 Briefing

Peak oil is back in the headlines. What is it and can we avoid it?

5 Markets Inflation could be a bigger threat than investors realise.

10 Columnists China’s population

7 August 2009

31 days. Shareholders get to spend another month in limbo.

20 Entrepreneurs How a ‘green’ bed maker made his millions.

23 Travel A tropical island dripping with

problem; per diems are bad for the poor.

luxury.

11 Strategy How to spot when a firm is being economical with the truth.

24 Cars The new AC Cobra – every petrolhead’s dream comes true.

news Global banks

UK banks’ huge profits a ‘blip’ “The economy may not be experiencing a V-shaped recovery,” but some banks certainly appear to be, said The Independent. Following strong results from Wall Street banks, Barclays has reported first-half profits of £3bn, 8% up on last year, while HSBC earned $5bn (£2.9bn). In each case, a jump in profits at the investment banking division offset bad debts on loans. At Barclays the baddebt charge jumped by 86%.

Lloyds, meanwhile, reported a £4bn first-half loss amid an unexpectedly large impairment charge of £13bn, largely thanks to HBOS’s loan book. The row over bonuses has also flared up again now that staff at Barclays’ investment banking arm Barclays Capital look set to earn £200,000 each this year.

Fewer competitors, low interest rates – which reduce funding costs – and the surge in bond and equity issuance are Barclays 400

Figures in pence

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boosting investment banking. But this “trading bonanza” is likely to slow as new rivals emerge, while the supply of corporate bonds is now easing, said Jeffrey Goldfarb on Breakingviews.

However, “the forces behind loan losses look more durable”.

“This is no ordinary recession,” said Patrick Jenkins in the Financial Times.

Unemployment looks set to exceed 10% – some economists are pencilling in 12% – and consumer debt as a proportion of income is a record 140%.

Bank lending growth to households and non-financial companies is still slowing, noted Capital Economics.

With bad debts rising, banks are likely to keep hoarding cash. Anaemic lending hampers growth, so unemployment keeps rising, turning more loans bad and making banks even less inclined to lend.

To make things worse, card debt was dished out like sub-prime mortgages, so losses will be spread around the system.

Meanwhile, Arturo de Frias of Evolution Securities warns that up to 10% of all mortgages could default, implying bad debts of £40bn in total. There’s also unfinished business in commercial mortgages, noted Carl Mortishead in The Times. Savills reckons that every British commercial property loan granted since 2004 is under water and rents remain depressed. So there is a long way to go before the banking sector can look forward to recovery. These profits, said Terry Smith of Tullett Prebon are “a temporary blip”.

Companies

SA’s big 4: In the tailwind of the storm It’s “white knuckle time for SA banks,” reports Mark Ashton on Fin24. The South African financial market has begun zeroing in on banks to discover what tactics will work best amid the ongoing consumer credit crunch. With defaults on the rise and people cancelling their policies left, right and centre, it’s clear our banks are in trouble.

Last week, Liberty Holdings (JSE:LBH) issued a profit warning to tell us that, apart from the R1.1bn it’s lost thanks to volatile interest rates and hedged equity positions, the group’s experiencing a higher number of policy defaults.

Although analysts believe “the large provisions for bad debts by South African banks in the previous reporting period [are] likely to be wound down as the credit cycle slows,” it didn’t prevent further bad news emerging from the sector.

“Absa (JSE:ASA), the local lender most exposed to single stock futures, [will] write down nearly R1.1bn on the value of shares in four JSE-firms it was forced to buy last year,” reports Ingi Salgado of the Business Report.

Late last year, thanks to falling markets, the group was forced to “foreclose on

The bottom line Ronaldo’s (right) legs have been insured for by Real Madrid.

$70,000 This is the amount Trina Thompson is suing her New York college for, after completing her Bachelors degree in IT. She says she wants the entire amount for her tuition repaid since she hasn’t managed to find gainful employment after four months of searching.

R45,000

Is a waste of money, according to a

3

7 August 2009

groom’s mother, for a 2.2km wedding dress. More than 200 guests took over three hours to unroll Lin Rong's wedding train, which stretched nearly 1,579m, and pin on 9,999 red silk roses for her wedding.

£250m What three fraudsters tried to sell the Ritz hotel for despite not owning it. Patrick Dolan, Conn Farrell, and Anthony Lee have gone on trial for fraud.

$20m The treasure recovered from the Polar Mist, a ship that

disappeared off the coast of Argentina in January this year. The cargo, which was mainly gold and sliver bullion, was headed for Santiago where it would then be flown to Switzerland.

$3.99

The price tag found on a bloody, women’s garment hanging in Michael Jackson’s cupboard. Legal experts suspect it might have been used to mop up the singer’s blood, but independent experts are suspicious since it wasn’t taken into evidence.

£150,000

The value of camera equipment stolen from BBC Television Centre since April.

©MIGUEL RIOPA/AFP/GETTY IMAGES

£90m What footballer Cristiano

news single stock futures [SSF] positions, a type of derivative, in a clutch of small JSElisted companies after investors defaulted on margin calls through small private client broker Cortex Securities,” explains Stuart Theobald in The Times. This saw the group shell out an astounding R1.44bn to pay the “acquisition cost” of these highly illiquid securities.

So what’s happened? Apart from the obvious recessionary environment, there’s also a lack of foresight from those in charge.

Just last month, the media lambasted Planning Minister, Trevor Manuel, for failing to emphasise that our economic growth would be relatively weak in the next few years.

The banking group’s results for the six months to June 2009 show earnings fell 38.9% for the Absa Group and 49.9% for Absa Bank. As a result, the company’s share price fell 0.4% to R177.50 by close of trade on Friday.

In a recent article on Fin24, Greta Steyn fittingly brought to light Manuel’s blatant omission: “Dig a little deeper,” she pointed out, “and it seems that government may be planning for a longer time of weak growth. Manuel talks about the ‘large budget deficits’ (plural) that will have to be reversed when the economy picks up again… But Manuel’s failure to stress that we face a prolonged period of economic malaise is a major omission.”

New Finance Minister, Pravin Gordhan, was less cagey on the issue. He believes that, at best, the country’s economic

Meanwhile, “Absa’s earnings performance sends it to the bottom of the pile, as analysts expect most local banks to report falls in earnings in the region of 30%”, reports Fin24.

Ecomony

The “blind” lead SA deeper into deficit hole

“With revenue unlikely to improve much before the new year, the only reasonable route seems to be to curb expenditure back to budgeted level. In our view, however, such a move is highly unlikely given the present climate,” he explained in a recent press meeting.

But it’s not all doom and gloom. Two weeks ago, ratings agency, Moody’s upgraded our foreign currency rating to A3 thanks to government’s commitment to “a ‘very sound approach’ to fiscal policy”. This higher rating will see further capital flow into our markets and should help dig us out of the (deficit) hole we’ve dug ourselves into. Whether or not Gordhan will let us dip into these funds, is another story.

The way we live now A Sicilian mayor has decided he has more chance of winning the lottery then getting more funding from the state. Bailio Ridolfo, mayor of Ficarra, has persuaded colleagues to contribute €115 from their pay packets in order to buy tickets for Italy’s SuperEnalotto. The draw hasn’t been won in weeks and the jackpot has now climbed to a record €116m.

Ridolfo said he and his colleagues chose numbers “connected with the town’s patron saint, the Virgin Mary of the Assumption”. If the council wins, he has said that half of the winnings will be spent on municipal projects, while the rest will be split between the town’s 2,000 residents.

©PHOTOLIBRARY

A year ago, we were sitting pretty on a surplus of R2.5bn. Last Friday, South Africa posted a deficit of R482m for the first fiscal quarter of 2009. So it’s only right that concern is growing about the “rapid rise in spending and widening fiscal deficit in SA at a time when revenue is declining at such a strong clip,” reports emerging market economist, Peter Attard Montalto.

growth will average between 2% and 3.5% for “several years following the recession”. That’s a far cry from the annual growth rate (of 5%) we enjoyed between 2004 and 2007.

MONEYWEEK’S strategic portfolio: Where to put your money now* Sector Benchmark Date first tipped Performance to date

Gold Bullion Nov 01 +17%/year

The yellow metal has risen to a seven-week high of just under $970 an ounce as the US dollar index has slumped.

With the dollar and other major currencies looking unappealing over the longer term as money printing by central banks raises the prospect of higher inflation, gold, the oldest currency (seen as the ultimate safe haven), should benefit.

Sector Benchmark Date first tipped Performance to date

Japan Nikkei May 03 3%/year

Japan’s exports and industrial output rebounded strongly in the second quarter, although rising unemployment, falling incomes and the return of deflation cloud the outlook for consumption. But the market looks appealing longer-term on just 0.5 times sales, while for the first time in years local retail investors have been buying stocks, says Barton Biggs of Traxis Partners.

Sector Benchmark Date first tipped Performance to date

Corp bonds FTSE £ Corp Feb 09 –

Yields on investment grade corporate bonds have fallen as prices have recovered.

The yield on the FTSE sterling corporate bond index has edged down to 5.6%, which still compares favourably with historically low government bond yields. One possible option for income seekers is the Invesco Perpetual corporate bond fund, which yields around 6%.

Sector Benchmark Date first tipped Performance to date

Defensives Inv Perp High Inc Jul 09 –

The rally over the past few months has been a “dash for trash”, with high-risk cyclical stocks in favour and solid defensive companies overlooked. So sectors such as pharmaceuticals, tobacco and utilities are undervalued, while oil giant BP yields over 6.5%. A fund worth considering is Neil Woodford’s Invesco perpetual High Income fund.

*Research shows that asset allocation is much more important than share selection. MoneyWeek doesn’t pick shares. But we have some definite ideas about which sectors are likely to go up.

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7 August 2009

the markets

Mind the output gap Is inflation or deflation the greater danger over the next few years? Will inflation take off now that central banks have cranked up the printing presses? Or, as the deflationists expect, will the credit squeeze bear down on growth and prices for years to come?

Investors are upbeat – company bosses aren’t

Estimates of the US output gap 8

Forecast 6

Deutsche Bank estimate

4 2 0 -2

OECD estimate -4

The most common argument -6 against inflation flaring up is ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 the so-called output gap, says Source: Source Deutsche Bank/ OECD Morgan Stanley. The “Great Recession” has created a gulf than assumed. Indeed, it was later between actual and potential GDP, and estimated that the economy had been all this spare capacity will take years to operating at full capacity as it entered the absorb. For example, the US oil shock, so loose monetary policy Congressional Budget Office estimated caused inflation. that the output gap in the US was -6.2% of GDP in the first quarter. This implies It could be a similar story this time round. that GDP could grow solidly for years Deutsche Bank says that US growth over before demand exceeds supply in the the past few years was artificially ramped economy and it begins to overheat. up by cheap credit. Potential growth was thus overstated. The unsustainable growth But estimating the current output gap is of recent years led to large amounts of hardly an exact science, says Edward capacity being built up – notably in the Chancellor in the FT. Economists can’t residential construction and financial agree on how to measure it, for one sectors. This is now obsolete because the thing, and estimates of potential growth unsustainable credit-driven demand can be wrong. Take the 1970s. The underpinning it has evaporated.

Federal Reserve thought the output gap was -10% during the recession that With this capacity gone forever, overall followed the oil crisis, and so kept capacity and hence the output gap are monetary policy loose. But it later smaller than assumed. Deutsche became clear that the oil crisis was a calculates that the US output gap in 2010 “supply shock”, which resulted in a great will be a mere -0.7%; and in the deal of spare capacity being rendered eurozone, it could be -2.4% next year, obsolete (effectively destroyed) as compared to the OECD’s estimate of businesses began to adjust to much 6.6%. So the risk of inflation, it higher oil prices. So overall levels of spare concludes, is higher than investors think. capacity, and potential GDP, were lower

Watch this space ● “I’m pretty sure we’ve already seen the bottom … it strikes me that we may very well have 2.5% [growth] in the current quarter.”

Alan Greenspan, August 2009 ● “It is very rare that you can be as unqualifiedly bullish as you can be now.”

Alan Greenspan, January 1973, just before the deep recession of 1973-1974 began

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7 August 2009

Onwards and upwards. America’s S&P 500 has eclipsed the 1,000 mark for the first time in nine months. The FTSE 100 has notched up its best July in six years – 8.5% – and is also at a nine-month high.

