Investment advice from the tea boy

A Moneyweb commentator suggested that my musings about the economy are about as useful as those of an office beverage assistant: “Like I said before, Magnus is not qualified or equipped to comment on such matters. He is only qualified to bring me tea to my office and not comment on economic affairs.”

Well, to Miela I say: Ou boet – or sus, as the case may be – sometimes this tea boy sees things you suited types in mahogany row don’t see or don’t want to see.

How? I talk to people, lots and lots of people. Mainly about money and their personal financial lives.

And the narrative these past months has been one of even the wealthy finding themselves in the grips of a financial anaconda, financial life being squeezed out of them. The stock market is not performing (negative in real terms over three years now); average residential property prices down 23% in real terms over eight years, wage and salary increases below inflation.

The portion of your salary that is paid in taxes has risen constantly. Tax Freedom Day, as calculated by the Free Market Foundation, was on May 23 this year – two days later than last year and the worst ever. (Tax Freedom Day means that up to that day you have been working for government and taxes in one way or another.) In 1994, it was five weeks earlier, on April 18.

All these contributory trends have been building up, but were accelerated by the lagging effects of currency declines and, in February, the sharp increases in personal taxes as well as the increase in dividend taxation in the annual budget.

Even a beverage assistant could work out that this represented an additional R4 billion per annum that was diverted from consumers’ pockets to that of the taxman. Overnight.

As Ernest Hemingway once famously said: “At first you go broke slowly and then suddenly…”.

More scathing condescension

About six months ago I penned an outlook on the financial prospects for the economy and individual consumers in particular.

It evidently got up the noses of certain of mainstream economists, with one – Dr Roelof Botha, adjunct facility member at the Gordon Institute of Business Science – writing a rather scathing and condescending reply to rebut my gloomy prognostications.

You can read if here but I wish to highlight one paragraph that seemed to me to reflect an unwillingness by many institutional economists to honestly confront the avalanche of bad economic data heading our way:

Higher economic growth is being forecast for South Africa in 2017 by both National Treasury and the World Bank, which should ease fiscal pressures and soon abolish the debt downgrade debate to the archives.” (Moneyweb, November 9 2016: Talk of ‘financial meltdown’ quite absurd).

In the glaring headlights of what has unfolded since then – the firing of Pravin Gordhan, credit downgrades, Guptagate, unemployment at record levels and the news this week that SA is now officially in a recession – imagine you basing your personal financial decisions on such a confident but misplaced prediction.

I have previously written about the herd-like thinking of our economists, with very few prepared to speak to conscience and tell it like it is. Being realistic can be career-limiting at our large financial institutions, as we saw years ago: Nico Czipiyonka from the Standard Bank Group got the heave-ho when he was considered to be too negative by the suits at head office. More recently Andrew Canter from Futuregrowth expressed concerns about the risks in taking up bond issues from state-owned enterprises.

Boy, did he get his gonads put through the wringer, with parent company Old Mutual forcing him to recant and apologise. But Canter was right. Subsequent bond issues by Transnet and Sanral, for example, have been dismal failures and were either cancelled or attracted only a portion of the funds they were seeking.

Relying on Treasury has also become dangerous. Virtually every forecast contained in the budget speeches since 2009 has sounded more like a wish list than a serious forecast of what the economy is likely to do.

The few economic commentators who from time to time deliver warnings of the economic grim reaper tend to be the independents who work for themselves, a small group I consider myself part of. I would count among them Mike Schüssler, Dawie Roodt, George Glynis and Azar Jammine.

The Bluffer’s Guide to Economics

Bear in mind that I don’t consider myself an economist. In reality, there is no such profession. Anyone who has read The Bluffer’s Guide to Economics can hang up a shingle and call themselves an economist. I happened to take economics as an additional course while at university mainly because the economics lecturer, Professor Geert de Wet, was a cousin of mine.

A more careful analysis of the GDP figures released this week shows that all sectors with the exception of agriculture and mining showed negative numbers. The turnaround in agriculture was mainly due to base effects and above-average rainfall this past summer, which the ANC can’t take credit for, while mining fortunes were driven by improved global commodity prices. Government with its newly-released Mining Charter actually seems hell-bent on further scaring away investors from our fragile mining industry.

Noticeable in the figures is the collapse in consumer spending in the first quarter of this year. Annualised growth of minus 5.9% was recorded in the retail, wholesale trade, accommodation and restaurant sectors – which are all directly related to how confident the average consumer feels.

In short: consumers have either run out of money or are scared to spend it.

The relativity of power and influence

These numbers don’t measure what the firing of Pravin Gordhan on March 31 has done to consumer and business confidence. That is still to come, as well as the effects of the downgrades by S&P Global Ratings and Fitch.

Moody’s demonstrated more optimism, keeping us at two grades above investment grade until Friday June 9. Its decision to downgrade SA’s local and foreign currency rating just one notch was fortunate to say the least. A two-notch downgrade would have announced the arrival of one of the Horsemen of a Financial Apocalypse.

Foreign investors, who have been selling SA equities every month for the past 19 months (R70 billion so far this year) but have been buying our bonds with juicy yields of above 8%, would have had their hands forced.

A double downgrade by Moody’s would have precipitated a disorderly withdrawal from our local bond and currency market with obvious consequences for us all.

But we are not out of the woods. Even the economically illiterate can see the storm clouds in the tea leaves by now….

And there’s not much the beverage assistants of the world can do about it.

Or is there? Suit or no suit, we are all equal on voting day.

–Moneyweb