Zimbabwe’s New Coins: Why They’re Needed

Today, the Reserve Bank of Zimbabwe officially mints a new set of coins and puts them into circulation. Here they are:

In my view – this isn’t the worst idea in the world. Of course, the introduction could be a bit problematic.

But what really doesn’t help is this kind of fear-mongering going viral on Facebook: “The bankrupt Zimbabwean government of President Robert Mugabe has hatched a secret plan to raid the U.S. dollar accounts of citizens and give the owners worthless coins.”

Especially when the author writes this:

What the governor did not tell the public, government insiders told Zimbabwe Today, is that on the same day, Mangudya will also announce that account holders will no longer be permitted to withdraw more than $200 at a time.

and

“If you have any foreign currency in the bank, now is the time to take it all out, before the withdrawal limits are imposed. A lot of people are going to lose money in the banks when the accounts are frozen. This has happened before, when Gono slashed the zeroes and when Zimdollars were rendered worthless upon adoption of the multi-currency regime,” said a senior government source.

There is no faster way to get a withdrawal limit implemented than by starting a bank run. And Zimbabwe’s financial system is fragile enough as it is – so even a whisper of heightened bank withdrawals could spark a full-blown financial crisis.

Some observations:

  1. It’s actually quite difficult to replace an entire currency base with 1 cent, 5 cent, 10 cent and 25 cent coins*.
    *There is also a 50 cent coin, but it’s only coming in March.
  2. I mean, do you know how many coins that is?
  3. According to this RBZ presentation, the initial tranche of $10 million coins would constitute 2% of the money in circulation. If you wanted to replace the full $500 million in circulation, then you’d need 2 billion coins.
  4. And if you say that each 25 cent coin will weigh about 5 grams, then you’re talking about 100,000 metric tonnes of coinage. Which is about 33,000 truckloads of coin to be transported (in armoured trucks that can carry ±3 tons of coinage).
  5. Even if you had a fleet of 500 armoured trucks, they would each have to do 66 trips.
  6. And if you assume that a return trip is 4 days, then you’re looking at a good 8 months before all the coin could actually arrive in Zimbabwe.
  7. Which is plenty enough time for the population to realise that something is up, and to decide that stuff is not as it should be.

To say nothing of: people could just refuse to use the coins (after all, we already did it with the original Zim dollar).

Gresham’s Law traditionally reads: “bad money drives out good”. Which, I guess, is the fear here: that the use of the coins would drive the US dollar out of circulation.

As I see it, the practical reality is that you need to have enough bad money in circulation in order to drive out the good money. At this point, there just isn’t enough “bad” money. Also, as Zimbabwe’s dollarisation demonstrated – bad money only drives out the good until people stop using it. And we’re well practised at dropping the use of a currency we distrust.

The other side of the coin (apologies – I can’t resist the pun):

Why Zimbabwe Really Needs Small Change

The term being thrown around here is “consumer convenience”.

The Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mangudya:

“The coins will ease the problem of small change and eliminate the problem of rounding up of prices to a dollar where there is no option to buy more goods and ease the hassle commuters go through trying to break up a dollar to find change.”

Former Finance Minister Patrick Chinamasa:

“Seriously, what is all this noise about these coins? They are simply meant for the convenience of consumers so that they do not eat sweets when they do not want to.”

But also, consider this article: “Eliminating the penny from the US Coinage System: An Economic Analysis.” The summary of its findings:

  1. Eliminating the penny would result in a rounding tax of $600 million per year, disproportionately affecting the poor and other disadvantaged groups.
  2. Eliminating the penny would also increase government spending by about $2 billion (in 2010).
  3. “Rounding could also have significant negative effects on firms, given the narrow profit margins in convenience stores and supermarkets, the possible adverse effects on theft deterrence, the cost of training cashiers and associated productivity losses, and the high costs associated with non-cash mediated transactions.”

And that’s just the prospect of losing the penny.

Zimbabwe has effectively dispensed with all coinage.

And it has felt many of those effects:

  1. Rounding taxes that effectively punish the poor for being poor (“Let them eat sweets”?)
  2. The “high costs associated with non-cash mediated transactions” (all those vouchers and credit notes and unwanted sweeties).

In particular, the problem is that first one. Here’s a scenario:

  1. I am a poor person that earns $1 a day from selling tomatoes on the side of the street.
  2. Each day, I buy a loaf of bread for $0.80.
  3. But because there is no change, I end up buying a loaf of bread for $0.80, and two small sweets for $0.10 each.
  4. Every 5 days, my spend could have been 5 loaves of bread for $4.
  5. Instead, I have to spend $4 on 5 loaves of bread, and an extra $1 on the sweets.
  6. Cumulate that over time, and I’ve lost 20% of my earnings.