Investors are looking forward to the end of the recession, but “aren’t paying much attention to economic reality”, says Edward Hadas on Breakingviews. The overriding theme in the US, as we noted last week, has been high profit growth through unsustainable cost-cutting, while European investors appear determined to ignore gloomy forecasts from firms. Last week, says Hadas, Lufthansa said there was “still no sign of a recovery”, while Rolls-Royce thinks it’s “still difficult to see green shoots”. German chemicals group BASF reckons that “a sustained upturn is not in sight”. So bosses think “the deep recession isn’t getting much shallower”.

The rally is thus overdone.

US valuations are ‘very stretched’ A key reason to doubt that the bounce from March is the beginning of a long-term bull run is that US stocks weren’t then at valuation levels typical of major bottoms, says David Rosenberg of Gluskin Sheff + Associates. They cost 13 times trailing earnings and yielded 3%. Now valuations look “very stretched” with the S&P on 24 times trailing profits. And that figure is based on operating earnings, a lenient definition that ignores problems thought unlikely to recur. Using much stricter “asreported” profits (what firms report on tax returns) the PE is a breathtaking 760.

The big picture: Britons profit from the monarchy “The taxpayer is not Royal value for money (£m) subsidising the monarchy but making a tidy profit from it,” Crown Estates income Taxpayer subsidy £200m says The Economist. Since £150m 1760, the income from the Crown Estate, the sovereign’s £100m property portfolio, has gone to the Treasury. The portfolio £50m includes includes holdings £0m such as the Ascot Racecourse, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 the Britannia wind farm off the Source: FT Source: The Economist/House of Commons Northumberland coast, and the former Café Royal in Regent Street. In return the monarch gets a fixed annual payment (the Civil List) to “run the royal show”. In the last financial year revenues reached £227m; in the decade to 2008, the British government made £1.3bn more than it paid out.

the markets

Could emerging markets be heading for a collapse?

©BLOOMBERG

Developing markets reached a milestone this week. The MSCI Emerging Markets index regained the level reached on 12 September, when the bankruptcy of Lehman Brothers sent equities into a tailspin. Following a 50% drop, the index has almost doubled since October. India and Brazil have gained a respective 64% and 89% this year, while global investors poured a record $35.5bn into emerging market stock funds in the first half.

Latin America has seen lending growth pick up Developing countries have “emerged from the crisis with their underlying superior secular growth trend solidified in investors’ minds”, says Ian Scott of Nomura. Emerging market demographics and debt levels compare favourably with the West, giving them greater long-term growth potential, and their banking systems have largely avoided trouble. Lending growth has resumed in Asia and Latin America, and “this is helping drive growth”, says Morgan Stanley’s Michael Wang.

But investors are getting ahead of themselves. While domestic demand is set to increase in emerging economies over the longer term, the global outlook remains crucial for emerging markets overall, especially Asia. And “for all the enthusiasm about China’s performance”, the key variable here is America, and especially its consumers, as Marco Annunziata of Unicredit points out.

% change

*4647.13 10252.53 1002.72 1993.05 3458.53 5353.01 22477.00 24909.00 11.42 13.39 7.87

And as its latest GDP figures confirmed, the consumer continues to retrench rather than go out and shop. With a feeble recovery in the offing, emerging markets look vulnerable to a renewed bout of risk aversion as investors realise that growth is set to disappoint – particularly since emerging markets are hardly cheap.

Société Général warns that emerging markets’ book value is now higher than the developed world’s. “The last time that happened” (between mid-2006 and mid2007) there was a “collapse” in emerging stocks. The MSCI index’s p/e is back up to almost 18, the highest since the market peak of late 2007. Brazil’s p/e is 23, a five-year high; China’s bubbling market is at almost 40, while India, another popular bet, is also no longer cheap at 20. In reference to these last two, Goldmans Sachs’ Jim O’Neill says: “wait for a correction”.

**0.34 0.87 1.62 0.44 0.67 -0.14 3.47 3.50 3.96 2.53 -0.58

*05 Aug ** since 30 July

Winners Cenmag (CMG) Trnshex (TSX) TWP (TWP) Anooraq (ARQ) Merafe (MRF) Sappi (SAP) Rare (RAR) Eastplats (EPS) Metorex (MTX) Palamin (PAM)

% change Price 78.13% 20.40% 20.00% 20.00% 19.66% 18.70% 16.67% 16.45% 15.51% 14.20%

285c 360c 600c 750c 140c 2850c 140c 439c 365c 7600c

Weekly change to JSE stocks as 5 August 2009

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7 August 2009

The red metal is red hot: copper has gained almost 80% this year and has eclipsed the $6,000 per tonne level last seen in September. A revival in global risk appetite has helped, but the main driver has been China, where imports have been running at twice the levels seen when Chinese GDP was rocketing in 2007 and 2008, says Capital Economics. In June imports reached a fresh record high, up 400% year-onyear. But “this is only sustainable if there has been an implausibly large and rapid increase in the commodityintensity of economic activity”. Instead, the government has been stockpiling commodities in the wake of the price slide last year.

But that can’t go on forever and, indeed, the trend seems to be weakening.

Japan’s second-largest smelter, Sumitomo Metal Mining, says Chinese imports are now slowing. What’s more, there certainly hasn’t been a “dramatic improvement” in demand, as Sumitomo’s Koichi Kaku points out.

The International Copper Study Group says imports of refined copper grew by an annual 119% in the first half but production of semi-processed copper goods, an indicator of actual usage, expanded by a mere 1.3% in the same timeframe. Note too that Chinese growth won’t make up for lacklustre demand elsewhere in the world, says Michael Pento of Delta Global Advisors.

Given all this, the price of copper is set to “come down to match reality”.

Best and worst-performing shares

Vital numbers FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$

The ‘red-hot’ metal looks set to cool off

Losers

% change Price

ERM (ERM) Afro-C (ACT) Lonrho (LAF) FiUranium (FUM) DiamondCP (DMC) Actowers (ATR) UCS (UCS) Angloplat CCP (AMSP) SilverB (SVB) Oando (OAO)

-100.00% -25.18% -20.00% -19.91% -11.94% -9.57% -8.33% -7.27% -7.14% -7.10%

0c 104c 100c 2603c 295c 104c 165c 10200c 130c 510c

sector of the week

How to salt away big profits from water desalination plants have been built for each of the last five years, says Connor Boals at Circle of Blue, meaning that the world market could soon reach $58bn a year.

Already, some 14,380 desalination plants operate across the planet with a total contracted capacity of 62 million cubic metres per day.

California has been fighting hard to avoid going bust recently.

But it’s short on something far more vital than money: water. The Golden State is suffering its worst drought in recorded history. Water levels in groundwater basins and reservoirs are well below average, says California’s Department of Water Resources. Court-ordered restrictions on deliveries have hit supplies from the two largest water systems. The outdated state water grid just can’t keep up with growth in the state’s population.

©PHOTOLIBRARY

by David Stevenson

California needs a long-term solution to its water problems, fast.

It’s not alone. Climate change, drought, growing populations and industrial demand are placing an ever-greater strain on the Earth’s available fresh water.

Water use has grown twice as fast as the world’s population over the last century, so that more than a billion people already live in areas where water is short, says the United Nations Food and Agriculture Organisation. By 2025, 1.8 billion people will experience severe water scarcity, while two-thirds of the planet’s population – 5.5 billion people – could be living under water ‘stress’ conditions.

The answer seems obvious – desalination.

Around 97% of the earth’s vast water reserves are too salty for human consumption. Of the 3% that is

Yet that only equals the annual rise in global freshwater demand.

Even if all US desalination operations ran at full capacity, they’d still only create enough water to supply 0.4% of the nation’s current needs. So there is little chance of overcapacity being an issue anytime soon. But it is California is looking to the sea for a freshwater supply by no means all plain sailing.

The “plants are enormously expensive, freshwater, 1.7% is locked in glaciers, use tremendous amounts of energy and with just 1% easily accessible in rivers, have major environmental costs that are lakes or groundwater. So it makes sense not always adequately addressed, to find a way to turn some of that salty including brine disposal” and damage to water into something we can use. fish and the coastline, says Peter Gleick, “Water is going to be very short until you president of the Pacific Institute. have a new source. And the only new source is desalination,” says Claude But help is at hand. At the UCLA Henry Lewis, Mayor of Carlsbad in southern Samueli School of Engineering & Applied California, which next year will open the Science, researchers are harnessing a largest desalination plant in the Western popular desalination technique called hemisphere, to turn 50 million gallons of reverse osmosis, a filtration process that seawater a day into fresh drinking water. forces water through a membrane to remove impurities, to find ways of cutting It’s part of an international trend. Global freshwater production costs. Meanwhile, desalination capacity has grown by 17% one British firm is also tapping into the a year since 1990, says Global Water latest desalination technology – as shown Intelligence, rising by 43% in 2006 and in the box below.

2007 alone. An average of 800 new

The best bet in the sector AIM-quoted Modern Water (LSE: MWG) is run by former head of Mid Kent Water 140 Neil McDougall and water industry veteran 120 Simon Humphrey. It owns a cutting-edge 100 desalination technology called manipulated 80 osmotic desalination (MOD). This process 60 converts large volumes of seawater into 40 drinking water relatively cheaply, saving on 20 both capital and operating costs. What’s more, it cuts energy use by desalination plants and lowers the consumption of, and so the need to dispose of, hazardous chemicals.

Modern Water

Figures in pence

Jan 2008

Furthermore, Modern owns a pre-treatment process for multistage flash (MSF) thermal desalination plants, which increases the plant’s top temperature. In plain English, this raises output by up to 25%, cuts pollutants and extends plant shelf-life.

7

7 August 2009

And the firm isn’t limited to desalination.

It owns a range of other technologies with complementary applications, such as using seawater for toilet flushing, which cuts the domestic need for freshwater by over 30%.

The company operates a small desalination plant in Gibraltar, which is doing better than forecast. It’s also building a unit in Jan 2009 Oman. With a £30m (R405m) market cap, this tiny company, currently making no money, isn’t without risk. But at the end of last year it had no debt and £27m (R365m) in the bank. If its technologies meet expectations, Modern should get “a host of orders and may even receive partnership approaches from larger, wealthier companies”, says Joanne Hart in Mail Online. “The next 12 months could revolutionise this business”.

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.

If you go down to the woods today – look out for this lean, mean, tree-growing machine Tip of the week: “It’s planting season for the long-term investor” – Finweek When the market’s falling down around its knees, (as, unfortunately, we’re all too familiar with recently) canny investors dive into “so-called” defensive stocks. Top of the list are pharmaceuticals and other “essentials” that we can’t live without, regardless of how dire the economy is. A favourite inclusion to the list in more developed markets is also timber, but this hasn’t proved a firm favourite in South Africa.

That might stem from the fact that there’s only really one stock to pick from!

In the JSE’s forestry and paper sector

there’s not much choice for investors. There’s only one “real” timber company along with three paper focused businesses, Sappi, Mondi Ltd and Mondi Plc. York Timber Holdings Limited (JSE: YRK) is the only way for a South African investor to gain exposure to the timber industry – but, the question is, should you be accumulating stock?

Sikonathi Mantshantsha of Finweek is super confident about the prospects for York Timber and MoneyWeek agrees. The company certainly looks like it’s shaping up to be a lean, mean, tree-growing machine!

York is undergoing a massive shake up. There’s new

Gamble of the week: Mazor Group Limited (JSE: MZR) You may think we’ve seen the last of the building boom, especially with the 2010 Soccer World Cup literally around the corner. But, don’t fall into the trap of believing all the development we’re seeing frantically being thrown together is going to end as soon as July 2010 dawns. You’d be very wrong!

The construction sector looks set to keep steaming on for at least the next couple of years. In fact, the infrastructure upgrades currently taking place on the highways and the like aren’t scheduled for completion until 2011 or 2012. So there are still opportunities to profit from this boom.

And what could be better than a construction firm you can actually understand! This company isn’t involved in

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management in the boardroom and, if their plans are anything to go by, it’ll be a different company – for the better – once they’re done.

York released a cautionary to the market in the middle of July, warning

underground work, need an engineering degree to understand, development – its works are plain to see! If you’ve driven round Cape Town recently – you’ve got this company to thank for some of the beautiful structures, including the V&A Waterfront Mall, the Cape Town Convention Centre and the Cape Gate Mall.

So who’s behind them? Well, it’s all down to Mazor Group Limited (JSE: MZR). This 28 year old family business has gone from strength to strength ever since. Despite being a listed entity now, the company’s still very much family run, with the founder’s son and daughter sitting in the CEO and one of the director seats on the board respectively.

