A Word of Apocalyptic Caution

Firstly, some admin news: I’m seizing the moment to take a blog hiatus for the next few weeks. I’ve prepared a full set of infographics and recaps to post themselves while I’m away – but I won’t be writing fresh each morning. I might do the occasional post if something really hectic happens in the between now and mid-June – but that’s…unlikely. 

Two of the most iconic news pieces from the last month were these:

  1. Unmasking the Men Behind Zero Hedge, Wall Street’s Renegade Blog (from Bloomberg); and
  2. The Full Story Behind Bloomberg’s Attempt To “Unmask” Zero Hedge (ZH’s response).

For those who don’t know the website, Zero Hedge is a strongly anti-establishment news/blog site, filled with apocalyptic realness.

clown realness

It’s where you’d go to get your Fed-bubblecovery jollies, and all those chills associated with America’s debt burden and the imminent-for-some-years-now crash.

The main blogger on Zero Hedge is Tyler Durden, of pseudonymistic Fight Club fame. And most importantly:


Only, it turns out, there were three people (until recently) who were posting as Tyler Durden, and then one of them…actually talked about it. To Bloomberg. Here.

Specifically, those three people were:

  1. Colin Lokey (the guy who got disgruntled and blabbed);
  2. Daniel Ivandjiiski, a Bulgarian-born former analyst; and
  3. Tim Backshall, “a well-known credit derivatives strategist”.

So here’s Bloomberg on what the site is:

Since being founded in the depths of the financial crisis, Zero Hedge has grown from a blog to an Internet powerhouse. Often distrustful of the “establishment” and almost always bearish, it’s known for a pessimistic world view. Posts entitled “Stocks Are In a Far More Precarious State Than Was Ever Truly Believed Possible” and “America’s Entitled (And Doomed) Upper Middle Class” are not uncommon.

The site’s ethos is perhaps best summed up by the tagline at the top of its homepage, also borrowed from Fight Club: “On a long enough timeline the survival rate for everyone drops to zero.”


And then there’s the scandal.

First up, the allegation that ZH headlines are specifically designed to generate web traffic #clickbait:

Despite holding itself out as a town crier for market angst, transcripts from Zero Hedge internal chat sessions provided by Lokey reveal a focus on Web traffic by the Durdens. Headlines are debated and a relentless publishing schedule maintained to keep readers sated.


“Reality checks are great. But Zero Hedge ceased to serve that public service years ago,” Lokey wrote. “They care what generates page views. Clicks. Money.”

On Putin as a good guy:

Lokey, who said he wrote much of the site’s political content, claimed there was pressure to frame issues in a way he felt was disingenuous. “I tried to inject as much truth as I could into my posts, but there’s no room for it. “Russia=good. Obama=idiot. Bashar al-Assad=benevolent leader. John Kerry= dunce. Vladimir Putin=greatest leader in the history of statecraft,” Lokey wrote, describing his take on the website’s politics.

And the ending:

“I can’t be a 24-hour cheerleader for Hezbollah, Moscow, Tehran, Beijing, and Trump anymore. It’ s wrong. Period. I know it gets you views now, but it will kill your brand over the long run,” Lokey texted Ivandjiiski. “This isn’t a revolution. It’s a joke.”

Zero Hedge’s Response

Basically, the entire article is a set of discrediting screenshots of the messages sent by Colin Lokey to various members of the Zero Hedge squad. Said screenshots? Well, they appear to be a public display of Colin repeatedly falling off the teetotalling bandwagon (although, who knows if they’re real – it’d be pretty easy to set-up a fake message chain).

Here’s Colin “begging for his job”:

Lokey begging for job

Colin “the coke dealer”:

colin coke dealer

Colin threatens to shut ZH down:

shut it down

Who knew that it could all get so real?

How real though.

you're insane

The Point

The point is this: irrespective of whether you think Colin is crazy, or Zero Hedge is crazy, or both are crazy, the one thing that isn’t denied is how headlines drive web traffic. And in particular, how those heavy-hitting conspiracy-theory-esque headlines are so good for business.

As Zero Hedge says:

We are ok with being typecast as “conspiracy theorists” as these “theories” tend to become “conspiracy fact” months to years later.