People will obviously try to find ways around that – buying in groups, taking credit vouchers, etc. But in the informal sector, it’s almost inevitable that you end up taking something in lieu of the change.

Hence, the introduction of these bond coins.

How The Bond Coins Are Meant To Work

The idea is this:

  1. The Reserve Bank of Zimbabwe has obtained a $50 million bond facility from the African Export-Import Bank (Afrixembank) to back the newly-minted bond coins.
  2. The bond coins will be freely convertible into US dollars at any Zimbabwean bank.
  3. Meaning that the coins are effectively on a dollar standard.

What Could Go Wrong

The main concern is that these coins will somehow end up supplanting the US dollar as the official currency. If that is the plan, then it has to be a fairly long-term one, because there is no trust in either the current government or the reserve bank to establish a new currency any time soon.

So perhaps this is an attempt to slowly encourage more confidence in the Reserve Bank which might one day lead to a re-introduction of the Zimbabwean Dollar (although this is vehemently denied in public).

But in itself, that is no bad thing. It’s pretty much given that the Zimbabwean economy will eventually need its own currency again. As it stands, Zimbabwe is the US dollar version of Greece in the Eurozone: rendered almost completely uncompetitive by an over-strong currency. It needs to have a currency that is reflective of its trade position. Without it, Zimbabwe is crippled. Albeit less crippled than it was under a hyperinflating currency that was just as unreflective of its trade position.

The other concern is that this will lead to speculative currency trading: where coin payments will be charged at a premium, and coin exchanges will take place at a discount, and you end up with a strange parallel exchange rate fluctuating between the rural areas (where there are no banks to do coin-dollar exchanges) and urban areas (where there are banks).

In the long term, the concern is that this kind of speculative trading encourages a greater supply of the coinage, and Zimbabwe ends up with a smaller version of Nixon abandoning the gold standard when the Reserve Bank imposes exchange restrictions by announcing that the coins will no longer be “freely” convertible for dollars.

But again I’ll say it: in order for any of these bad scenarios to happen, you need widespread acceptance of the coinage.

And we’ll have to see if that actually happens.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

The Investor Diaries: Week 39

The Preamble

For the background to this series of posts: herehere and here. And the summary:

  1. Small investors have some investing options.
  2. You can invest occasionally in lump sums (the once-off investors) or monthly through debit orders (the monthly investors).
  3. As for things to invest in, I’m a general fan of low-cost equity-index-tracker ETFs (as is Warren Buffett). But there are other possibilities as well.
  4. This series of posts is there to see which would work out well.
  5. Then there are some indicators at the end. Because why not.

So.

The reason that today’s post is so late: I’ve spent the morning in a governmental office where my phone had to be switched off. And there was a guard whose entire job description involved going up to people and shouting at them for trying to whatsapp from behind their folders. Which seems like an odd thing to be so concerned with.

But who am I to judge? I’m just delighted to be out in the fresh air, and (fingers crossed) done with governmental offices for the year.

Sadly, my high point was not best echoed by the market place. The Rand is blowing out, the stock market is shaky, and gold and platinum prices are doing a tango of a death rattle.

What to say, really… Buy resources, perhaps, because they’re all so dastardly cheap? Or just weather the storm, go on holiday, eat mince pies, and wish joy to the world.

I vote with mince pies.

The week past:

Once-Off Investors

In numbers:

Week 39 Once Off Table

In pictures:

Week 39 Once Off Graph

Monthly Investors

In numbers:

Week 39 Monthly Table

In pictures:

Week 39 Monthly Graph

The Indicators

Week 39 Indicators

The exchange rate:

Week 39 ZAR USD Exchange Rate

Government bond yields weakened:

Week 39 10 Year Govt Bond

The Stock Market:

Week 39 ALSI ZAR

In real terms, ghastly:

Week 39 ALSI USD

Commodity prices fell:

Week 39 Gold Platinum USD

Even for the ZAR producers here in SA:

Week 39 Gold and Platinum ZAR

Some commodities fell worse than others:

Week 39 Crude USD

Even if slightly less badly in ZAR terms:

Week 39 Crude ZAR

Until next time!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Privilege? Defending the Nut Job.

Two recent happenings that are attracting the ire of the middle class facebooking collective:

So obviously, these are being used as a launch pad for all the evils of wealth inequality. The worst of which clearly all this rudeness.

However.

The one that is getting the most outrage is the Korean Air story. And to be honest, I’m not convinced that Heather Cho was all that wrong.

In First Class, Macadamias Come In A Ramekin

Heather Cho was the chief of in-flight service for Korean Air (until her well-shameful resignation last week). She is also the daughter of the Korean Air chairman, Yang-ho Cho.