Mazor falls under the construction and materials sector of the JSE. The company’s grouped into three divisions, namely steel, aluminium and glass. These divisions design, manufacture, supply and install or erect its final product. The company

who’s tipping what shareholders about the re-haul of the company’s current structure. As Mantshantsha comments, it “might see it closing three sawn timber processing plants in light of the current trading environment”. There’s nothing more reassuring than a company taking the bull by the horns and addressing its problems.

Tucking away some York shares at its current price of 435c for the long-term – and we mean longterm! – should reap you gains as the company shuffle beds down.

Buy.

The market has reprimanded the company for its woes. The share price fell significantly over the past six months, dropping from around the 1600c/share mark to 435c. The most recently released financial results were poor – but considering the company shake up underway, they shouldn’t be given too much emphasis.

Turkey of the week:

We looked at the timber industry in our sector of the week in our last issue. As Eoin Gleeson highlighted, “timber has such a great record of performance during recessions – rising during three out of the four big ones this last century”. This might not hold true for York at the moment – but watch out!

Once the new structure’s in place, the company should prove itself a more efficient counter.

And, when you’re looking into timber companies, staying in for the long-term is what counts. Trees don’t grow overnight. The older a tree, the more money it’s worth. For example, during the “first 15 years,” as Gleeson notes, “a pine tree is good for cheap pulp. But at about 20-27 years, it’s useful for telephone poles or plywood and fetches far more.”

Recommendation: BUY at 435c Market capitalisation: R340.910m

“Dangling from the noose,” says the Financial Mail “When a company has taken 17 months to issue its results,” comments Jamie Carr in his Diamonds & Dogs column in the Financial Mail, something is definitely awry. Share in m Cubed Holdings Limited (JSE: MCU) haven’t traded for over two years. And if you’re unfortunate enough to be a shareholder, you’ll be all too familiar with the fact that you’re stuck with it.

If you’re one of the “victims,” you might take some solace in the fact that the company’s “attempting to dispose of its remaining subsidiaries and unlock what value it can for shareholders”, comments Carr. But, after the delay in releasing results, one has to wonder how long that will take to implement!

With most listed entities releasing their results a few months after year end, taking nearly a year and a half doesn’t inspire confidence! And after all that waiting, not surprisingly, the results are absolutely shocking. The long awaited results show that m Cubed racked up a massive loss, and nothing much is positive.

originally listed on the AltX back in 2007 before moving to the main board a year ago.

Despite the general slowdown in the South African economy, Mazor’s shrugged off these conditions. The latest results, to end February 2009, are impressive. Turnover jumped 67% and headline earnings per shares rose a whopping 82% to 52c/share. A bonus to this baby in its sector is it’s already paying a dividend! The share’s currently trading on a very healthy 7% dividend yield. So, not only will it reward you with growth, it’ll pay you for the pleasure of holding the share too Mazor predominately uses glass, aluminium and steel for its structures. And the depressed steel price has helped keep

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At the end of June, a new financial director took over. Not an easy task to bite into – we doubt many of us would relish being in his position.

When a company lists on a stock exchange – one of the primary factors investors look to is transparency. Once a company starts to muck about – confidence is torn to shreds and unless something of major significance is done, it takes a considerable period of time to gain that confidence back. The JSE reprimanded m Cubed for its failings by suspending the company from trading but, if you’re a shareholder, that’s no help. Not only has m Cubed managed to peeve off the exchange, the Receiver of Revenue’s also had to deal with its fair share of problems with the company regarding tax issues.

Even if you wanted to get into this share, against our better judgement, you can’t – it’s suspended.

Recommendation: Avoid Market capitalisation: R150m

company costs down. Fantastic news for the bottom line. Mazor released a cautionary announcement at the beginning of July concerning negotiations the company’s entered into – we wait with baited breath for further news.

Mazor’s currently trading around the 250c/share level on a modest PE of 4.8.

We rate Mazor a cracking buy at these prices. It’s well worth tucking away some of these for a couple of years.

You should be rewarded over the medium-term and, of course, you’ve got the dividend payments to look forward to.

Recommendation: BUY at 250c Market capitalisation R30.754m

best of the financial columnists

Rosemary Righter The Times

Wall Street is socially worthless Paul Krugman The New York Times

The high cost of per diems for the poor Andrew Jack Financial Times

Shoppers of the world unite!

Neal Lawson The Guardian

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Falling birthrates are good for the planet, but have serious implications for society, says Rosemary Righter. Western countries face labour shortages, slower growth and higher taxes to fund pensions and long-term care. But our problems are nothing compared to China’s. Just six years from now, the labour force will start to shrink. By 2050, there will be just 1.6 working-age adults per pensioner. Beijing is proving slow to invest in social infrastructure, “yet failure to do so will render the ‘harmonious society’ unstable”.

Safety nets “barely exist”; the “basic social services that communism used to guarantee are long gone”. There are signs the one-child policy is easing, but a resurgence of big families is unlikely – men outnumber women by 50 million. China will just have to grow old gracefully.

“But the cost of providing for tomorrow’s pensioners is bound to dampen growth even before the workforce starts to decline.

This might not be ‘China’s century’ after all.”

“Crashing the economy and fleecing the taxpayer aren’t Wall Street’s only sins,” says Paul Krugman. High-fliers made fortunes through activities that were socially worthless before the crisis and they’re still at it. Goldman Sachs is earning record profits because of high-speed trading (the use of superfast computers to “get the jump” on other investors); Andrew Hall, who runs an arm of Citigroup that speculates in commodities, is apparently owed $100m for his contribution to the business. Goldman and Hall may be very good at what they do, but “what they do is bad for America”. The stockmarket is meant to allocate capital to its most productive uses.

High-speed trading degrades that function; it’s a “tax on investors who lack access to those superfast computers”. Hall may outsmart other investors, but it’s hard to see the social value of what he does.

It’s time the administration realised that society “lavishly rewards those who make us poorer” and actually did something about it.

Expenses culture is damaging poor countries too, says Andrew Jack.

One reason the public sector in developing countries operates so slowly is because of a “form of institutionalised, legal time-wasting” known as the ‘per diem’. This is the daily payment made to officials to attend meetings. It’s meant to pay for food, travel and accommodation costs. In reality, it gives underpaid civil servants an incentive to boost their pay by attending meetings that often achieve little. They end up being out of the office so frequently that vital economic decisions take far longer to make than they should. UN organisations are “among the worst offenders”, paying lucrative per diems that “undermine functioning governments from developing countries”. Sure, some meetings are worth attending and those who do so should have their costs covered, yet too often they aren’t. The system rewards people by “outputs not outcomes”; it must be changed. “Management by results may have its limitations, but it merits more attention than payment by meeting.”

We consume to sustain life, but over the last 30 years we have become turbo consumers, says Neal Lawson, consuming to buy identity, gain respect and secure status. Shopping has become such a predominant force that it is at the point not only of ruining our environment and our own happiness, but of ruling out alternative ways of being. “Who will challenge this creeping monoculture?”

Political parties offer “minute variations of the same pro-consumption product”; they even behave like retailers, testing policies to see what works best and adjusting them accordingly. Thankfully we haven’t reached the point of no return – and millions of people are deciding to shop ethically and shop less, “swapping money for time” and “drudgery for creativity”. “But they are leaderless. No mainstream party will speak out about the dire need to curtail growth and ensure that limited resources are fairly redistributed.” So it is down to us: “shoppers of the world unite”. “A life of turbo consumption cannot be the pinnacle of human development.”

Money talk

©CHANNEL 4

China’s shrinking population

“I’ve begun to realise that money and fame are meaningless. I used to be poor. The money does not make me happy.”

Comedian Russell Brand (pictured above), quoted on Sky News “If the Taliban can recruit fighters by paying farmers ten dollars a day, why shouldn’t we pay them eleven to work for us?”

An Army officer on Britain’s proposal to negotiate with Afghan insurgents, quoted in The Mail on Sunday “I don’t know where my savings are; I believe in a company called Alico, which I haven’t even heard of. It could be in a tin mine in South Africa.”

Frank Skinner on having half his savings frozen until 2012 due to US insurer AIG’s problems, quoted in The Sunday Times “Being the face of a consumer brand most people assume I’m wealthier than I am, even though I rarely talk about it. I think they believe I actually own all the easyJet planes.”

Sir Stelios Haji-Ioannou, founder of easyJet, quoted in The Sunday Telegraph

investment strategy

How to spot a devil in the detail One good metric to keep an eye on is the cash conversion cycle. This measures the number of days between the outlay of cash on inventory and the point when you get paid by your customer. It’s calculated as (average inventory over period/cost of goods sold) + (average accounts receivable over period/revenue) – (average accounts payable over period/ cost of goods sold, plus inventory growth in period), all multiplied by the length of the accounting period (eg, 90 days for quarterly accounts, 365 days for yearly accounts). If this number is high relative to peers and consistently rising, it may be a sign of trouble – possibly because management is failing to keep a grip on cash flow, but perhaps because the numbers are being fiddled.

by Cris Sholto Heaton

Should investors have been able to spot the fraud in advance? Unfortunately, there’s no single test that will tell you if a company is cooking its books. Most of due diligence on investments boils down to forming an overall impression: for example, is the company structure oddly complicated, with lots of deals with related parties? This takes a lot of work; many investors don’t have enough time and put their trust in the fact that a major auditor – PricewaterhouseCoopers in this case – has signed off on the accounts. But there are a handful of quick and easy tests that can tip you off if something is wrong.

Follow the money One giveaway with Satyam would have been the return it was earning on its cash – or the lack of it. Interest income on cash holdings should be reasonably close to the prevailing interest rate in the country where the cash is parked. If interest earned is much lower than you’d expect, it could mean that some of the cash may not exist. Conversely, oddly high interest may point to a firm that’s speculating in higher-risk investments to try to earn a higher return. More generally, it may be a warning if a large or rising share of income comes from investments rather than the operating activities that are supposed to be the company’s main focus.

In a similar vein, be careful when associates (other firms in which the company has a stake of less than 50%) seem to account for a large share of income. This can be a useful way of shifting heavily indebted, poor-quality subsidiaries off a firm’s accounts, making its earnings quality and balance sheet

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©IMAGES.COM/CORBIS

Until January, Indian IT firm Satyam was an investor favourite, thanks to its rapid growth, healthy margins and a cash pile of $1.1bn. One high-profile British manager had almost 10% of their India fund invested in the stock. Then chairman Ramalinga Raju made a shocking confession: it was all a sham. He’d been fiddling the accounts for years. Profit margins were just 3% and cash on hand was around $80m. The stock collapsed, the company has now been bought at a fraction of its old value and Raju is now stewing in a Hyderabad prison.

How real are the profits?

Always monitor a firm’s working capital

“Focusing on cash flow will help catch frauds” look more attractive to investors, while still holding on to some of the earnings.

But if the economy turns down and the associates hit trouble, those profits will dry up; even worse, the firm will sometimes have guaranteed part of its associates’ debts to keep the bankers happy (if so, this should be disclosed in the notes to the accounts).

Exceptionally high profit margins lure in investors, but can also be a danger sign.

Take care when a firm shows rapid growth in income without comparable growth in revenues; it may be concealing expenses artifically to inflate profits.

One possible way to spot this is to compare the firm’s effective tax rate (reported tax paid/pretax profits) with the tax rate that should apply to it. If the firm seems to be paying tax at a significantly lower rate than you’d expect and there’s no obvious reason for this – such as tax allowances or subsidiaries in lower-tax countries – it could indicate that the firm is overstating its profits to shareholders.

Watch out for working capital You should always monitor a firm’s ‘working capital’ – the money used in its day-to-day activities. There are three parts to this: accounts receivable, which is money owed to the company; accounts payable, which is money owed by the firm; and inventories, which is the stock of raw materials, intermediate components and finished goods for sale.

It’s easy to see how problems can be hidden in this section of the accounts.

A firm can achieve apparently strong growth by selling goods on extended credit to lower-quality customers. This inflates this year’s revenues and profits, but in the long run many of those accounts may be uncollectible. In the worst case, management may even fudge sales figures completely. Similarly, obsolete or even non-existent inventories can be carried at high values to make the balance sheet look better.

Lastly, remember that what really matters is cash. Reported profits on the income statement and cash from operations on the cash flow statement can diverge for good reasons in the short-term, but eventually reported profits must be reflected in inflows of hard cash. Over time, the only real difference between the two should be the depreciation and amortisation of the company’s assets.