But if you read that in combination with:

Screen Shot 2016-05-27 at 9.00.51 AM

Then really, all that you get is “bad news is inevitable”.

Here’s an example, if I spend the next 70 years forecasting my death, then I’ll eventually be right. That’s not in question. In the same way: market crashes happen, market bubbles happen, dictators and democracies both rise and fall.

But would my life be any better for regularly forecasting my imminent demise, year-on-year? Well, no – no it wouldn’t. If I were constantly living in expectation of death, then I wouldn’t bother to invest my savings, or invest in longer term relationships/assets/anything-with-a-time-horizon-really.

And that’s not an especially wise way to live. It’s far too one-dimensional.

Which brings me to my final word-of-caution/lament: there appears to be no room in the blogosphere for moderation. If you want to have a voice, then you have to be extreme. And that’s because considering things in a multidimensional space is boring. It means that you have to say things like “on one hand…on the other” and then plead agnosticism. Only, that doesn’t get you headlines.

So what I’m really saying is: we need to take a great many more pinches of salt when dealing with headlines. They’re (apparently) designed to specifically grab our panicked attention.

Also, we ought to panic less.

Happy Friday.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

“This Graph Shows How South Africa Has Gone Down The Tubes”

I’ve been asked by a few readers this week about an article that’s doing the rounds, and this graph that went with it:


Yes, dismal, isn’t it?

Here’s a quote from the article:

Shapiro said he was shocked when he looked at a graph of the five-year performance of the JSE in US dollars.

Someone who bought into the JSE would have shown a return of around 60% in rand terms. The US’s S&P 500, in comparison, was up by around 55%.

However, when the JSE’s value is converted into US dollars, the JSE’s returns are down 25%. That means there is an 80% gap between the JSE and the S&P 500 when measured in a hard currency.

“This shows how far down the tubes we’ve gone,” said Shapiro, highlighting that the rand has declined by 120% over the last five years [RA: the emphasis is mine].

And here’s my first thought on this kind of apocalyptic-bad-news analysis: “the rand has declined by 120% over the last five years” would indicate that the value of the rand is now negative.


100% of value gone means that the Rand is worthless. That extra 20% over and above that? I guess that would make the Rand “negative money”.

I know my friend Deon Gouws from the Credo Group has a particular irritation when it comes to this kind of bad math. He wrote about it on Moneyweb’s soapbox: “You Can Feel A Bit Better About The Rand.” You should read it. And you can follow him on twitter here.

I think what we’re actually trying to say is that the Rand was at R6.80 to the dollar five years ago, and sits at R15 to $1 today. In practice, what that means is:

  • If R6.80 could have bought you an Americano in New York five years ago;
  • That same R6.80 can only buy you half an Americano today. Less than half, even.
  • That is: the rand has lost over half of its overseas purchasing power (note: that’s half its value, not 120% of it).

I’m emphasising the overseas part because, for the most part, we don’t live overseas. Yes, it might be more expensive to visit other countries. And yes, perhaps your portfolio would have done better if you’d just taken a bet on the dollar than taken a bet on the local stock market. But we don’t live overseas.

We live in South Africa, where our expenses are priced in Rands. And those haven’t all increased in line with the weakening of the Rand, because not everything is imported. I harped on about it in this post: “Your Salary Has Lost Half Its Value In Dollar Terms.”

Also, even if we’re talking about imports, one of our big imports is fuel. And consider this:

  • Five years ago, a barrel of crude oil cost $118.93.
  • Today, that same barrel of crude oil would cost $49.88.
  • So if we called ‘barrels of oil” a type of currency, then:
    • Five years ago, 0.008 of a barrel of oil would have bought you $1 (or an Americano).
    • Today, that same 0.008 of a barrel would only buy you $0.40 (or less than half an Americano).
  • So in barrel-of-oil terms, the Rand is roughly on part – even stronger.
  • That is: the barrel of oil that cost R808.72 five years ago would cost you R748.20 today.

And perhaps you might say something like “Oh, well, oil is a commodity and it’s going through a slump. The Rand is different!”

Well, no, it’s not that different: the Rand is also going through a slump. Not all of the depreciation is South Africa’s fault – much of it is just a general emerging market problem, and/or a strong dollar problem. You can’t blame that part on domestic woes – it’s just global capital sloshing around the financial system. Of course, some of the problem is internal/domestic. As in: perhaps the depreciation wouldn’t have been so severe if we’d had our house in order. But still.