She was flying first class out of New York on flight KE086 last week. The plane had a 12:50am departure. And during the taxi to the runway, Head Steward Park Chang-jin handed her some macadamia nuts.

In a bag.

Without asking her if she wanted some nuts.

My bet is that her thought process went something like this:

  • *groggily rouses self from post-midnight travel fugue*
  • *realises that she just got handed a bag of macadamia nuts in first class*
  • Thinks “These should be in a ramekin. And actually, I should have been asked if I wanted any – not just had them tossed at me. Honestly, my First Class customers pay thousands of dollars to be served macadamia nuts in a ramekin but only if they want them. Is this clown actually being serious? Did the HEAD STEWARD just break the service rules while offering nuts to the CHIEF OF IN-FLIGHT SERVICE who is also THE DAUGHTER OF THE CHAIRMAN?”
  • “I’ll bet it’s because I’m a woman.”
  • “But also: WHAT IN THE HELL KIND OF OPERATION ARE WE RUNNING HERE? And if this is how he treats me, can you imagine how he’s treating the paying travellers?”
  • “F**k me if it’s not too early in the morning for this sh*t. I’m going to have to make a scene.”
  • “Actually, I might just enjoy this.”
  • “KNEEL, BITCH.”
  • “CAPTAIN, TURN THIS PLANE AROUND.”

So agreed – there was some overreaction. I mean, turning the plane around and making him kneel is a bit extreme.

But the crux is: what are First Class passengers really paying for? Their tickets can be up to ten times the price of economy class. And double that of business class – although they usually have just about the same seat size. Really, First Class passengers pay the extra to be treated like the upstairs of Downton Abbey.

Two things:

  1. First Class and Business Class passengers are the margin on long-haul flights.
  2. Also, they’re the ones who are the most likely to kick up a fuss when things aren’t up to scratch.

Consider this: are you more likely to complain about bad service in a McDonalds, where you just spent R40 on a Big Mac McMeal; or in a fine-dining establishment, where you just spent R1,500 per person for the degustation menu with wine pairings?

If the head waiter in a fine-dining establishment just arrived at the table and placed a small bottle of sparkling water in front of you, without a glass and without asking you if you wanted water, I think you’d be a bit taken aback. Now consider how you would react if you were the owner’s daughter, and you knew that the head waiter knew who you were?

I think that you would be completely justified in throwing a fit.

That kind of behaviour is putting the company at risk: firstly because it sets a tone for the staff lower down in the ranks; and secondly, because it riles your profitable customers.

But contrast this to our Harvard Professor.

Going After The Little Guy

Professor Benjamin Edelmann classes himself as a kind of consumer crusader.

He ordered some Chinese food. The website menu was out of date.

Here is the email exchange:

The question is: really? For $4?

Seems extreme. Seems, in truth, like unnecessary bullying.

And yet, he gets defended. Like in this article from Slate.

I’m all about getting what you pay for. But this, to me, sounds like complaining about customer services in McDonalds.

Fortunately for Ran Duan, the internet agreed, Professor Edelman apologised, and Sichuan Gardens Brookline got a whole lot of publicity.

Happy Monday.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Just Gift Cash. It’s Better, And Easier.

In what seems to have become my holiday tradition, this is a post on gift-giving. The original and wordy post, written exactly a year ago, can be found here:

The Irrationality of Gifts

The basic conclusion: unless you know exactly what the other person wants (unlikely), then gifting anything other than cash results in “deadweight loss” (where the value given up by the gifter is larger than the value received by the giftee).

Here’s an infographic to illustrate:

Happy weekend!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Sneakernomics. And SWAG. And Old Cars. And Value, Baby.

Two recent podcast episodes that are well worth your time in traffic:

And on today’s theme, I’d also like to point you in the direction of this recent news piece:

Welcome to the rise and rise of the alternative asset class.

On Slate Money, Felix Salmon and company were talking about the contemporary art market. The story on Planet Money dealt with the crazy market for Nike Sneakers. And then there are all those old cars, found in a French barn, which are going to be auctioned off by Artcurial in Paris early next year for millions of dollars.

Starting With The Sneakers

Here’s a fact that blew my mind: there is a whole sophisticated economy for the resale of Nike special edition sneakers, with speculators and data observers and market trends. Here’s a graph from campless.com, a data service that has (at the time of writing) tracked 14.5 million auctions for Nike Sneakers:

But that’s only vaguely impressive. If you really want to be impressed, you need to go and visit the Campless website, where you’ll be able to track volatility and price premium and availability levels.

An Example:

Screen Shot 2014-12-11 at 7.16.03 AM

Some information on price (Deadstock or DS means that the shoe is in mint condition):

Screen Shot 2014-12-11 at 7.16.18 AM

A high price of $11,100 – on a shoe that cost $200 retail? And a high of $4,000 for a USED pair?!