Cash flow is not infallible. It can be faked – for example, by juggling cash balances between related firms with different yearend dates, or by creating false bank statements. But this is harder than overstating earnings. Focusing on cash flow rather than earnings will help investors to catch many frauds – as well as spotting managers who are dressing up earnings to boost the share price and the value of their options.

personal view

Watch this defensive counter shoot up as sentiment turns the market What I would invest in now Good news has been pushing global markets to 2009 highs. This is largely thanks to earnings released around the globe (especially in America) that have surprised on the upside.

This week, Daniel Kraus, an equities and derivatives trader at Newstrading, tells MoneyWeek where he would put his money.

While it’s true there are still some losses, and all-important economic data may still be contracting, it’s happening at a slower pace than previously.

The recession is, as they all say, ‘‘coming to an end”.

Whether or not this is true, there are overpriced and overbought shares out there.

I wouldn’t be buying into them at these levels.

Having said that, there are also some great shares you can buy on any small pullback.

And that’s why I’m choosing a defensive counter like Bidvest (JSE:BVT).

Bidvest is a South African investment holding company, founded in 1988, with subsidiaries in various markets. It’s involved in over 100 businesses and is led by astute businessman, CEO Brian Joffe, who’s proven to make very few mistakes.

His business model is to buy distressed assets that show value and turn them into profitable money making machines. As such, the group seeks acquisitions and organic growth opportunities that best fit its business focus.

Just recently, for example, it bought Nowaco

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Group, a leading foodservice player in the Czech Republic, Slovakia and Poland for €250m. This move shows off the company’s ever-eager nature to grow and expand, not only in Africa, but globally and into other emerging market countries, such as the eastern parts of Europe.

As global markets slowly recover and the recession ends, Bidvest is a safe long-term hold and its share price could trade all the way back to its all-time highs of R150.

In March of this year, when the market was at its lowest and the world was literally collapsing around us, Bidvest fell along with it – trading as low as R75. What an opportunity that was!

But since then, the share’s recovered a phenomenal 42.68% to its current level of R107.01. Bidvest is currently on a forward PE of 11.3 and a dividend yield of 0.9%.

Although shareholders received a smaller than expected dividend, it’s commendable that Bidvest paid one at all, especially since other listed companies (like Anglo American and Old Mutual) decided to pay zip.

With a man like Brian Joffe at the helm, I’d be happy to get into this one on any pullback and accumulate shares between R95 and R100 with a long-term view.

The share Daniel Kraus likes: Bidvest

12mth high 12mth low Now R116.74 R74.76 R107.01 * Share prices as at 5 August 2009

investment briefing

Are we about to hit Peak Oil? Fears that the world is running out of crude oil have just resurfaced after a new International Energy Agency warning, says David Stevenson. So how worried should we be?

What are the latest jitters about?

recovery hopes. This would increase the power of the countries with substantial reserves – mostly in the Middle East.

“If we see a tightness of the markets, people in the street will see much higher prices than now,” Dr Birol tells The Independent. With the global economy still fragile, any recovery risks being strangled by higher crude costs. The upshot is that “we have to prepare ourselves and leave oil before oil leaves us. The earlier we start, the better, because all our economic and social system is based on oil”. ©WILLIAM WHITEHURST/CORBIS

Crude oil is what makes our modern lifestyles possible. As well as providing the world’s main transport fuel, it’s also the key raw material for the chemical, plastics and drug industries, while food production depends on it for fertilisers. The trouble is, many credible people believe it’s running out. Dr Fatih Birol is chief economist at the International Energy Agency (IEA), whose job it is to assess future energy supplies by OECD countries. He believes that “both the public and also many governments appear oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted”, reported The Independent’s Steve Connor this week. In other words, “Peak Oil” may hit earlier than expected.

Should we be panicking?

Not necessarily. IEA oil supply alarmism isn’t new, says John Kemp at Reuters.

“It’s paid to be the ‘conscience’ of the oilconsuming countries.” Although the word ‘reserves’ implies high certainty, all reserve What is “Peak Oil” theory?

The IEA has confirmed we’re running out of oil estimates are uncertain and depend on sound geologic and engineering data.

Peak Oil isn’t the point at which oil runs Reserves fall under one of four criteria: discovered, recoverable, out altogether. It’s the point at which the maximum feasible rate commercially viable or remaining in the ground – and can either of global oil extraction is hit, due to technical and geological be proved or unproved. Unproved reserves are either ‘probable’, constraints. Production then falls. In other words, Peak Oil is with a greater than 50% likelihood of extraction, or ‘possible’, the point at which we’re getting as much oil out of the ground with a less than 50% chance. But oil recoverability isn’t just per day as we’ll ever achieve. “The real godfather of the about geology. It depends on oil prices, forecast demand and movement,” says Reuter’s John Kemp, was Shell geophysicist potential extraction costs. Further, different experts make M King Hubbert, who correctly forecast in 1956 that US oil varying assumptions. At fields past their peak, varying production would peak in 1970. Some Peak Oil pundits reckon production rate declines affect calculations. Then politics can it’s already happened globally, and certainly, extraction has creep in. Some countries regard the size of their oilfields as a peaked in major producers such as Britain and Indonesia. national security issue and don’t provide accurate data.

But mainstream authorities had believed Peak Oil won’t occur until at least 2030, says Connor. Until now.

What’s the long-term answer?

What’s the IEA’s latest thinking?

On a simplistic basis, says Kemp, Peak Oil “must be true”.

Like all good things, “oil is something they don’t make any The IEA reckons global oil production is likely to top out in ten more”. Even if demand remains steady, the world would need years’ time, rather than the 20 or more it had earlier thought. the equivalent of four Saudi Arabias to maintain production, That’s the most pessimistic assessment seen yet from a and six Saudis to keep up with demand increases between now mainstream, respected source. The change of heart came after and 2030, reckons Dr Birol. But, says Kemp, there’s no reason the IEA’s first-ever detailed assessment of more than 800 of the we won’t be able to find that. world’s major oil fields, As prices rise and technology covering 75% of global improves, there’s lots of crude reserves. It found that “most of to be found in hard-to-reach the biggest fields have already Is oil the only thing that’s running out? areas such as the ocean floor, peaked”, while production Far from it. The recession may have bought us some time as while technology exists to turn rates at existing fields are global growth slows. However, says Jeremy Grantham of US other sources (such as bitumen) falling at 6.7% a year, nearly fund manager GMO, beyond our debt problems “lurks another into oil. The real question is twice the 3.7% it estimated in longer-term and more important factor affecting future growth not, “when will we run out?”; 2007. And the recent oil price – the increasing limitations on resources. We’re simply running but “how much will these drop means that producers out of everything at a dangerous rate”. The planet’s metal alternative hydrocarbons cost aren’t spending enough on supply is fast depleting, and the quality of what’s left is lower: and what happens to the finding new supplies. “where 30 tons of copper ore once produced a ton of copper, it environment if we combust now takes 500 tons”. Even water’s running out (see page 7). them all?” If we don’t take What could this mean?

As the planet’s population soars, says Grantham, “we must steps to cut our use now, prepare ourselves for waves of higher resource prices and We could see an “oil crunch” we could face a very expensive within the next five years, says shortages unlike anything we’ve faced outside wartime”. future. the IEA. That will hit economic 13

7 August 2009

politics & economics

The real villain in the McKinnon scandal

by Jody Clarke But there’s a bigger issue here: the “lopsided” extradition treaty that makes it “much easier for British citizens to be sent to the US than for Americans to be brought here”, says the Daily Mail. As it stands, the UK requires that the US show only “reasonable suspicion” to extradite a British citizen. So no firm evidence need be supplied. But the US asks for “probable cause” from the UK, which carries a greater burden of proof.

©STEVE MAISEY/REX FEATURES

He has the backing of politicians across the spectrum, and celebrities flock to his cause. Pink Floyd’s Dave Gilmour, Sir Bob Geldof and Chrissie Hynde are even recording a charity record for him. But last Friday, self-avowed “bumbling computer nerd” Gary McKinnon moved one step closer to being extradited to the US. The High Court ruled that he could not be tried in Britain for what America alleges was “the biggest military computer hack of all time”.

He faces up to 60 years in a maximum-security jail if convicted.

There are serious questions about how the process operates, say Sophie Kemp and Jill Lorimer, Computer hacker Gary McKinnon: martyr or dangerous criminal? extradition experts at law firm Kingsley Napley in The But this wasn’t the work of a Independent. Government figures released But “this is not simply an emotional terrorist, says Boris Johnson in The Daily by the Liberal Democrats show that argument”, argues David Rawcliffe on Telegraph. McKinnon, 43, who admits to suspects in the US are 20% less likely to the Adam Smith Institute blog. “It is a hacking into 97 US military computers be extradited than those living in Britain. legal debate.” Do McKinnon’s supporters seven years ago, was “simply following really believe the High Court should up a weird intuition that UFOs exist, You can feel sympathy for McKinnon “have put public pressure and personal with all the compulsiveness that he has and the US authorities, who “are doing pity before the honest interpretation of exhibited since he was a child”. what they think is right”. The real villain the law?”

Diagnosed with Asperger’s syndrome, the in this case is “our own (British) Home Glasgow-born hacker is just “a classic Office”, says David Hughes on his Daily Johnson and other supporters of British nutjob, who passionately believes Telegraph blog. Home Secretary Alan McKinnon can say all they want, but “if something that is irrational... he is a Johnson protested in The Times that he is the law is to mean anything, it must prime candidate for the protection of powerless to intervene. But this handremain the preserve of the judiciary, and, the Government”. washing “would have done justice to paradoxically, it must be followed by the Pontius Pilate,” says the Daily Mail. courts even when it seems unjust”.

That seems even more the case when you The Home Secretary can intervene on This “was not some harmless incident”, consider that he is being tried under the humanitarian grounds. As an Asperger’s as one military officer at the US Pentagon 2003 US-UK extradition treaty, which sufferer, McKinnon’s “health, sanity and tells The Sunday Telegraph. “He did very was meant to tackle the threat posed by possibly life” are at stake if he is locked serious and deliberate damage to military al-Qaeda, says Anthony Painter on The up in the US. “What more humanitarian and Nasa computers,” causing $700,000 Huffington Post. “Now it is being used to grounds could Mr Johnson need?” worth of damage. extradite a frightened and disabled man.”

Iraq inquiry could rebound on Brown The latest Iraq inquiry has got off to a good start. Chairman John Chilcott has already upset his political masters by defying Lord Mandelson and Gordon Brown’s requests to hold the inquiry in private. “Clearly he is a man that takes no prisoners,” says Trevor Royle in The Sunday Herald.

But what will the inquiry achieve? Lots of leaked information exists to confirm the fact that intelligence documents were sexed up and that then-Prime Minister Tony Blair and then-President George Bush struck a deal at least a year before the “elaborate diplomatic dance that preceded the invasion”, says the FT. Yet two previous inquiries into the war failed to hold either to account.

And even if Blair does give evidence in public, and on oath, is he really going to say anything new?, asks Con Coughlin in

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The Daily Telegraph. “After all, in the final months of his premiership, he gave countless interviews justifying his decision to overthrow Saddam Hussein’s despicable regime”. We know exactly what we are going to get, says Marina Hyde in The Guardian – “faux self-deprecation and the messianic stuff about doing what he believed to be right (as though that were remotely relevant)”.

Indeed, if this inquiry causes any damage it will be to Gordon Brown, says the FT. He has already managed to rile the public with a “cack-handed attempt” to hold the investigation in secret.

And in the run up to a general election, a British public that has turned “surly and deeply undeferential” is bound to focus their anger, not on the inquiry’s targets, but on those still sitting in office.

investing in property

3 ways to survive an auction

by Gary Booysen If you’re watch the media as closely as I do, you’ll know that headlines reading, “House market still taking strain” and “Mortgage defaulters stack up” have been plastered all over the property sections in the last week.

Elma Kloppers at Finweek writes, “Mortgage stress among South African homeowners is at a record high, despite the lower interest rates since last December.” But let’s face it, Vic de Klerk of Finweek hits the nail on the head when he says, “banks aren’t interested in buying more residential property and seem to be prepared to accept lower offers for properties sold at auction.” But don’t be fooled, this situation isn’t going to last forever.

This is unique opportunity. Here are three rules to help you take advantage:

Rule 1 – Have brass to back the bid Before you even think of coming to play with the big boys at auction, make sure you have the cash. There’s no such thing as an “offer subject to mortgage” in the auctioneers’ world.

