An Interlude on a Friday

I’ve been in the process of travelling since 4:30 this morning. Earlier if you count the time that I was awake waiting for the alarm to go off.

Thus far, I’ve done the plane and the train. Now, I’m about to start part 2, which involves a road trip and many many toll gates.

Ah – wedding season.

In the interim, because I can’t break an unbroken record of daily posts, here is this:

Happy weekend!

An Open Letter: how South Africa discriminates

In my day job, I spend most of my time dealing with the administration of compliance.

Not because I want to, of course – I’d much prefer to be “ideas guy” with all the big-picture-plans and the big-shot-schmoozing.

But it seems that my OCD is more valued than my thoughts. And admittedly, I have myself to blame – I am not patient about watching something come to nothing because it gets stuck with someone who can’t bear the thought of actually going to the bank right now and sorting out the fine-print. So on any given day, I get to be “ideas guy” for about 10 minutes before I turn into “details guy” for the next three weeks.


I bring this up because it demonstrates that South Africa has a deep and institutionalized hatred of business.

Businesses are treated as though they are wage-gouging, money-laundering, tax-evading, mass-firing, credit-mongering, deeply-racist and generally-all-out-evil bad guys. And those bitches needs to be regulated.

Curiously, regulators seem to feel that most of this can be fixed by regularly requiring one to prove one’s address.

Which is deeply mysterious to me. I mean – what exactly does proving a physical address assist with? Finding you when you’ve done evil? Because evil-doers are not known for getting the hell out of Dodge?


The trouble is – it costs a lot of time and money to be constantly trying to show that you’re not wage-gouging, money-laundering, tax-evading, mass-firing, credit-mongering, deeply-racist or a generally-all-out-evil bad guy.

And to be honest, the compliance burden is only really sustainable if you’re a Big Institution that became Big by being all those naughty things back when times were good and life was easy.

So who does this really affect?

The SMMEs and entrepreneurs and so on. Who are forced to spend much of their time and money on being compliant when really, they should be focusing on trying to get off the ground.

Despite the fact that small businesses are responsible for:

  • 34% of South Africa’s GDP;
  • 60% of employment; and
  • 80% of all new jobs created.

So here’s an angry letter about it:

Dear South Africa

The craziness must stop.

Do you know how hard it is to set up a new business for a first-timer venturing out of the world of formalised employment?

Oh – I’m not talking about the things that you’re thinking of. All the stress and anxiety and lack of funding. That – that is the easy part.

I’m talking about the practical stuff. I have a list:

1. The Banks


3. Employees

4. Other Businesses

To begin…

How the banks hate you

The minute you’re an entrepreneur: farewell new credit cards; farewell car financing; farewell mortgages. You’re on your own, because you’re a credit risk.

Of course, if you hire someone to work for you – they will be able to apply for credit cards and car financing and mortgages off the salary slip that you give them each month. But you won’t.

You’re a credit risk.

How hard it is to pay tax

The minute you step out, you become liable for tax in all kinds of new ways. If you decide to operate as a sole proprietor, then you’re immediately super-suspicious to the SARS efiling system. Your annual return? It’s always flagged for audit. Always.

So you’re forced to start furiously bookkeeping. Or you have to hire a bookkeeper. And more likely than not, you’re going to have to get someone to do your tax for you.

Costing you time. Costing you money.

And don’t get me started on VAT

To register for VAT, you need to prove that you’ll have more than R50,000 in turnover each year. And it takes you at least 21 days to be approved from the day that SARS finally agrees that you’re eligible to register (they’re concerned about VAT fraud, so the onus is firmly on you to demonstrate that you’re not trying to defraud SARS by being a small business that needs its VAT to be refunded).

What this means: your operating costs are 14% higher than a VAT-registered vendor.

You know what else that 14% is?

Your profit margin.