Some information on availability:

Screen Shot 2014-12-11 at 7.17.17 AM

And data on volatility (!):

Screen Shot 2014-12-11 at 7.16.32 AMThe eBay market for Nike Limited Edition sneakers was estimated to be worth around $338 million last year. And the market observers say that eBay probably represents about a quarter of the resale market (most sales take place privately, through Instagram, Twitter, etc).

To be clear – this isn’t a market that is frequented by high finance. This is a market driven by the street, and long queues of speculators waiting for Foot Lockers to open on the day of new releases.

If you’d like to read a bit more about this, you have to read this article: “You see sneakers – these guys see hundreds of millions in resale profits“. And entertainingly, this pre and post release date trading analysis for Nike’s What The LeBron 11 sneaker, which was released in September.

The big question being asked in most of these articles: “Why is Nike letting all this uncaptured profit go to waste?” Which, in my mind, is the wrong question.

Because surely the bigger economic question is “What the hell is going on?”

The pricing here is well outside our standard economic framework. If you believe that people buy shoes for walking, then there exist a host of great substitutes at far more reasonable prices. So clearly, we can’t talk about basic material needs driving the utility of a $2,109 used Air Yeezy 2 Red October Nike sneaker.

I think that we need to talk about another human need here. Maybe the prestige need. Or the status need. Or something else that’s just as psycho-spiritual.

The thing is, as a finance person, I’ve been taught to have an inherent distrust of any demand that’s driven by something other than superficially base living requirements. We prefer this kind of thing:

  1. Food stocks, because people need to eat.
  2. Construction stocks, because people need to have places to live and work.
  3. Manufacturing stocks, because people need things to be manufactured – like furniture for their houses, and cars for them to drive to work in.
  4. Mining stocks, because manufacturers need things to make into manufactured things.
  5. Financial services stocks, because everything needs to be financed.
  6. Health stocks, because people get sick.
  7. Bonds, because people need to borrow money.

The list goes on.

But what I’m saying is, I think we’re more comfortable about investing in businesses that are driven by a biological imperative: like the need for nutrition and shelter – and the supplementary needs that spring from them (like the demand for anything that enables us to address the need for nutrition and shelter).

This is probably a failure on the part of finance to grasp human nature. And it leaves us looking at any collector market as being inherently flawed and imminently at risk of being superseded and crushed by a pressing need to eat, or whatever.

But even if you’re of the school that believes people to be more animal than spiritual in their priorities, you can’t deny two things:

  1. The rich are getting richer – and they have no issue with meeting their biological urges.
  2. But also, almost everyone is doing better: our biological needs today are often met in abundance; gone are the dread diseases of yesteryear, and the debtors’ prisons, and the Dickensian sweat shops (at least, in the developed world); in most countries, the poor have access to some sort of welfare; and even if they complain about their status, they’re vastly better off than they would have been 150 years ago.

And once the physical self is satisfied, there are other sides that need attention. And how do we place a value on that?

The SWAG of the investing world

In the Slate Money podcast that I referenced earlier, Felix Salmon made a throwaway comment about SWAG, being the collective term in the investing world for Silver, Wine, Art and Gold. But I suspect that antique cars (hence the other mention), Nike sneakers, baseball cards and antiques would also fall into that category.

And the point Felix made is that these assets aren’t really assets in the strictest sense, because they don’t have cash flows associated with them. And therefore, to talk about intrinsic value is a bit of a misnomer – because you can’t do a proper Net Present Value analysis.

To me, this sounds like an echo of my earlier prejudice. Because there are at least two cash flows associated with SWAG assets: what you pay for them, and what you expect to get when you sell them. NPV analysis sorted.

Only, it’s not as nice an NPV analysis as the one you’d do for “real” assets, because you don’t get dividends or earnings or interest payments in between.

My question is: does it really matter though? Because any time you mention earnings, you’re doing just as much forecasting as you might do with the future selling price of an art piece. Both of those are ultimately driven by your view of future human needs. I’m just not sure that the difference between them is so clear cut.

The Consequence of Rising Tides

The world has changed.

In general, we have the health and the physical fulfilment to become decadent and, perhaps, more self-indulgent*. By that, I mean that we can be more academic in our tastes and more refined in the way that we satisfy them.
*There’s my inner puritan.

It will appear as though we’ve become less homogenous in our needs. And based on our older prejudices, we’re going to find ourselves looking at things and their valuations that seem bizarre and outlandish.

So firstly, I’m excited to see that.

But secondly, finance needs to catch up with the eclectic. And find a better way to value it.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.