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I am sometimes tempted to think of myself as a company analyst, with South Africa as my company, government as management and the currency and bonds as the share price
Company analysts make sell, hold or buy recommendations. Obviously a buy means the analyst believes the shares are cheap – in some difficult to determine absolute terms, but more likely in relation to appropriate peer or category comparisons.
If I was a company analyst, then what I might have been doing over the last while would have been writing a report changing my recommendation on South Africa from a hold to a sell.
Here is a bare-bones summary and ordering of that argument:
- There are two major cycles driving negative sentiment which are coinciding now (which they do every five years): the “strike season” and the lead up to the ANC’s National Conference ;
- Both these cycles are deeper and more traumatic that usual;
- The reasons the strikes are worse than usual is excellently addressed by Gavin Hartford of Esop Shop - here for a link to his paper at polity.org;
- Mangaung is “deeper” and more traumatic than Polokwane because there is more at stake (some ANC members realise that another seven years of Zuma could hurt the ANC and the country; and Zuma and his backers cannot afford to lose office, because their dealing is not yet wrapped up and because their man remains legally vulnerable to the original corruption allegations against him);
But the main reason these cycles are deeper than previously is they are meeting a structural or secular trend, which consists of (and this is very stripped down):
- Uncertain political stewardship from the top;
- Institutional weaknesses in political (and labour) organisation characterised by systemic cronyism, corruption and nepotism (which leads to violent competition for control), managerial incoherence, narrowing support base and falsely inflated membership figures;
- A significantly negative economic policy environment which might lower investment levels – e.g. fiscal uncertainty (because there is no way the ANC cannot keep increasing social grants and the public sector wage bill, which together are already more than half annual non-interest government spending) and a highly interventionist industrial policy (best exemplified in the SIMS document) which is one step away from ‘nationalisation by stealth” i.e. the effective deployment of private assets for public – or more narrowly governmental or even party – ends.
- Incompetent infrastructure build, disruptive labour relations and failed educations systems are constant, apparently irresolvable and narrowing bottlenecks in the economy;
- Institutional and administrative failures of government (in specific geographies and at specific levels of government) – with similar features to the second bullet referring to parties and labour unions;
- Failures of the collective bargaining system – and other institutions designed to manage and mediate conflicting interests in society;
- Growing social stresses around levels of inequality, unemployment, indebtedness and poverty – and unresolved racial overlays of the same.
Just listing that is faintly distressing … and you can imagine writing about it for weeks is not very uplifting.
But, I have, mid-stream, decided that I am not at all certain it is appropriate to take this relentlessly negative view.
Let’s go back to the political analyst/company analyst metaphor. Company analysts often suggest investors sell a share in a top quality, well managed and highly profitable company if it is too expensive.
They might also recommend a buy on a company in all kinds of trouble – but one that is cheap and has upside that the herd of sellers hasn’t spotted.
I cannot remember an SA political shock or flood of negative sentiment that did not represent a buying opportunity in our financial markets. Remember the sell-off of R54bn of SA resources companies after the leaking of a draft mining charter in 2002? It proposed forcing mining companies to immediately sell half their equity to black South Africans and spooked the market. The next few months was the chance of a life-time to buy excellent value company shares on the cheap.
Whether financial analysis adds real value to the investment process (or is just another bleed-off) is a matter of endless dispute. But here is why I would hesitate to call a sell on SA:
- I cannot honestly say we have more political risk than Russia and Turkey, for example;
- Where are the safe havens for investors, given the complex risks and problems in the global economy?
- I cannot be sure that the negative news flow is not already in the price – it would be a very financial-market-analyst-type error to rush around shouting sell, sell, sell just after the last savvy investor had finished selling and begun buying;
- My ‘negative secular trend’ is described as if it is inevitable – whereas there is much that can be decided and turned around by citizens, government and the ANC (despite my bleak outlook as to the likelihood of that happening, it must be in the mix as a possibility);
- The country has a number of inherent advantages: its natural resources, its growing domestic market, its proximity to the last great frontier market (Africa), its sophisticated financial system and complex infrastructure, its constitutional framework, judicial independence and stable democracy – to name just a few.