*poof into thin air*

And even once you’re registered, SARS doesn’t like to give refunds for all the months that you were paying an extra 14% of operating costs. So you’re going to be bogged down in more audits because you’re so suspiciously evil-looking for trying to get a VAT refund, you likely-tax-evader, you.

Let’s Talk About National Bargaining Councils for your employees

So if you fall into an industry – which is, you know, the unfortunate side-bar to being a business – chances are, your industry has a National Bargaining Council.


The National Bargaining Council (NBC) will negotiate the terms of employment with the Big Institutions in your industry. And they’ll agree on pension contributions and compensation policies and sick leave payouts, etc.

Then, because businesses will obviously never stick to their word, the National Bargaining Councils will insist that businesses contribute monthly to all these new funds that the NBC will set up for pensions, gratuities, sick leave, vacation pay, etc. And the NBC will take responsibility for making those payments – if you’ll just send your staff along when they go on leave to sign some forms and they’ll get paid by the NBC instead of by you.


Now that they’ve thought about it – perhaps it would be best if you paid the employee, and then claimed the payment back from the NBC fund in question. Which will take months because you could be attempting to defraud the NBC. Because you’re so evil. Refer back to square one.

But you might think that this is just for the big players who agreed to this ridiculous set-up?


So so wrong.

The National Bargaining Council will take their agreed resolution to the Minister of Labour, who will use their legislative power to extend the coverage of the agreement to include all businesses in the industry.

And then the NBC will show up at your door, and charge you penalties for having failed to comply.

Finally, Other Businesses

Because all the slightly larger fish in the corporate sea are concerned about their own compliance, any time you apply for a tender, you’ll be anxiously attempting to prove that you’re BEE-compliant and VAT-registered and regularly-audited and formally-registered and tax-cleared and labour-regulated and fair-policied and all those things that require certificates and registrations and the varying approvals of approved bodies.

Otherwise, they run the risk of running into their own compliance dramas.

Here is my observation

This is the path to much fiscal stability.

But it’ll be a very small fiscus. With a lot of unhappy people. And many of them will be unemployed.

Is this really what we want?

Surely not.

Let the occasional employee get taken advantage of. Let a bit of money get laundered. All that will happen at the edges. It won’t be mainstream.

But this current attempt to rigidly abolish the fringe element is killing the host.

Stop it already.


Your Economy’s Backbone

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

The Investor Diaries: Week 31

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.

A look at the week everyone had:

Once-Off Investors

In numbers:

Once Off Investors Week 31

In pictures:

Once-Off Graph Week 31

So after last week’s little wobble in the market, we’re starting to see some “correction” (just in the other direction).

The strong end to last week had all the pundits flummoxed.

Monthly Investors

In numbers:

Monthly Investors Week 31

In pictures:

Monthly Graph Week 31

The Indicators

Indicators Week 31

The exchange rate…seems to be stabilising.

ZAR USD Week 31

I’ve heard some analysts say that this seems to indicate that there is not much flow of foreign capital, which is good for stability. But also: potentially not good because it could indicate that the instability is yet to come upon us. Which seems like a hedged bet to me – but what do I know?

The stock market…is correcting its incorrection?

ALSI Week 31

In dollar terms, slightly more so:

ALSI USD Week 31

The 10 Year Government Bond yield seems to be stable:

10 Year Govt Bond Week 31


Gold and Platinum…seem to be finally (and somewhat inexplicably) recovering.

USD Gold and Platinum Week 31

ZAR Gold and Platinum Week 31

While the Oil Price seems determined to proceed on its downward trajectory (also somewhat inexplicably, as it’s not like we got that much news in the last week that would suggest that the oil price should be lower):

Oil Week 31

ZAR Oil Week 31

Until next week!

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

The Investor Sentiment Saga. And being part of the herd.

I found this:

Which I feel ties in quite nicely to yesterday’s post.

So the thing is: we know this. As in: everyone knows this. This is not new. It is not news. We’re generally aware of the fact that market bubbles are not the time to buy – because that’s when everyone is buying.