“It’s 10% of the buying price in cash (plus a bit) when the hammer falls and the balance within 14 days, or if you’re lucky, 30 days”, says de Klerk.

Rule 2 – Get to the right auction!

So, now that you’ve got the tom, you need to know the place. There are two kinds of auctions: The ones held by auction houses and the ones you’re looking for. Veteran investors, the ones that make the real money in property, are only interested in sheriff’s auctions.

De Klerk explains the difference best when he says, “Auctions held by an auction house are almost like a friendly tea party compared to a sheriff’s auction”.

Auction houses are different. In this case, the defaulting property owner is declared insolvent. A curator is then appointed by the court and the property is sold through the auction house. The auctioneer, therefore, holds the auction on behalf of the bank. When the hammer falls, the price bid must be referred back to the bank and should it not like it, it’ll simply reject the bid.

When this happens, anyone that was at the auction has the next seven days to

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better your bid. This allows the market to operate more smoothly and possibly find a better price for the seller.

Bargains can be swept up in an adrenaline charged sheriff’s auction. In this case, the person’s fallen behind on their mortgage and a court order has been applied for so that the sheriff can sell the house off at public auction – no insolvency. The house will be sold to the highest bidder. There will be a representative of the bank at the auction (this is required by law). If the bid comes in too low for the banks liking, the representative will bid on the house himself. When the hammer falls, you’ll know you have the house. You’ll find yourself mano a mano with the bank representative without any comeback.

Quick thinking can, and has, secured bargains.

Rule 3 – Unexpected costs only arise from poor planning Be aware of the hidden costs. In a sheriff’s auction, you need to pay the sheriff’s commission (up to a maximum of R10,000) along with the 10% deposit. When going through an auction house, the sellers pay the commission (the bank and the curator) but remember, nothing in this world is for free. Any commission charges can easily be past onto the final selling price. With all auctions beware; you’ll be liable for all the rates and taxes that are in arrears. You’ll also be able to research all the properties before hand. Make sure you take the opportunity to do so.

cover story

How to tag along as wealth and power head East The domination of the West is coming to an end. Jody Clarke reports on where to find the next big investment opportunities.

Few things in recent years have symbolised the end of empire better than the lowering of the Union Jack over Hong Kong. It wasn’t as dramatic as the sacking of Rome. But for anyone standing outside Government House on 1 July 1997 as the British colony was handed back to China, it was no less significant.

On 2 June this year, the US had its own Hong Kong moment. General Motors, once the embodiment of US economic might, agreed to sell its Hummer brand to a little-known Chinese manufacturer, part of the process of slimming down and entering Chapter 11 bankruptcy. If there were any doubts before the event that economic dominance is moving away from America, the sight of a nimbler, smaller rival picking over the bones of the US giant should have

dispelled them.

Emerging markets are the world’s new economic powerhouses. And their companies are increasingly going global.

Emerging multinationals, such as Indian information technology (IT) firms Wipro and Infosys, have revolutionised the $180bn global IT market, while brewers such as South Africa’s SabMiller are snapping up rivals in Europe and beyond. Meanwhile, fuelled by low labour costs and rapidly growing domestic markets, America Movil, Latin America’s largest mobile-phone company, is expanding fast in the US, while Brazil’s Embraer has surged past Canada’s Bombardier to become the world’s number-three aircraft maker.

We are, as Fareed Zakaria writes in his book The Post-American World, “living through the third great power shift of the modern era”.

The ‘multinationals of the future’

The first shift, says Zakaria, was the rise of the Western world in the 15th century. The second, in the closing of the 19th century, was the rise of the US to dominate global economics, politics, science and culture. Now, along every dimension – industrial, financial, social, cultural – the distribution of power is shifting. This third wave isn’t so much about the decline of America, says Zakaria, as about “the rise of the rest”.

And as less wealthy nations across the world continue to grow, it won’t be long before the biggest companies you have never heard of become household names. In fact, it’s already happening.

Between 2006 and 2008, the number of firms from emerging markets in the FT Global 500 (which lists the world’s top 500 firms ranked by market Continued overleaf

Figures in dollars

Thai Beverage 80% 60%

Telecommunications One area where emerging-market companies have made huge inroads is telecommunications. Mobile-phone firms are using bases in stable countries such as South Africa and Singapore to expand across the globe. Take MTN Group (JSE: MTN). Once a small mobile-phone operator in South Africa, it now spans 21 countries across Africa and the Middle East, with a full one in five of the 500 million people living within its network subscribing to the service. It trades on a p/e of 15.

SingTel (SP: ST), Singapore’s largest telecoms firm, holds significant stakes in six foreign mobile operators: India’s Bharti Airtel; Indonesia’s Telkomsel; Thailand’s Advanced Info Service; Pakistan’s Warid Telecom; Globe Telecom in the Philippines; and Pacific Bangladesh Telecom. SingTel operates in Singapore and in Australia through Optus, and trades on a forward p/e of 14, yielding around 3.5%.

Finally, for access to Latin American, América Móvil (US: AMX) is the world’s fourth-largest mobile-phone firm, with a 70% share of

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Straits Times index

the Mexican mobile- 40% 20% phone market. It 0% also provides -20% Thai Beverage wireless access for -40% devices such as -60% Jan Jan Apple’s iPhone and 2008 2009 Source: CLSA Asia-Pacific markets netbook computers (LHS) as it bets on a mobile broadband boom in Latin America. The group added 3.7 million wireless subscribers during the second quarter, lifting its total wireless client base to 190.3 million across 18 countries at the end of June. Its forward p/e is 13 and it yields just over 1%.

Banking As regular readers will know, we’re still very wary of Western banks. For access to emerging markets, London-listed Standard Chartered (LSE: SRAN), on a p/e of 11, offers plenty of exposure to Asia, as does rival HSBC (LSE: HSBC). However, while both Continued overleaf

cover story

©DAVE CUTLER/GETTY IMAGES

Fortune 500 company towers over its Indian rival. Accenture made sales of $25bn in the year to August 2008, against $4.2bn for Infosys (in the year to March 2008). However, the Indian group boasts operating margins of 30.7% compared to Accenture’s 11.9%.

Western companies are being picked over and snapped up by emerging economies Continued from previous page

capitalisation) has quadrupled from 15 to 62. Multinationals from Brazil, China, Mexico and Israel have pushed aside rivals from more developed markets as they acquire, or merge with, aged rivals in the US, Europe and Japan. Being younger challengers, they are growing far more rapidly. For example, a report from Boston Consulting in January listed 100 firms that are leading the push into global markets from what Boston dubs “rapidly developing economies: (RDE)”.

Revenues from these 100 firms grew at 29% a year from 2005 to 2007,

outpacing rivals in the S&P 500, Nikkei 225 and Dax 30. This trend continued in first half of 2008, when challengers’ revenue rose by almost 32%. This is likely to have dropped during the credit crunch. But whose hasn’t?

These firms are also more profitable.

The 100 RDE challengers made operating profits of 17% in 2007. The S&P 500 average is 14%. Take Infosys and Accenture, two companies involved in much the same business: providing IT consulting and software services to firms in the banking, telecommunication and manufacturing sectors. At first sight, the

Of course, younger more vigorous firms snapping at the heels of older rivals isn’t a new phenomenon – it’s central to the whole capitalist system. In the second half of the 20th century, South Korean firms such as Samsung and Hyundai stole a march on more established rivals, including Toyota in Japan and Krupps in Germany. They “began by making products efficiently and cheaply but now have recognised brand names, a high-quality image, world-class technology, and appealing designs”, says Antoine van Agtmael in The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World.

The same factors are at work today, on a grander scale, meaning that “as time goes on, more emerging-markets firms will take over long-established Western companies, including those they now supply”. They certainly have the money and know-how to do so. “In many cases, they have built large home markets and made good profits on those markets enabling them to build up a cash pile for overseas expansions,” says Mark Continued overleaf

Continued from previous page other home loans. But it should perform over the longer-term. banks managed to evade the worst of the credit crunch, we’d suggest that investors with a strong risk appetite might be better off taking a look at some smaller, developing banks with stronger potential for growth as the growing global middle-class demands wider access to credit and other financial services.

Prime among these is the Nigerian banking sector. “Despite the challenging operating environment, Nigerian banks continued to report strong earnings growth in 2008 on the back of rapid credit and deposit growth and Fitch expects earnings growth will continue in 2009, albeit at a slower pace,” says Anthony Walker of Fitch’s Financial Institutions last month. You can buy shares in Guaranty Trust Bank (LSE: GRTB) and Diamond Bank (LSE: DBGA) – which account for a sizeable share of the Nigerian retail market – on the London Stock Exchange.

Another to watch – but only to watch for now – is ABSA (JSE: ASA). South Africa’s largest consumer bank, it also has stakes in banks in Tanzania, Zimbabwe, Mozambique and Angola. On a forward p/e of 8.8 it looks cheap. However, while South Africa’s banks escaped the worst of the credit crunch, they’ve been hit hard by rising defaults as customers struggle to pay for cars and

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Beer and brewing From 2005 to 2008, brewers had to raise their production levels by 14% to meet global demand, says Reuters. Consumption is steady in the West, but rocketing in Chile, Africa and Thailand, for example. You can get access to the African beer market through SabMiller (JSE: SAB). This well-known multinational brewer, with its roots in South Africa, owns beer brands ranging from Pilsner Urquell to Peroni and Miller. But on a forward p/e of 15, and a yield of 2.95%, it’s not an obvious bargain.

A more interesting play to us is Singapore-listed Thaibev (SP: THBEV), one of southeast Asia’s biggest alcohol manufacturers.

It has 18 distilleries in Thailand, three breweries and five whisky distilleries in Scotland. You might know its beer brand Chang from its sponsorship deal with Everton Football Club. The group has cornered 47% of Thailand’s beer market and looks good value on a forward p/e of 11 and a tasty yield of 6.1%. In Latin America, Grupo Modelo (US: GPMYC), owner of the Corona brand, is one of the most dominant players. But on a forward p/e Continued overleaf

cover story about this, when Japanese companies bought Colombia Pictures, the Rockefeller Centre and of course, Van Gogh’s Sunflowers, for which Japanese insurance magnate Yasuo Goto paid the equivalent of $39,921,750 at auction at Christie’s in London – a record price for a piece of art at the time.

Continued from previous page

Mobius, manager of the Templeton Emerging Markets investment trust. While the financial crisis and recession has hurt firms across the world, it has also given others the perfect opportunity to snap up assets in the West.

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China is a case in point. Prior However, “a lot of this was to the crash, the country’s the buying of quasi-trophy attentions have not always assets and not strategic”, says proved welcome. They’re hardly getting a smooth ride Indian firm Tata’s purchase of Jaguar is a warning about imperial overstretch Julian Mayo, investment director at Charlemagne now (mining giant Rio Tinto’s Capital. We’ve yet to see that sort of withstand any difficulties as they expand decision to walk away from a $19.5bn manic over-confidence take hold in any overseas”, says Mobius. Success, it deal with state-owned aluminium group emerging economies. This isn’t a seems, is guaranteed.

Chinalco is a case in point). However, stratospheric bubble in one single it’s fair to say that people become less economy we’re talking about here – it’s a Well, not quite. Big emerging-market fussy about where money comes from big, gradual shift in power. This year firms are no more immune to ‘imperial when they’re in dire need of it. could represent a major turning point in over-stretch’ and egotistical empirebuilding than their Western counterparts. that shift. According to the Centre for According to BusinessWeek, China’s Economics and Business Research For example, D’Long Group, a Chinese overseas investments doubled last year (CEBR), the US, Canada and Europe will investment company, bought German to $52bn, with expectations of a 13% contribute 49.4% to the world’s total aircraft manufacturer Fairchild Dornier rise this year. And with Beijing eager to gross domestic product in 2009. to much fanfare in 2003, only to seek swap its vast dollar reserves for physical bankruptcy protection a year later. assets, firms are being pushed to get out This is the first time since the beginning and do deals. “We must encourage our of the Industrial Revolution in the midAnd you only have to look at the top enterprises to go out and enter 19th century that non-Western purchase of Jaguar by Tata Motors and overseas markets and expand their Fortis Bank by China’s Ping An to realise economies will have produced more than businesses,” says Li Rongrong, head of half of the world’s GDP. The key for that not all of these deals are destined to the agency responsible for China’s be successes. “With hindsight, [purchases investors is to establish which of the biggest state firms. such as the Jaguar deal] were close to the rising multinationals – and firms that have the potential to go global – will top of cycle,” says Sam Mahtani, And as well as money and ambition, survive and make them money. director of emerging equities at F&C, these challenger companies also “have with companies having to stretch their managements who have honed their In the box below, we look at the most balance sheets to complete them. skills in difficult emerging market promising stocks in key sectors.