So let’s go back to that first graph (which isn’t really a question of JSE performance – it’s much more a function of the weakening USD:ZAR exchange rate). Even if you’re upset by the performance over the last 12 months, that’s just a time-period. Time periods are arbitrary, and they can be changed to give vastly different results. For example, if you looked at the performance of that same index from inception in 2003:

Screen Shot 2016-05-26 at 11.38.14 AM

What would we say here? That the country has flourished over the last decade and a half, despite a global financial crisis, because the stock market index is worth almost 4 times what it was in 2003?

This kind of thinking is dangerous. All we can really say is: there are some investments that are better than others. If you’d put R76,000 into dollars in 2003, when the exchange rate was R7.60 to one – then today, that $10,000 would be worth R156,000. If you’d put that same R76,000 into the index, then today, it would be worth somewhere in the region of R600,000. Over some time frames, the JSE has outperformed the Rand/Dollar exchange rate – in other (more recent) time frames, it hasn’t.

But agreed. If you really wanted to have done well over the last five years, then you really should have taken your $10,000 worth of Rands in 2012 and put them into the S&P500.

Hindsight, eh? I wish it was foresight. #regret

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

You can’t just impose a price control…

Almost three years ago, I was writing about Nicolás Maduro and the mess that he was making of Venezuela. He’s still making it. I’m going to update that post here.


Three years ago, President Nicolás Maduro of Venezuela was signing decrees to control the prices of new and secondhand cars. He was accusing criminal gangs and those pesky Western-imperialist economic saboteurs of creating artificially high prices for automobiles. According to Nicky, anyone caught breaking the decree/law would face jail sentences of between 6 and 12 years.

This was but one of many price controls, most of which have led to long queues, empty supermarkets, a nation that only produces sugar-free Coke, and a flourishing black market. But admittedly, there are pyrrhic opportunities to be found as well. Here’s an extract from a Guardian article:

On the country’s border with Colombia at San Antonio, engineer Jesús Arias, 33, has given up on his profession and smuggles petrol across the border. One of the country’s most costly price controls means that filling an entire tank costs just a couple of cents, converted at black market rates. Over the border, petrol sells for hundreds of times more. “Here petrol is practically a free gift,” Arias said. “A litre of mineral water costs more than a litre of gas.”


Arias fills his 50-litre tank for just a few pence; a few hundred metres across the bridge in Cúcuta, Colombia, he can sell that for around £15. “Doctors, lawyers, architects, engineers we’re all doing it,” he said. “Here on the border, I can earn in three or four days what I earn as a professional in a month.” Children walk across the bridge with Coca-Cola bottles filled with petrol.

As a practical observation, these kinds of economic policies mean one of two things:

  1. Nicolás Maduro is clinically insane; or
  2. Nicolás Maduro is evil.

But I think we have an answer to that question. An extract from the Financial Times:

Ever since he became Venezuelan president, Nicolás Maduro has gone to ridiculous lengths to eulogise the memory of Hugo Chávez. The burly 53-year-old has claimed to speak with his predecessor’s spirit manifested as a “little bird”. At cabinet meetings he waves a book of his mentor’s sayings as if they are holy script. He has even argued that Chávez should be sanctified: a rare trespass into Christianity by the gaffe-prone Mr Maduro, who once compared Venezuelan socialism to “when Christ multiplied the penises” — a confusion of peces, the Spanish for fish, and penes that must rank as one of the worst malapropisms in history.

But let’s focus on the economic insanity.

On Price Controls

The theory goes something like this:

  • Ignore economics
  • Impose price
  • Punish anyone that disagrees

I’m not saying that the occasional government intervention isn’t warranted. I think it can be, especially when the market needs a little encouragement (as in the case of public goods). But in practice, price controls are rarely a response to market inefficiencies. Instead, price controls are a response to a market that is being altogether too efficient in its response to an economically useless government/governor.

It looks like this in the textbooks:

As Milton Friedman has said:

“We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly, you’ll have a tomato shortage.”

And before you know it, you have instances like motorcyclists being killed for spare parts, because the spare parts were subject to price controls, and no one would import them at that kind of price (because why would you go to all that trouble to make a loss?).