But in a world of supposedly rational individuals, the real question is: “But why though?”

I mean – if everyone knows not to buy shares when everyone else is buying – why do you still get these moments?

The Good News

Two things to realise:

  1. Firstly, it’s hard to have an independent opinion. Mainly because people get annoyed with you, start calling you names (“Mary contrary”), and question your sanity (popular opinion, after all, is against you – and “Are you saying that the whole world has it wrong?” is a tough counter to your “But this is madness!” statement).
  2. Secondly, it’s even harder to act on an independent opinion with real money #lossaversionbias

But the reason this is good news: it suggests that good investing can sometimes just be a question of moral fortitude and a willingness to step away from the herd.

And this should make sense.

Because logically, yes, the whole world could quite conceivably have it all wrong. And that’s not necessarily arrogance…

As herd animals, we like to be a part of things. Being part of a herd makes us feel safe and secure and like we won’t be the only one looking like an idiot if it all goes horribly wrong (and/or eaten by wolves). But there is a price to be paid for all that security: it means that we’re late to the good stuff and hang around for the scraps long after we should have moved on to greener pastures. It’s the sheep at the front that get the sweetest grass – the followers get the remnants, which can be dust depending on just how far back in the pack they are.

So the obvious solution: don’t be afraid to look up from time to time. And it’s okay to step out occasionally – just avoid the gullies and shadowy places where the wolves tend to hang out.

It’s just my view.

PS: apologies for the shortness of the post – busy morning!

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

The Changing Face of Equity Trading

At the end of last week, I wrote a post on market corrections: “Wait – was that a bubble? BUBBLES.

The basic idea:

  1. I’m not convinced that you can talk about market corrections in relation to historic norms and averages.
  2. Basically, because of two things:
    1. Quantitative Easing – as of two weeks ago, the M2 money supply of the US dollar was sitting at around $11.5 trillion. 5 years ago, it was $8.5 trillion. That is a seismic 36% jump in such a short period of time.
    2. Wealth Inequality – the gap has been steadily growing for decades, and it leapt in the last five years, as most of that increase-in-money-supply recovery went into the investments of the already-rich*.
      *Of course, we’re also suddenly more aware of it now that the formerly-middle and now-mostly-lower classes can’t hide from it with credit.
  3. Those are foundational differences. If you look at the inequality story, the wealthy invest based on their expectation of a consumption demand – but if the middle class is disappearing, then you’re looking at a shrinking consumer base. What else can that imply but settling for lower returns on capital?
  4. Comparing today’s market to recent history is about as meaningful as expecting today’s communication levels to be one a historic par with average communication levels from the past 50 years (bearing in mind that we’ve only had the internet for the last two decades, and the first iPhone was only introduced in 2007). I mean – sure, we’re still human beings with a need to communicate – but our abilities have shifted.
  5. So for those reasons, and a variety of structural ones, I think that we’re headed into an era where the wealthy are going to accept lower returns for each level of risk that they take on.

When Paul Krugman talked about the Great Moderation in the 1990s, maybe he only got his timing wrong.

Anway – this weekend, I spent some time thinking about how other empirical theories in finance might have just become anachronistic.

The first big one that I came up with: stock-trading and the efficient market hypothesis.

How The World Of Trading Has Changed

For most of history, stock exchanges operated as you’d probably imagine: skeezy gentlemen in brown suits and bowler hats shouting at each other across a floor.

But then we invented the computer, and trading started to become electronic.

The first major stock exchange to do so was the London Stock Exchange in 1986. Then the Italian Stock Exchange in 1994, the Toronto Stock Exchange in 1997, and the Tokyo Stock Exchange in 1999. The NASDAQ has been mostly electronic since the 1987 crash – although the other US exchanges (the NYSE, NYMEX, Chicago Merc, the Chicago Board Options Exchange…) took a little longer to get on board. The NYSE only really stepped over to the electronic side in early 2007.

