Brohemian Rhapsody

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I’m now a poor boy
High-yielding casualty
Because I bought it high, watched it blow
Rating high, value low
Any way the Fed goes, doesn’t really matter to me,
To me

Mama – just killed my fund
Quoted CDO’s instead
Pulled the trigger, now it’s dead
Mama – I had just begun
These CDO’s have blown it all away
Mama – oooh
I still wanna buy
I sometimes wish I’d never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Bernanke!
Can you save the whole market?
Monolines and munis – very very frightening me!
Super senior, super senior
Super senior CDO – magnifico

I’m long of subprime, nobody loves me
He’s long of subprime CDO fantasy
Spare the margin call you monstrous PB!
Easy come easy go, will you let me go?
Peloton! No – we will not let you go – let him go
Peloton! We will not let you go – let him go
Peloton! We will not let you go – let me go
Will not let you go – let me go (never)
Never let you go – let me go
Never let me go – ooo
Oh mama mia, mama mia, mama mia let me go
S&P had the devil put aside for me, for me, for me, for me

So you think you can fund me and spit in my eye?
And then margin call me and leave me to die
Oh PB – can’t do this to me PB
Just gotta get out – just gotta get right outta here
Ooh yeah, ooh yeah

No price really matters
No liquidity
Nothing really matters – no price really matters to me

Any way the Fed goes…..

South Africa Analysis

By “Jimmm Slater”, nom-de-plume of a resources expert based in London

SA is unique in having such a dependence on primary output. Boom and bust happens everywhere but in SA the cycles have bigger amplitudes. The main issue is that SA just cannot seem to attract foreign direct investment (FDI), meaning that it cannot fund a current account deficit without jacking up interest rates to attract hot money. As SA’s economy is counter-cyclical, i.e. because its commodity basket is late cycle, SA interest rates tend to high when everyone else’s are low, causing wild swings in money flow. The issue here is that everyone, including Mr. Mboweni, knows this and knows what’s going to happen in the future. The problem is that the ANC still doesn’t like encouraging FDI because to do so would mean it having to abandon much of its social engineering agenda.

The ZAR will tank because its strength carries the seeds of its own destruction. SA is structurally an inefficient economy which cannot produce the goods its economy needs. It remains a primary exporter (much like Australia). When the price of primary commodities rise so do the earnings of the producers, so does the Government’s tax take and so does the currency. But the currency overshoots – it always does – and the commodity producers get squeezed. At around this time the good old SA consumer resumes his/her love affair with imports and the trade balance starts to tilt into the red. There is little or no FDI into SA, so hot money has to come in – attracted by interest rates to balance the books. The ZAR continues to rise, primary producers are stuffed. The Government cuts rates to bring down the ZAR but all it does is fuel a massive import boom. The economic wheel revolves, SA’s late cycle commodity basket starts to weaken and the ZAR begins to slip. The industry is still so messed up that tax receipts and export earnings have fallen away. The current account balloons and the ZAR begins to tank. The Government “welcomes” the correction, but as the slide becomes a descent into the abyss it responds by jacking up interest rates and the whole SA economy grinds to a halt. It’s all happened before and it’s all going to happen again.

In emerging economies, particularly those with commodities – FDI is almost always essential as the cost of development and the long-term nature of the assets requires a time horizon and scale that proto-industrial economies cannot generate. SA’s mining infrastructure was created with British capital. It’s hard to see how new projects will be financed given the Government’s decisions to make the economy a target of its social policies. Capital that’s trapped in SA will leak out, no new capital will come in – and as the savings potential of SA is not sufficient to fund major investments, the economy will be condemned to sub-par growth. In non-economist language, the future is f*cked.

Property in “post-liberation” African societies is a tricky question. Check Harare – post independence, white flight and very little building and construction. Property becomes scare but is cheap. Cycle 94-96 turns in Zimbabwe’s favour and house prices shoot up in real terms as there is a shortage. But the politicians are cr*p and switch to populism (why is a much longer story) and the economics of the country start to go south. Property in hard currency terms gets cheaper but then inflation really lets rip and there is a rush for hard assets. No building as a shortage of forex to pay for materials and lots of cash means that property – in local terms – goes through the roof. I reckon SA is in the Zimbabwe 1994-1996 spot – I hope it doesn’t follow through the Zimbabwe cycle, but I suspect it will. So I reckon property in USD/GBP terms to fall sharply – in SA terms mildly for 3-4 years. Then to shoot up in ZAR terms in a rush for hard assets.