Prison sentences? Please. 

I realise that some people might be thinking that a prison sentence would be a good deterrent to stop the black market from happening, and to force people to abide by the price controls.

I have two responses to that:

  1. Has the threat of imprisonment stopped the black market for drugs? And
  2. Let’s take a walk through history.

Venezuela is not the first to try it…

Price controls have been the conceit of many a megalomaniac. Some examples:


In his infamous Edict of 301 AD, Diocletian blamed the rapid rise in prices in the Roman empire on the “avarice” of merchants. Obviously, the inflation had nothing to do with his debasement of the currency to pay for all the new troops he was hiring.

A line from that edict which could have been written by the Venezuelan bus driver:

“To be sure, if any spirit of self-restraint were holding in check those practices by which the raging and boundless avarice is inflamed…perhaps then there would be room left for shutting our eyes and holding our peace…[but since it is unlikely that this greed will restrain itself]…it suits us, who are the watchful parents of the whole human race, that justice step in as an arbiter in the case”

He then imposed the death penalty on anyone that tried to sell at higher prices than the price controls that he’d set on beef, grain, eggs, clothing, and everything else.

The death penalty was also in place for anyone that tried to hoard goods, as well as for anyone that even tried to buy something at a higher price.

So many people died under that law that it was eventually set aside. And Diocletian abdicated with it.

The key point: people would rather die than comply.


In the aftermath of the French Revolution, the new assembly passed the “Law of the Maximum”: price controls to try and slow the inflation in the new french currency, the assignat.

The penalty for violation was also death.

The French public largely ignored it. And as Robespierre was dragged to the guillotine, the historical record is that the mob jeered “There goes the dirty Maximum!”


The Soviet price controls are perhaps the most famous of all. And despite the threat of heavy penalties, black markets flourished.

You can go back through history and look at price controls enforced in every era in almost every place (megalomania happens across the board), and you’ll find a story of overreach followed by a lesson in humility.

Maybe the Venezuelans will also build a guillotine.

It’d be loco.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

Loyalty Programs and Flying Business

Before I start, I have a disclaimer: I am a regular work-traveller.

In 2015, I was away from home for about 26 weeks. I mean, I usually made it home for at least part of every weekend (barring some of the longer trips) – but in terms of work-day weeks, 26 out of the 52 were spent outside of Johannesburg.

What that means:

  1. I definitely belong to a loyalty program (British Airways’ Executive Club);
  2. I’m a regular on the BA website, so I usually know when there’s a special going on; and
  3. I am now one of those people who tends to arrive at the last possible moment before a flight.

More embarrassingly, I sometimes delay my return flights to Johannesburg in order to avoid congestion at the immigration section in OR Tambo International. Because let me tell you, if you arrive on a Friday evening, that place is chaos (there’ve been days when I’ve spent more time in those immigration queues than I’ve spent in the air). I realise that it may not make obvious sense to delay a flight by a day in order to save an hour in a queue – but there we are.

Anyway, I now travel so often that I am occasionally tempted to sneak in a Business Class ticket on some of the longer trips, especially if it involves a layover.

Usually, this attracts a lot of snide remarks. People use hurtful terms like “spoilt” and “brattish” and “living a life full of comforts, eh?”

But this is unfair, because it’s sometimes quite mathematical (although, in the spirit of fairness, not entirely). And so I’m going to try explain some of that mathematical justification.

Firstly, what is the Rand Value of an Avios?

Other rewards programmes may use air miles or voyager miles or whatever, but on British Airways (and the other members of the ONE World Alliance), it’s Avios – and that’s what I’m going to use here.

So when I look at my own travel plans, here’s what I pay attention to when I’m thinking about Avios (I got these off the BA website this morning):

Screen Shot 2016-05-24 at 7.37.55 AM

By far, my most frequently travelled route (two weekends out of three) is the JHB-HRE leg (or the return). So it’s where I tend to spend my Avios. And if I wanted to book a return trip that way, it would cost me:

  • 8,000 Avios (the above figures are one-way, and I’m usually on an off-peak flight); and
  • R750 in Reward Flight Saver fees.