So obviously, with the rise of electronic trading, a whole world of algorithmic possibilities opened up. Instead of waiting for news, interpreting it, trying to decide how it would impact a stock, and then making a decision – you could make some decisions prior to the news event and tell an algorithm how to trade for you.

From there, it was only a quick leap to bandwidth speed being a determinant in the trade. And we witnessed the rise of High-Frequency Traders (HFTs). doing the split-second version of front-running.

This then led to Dark Pools and the fragmentation of the stock exchanges in attempts to assuage the fears of large institutional investors who felt they were being gouged by the HFTs. Which ironically led to even more gouging as the fragmentation permitted yet more speedy front-running.

Estimates of high-frequency trading amount range from between 50% to 70% of all stock trades. Algorithmic trading in general is estimated to be over 80% of all stock trades (and that was back in 2008).

To talk about “efficient market hypothesis” studies from the 80s and 90s, at this point, is madness:

  • You have algorithms that are pre-set to trade based on certain keywords in a news releases.
  • You have algorithms that are pre-set to trade based on the volume of trades in shares immediately after a news release.
  • You have algorithms that are pre-set to bid the share price up or down depending on the direction of the trade in order to earn the bid/ask spread.
  • You have algorithms that are pre-set to re-balance portfolios in response to specific movements in the market in order to match a pre-defined index.
  • You have algorithms that are pre-set to anticipate the re-balancing of those portfolios in order to profit off the trade up or down.
  • You have algorithms that are pre-set to anticipate the anticipation of the re-balancings.

In short: you have a trading environment of algorithms that can cause an infinite swirl of feedback loops – limited only by pre-defined limits in their formulae, their fund size, and a trade’s proximity to the next news release.

What this may mean

For human traders, this means that the short-term movements (and even the longer-term movements) in the market can cause dysfunctional disconnection between a share price and the share’s fundamentals.

And you really have no idea whether this is an appropriate market reaction, or whether this is just a market reaction based on conflicting opinions by the algorithm’s designers as to what the market reaction would be to an infinite array of determining factors.

Also, any move you make to take advantage of a perceived disconnection will likely throw the algorithmic traders into a frenzy, which could spark off even more swirling feedback mechanisms.

So what is one to do in all this chaos?

Accept the fact that “market efficiency” is a total misnomer because it implies that:

  • The market absorbs all information into the price; and
  • It does so correctly (or the absorption is rendered “correct” by the market consensus).

Only, you can’t have that when a piece of new information spawns new information which in turn spawns new information and so on into the dark night.

I can’t help but think that this creates an excellent opportunity for some long-term fundamentals-focused contrarianism.

Until, you know, they create an algorithm for that. If they haven’t already.

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

Wait – was that a bubble? BUBBLES.

After my post on Wednesday, I’ve had some questions come back – which I’m quite pleased about, because it allows me to draw together a couple of things that I’ve been thinking about this week.

To Recap

In Monday’s post (The Great Divestment), I said that the stock market appears to be going crazy, because:

Then on Wednesday (Investor Diaries: Week 30):

  1. The world today is very different to the world five years ago.
  2. Five years ago, the Fed was just beginning QE round 2.
  3. As of this October, we’re…well…5 years on – and the tapering is only finishing this month.
  4. Meaning that there is so much more money sloshing around in the global market place.
  5. Obviously there has been a steady increase in the stock market indices (where else was the money to go?).
  6. But does that mean “exuberance”?
  7. I think far from it.