There are unsettling echoes of the 1980s conditions and are thus able to

Continued from previous page of 12 compared to Grupo Modelo’s 19, we’d sooner plump for Compañia Cervecerias Unidas S.A. (NYSE: CCU), the Chilean beverage company. It controls 86% of the Chilean beer market, but sells in Argentina too, and also has the licence to make and sell soft drinks such as Pepsi.

Engineering and technology Embraer (NYSE: ERJ), as mentioned above, is one of the largest aircraft manufacturers in the world. It’s been hit hard by the recession, but should benefit from “the eventual recovery in the global aviation market, as well as the growth of the industry within new regions, particularly Latin America”, says Hugh Young, managing director of Aberdeen Asset Management Asia Ltd. On a price/book-value ratio of one and a forward p/e of 5.5, it currently looks super cheap. One to tuck away for the long term.

South Korean firms such as Samsung and LG started out as manufacturers of cheap electronic products. Now they’re

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recognised brand names. The same is happening to Taiwanese computer firms Asustek (LI: ASKD) and ACER (LI: ACID) today.

Asustek is credited with pretty much inventing the notebook, which have seen sales continue to rise as cost-conscious consumers opt for them over PCs. Acer is expected shortly to overtake its US rival Dell as the largest PC seller in the world. While Dell saw its market share slip 2.4% in the second quarter compared to the same period a year ago, Acer’s slice of the market grew by 2.7%, according to Reuters. Acer currently trades on a forward p/e of around 15, while Asustek is on 24. Neither stock is cheap, but given their good growth prospects, they look worth having some exposure to.

Another emerging multinational tech stock liked by Aberdeen’s Hugh Young is Infoysys (NYSE: INFY). The group is one of India’s biggest software developers and has evolved from being “a lowcost provider to one offering globally-competitive, value-added services.” It currently looks overbought, so it’s one to keep an eye on and then buy when the next correction comes round.

the best blogs What the bloggers are saying

Trains are on track to generate wealth

Industrial farming is sustainable and cheap

Donaldson’s research “is a reminder of the huge importance of quality transport links” in boosting trade with other regions. It’s also a useful reminder that allowing people to trade freely with those outside their communities “is not an entirely pernicious act”.

Light sheds light on the state of local economies http://blogs.wsj.com/economics/ Forget GDP. If you want to estimate economic growth in the developing world, look at the night sky. Satellite data showing the intensity of night-time light usage is a good substitute for more traditional measures of economic growth, suggests a new study from Brown University in America.

That’s because “as income rises, so does light usage per person” because “consumption of nearly all goods in the evening requires light”. For example, in

Moldova and Ukraine, as income per head fell by 30% and 35% respectively, light intensity fell by 68% and 47%.

In Hungary and Poland, where incomes rose by 41% and 56%, the respective rises in light usage were 46% and 80%.

It can also point to local booms – when large deposits of rubies and sapphires were found in southern Madagascar in 1998, there was a sharp growth in intensity of light from the nearby towns of Ilakaka and Sakaraha. But another local town’s lights weakened as people left it to head to the boom towns.

www.american.com Books critical of ‘industrial’ farming methods are ten a penny, writes Blake Hurst, a farmer in Missouri. But have any of these authors who praise organic food and farming methods thought of talking to the small, independent family farmers they so exalt? No. That’s because most family farmers use ‘industrial’ methods. ©CORBIS

http://timharford.com Railways are back in fashion, writes Tim Harford. But what effect do they have on a country’s economy? LSE economist Dave Donaldson went back through paper records detailing the building of 60,000km of railway across colonial India between 1850 and 1930 to find out. At the time, the railways had their detractors. Mahatma Gandhi for one saw them as “promoters of the bubonic plague”.

But Donaldson discovered that in fact railways India’s railways improved the economy “profoundly improved the rural economies” they went through. When two regions were linked by rail, local droughts no longer affected food prices, local income became less volatile, and income levels rose by almost 20%.

But who can blame them? “I use chemicals and diesel fuel to accomplish the tasks my grandfather used to do with sweat,” just as “I use a computer instead of a lined notebook and a pencil”. And industrial methods don’t just make life easier for farmers. Biotech crops cut the use of chemicals, increasing food safety.

Herbicides also cut the need for tillage, which decreases soil erosion by millions of tons; using a combination of herbicides and genetically modified seed has “made my farm more sustainable, not less, and reduced the pollution I send down the [Missouri] river”.

Most importantly, consumers benefit from cheap food. According to the United Nations, 50 million additional people are now hungry because of rising food prices. Only “industrial farming” can meet the demands of an increasing population and increased demand for food”. But by using industrial tools “sensibly” we can achieve this while still leaving our grandchildren “prosperous and productive” farms and “protecting the land, water and air around us”.

The ‘hot waitress’ index http://nymag.com

Not anymore. As the best jobs dry up, “hot girls” who would once have secured better-paid, easier jobs, such as modelling, are “hunting for work” and being snapped up by restaurateurs “in the hope of bringing in more business”. So the “Hot

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“The hotter the waitresses, the weaker the economy”, says Hugo Lindgren. And the bad news is that – in New York at least – waitresses are getting better looking by the day. Why? Because “in flush times” good-looking people snap up the cushy jobs pushing luxury brands. Everything from condos to premium vodka require pretty young things to sell them.

That leaves more punishing work “like waiting tables, to those with less striking genetic gifts”.

Waitress Index” can be a useful economic indicator. As the economy picks up, “hotness will likely be back in demand long before your average Michigan autoworker”. So next time you’re in a café, hope to be served by “a bald dude with a nose ring”.

entrepreneurs

How a Texas-born bedmaker feathered his nest With “nothing else to do”, he took a job with a bedmaker underneath a railway arch in Camden. But “he did such a poor job of paying the bills that I ended up paying the rent” and Evans took over the business in 1993. Homeless, he had no choice but to move into the rat-infested workshop as well. “And when I say rats, I mean they were playing cards in the yard, smoking cigars shouting ‘eff off out of here, we have a game going on’.

Back then, Camden was a rough-ass end of town.”

by Jody Clarke The high street has been hit hard by the recession. With the property market in the doldrums, furniture shops have been among the biggest casualties. Yet Warren Evans’s bed business is thriving. Sales at the Camden-based bed maker are up 60% on last year, with the company expecting turnover to hit £13m this year.

For Texas-born Evans, it couldn’t be more different from the 1990s downturn, when he lost his three-bedroom semidetached home in West Hampstead after going bankrupt. “I’ve learned a lot since then,” says the 46-year-old. “We have no debt, no outside investors, and have got more aggressive with our marketing. In a recession, it really makes you stand out.”

The son of a Harvard economist, Evans came to Britain aged 13, when his father got a job with the economic thinker Ernst Schumacher. “That’s the guy who came up with the phrase ‘small is beautiful’.”

Summers were spent in Maine on the east coast of the US. This was where Evans got his first taste for working with wood, helping a friend’s father make speedboats and bi-planes out of pine. “I just loved it.

Here you had a natural product that was not a high pollutant,” and because it was pine, it could be used sustainably, unlike hardwoods from the rainforests.

So in 1979, aged 17, Evans built his first wooden bed in a Clerkenwell basement.

With £600 borrowed from his sister, he

MY FIRST MILLION Warren Evans, Warren Evans bought two big tabletops, a drill, saw and chisel, and put a one-line advertisement on the back of Time Out. Soon he was making one or two beds a week.

But when the housing crash hit in the early 1990s, sales slumped. By 1992, he owed £300,000 personally, and the firm owed another £300,000. “It was a quick bankruptcy. Quick and dangerous.”

One creditor even physically threatened him. “So I didn’t go back to my house.

One Thursday, I just moved out with my six-year old son. It was really scary.”

Evans began pushing the environmental benefits of using pine in advertising, “as when someone says they use sustainable hardwood, it’s dubious”. In 1999, the business hit £1m in turnover, and has grown 30% a year since. In 2006, he moved to a 50,000 sq ft workshop in Walthamstow. In line with his green credentials, he installed a biomass boiler that uses offcuts as fuel, which has cut the amount of waste going to landfill.

The only UK bedmaker certified by the Forest Stewardship Council for sustainability, Evans modestly says that he just “works hard to get the right product at the right price”. But beneath that self-effacement is a shrewd businessman who has learned from his mistakes. “If you speak to an accountant, he’ll say: ‘Well, you’ll save a lot of money if you cut your advertising’. Well, you will for the first three months. After that, you’ll be finished. So we’ve turned it up.”

The MoneyWeek audit: Michael Schumacher

©T CARRAFA/NEWSPIX/REX FEATURES

• How did his career begin?

Michael Schumacher got his first taste of racing aged four, when he would tag along with his father, who helped out at the local go-kart track. He began racing go-karts but didn’t have the financial power of the richer racers. He’d scour rubbish dumps for spare parts, but his racing career looked as though it would stall when his family couldn’t afford the 800DM (€400 in today’s money) for a new engine. His father convinced local businesses to club together to buy it. Schumacher left school at 17 and became a mechanic so that he would have a back-up source of income if his racing dreams failed. In 1988, aged 18, he became a Formula Three racing driver for Willi Weber’s team.

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Weber had been so impressed by his kart racing that he funded Schumacher in the early years.

• What did he earn at his peak?

Schumacher is estimated to have earned over £500m during his Formula One career. Widely attributed as being F1’s greatest ever driver, he has broken almost every race record and won the championship seven times. In 2006, the year he retired from racing, he earned £30m. While he was racing he brought in around £20m a year in salary, sponsorship and bonuses, making him one of the best-paid sportsmen in the world.

• What will he pocket from his return to racing?

Following Felipe Massa’s crash at the Hungarian Grand Prix, the Ferrari team have said that Schumacher will replace Massa for as long as is necessary. If Schumacher completes the final seven races of this year’s championship, he’s expected to pocket about £21m in nine weeks – not including potential win bonuses.

personal finance

5 ways to equip your kids with the tools to their financial freedom

by Karin Iten I remember working for my weekly allowance when I was little. Although the sum of my chores included raking up the leaves, the occasional bout of weeding and a rather smelly (and unmentionable) task involving my dogs, I’ll be forever grateful to my folks for instilling the value of money in me at an early age. There was nothing more exciting than popping into the local Spar to spend my earnings on a handful of Chappies and the latest Casper the Friendly Ghost comic.

(Although, I’m equally glad I was too young to remember how many times my dad had to chip in to help me “buy” what I wanted.) Be that as it may, it was a vital lesson.

As parents, we like to take care of our kids and meet their needs. We supply all the essentials (and most of the niceties).

But we need to make sure our kids have their own money too. That is, unless you want your daughter to grow up as a spoilt heiress (who spares little or no thought on what things actually cost).

Simply forking it out deprives your child of an essential tool they’ll need throughout their lives: The skill to manage money effectively. So here are five tips to teach your child the value of money the fun way!

Tip #1: Play money games Money games, like Payday and Monopoly Junior, are fun ways to help your kids understand what money can be used for.

These games are more real than they first appear. Not only do they teach them about buying assets, they also touch on issues such as debt and even hidden costs (like those awful municipality “fines” in Monopoly).

Tip #2: Let them keep the money safe themselves With the consumer needy society we live in, today’s kids want for nothing. As such, money’s becoming an ever more popular birthday and Christmas gift. So instead of keeping the money for them, encourage your child to save all (or part) of their cash themselves for a “special” purchase.

Remember, before he/she spends it, sit down and chat to them about choosing wisely.

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of piggy bank is one that lets kids see their money grow. Go transparent!

Don’t forget to encourage them to save any change they have at the end of a shopping trip (grocery shopping is an important part of the learning curve). And remember, any money they receive from the tooth fairy should go in their piggy bank too.

Tip #4: Be flexible If you can’t make your child recognise a ridiculously expensive item they “just have to have”, why not put the cost into perspective for them. I remember wanting a really expensive pair of boots when I was about 13. When I asked my mom if she’d get it for me, she told me the boots were worth four days’ of her teaching salary. Naturally, she said no. But she did promise to go half if I could raise the remaining half myself. After about a week, I realised just how much this would eat into my savings and the boots went to the home of another lucky girl. Wow, what an eye opener!