The next question is, what would I normally pay for a return ticket to Harare? Helpfully, this:

Screen Shot 2016-05-24 at 7.57.23 AM

So if I take that R4,729 normal cost, and deduct the R750 that I’d have to pay in Reward Flight Saver fees, my ‘saving’ with an Avios flight is about R4,000. And given that I’ll use up 8,000 avios on those flight – it means that each Avios I earn on a fully-paid ticket is worth around R0.50.

So whenever I’m looking at flights, and the ‘pricing’ of the different classes, I am bearing in mind two things:

  1. Yes, business class is a lot more expensive than economy class; but
  2. Business class also earns a lot more in Avios than economy (and the earnings increase as you go up the tiers in your loyalty program – but I’m just going to pretend that we’re on the lowest tier in this post).

Also, it’s worth pointing out that BA recently made changes to its reward program that guaranteed a number of reward seats on every flight. Before this, you’d earn a lot of avios, but not find any seats to spend them on. Now, you tend to earn less avios per flight, but you can almost always find a reward seat going (unless you leave it too late).


Okay, so, here’s the first scenario (Business Class Return to London):

Screen Shot 2016-05-24 at 7.57.01 AM

So pretty expensive.

But then there’s also the Avios earned, which you’ll find below. Happily – because the quote here is for the one-way Avios earning, which you’d have to double to get the return trip earnings, and then halve to get the rand value because each Avios is worth around R0.50 – these numbers are actually pretty much equal to the Rand value of the full Avios earn on a return trip:

Screen Shot 2016-05-24 at 7.34.20 AM

So provided that you’re a regular traveller and can use the Avios for other flights, the cheapest business class ticket to London in June will have an effective cost to you of R35,812 – which is substantially cheaper than R44,272. And as an aside, if you had Gold status on Executive Club, then you’d near-double your Avios earn, and you’d be paying an effective cost of R30,172.


Even with Gold, that’s still more than three times the price of a R9,879 effective economy return fare over the same time period.

So that definitely doesn’t make sense to me. And I’m much more likely to try for Premium Economy – which has an effective cost of R15,908, and earns me an extra 140 tier points*.
*the tier points might eventually push me up to a higher tier class, which would make the Premium Economy seats even more discounted in the future.

But the real benefits for this are actually in the ONE World Alliance, when you occasionally manage to score a special with one of BA’s partner airlines.

Stopovers in Doha

So I went onto Qatar Airways website this morning (the airlines belonging to the emirate states along the Arab peninsula are always a good bet for a special), and I found these business class return specials:

Screen Shot 2016-05-24 at 8.06.54 AMScreen Shot 2016-05-24 at 8.07.38 AM Screen Shot 2016-05-24 at 8.07.20 AMScreen Shot 2016-05-24 at 8.08.11 AM

Now because Qatar Airlines is part of the ONE World Alliance, you can earn Avios on those flights.

So I’ve done a comparison of those fares against:

  1. A concurrent special for Economy Class fares on Qatar; and
  2. An economy class ticket for the same flight path in Economy on British Airways (yes, Economy – let’s remember that). Which is also apparently having a special at the moment.

A graph:

Screen Shot 2016-05-24 at 9.48.43 AM

So far, so good. I mean, clearly there are some specials that are better than others – but it’s definitely cheaper to fly Economy Class on BA than it is to fly Business on Qatar Airways (and the economy class fare on Qatar Airways is incredibly cheap by comparison, even though Qatar Airways’ economy class is definitely lite on the legroom). 

But then there’s a Rand value for that Avios earn on each flight:

Screen Shot 2016-05-24 at 9.48.56 AM

And again, we’re not surprised that Business Class on Qatar earns so well, because Business Class gets you a lot of Avios.

But now, once we net off all those free tickets earned in Avios points, you get this:

Screen Shot 2016-05-24 at 9.49.07 AM

Notes (assuming that you’re a frequent flyer who uses Avios):

  1. For New York and Paris, it’s only double the price of BA economy to travel in Qatar business;
  2. It is over R1,000 cheaper to fly to Hong Kong in business class on Qatar Airways than it is to fly on BA in economy (although admittedly, a Joburg-London-HongKong trip is a bit roundabout); and
  3. It only costs an extra R330 to fly to Athens in business class on Qatar Airways than it does to fly in on BA economy. PLUS all those delicious Tier Points.