Finally, here’s a graph of the S&P 500 and the JSE All Share over the last five years:


So my thinking is, over the last five years:

  1. The USA has leapt on and off the fiscal cliff repeatedly.
  2. The Eurozone has been a dire mess.
  3. China has slowed down and there has been constant warning of a shadow-banking crisis à la 2008.
  4. Russia annexed the Crimea.
  5. The Middle East has been the Middle East.
  6. The Arab Spring came and went and came back again and it’s all looking a bit dicey.
  7. Japan and China threatened war with each other over some islands.
  8. Syria.
  9. The Islamic Caliphate.
  10. The Rise of Bitcoin as an alternative to the existing financial system.
  11. Israel and Palestine.
  12. Libya and her oil imploded.
  13. North Korea regularly threatened nuclear warfare with just about everyone.
  14. Iceland’s volcano downed almost all air travel in Europe for weeks.
  15. And the current outbreak of Ebola has been ravaging West Africa since December 2013 (yes – that’s when it broke out – we’re talking about 10 months of epidemic).

And despite much calamitous reason for the markets to be anxious, we have witnessed the greatest equity rally in history:


The question is: does that sound like a “bubble”?

Well, to answer that, I’m going to call on Robert Shiller (mentioned above in Monday’s off-hand comment). Mr Shiller, who won the Nobel last year for his work on asset prices, is sort of the market authority on bubbles. I wrote about him last year in Bitcoin: Bubble Bubble but no Toil or Trouble (a post that I’m still rather proud of), and he defines asset-pricing bubbles thus:

…a psycho-economic phenomenon. It’s like a mental illness. It is marked by excessive enthusiasm, participation of the news media and feelings of regret among people who weren’t in the bubble.

“Excessive enthusiasm”?


The last five years have been a long dreary series of economic disappointments and compounding global crises.

If anything, we should have seen the opposite of an equity rally.

Only we didn’t.

Very deliberately: the world was pumped with liquidity.

This wasn’t an equity rally driven by enthusiasm – it was an equity rally driven by an overabundance of money. That is: asset price inflation – where “inflation” is the monetary phenomenon, rather than a function of animal spirits/whatever.

And yes – agreed, this has led to some seeming market dysfunction (high average PE ratios, etc).

The Return To Equilibrium?

Two potential paths to correction:

  1. Asset prices deflate.
  2. Earnings inflate.

On the Asset Prices front – how realistic is deflation? It was driven by money supply. So in order for a full correction to take place, my guess is that you’d need excess liquidity to be drained out of the markets by the Central Banks.

But the Central Banks don’t really do that kind of thing. Bad for growth, etc.

So we may have to wait for consumer price inflation before we get any type of correction of earnings relative to asset prices.

Only, Central Banks don’t really like that kind of thing either.

The Third Option 

As we move into a world with lower growth and more inequality – we might just have accelerated ourselves into a new equilibrium – one where capital earns lower returns.

That is: higher asset prices (from investments by the wealthy) and lower earnings (from the diminishing middle class) might combine to make higher PE ratios the norm.

After all – why should anything return to historic averages, when the circumstances that gave rise to those averages have so drastically changed?

It’s just a thought.

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

Nobel Prizes, Jean Tirole, and some vitriol

On Tuesday night, I went to a pub quiz and spent the last few minutes before it began googling the 2014 Nobel prizewinner for Economics – in case it came up as a question.

It didn’t.

There were, however, some questions about recent soccer scores. And a brief triumphant moment where I correctly guessed that the unit of currency in use today that was once a unit of weight in Ancient Mesopotamia was the (Israeli) shekel*.
*Confession: it did help that the quizmaster was Jewish.

Jean Tirole, who won the 2014 Sverige Riksbank’s Prize in Economic Sciences in memory of Alfred Nobel, is French. And he won it for his work in New Industrial Organisation (or “new IO” – or “calculated silliness” as Paul Krugman so affectionately refers to it).

“Calculated Silliness”

In a time before Jean Tirole (and his colleague Jean-Jacques Laffont – who suffers from the unfortunate personal crisis of being dead, thereby disqualifying him from sharing the prize), economists saw the world of business in two ways:

  1. A world in which a single business has all the power – moo ha ha! (Monopoly); or
  2. A world in which no business has any power whatsoever – boo. (Perfect Competition).