Now obviously that does not counter the negative “secular” or structural trend I describe above. But there is something of a “baking a cake” strategy about how I have motivated for the big underlying negative trend. What I mean by that is I have marshaled all (or as many as I can come up with) of the negative arguments in one place to bolster a particular conclusion: sell!
To make a cake one follows certain steps – mix ingredients, add energy and voilà: a nasty, stodgy, too sweet lump.
And that is a relatively simple object, with only a few requisite variables for its construction.
When we think about the future – especially when we write about it and propose to people how they should position themselves – the very first thing we should be is extremely tentative.
So I can’t, in good conscience, say sell South Africa.
I am unmistakably bleak about our politics and governance, but don’t take that as a signal to sell. I am quite likely being tossed on the waves of sentiment – following financial market indicators, rather than leading them.
My very negativity could as easily be the indicator to start buying; that all the bad news is already in the price.
The 2008 global debt crisis, Eyjafjallajökull (pronunciation fun here), Haiti and New Zealand Earthquake, China drought, Queensland floods the political crises in Middle East and North Africa (MENA) and the Japanese earthquake/tsunami/nuclear disasters seem to prove that it is not the mundane everyday that shapes the world but rather high impact and extremely rare events.
The moment has rather given credence to Nicholas Taleb’s assertion in his book The Black Swan: The Impact of the Highly Improbable that outlier probabilities are what shape our world and not the day-to-day numbers.
The point about black swan events is that they are highly unpredictable. Sitting there in January we did have a sense that we were in the midst of shocks and the consequences of shocks: we were finally recovering from the mortgage linked debt crises and appeared be entering a new and threatening terrain associated with sovereign debt worries in Europe – and beyond.
That wasn’t all good, but it was part of the “known known” and we had a general sense of where to look for the things we didn’t know (the known unknowns – for a useful breakdown of Donald Rumsfeld’s discussion about certainty and unpredictability and Slavoj Žižek’s caustic reply see here.)
Two months later the world is a markedly different place and I have found it useful to use the Japanese earthquake and linked disasters as well as the political instability in MENA (Middle East North Africa) to ask the big and scary questions about South Africa.
Usefully, Moeletsi Mbeki has written an article predicting South Africa’s Tunisia Day for some time in about 2020.
Catch the Business Day article here and see my review of his book Architects of Poverty on which that Business Day article is extensively based here. (Afterthought note: the Business Day article is “extensively based” on Architects of Poverty not on my review.)
The long and the short of Mbeki’s argument is that the primary resource intensive phase of Chinese growth will be concluded by 2020 (and therefore the commodity supercycle will come to an end) and the ANC government will run out of money to keep paying the social grants bribe to the poorest South Africans – which in turn will lead to revolt and rebellion.
He takes it a lot further – instead of growing our competitive advantage while the commodity bonanza is with us, the ANC has instituted another system of bribes to its own leaders and supporters (Black Economic Empowerment) which consists of getting wodges of the non-essential parts of existing business and turning those into consumption fuel. Thus fat cat politicians and their families act as representatives of the cheap-labour and primary-resource-addicted conglomerates in exchange for the mess of pottage and extreme ostentatious consumption.
And waiting in their future, according to Mbeki’s argument, is a Tunisia style revolt.
So that’s the layout of the argument.
I think it is timely and provocative and interesting, but I do not think it is meant – or should be taken seriously – as a real prediction. It is polemic that warns about the excesses the new elite is indulging in.
I am in the middle of a road show where I ask the big questions about South Africa’s future stability.
I finish this evening and will then be in a position to summarise my own view; looking at the factors that lead towards instability and revolt and the factors that act to keep them at bay, asking how these balance in South Africa today.
The one thing the last few weeks have taught us is that the world is complex and interlinked in ways that make it extremely difficult to predict outcomes. With this proviso, I do not think we realistically can suggest that there are processes operative in our society that lead, in a linear fashion, to a Tunisia Day in the next ten years of our history … but it is a close call and I will examine some of that tonight and tomorrow morning.