Look, I’m not saying that there aren’t cheaper ways to get to Athens (you could just fly on Qatar economy for about R6,000). But I am saying that ‘flying business’ is not always as spendthrift as it appears.

And if the business class ticket gives you a tier point uplift into the next class (where you earn more avios as you fly), then some of those business class specials are literally golden.

The Main Points

  1. If you’re a frequent flyer, there are really good reasons join a loyalty program.
  2. Some airlines have really great specials.
  3. Those specials are especially special when you fly frequently and can spend the extra air miles/avios.
  4. There are times when it’s cheaper to fly business than it is to fly economy (assuming that you’re comparing fares between airlines rather than fares on the same airline).
  5. But even so, that’s pretty startling. Because if we’re honest, and I said to you “There’s this deal where you can actually pay about the same to fly business as you would to pay to fly economy on a different airline but over a similar distance”, then you’d call that a damn good deal.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

Junk Status: How It Affects You, Sir. Yes, You.

A question that I keep getting asked: “But how will a downgrade to junk status actually affect me? Quickly. Like, in two sentences. Thanks.”

So that’s a fairly tall order, because the answer is usually quite complex. But I’m going to try and work my way there.

Before you can talk about a credit rating downgrade, we need to talk about credit ratings in general.

What is a Credit Rating?

So a Credit Rating is an ‘independent’ assessment of the credit quality of a bond (or any debt instrument really), issued by a recognised credit rating agency.

When credit rating agencies first started, they were just investment research companies. They would do research on the various bonds in the market, publish their views in thick manuals, and then sell those manuals to fund managers and investors. For ease of reference, they applied letter grades to the bonds – with the A grades being good, and the subsequent letters, not so much.

Then…things changed.

Here’s an extract from this “A Brief History of Credit Rating Agencies” publication:

[The] relationship between the rating agencies and the U.S. bond markets changed in 1936 when the Office of the Comptroller of the Currency prohibited banks from investing in “speculative investment securities,” as determined by “recognized rating manuals” (i.e., Moody’s, Poor’s, Standard, and Fitch). “Speculative” securities were bonds that were below “investment grade,” thereby forcing banks that invested in bonds to hold only those bonds that were rated highly (e.g., BBB or better on the S&P scale) by these four agencies [RA note: Standard, Poors, Moodys, Fitch – as they were at the time]. In effect, regulators had endowed third-party safety judgments with the force of law.

In the following decades, insurance regulators and then pension fund regulators followed with similar regulatory actions that forced their regulated financial institutions to heed the judgments of a handful of credit rating agencies.


In 1975, the Securities and Exchange Commission (SEC) issued new rules that crystallized the centrality of the rating agencies. To make capital requirements sensitive to the riskiness of broker-dealers’ bond portfolios, the SEC decided to use the ratings on those bonds as the indicators of risk.

Then people began worrying about the term ‘recognised rating manuals’ – because who’s to say what counts as ‘recognised’? I mean, if I pay you to give me a good credit rating, and then I alone choose to recognise it – is that enough to say that the rating is ‘recognised’?

More changes:

However, the SEC worried that references to “recognized rating manuals” were too vague and that a “bogus” rating firm might arise that would promise “AAA” ratings to those companies that would suitably reward it and “DDD” ratings to those that would not. If a broker-dealer claimed that those ratings were “recognized,” the SEC might have difficulties challenging this assertion.

To solve this problem, the SEC designated Moody’s, S&P, and Fitch as “Nationally Recognized Statistical Rating Organizations” (NRSROs). In effect, the SEC endorsed the ratings of NRSROs for the determination of the broker-dealers’ capital requirements. Other financial regulators soon followed suit and deemed the SEC-identified NRSROs as the relevant sources of the ratings required for evaluations of the bond portfolios of their regulated financial institutions.

And by today’s stage in the financial evolution, the rest of the world has echoed these policies in their own financial regulation. That is: we’re all collectively subject to the ratings agencies, because of fancy terms like “best practice”.