We’ve all wasted money on things we didn’t need. But, at the end of the day, it’s your money. And it’s the same for your children. So be supportive. Encourage them to spend wisely, but let them discover the consequences of bad monetary decisions too. They’ll thank you for this later.

Tip #5: Make them earn it Yes, it’s essential your child has an allowance, but at least make sure they earn it. Although you should cover your child’s necessities with a fixed income, have a job list up on the fridge that gives them chores to do for extra cash.

Tip #3: Let them see it grow I love piggy banks and these days you’re spoilt for choice. But, before you spend a ton of money on a cute, old fashioned ceramic pig, consider this: The best kind

Just implement a few of these simple tips and your children will be more money smart and more responsible members of society – and boy do we need them!

Tax tip of the week Want to keep your assessed loss alive? Don’t bother with SARS interpretations!

Section 20(1)(a) of the Income Tax Act states that a company that doesn’t carry on a trade during a year of assessment forfeits the right to carry forward its assessed loss from the previous year.

In its Interpretation Note No. 33, however, SARS gave taxpayers a concession where it said that as long as a company traded during the current year of assessment, it can set off its assessed loss from the preceding year, even if no income accrued from that trading.

However, in ITC 1830 2007 70 SATC 123, SARS went against its own interpretation and successfully contended that the taxpayer’s 2003 losses couldn’t be carried forward to the 2004 year of assessment, because no income from trade had been earned in 2004.

It therefore seems that the ‘income from trade requirement‘ is now back in full operation, casting doubt on the reliability of SARS’ Interpretation Notes... but that’s a discussion for another day!

Matsika Vengesa, TaxConsulting, matsika@taxconsulting.co.za

profile This week: Lord Bilimoria

The irrepressible entrepreneur who is defying the malaise in the beer industry

Cobra’s fall from grace has been dramatic, says Sathnam Sanghera in The Times.

Last November, it was being touted round top brewers with a reported price tag of £200m; only months before it went into administration it planned to sponsor this year’s Baftas as part of an £8.4m PR drive. But for all its “glitzy marketing efforts”(it spent £40m on marketing over 20 years), people “rarely drank the stuff unless in Indian restaurants” and it “had never been profitable”.

Bilimoria’s is not the typical immigrant’s rags-to-riches tale. His father was commander-in-chief of the Central Indian

Army. Bilimoria moved from India to Britain at 19 to train as a chartered accountant at Ernst & Young. He read law at Cambridge, where he captained the polo team. When he left, he began importing polo sticks from India to sell to Harrods. He struggled with various ideas, earning the name of ‘import-export wallah’ back home as he experimented with fashion, furnishings and fabrics, says Josephine Moulds in The Daily Telegraph.

After “lots of dead ends” he decided to pursue an idea he’d had at Cambridge – to develop a “less gassy” beer, easier to drink with food, particularly Indian food.

In 1989, aged 27 and £20,000 in debt, he and a friend, Arjun Reddy, founded Cobra Beer. The next year, with the help of a brewery in India, the first crates were shipped to Britain.

Persuading people to buy his beer was tough. It was “at the beginning of the worst recession since the war at that time”, he tells The Guardian’s Jemima Kiss, and he was selling into “the most competitive beer market in the world”.

He and Reddy would drive round to Indian restaurants in an old 2CV, parking a distance away so managers wouldn’t be put off their premium-branded Cobra.

It was Bilimoria’s positioning of Cobra as a beer to drink with curry that helped it take off: it was a niche that none of the

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If the test of a good entrepreneur is an ability to bounce back, Lord Bilimoria looks set to pass with flying colours.

Earlier this summer, he bought back Cobra Beer, his failed business, from administrators in a ‘pre-pack’ deal.

Karan Bilimoria, 47, is a director of the new firm, a joint venture with US brewer Molson Coors, which paid £14m for a 50.1% stake. But the move has enraged creditors, left with almost £70m in debts, says Matthew Goodman in The Sunday Times. Bilimoria says he fought to avoid this and was working on a company voluntary arrangement (CVA) that fell apart when Cobra’s brewers, Wells & Young’s, vetoed it. When the CVA, which would’ve given creditors some cash, broke down, pre-pack was the only option.

big brewers had thought of. Cobra is now sold in 90% of licensed Indian restaurants as well as most supermarkets. It is exported to 50 countries, including India. Bilimoria’s mistake was to focus on rapid sales growth and expansion at the expense of the bottom line, says Goodman. But not all the figures look bleak. Cobra has defied the “malaise in the beer industry” by growing 20% year on year. Cobra’s creditors may be left with a bitter taste, but Molson Coors may have landed a “fantastic deal”.

A flawed poster-boy for British business Bilimoria became a poster-boy for entrepreneurship in Britain, aided by a flair for self-promotion (his autobiography is entitled Bottled for Business) and “rubbing shoulders” with the powerful, says Josephine Moulds. As chancellor, Gordon Brown appointed him a ‘national champion’ for entrepreneurship, and in 2007 Tony Blair made him one of the youngest peers.

Bilimoria, like other Asian entrepreneurs, has “got away with more than most”, says Sathnam Sanghera. His ethnicity was “undoubtedly one of the reasons he had a profile that far outstripped his achievements and one of the reasons he was so ludicrously over-promoted”, being appointed deputy president of the London Chamber of Commerce and Industry and the youngest-ever Chancellor of Thames Valley University.

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This is not some “politically correct conspiracy”; it’s because so many Asian entrepreneurs are very successful that we assume they all are, and because we like to hear stories that prove that multiculturalism can work. Bilimoria is not the most extreme example. That “unhappy accolade” goes to the schoolboy founder of Miss Attitude, Reuben Singh, who was publicly feted

by Blair and made a government adviser before being “unmasked as a serial fantasist” and declared bankrupt. Bilimoria has not come down to earth with such a thud, but his reputation has been dented. As Brian Flanagan, whose firm Spark Promotions UK is owed £62,018 for developing a beer pump for Cobra, tells The Sunday Times: “How can he possibly offer advice to others in business when he clearly has no intention of taking his responsibilities seriously?”

Spending it Travel

An island paradise in the Maldives

By Justin Blundell When it comes to holiday destinations, the Maldives is renowned as paradise on earth. But what is there to do in paradise, apart from take in the views? I visited Velassaru, the country’s newest island resort, to discover the answer and was pleasantly surprised with what I found.

The Maldives is famous as a honeymoon destination and if it’s a luxurious romantic break you’re after, Velassaru ticks all the boxes. With their high ceilings and minimalist teak interior, the beach bungalows look like they’ve just been transported in from a New York boutique hotel. I particularly liked the open-air bathrooms complete with your own personal palm tree. But for the ultimate luxury, book into the water villas, which each boast their own terrace with uninterrupted views across the lagoon and the Indian Ocean beyond. There’s no better feeling than rolling out of bed in the morning and stepping straight into the warm turquoise sea. Though if you want lots of fish on your doorstep, it’s best to head for the water bungalows on the corner of the island. The gentle current across the lagoon means the water there is thick with angelfish and parrotfish.

The island has two bars and four restaurants offering cuisine from around the world. Gastronomes might be tempted by the upmarket Mediterranean flavours and wines at the Etesian restaurant. But my favourites were Turquoise for the Maldivian curries (only take up the chef’s offer of making them ‘authentic’ if you’re feeling really brave),

Velassaru’s villas give you uninterrupted ocean views and Sands, where you can feast on delicious teppanyaki while perched over the lagoon.

But a visit to Velassaru isn’t just about relaxing in luxury and stretching your waistband with fabulous food.

The good news for anyone who may be worried about the onset of cabin fever is that there’s a whole list of activities to get stuck into too. The island has a dedicated dive school complete with its own marine biologist. I did my first dive in Velassaru and it was the best experience of the whole trip. But you don’t have to be able to dive to enjoy the amazing array of marine life in the Maldives. For the ultimate trip, the staff at Velassaru offer you a speedboat trip to your very own mid-ocean desert island.

Once there you’ll find a picnic hamper,

your own personal waiter, stunning underwater views from the edge of the reef and some of the best snorkelling you can imagine, with turtles, rays and dolphins as regular visitors.

Since El Niño the locals tell me the wet season has been a lot drier. So you don’t have to come in the December to April high season – and pay premium prices – to enjoy a sun-drenched holiday in the Maldives any more. These days it really is an all-year-round destination.

Flight Centre (www.flightcentre.co.za) offers seven nights, all inclusive, in the Maldives, including direct flights from O.R. Tambo with transfers. Prices for 1 August – 23 October 2009 from R17,105 per person based on two sharing.

Three other paradise resorts

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Mauritius

Tahiti

The Intercontinental has a two-tier infinity pool and a rooftop spa. Rates start from R1,400.

Ichotelsgroup.com.

Le Taha’a Island Resort & Spa is situated on its own private coral island.

Double rooms cost from R7,500. See Letahaa.com.

7 August 2009

The Seychelles Every villa at Maia has a private infinity pool. Rooms cost from R23,500 per night. See Maia.com.sc.

cars

The return of the classic Cobra This is the AC MkVI – an AC Cobra with a difference, says Steve Sutcliffe in Autocar. If you’ve always fancied a Cobra – a proper AC Cobra, not one of the many replicas available – but have always thought they’d be “a bit cruddy to drive”, this is “worthy of your attention”. At around £90,000 (R1.1m), it’s not cheap, “but then no car wearing an AC badge with 432bhp from a 6.2litre V8 under the bonnet is likely to be affordable”. What you get with this car is essentially German build integrity – it’s made under licence for AC Cars by Gullwing GmbH in Heyda, Germany – “mated to a very obvious slice of English heritage, with a large side order of 22ndcentury performance to round things off”. The car is basically

exactly the same as it always was, from the cramped cabin to the smell of hot exhaust gases, the rumbling V8 engine (taken from a Corvette) and the “crazed performance” (the car is “mindbogglingly rapid” and easily blew away a Corvette ZR1 up to 160km/h). “Were I a rich man, I’d have one of these in the garage like a shot.”

But under the surface, it’s changed a great deal, says Keith Adams in Evo. It has

a lengthened wheelbase and more legroom; there is an “optional and exceptionally pretty” hardtop and gullwing doors; and there are features, such as seat heaters, air-conditioning and a large fuel tank, that a modern car driver will take for granted, but were always missing on the raw Cobras of old. It means this is now a “car you can enjoy on a long trip”. It’s even a “pussycat to drive in town”. Yet the performance is “towering”, especially between 60km/h and 160km/h. It even corners, rides and holds well. A fine achievement: “welcome back, AC”.

Wine of the week: A winery that over delivers on price Slanghoek Private Selection Chardonnay 2008 R35 from select wine retailers Many people disregard wineries “on the other side of the tunnel”, but this is where the bargains lie. Situated in the Worcester area, Slanghoek is a cooperative that makes outstanding sweet wines – Noble Late Harvest and

by Marilyn Cooper Muscadel. It also makes a range of every day quaffers that are real value for money.

The 25 members of the co-op belong to the Biodiversity & Wine Initiative. This means a large percentage of their land is not cultivated but, instead, is left to the natural fynbos. South Africa

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7 August 2009

is sixth in the world for the diversity of fauna and flora, many of which are found in the Cape fynbos area. Unfortunately over 2,000 are threatened and the wine industry is making a concerted effort to play a part in preserving our natural heritage.

This Chardonnay, being lightly oaked, is an all rounder. It matches a wide range of cuisine, but is especially nice to have for a party – with less discerning guests. And it’s just the right price too.

Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.

blowing it

Roman Abramovich’s R520,000 takeaway that any country’s cuisine is so devoid of flavour that a man has to go all the way to the wastelands of Canary Wharf to get something appetising.

Roman Abramovich, owner of Chelsea Football Club, and arguably London’s favourite oligarch (spending pots of money on a local football team and having a pretty girlfriend who spends pots of money on the local arts scene will do that for a man), was in Baku, capital of Azerbaijan, when he fancied some sushi.

©PRESS ASSOCIATION

In his review in The Sunday Times of Londongrad: From Russia with Cash; The Inside Story of the Oligarchs by Mark Hollingsworth and Stewart Lansley, Rod Liddle picked out a particular example to epitomise the “outrageous vulgarity, tastelessness and ruthlessness of people who are wealthy beyond all imagining”.

Why spend R520,000 on sushi? Because he can bankers spending tens of thousands of pounds on boozy lunches before going off to bankrupt the financial system.