Of course, economists knew that the real world was somewhere in between – but then economists tend to live by “Yes, it works in practice – but does it work in theory, my good chap?”

You see – the problem is that the real world is econometrically-awkward. There are feedback loops, conundrums and irrational inconsistencies that make the whole business of modelling it with calculus – well – more than a life’s work. And that’s not good for winning Nobel prizes – because then you die and a protégé picks up where you left off and wins the 8 million kroner and all you’re left with is a passing reference in articles where the old guard are pretty sure that you would have won it if only you’d not been so unfortunately mortal. Humbug.

Anyway – because economists were so fixated on the extremes of perfect competition and monopoly, it meant that their solutions to market failures were somewhat prescriptive. As in “That market is a bit monopolistic – put a price cap on it!” or “Collusion is basically a monopoly, with is basically the root of all evil – destroy it with fines!”

There are some real problems with that kind of prescriptive approach. And just bear that “price cap” in mind for a moment – I’ll get to it shortly.

Jean Tirole was one of the many economists that noticed the problems associated with the simplistic measures being put in place. And instead of dealing with things mathematically, Jean Tirole went at the problem with a series of thought experiments, adding in dashes of game theory*.
*I’m simplifying – but that’s what I do.

So take the price cap as an example.

Thought experiment:

  1. If the government proposes a price cap, what might a rational firm do?
  2. It could set out to influence the setting of the price cap.
  3. It might present high cost schedules to justify the higher price cap – including lavish executive compensation packages, etc.
  4. It might also try to capture the regulatory bodies attempting to regulate it.
  5. And once the price cap is set, it might attempt to suppress any development or innovation that would result in lower prices due to lower costs – because why risk it?
  6. Cue: market failure.
  7. Which is not in the public interest – despite the original intention.

In particular, Jean Tirole’s work tended to focus on the large corporations that are so problematic to regulate – mainly because their size allows them to react to regulation in a way that can get a bit macro…

A quote from the New Yorker:

From Amazon’s battle with book publishers to Cablevision’s attempted takeover of Time Warner Cable and the European Commission’s investigation of Google, the issue of how to deal with companies that operate in markets where competition is restricted or absent has become front-page news around the world. Tirole and his colleagues, particularly the late Jean-Jacques Laffont, didn’t establish a set of hard-and-fast rules for governments to follow in individual cases. But they did create a unifying intellectual framework that regulators, aggrieved parties, and the companies themselves can draw on in thinking through the relevant issues.

The key point:

[Regulation is] an ongoing game between two players with different goals and secrets that they can hide from each other. In the language of game theory, in which Tirole is expert, it is a “principal-agent” problem, where the government is the principal and the firm is the agent. The general question then becomes this: Can you design a regulatory system that offers incentives to both sides—the regulators and the firms—to do things that are in the public interest?

And because I like flexible results, I’m a fan of this:

The Tirole approach doesn’t always point toward tougher oversight. In some cases, it may make sense for regulators to back off, lest they discourage firms from investing and innovating. As in many other areas of economics, a tradeoff is involved, in this case between stimulating technical progress and preventing firms from gouging consumers. On the other hand, Tirole points out, there’s also a danger that government officials will get “captured” by the industries they are supposed to be regulating, and go too easy on them.

Which sounds far more realistic than general economic theory would normally allow.

The Vitriol

When I was reading up on Jean Tirole, I came across this Austrian response: Nota Bene: Jean Tirole wins Nobel for a pseudo-problem.

In it, Mr Tirole is called “a garden-variety neoclassical economist”, alongside much belittling use of adjective (my personal favourite: “teeny-weeny”).

Basically, the crux seems to be “How dare you say that firms get caught up in games with each other – they’re just trying to find the right price to charge the market!”

Did I hear someone say ad hominem? And straw-man? And jealous much?


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