Some roll-out impacts:

  1. Most of the world’s money is managed by large funds (pension funds, investment funds, medical aid funds, sovereign funds, etc).
  2. Those funds are not free to just ‘make investments’.
  3. They have to make investments in…um…”investment grade” securities. Not “speculative” ones.
  4. And in Credit Rating Agency speak: “Speculative” = “junk”

What that means:

  1. The standard story for credit ratings is: “the lower the credit rating, the higher the credit risk – and therefore, the higher the interest rate that the borrower will have to pay in order to compensate the lender for the extra risk”.
  2. But because of this new and highly regulated defining line between “speculative grade” and “investment grade” securities, there is a bit of an ‘interest rate’ cliff floating around somewhere in the middle.

Here’s a Venn Diagram of the main problem:

So when a bond goes from being investment grade to speculative grade, there is a much-larger-than-usual impact because those bonds are now ineligible for most of the world’s investors. And those investors have to sell-out of their bond investments pretty quickly in order to be legally-compliant in their own jurisdictions, and you get this:

Apologies for my handwriting – that’s “cliff” not “cuff”.

When the “junk” downgrade happens…

So if South Africa were rated down to Junk status, there would be a sudden spike in interest rates. And even if there might be some anticipated sell-off in advance of a downgrade to junk, the real sell-off will still happen at and around the time of the actual downgrade.

This then has further ripple effects, because:

  1. The ratings of corporate bonds of SA companies are linked to the ratings of the sovereign.
  2. So if SA government debt is downgraded to junk, it’s incredibly likely that the parastatals, the SA banks, and everyone else will drop down to junk as well.

As investors are forced to divest from those bonds, you’ll then have them cashing in their Rands for Dollars and shipping their money offshore. So the Rand will plummet. And in expectation of this depreciation, you’ll no doubt find foreign investors in the JSE cashing out their equity holdings in order to try and realise their dollar-returns in advance of it.

Whether they’ll manage or not is a different question – but either way, whether expectation of a rand depreciation causes a rand depreciation and a sell-off in the stock market, or whether the sell-off in the stock market causes further rand depreciation, South Africa will still end up with a weaker stock market and a weaker rand.

To be fair, we really should be distinguishing here between:

  • Rand-denominated Government Bonds; and
  • Forex-denominated Government Bonds issued on the Eurobond market.

Rand-denominated Government Bonds are still quite strongly investment grade (because it’s not all that common to default on local debt – the government can theoretically arrange to have more Rands printed to repay that debt if it needed to). It’s the Forex-denominated Government debt that’s currently at risk.

But this is probably just a technicality. I know that there’s a difference between the two – now you might know that there’s a difference after reading this. But that will not be the general feeling. I almost challenge you to find me the ‘finance professional’ who still distinguishes between these two types of sovereign credit rating.

So putting that small side note aside, the rand depreciation means that there’ll inevitably be inflation. And the SARB will respond to that as it always does: by increasing interest rates.

As the costs of doing business and the costs of financing said business increase, corporate profits will decline, salary increases will slow, and the fiscus will come under pressure as its tax revenues decline. So there will be pressure on government to either increase taxes or cut back spending.

And if history is any indicator, given that it’s an election year…

What all the above means

  1. The price of fuel will go up.
  2. Your monthly mortgage repayment will go up.
  3. Your monthly car repayment will go up.
  4. The cost of coffee, olive oil, prosecco and all those imported fun things will go up.
  5. The value of your pension savings will go down.
  6. You almost certainly won’t get a bonus this year.
  7. Annual salary increases will be small, if they happen at all.
  8. You might even be retrenched.
  9. And if you remain employed, it’s entirely likely that you’ll have to pay more tax.
  10. Then if that’s not enough, expect more strikes as people get really unhappy about points 1 through 9.

And that situation will persist for some years. Unfortunately, once countries fall off the junk cliff, there’s a lot of self-fulfillment waiting at the bottom there. And climbing back up the cliff is arduous, and may require an IMF bailout.

So in two (very long) sentences:

“Junk status means that South Africa’s government, the parastatals, and South African corporates, will have lost access to much of the world’s investing money. Being cast out of the investment quality club means that: any first world comforts will be now be more expensive, anything financed with debt will cost more, the economy will stutter, jobs will be lost, and the South African taxpayers that are left will have to absorb the freshly-higher borrowing costs of the government’s debt – even as it might try to borrow more than before in order to keep up the levels of government spending that caused the cast-outedness in the first place.”

Gloom, eh? Let’s hope that I’m overstating it.