Perhaps this is simply what happens when you become really rich. You don’t order sushi to be flown 5,000km at a cost of £40,000 (R520,000) because you really crave raw fish. You do it to prove that you can. In the arms race between the super-wealthy, having a brand new yacht with its own submarine and antimissile system is nothing special. But being able to click your fingers and get a takeaway from your local restaurant delivered halfway across the world? That shows real clout.

Cashing in on swine flu

“There are many things in Baku, but not, as it happens, sushi,” says Liddle. So an aide ordered £1,200 (R15,600) of sushi from Ubon in Canary Wharf, which was driven to Luton airport, then flown by private jet to Azerbaijan. “At an estimated cost of £40,000 (R520,000), it must rank as the most expensive takeaway in history,” the writers say.

No, it’s the logistics that leave me baffled.

Think about it. The flight time from Luton to Baku is about five or six hours.

The drive from Canary Wharf to Luton Airport alone takes about an hour. I like a decent takeaway as much as the next man, but I can’t say I’d be happy to wait for nearly half a day to get it delivered.

I found this story fascinating. It’s not the money as such. Tales of excess from the days of the credit boom are ten-a-penny.

And many wealthy individuals have wasted far greater sums on food – there are plenty of stories of high-living City

It all makes me wonder how much truth there is in such tales of excess.

Are there really no decent restaurants in Azerbaijan? I’ve had perfectly respectable meals in the capitals of Mongolia and even Burkina Faso, so I refuse to believe

There have been some grim views on what swine flu could cost the economy, but for now it seems the threat is helping more companies than it hinders. PZ Cussons, maker of Imperial Leather soap, has seen sales of anti-bacterial handwash rocket. And private jet operators – early victims of the crunch – are said to be profiting as newly flush bankers splash out on private flights to avoid exposing their loved ones to the rest of us cattleclass travellers. Nice to know they’re not just wasting it all on takeaways.

Tabloid money… “a philistine proposal based on envy and spite” ■ British MPs are back at the trough, sighs the Daily Star. Just weeks after the expenses scandal, nearly 40 are jetting off on taxpayer-funded junkets to far-flung, usually warm and sunny destinations. Meanwhile, the rest of us “shiver under leaden skies, wondering how the ongoing recession will hit our families”. For sheer shamelessness, it takes some beating.

Take the seven flying off to Fiji to discuss climate change.

“How does that benefit their constituents?” And “why must they take R50,000 business-class flights”? Of course, they’ll argue that the trip provides valuable insight into local problems. “That’s baloney”. They’ll do nothing they couldn’t do on the phone. “Except get a suntan.”

■ Bride Suzanne Daniel may have set a new record for creditcrunch frugality after buying a wedding dress off eBay for R13, reports Metro. The PE teacher from Coniston, in the Lake District, slapped the bid down for the “dream dress”, and to

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her shock, won it. With insurance and postage the total bill for the dress, which was made to measure in China, came to R1,100.

■ According to Councillor John Mendelsohn on Carte Blanche, the City of Johannesburg is once again in trouble.

He says, “The City’s current liabilities exceeded its current assets – which meant it’s short of day to day cash." This situation isn’t entirely unprecedented. Twelve years ago now the city ran into trouble and had to be bailed out by the government. The city's debtor's book sits at a staggering R10bn. This amount is still rising thanks to inefficient collections and general chaos in the billing department.

Mendelsohn goes on to say: “A recent report tells us that the data on 350,000 of those accounts is faulty – of the approximately 170,000 sectional title units in the city, they’re missing the addresses for 100,000 of them."

shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

PUNTS Company

Media

Reason

Current price

Kumba Iron Ore (KIO) Mining

Financial Mail

“The steel sector will take time to shake off the recessionary rust”, says Matthew Hill in the Financial Mail. Despite this Kumba has shown an iron will, growing sales in a tough first half. It’s trading on a PE of 9.11 and that’s cheap. Buy.

22650c

In a research note, BoE Private Clients analyst Peter Wille reckons a 15% discount on DD Holdco’s shares is to be expected if you hold the view that corporate action is likely at the company over the short- to medium-term. If this corporate action didn’t materialise, then the discount is closer to 30%. DD Holdco or VenFin DD Holdings contains VenFin’s 25.4% stake in Didata, which was spun away from the proposed VenFin/Remgro merger last month. It’s likely DD Holdco will be offered a premium for its Didata shares which will then be distributed to shareholders. As Marc Hasenfuss puts it in the Financial Times, “If such a scenario transpires, a 1100c buy-in at DD Holdco could prove rewarding. If not, it’s still the cheapest entry point into Didata – which seems to be on the mend with regard to its all-important margins.” Buy.

1100c

“Profits from starch are growing modestly, while land and property development, always likely to be a lumpy performer, is sharply down, but the core sugar business is raking in the loot,” says Jamie Carr in the Financial Mail. He’s selected Tongaat as his diamond this week. With the unbundling of Hulamin, the sugar barons are back at the core of their business and the future’s never looked sweeter. Tongaat also attributes some of its success to the restocking of Zimbabwe. With its move to a rand-dollar based currency, Tongaat believes this has removed many distortions in the Zimbabwean economy and restored key fundamentals. As a result, the group’s seen a vast improvement in it operations in our neighbouring country.

Buy.

10255c

On Monday, Bruce Main told Summit TV, he wants to get into the Rupert stable and has selected Reinet as his “pick of the week”. He says: “Look at the rand to the extent that it’s pulled back against the US dollar and you’re essentially buying a discounted holding into British American Tobacco (BAT).”

Reinet also just bought a stake in Lehman Brothers Private Equity, which gives it valuable diversification points. He goes on to say that “slowly but surely, we’re moving that up to quite a big weighting in our portfolios. We like the long-term outlook for that...” Buy.

1085c

AVI isn’t immune to the adverse conditions. Its half year numbers to end-December showed it was taking strain, but was still operating at healthy margins. It’s managed to remain profitable. Larry Claasen writes in Financial Mail that it’s fairly valued with a PE of 11.15. The value of this company is that it’ll run up quickly if trading conditions improve. Buy.

1860c

Dimension Data Holdings Company Computer Services

Tongaat Hulett (Ton) Food Processors

Financial Mail

Summit TV Bruce Main, Ivy Asset Management

Reinet (REI) Investment Companies

AVI LTD (AVI) Food Processors

26

Finweek

Financial Mail

7 August 2009

shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

DOGS Company

Media

Anglo Platinum (AMS) Platinum

Hulamin (HLM) Aluminium

M Cubed(MCU) Asset Manager

Financial Mail

Financial Mail

Financial Mail

Reason

Current price

Matthew Hill at the Financial Mail believes that if the rand platinum price fails to gain from current levels, AngloPlat’s growing debt will prove more than a headache. The imminent wage increase will dilute the benefit of its nearly 10,000 job cut.

Avoid.

61790c

“It has been a difficult period for the aluminium producer”, says Larry Claasen in Financial Mail The global recession had a “severe impact” on it with the car, construction, general engineering and transport sectors taking strain. The PE is 26.32 and the market cap is R150m. Avoid.

1369c

The unwinding of its operations has hit a snag. Larry Claasen in the Financial Mail says that its auditor gave it a “qualified review” because it’s uncertain whether m Cubed will recover the R56.3m held in trust by an unnamed regulator. Avoid.

20c

Reason

Current price

WATCHLIST Company

Media

Mercantile Bank (MTL) Banks

AECI (AFE) Speciality chemicals

Lonmin Plc (LON) Mining

Financial Mail

Financial Mail

Finweek

Tax is eating into Mercantile’s headline earnings per share (HEPS). “Tangible NAV is 31.1c, well above the share price.

Tough economic conditions will impair performance for the rest of 2009”, writes Andrew McNulty in the Financial Mail. This share’s trading on a PE of 2.29. Hold.

22c

Larry Claasen in the Financial Mail believes that the volatility of the chemical company’s fortunes is reflected in its latest results.

Turnover was down 9% while earnings per share (EPS) fell a massive 68%. This share’s trading at a PE of 28.41. Hold.

5450c

“Lonmin shares are underperforming”, writes Brendan Ryan in Finweek. But while the share price maybe down, there are good reasons for it. The primary cause for concern is the short-term performance at its troublesome number one furnace. It’s started up again in mid-July but quickly began giving trouble. It is currently running at greatly reduced production levels.

Concentrates the furnace can’t handle are being treated in other furnaces that have been restarted. They, unfortunately, have much higher running costs. Depending on how these issues are resolved, we’ll see a shift in the price of Lonmin. Lonmin is also facing challenges as the rand strengthens and puts pressure on revenue. This is a solid company and, despite its problems, on a PE of 14.45 it’s looking cheap. Hold.

19330c

**Closing prices as at 5 August 2009

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last word

You cannot cheat the clock forever The future has arrived in the here and now – and it is costing us dear biggest creditor that the public sector wouldn’t continue to run huge deficits – practically an outright lie. But it’s one thing to stiff the Chinese; it’s another to stiff time. Adjusted for inflation, the US consumer’s earnings have barely risen since the 1970s; by some measures, he actually had less disposable spending power in 2007 than in 1973. And now his income is going down. The June number reflected the biggest drop in income in four years. Salaries and wages fell 0.4% in June – the ninth drop in the

At least something good has come of the economic crisis: it blew off the purple robes that clothed economists and exposed their naked flanks.

Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments. They deserve better. A beating with sticks!

Bill Bonner

Even Alan Greenspan admitted he had “found a flaw” in his own thinking.

We will have to imagine the giggles from the back of the room – if anyone had been awake. If was as if Stalin had confessed to being rude to his mother, or Bernie Madoff copped a plea for shoplifting. The “mea” was fine, but the “culpa” didn’t measure up to the facts.

He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.

It was the exact opposite – imagination run wild. At the heart of the delusion was an idea so preposterous it almost couldn’t be a simple mistake. Economists imagined a world without yesterday or tomorrow; a world in which you could run up debts forever and never pay them back. They were like a primitive tribe with no verb tenses, neither past nor future. Still, when they invited you to hop into their ‘hot tub’ it’s hard to believe they weren’t looking ahead to dinner.

Last week, US Treasury secretary Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector.

That was his way of reassuring America’s 28

7 August 2009

Time always gets even. Now, it’s the past that’s doing the reaching. The automobile bought in 2006; the house bought in 2005; the vacation taken in 1999: the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realised they’d never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear Sterns, Lehman, Goldman Sachs, JP Morgan and Merrill Lynch – only two survived intact. And we know now that Goldman only survived because Henry Paulson, its former CEO and then Treasury secretary, arranged a hidden bail-out: he had the government step in to save AIG, which owed Goldman $13bn.

From one scam to another: from bailing out Wall Street to bailing out the entire world economy, the more stimulus programmes fail to bring a recovery, the more US economists call for more stimulus. The International Herald Tribune on Monday said: “More stimulus is needed to spark a strong recovery”.

©BLOOMBERG

Meanwhile, the Queen visited the London School of Economics and asked: how come economists were not on top of this thing? Last month, they replied. In a three-page letter they avoided the simple truth – that their trade was no more reliable than fortune-telling and marriage counselling. They claimed a “psychology of denial” had prevented government and financial eyes from seeing the catastrophe ahead. It was “a failure of the collective imagination of many bright people”.

depression now; because consumers already spent what they would normally be spending now. The future is here.

Alan Greenspan admitted a ‘flaw’ in his logic last ten months. How is it possible for him to spend more? Whence cometh more demand from the private sector?

We pose the familiar question – only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future and into never-never land. Consumers didn’t want to wait until they’d made the money to take vacations or buy houses.

They borrowed against future earnings.

They spent money they hadn’t earned yet, bringing forward purchases that should’ve been made years later. The accumulated effect of this was to add $35trn in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945-2007. That’s why we have a

What are they thinking? Since neither the private nor public sector has any savings, extra demand from either must be borrowed from the future. (Setting aside ‘quantitative easing’, or Zimbabwe-style stimulus: an even bigger fraud.) But borrowing from the future is what brought on the current malaise. Whether it is the private or public sector reaching into the future hardly matters: either way, the same saps are supposed to pay.

The purest illustration of how this works is in the popular ‘cash for clunkers’ programmes. Instead of letting consumers wait until they are ready to buy a car, the feds give them money to buy it now. So, they buy in 2009 not 2010. What good is accomplished? It’s as if they didn’t expect 2010 ever to arrive; as if they thought they could hoodwink time itself, as well as the Chinese. The more economists try to stitch up the future, the less they seem like harmless fortune-tellers – and the more they seem like conniving shysters.