Also, fortunately, it never feels as bad as you’d expect. And I’m really not joking #ZimbabweanEmpiricism

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

Achieving Productivity…

I have a productivity infographic to share this morning. I realise that a fair few of these “44 ways” are more than a bit airy-fairy. I mean: “Be mindful during your commute to relax and gain focus”? We are not all hippies here. Instead, I’ll be mindfully paying attention to number 09 – and listen to podcasts in traffic. Because podcasts are cool.

In fact, I’m really just sharing this because I read number 09.

Happy Weekend.

*goes off to listen to the new Pop Culture Happy Hour episode in traffic*

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.

The Rand: Who The Hell Knows

Often, around the lunch table and at business meetings, I get asked the awkward “What’s going to happen to the Rand?” question.

And it’s on the increase – after all, a week ago, ex-Standard-Bank economist Chris Hart suggested in public that the Rand could reach R60 to $1 by 2019. For ages now, Moneyweb columnist Magnus Heystek has been saying R20 to $1 by year-end. Other economists are spending time in public rubbishing those calls.

This morning, I screen-captured the following two headlines, right next to each other, straight off the Moneyweb website:

Screen Shot 2016-05-19 at 6.53.01 AM

Those two articles, published at basically the same time, were followed by this:

Screen Shot 2016-05-19 at 6.53.24 AM

Which might equally have read “Rand crashes on Fed signal of June interest rate hike.”

Depending on which headline(s) you read this morning, the Rand’s movements are therefore being governed by:

  • CPI data
  • The Stock Market
  • Political instability AKA Finance Minister Gordhan’s potential arrest
  • The Federal Reserve
  • All of the above
  • None of the above
  • Some of the above
  • More of some, less of others
  • More of others, less of some
  • Some of the above, some of the time; others of the above, other of the time
  • Sometimes those, sometimes other things
  • *throws hands up in air*

Traditionally, I’m a fan of the risk-on-risk-off interpretation: that money flows affect exchange rates more than anything else, and global money moves in and out of developed and emerging markets in response to the Central Bankers of the Big Currencies (the Fed, the ECB, etc). So you’d expected the emerging market currencies to move mostly in concert.

I pulled some graphs of Bloomberg:

Screen Shot 2016-05-19 at 7.05.34 AM

The last 24 hours

In the last month, the Rand (in orange) did far worse than the Turkish Lira (in blue), the Malaysian ringgit (in green), the Brazilian Real (in red), the Thai Baht (in purple) and the Indonesian Rupiah (in yellow).

Screen Shot 2016-05-19 at 7.05.55 AM

In the last year, the Rand (in orange) did far worse than the Turkish Lira (in blue), the Malaysian ringgit (in green), the Brazilian Real (in red), the Thai Baht (in purple) and the Indonesian Rupiah (in yellow).

Screen Shot 2016-05-19 at 7.06.10 AM

In the last five years, the Rand (in orange) did worse than the Brazilian Real (in red), the Turkish Lira (in blue), the Malaysian ringgit (in green), the Thai Baht (in purple) and the Indonesian Rupiah (in yellow).

I guess if you squint your eyes, then you’d see that the Emerging Market currencies mostly tend to move up or down together – but there is always variation for specific country risks, and the Rand has fared worst in that department.

So let me illustrate the polarised problem of narrativising that:

  1. If I was fervently opposed to the current government and its policies, I could say something along the lines of “You see? The other emerging market currencies may have weakened – but the Rand did SO much worse. It’s the ANC and that Zuma, I tell you. He’s effing it up. Look at how effed the Rand is! Dear God, how I wish to bloody hell that they’d drag him off to the Hague for crimes against humanity… <insert unabashedly racist tirade>” 
  2. If I was anti-West, then I might say “It’s because of the neoliberal open market policies that Mandela was coerced into adopting in 1994! Our free-floating exchange rate – do you know that the Rand is easier to buy and sell than any of those other ’emerging market’ currencies? Those traders in London, they use us for their hedges and bets. The bastards – playing their little games with people’s lives and livelihoods… <insert anti-imperialist tirade>

The trouble is: there are many opinions.

But they’re all just opinions. No formula or scientific method – just speculation, usually masked under complex layers of prejudice and confirmation bias.

Which is why I’m skeptical of those kind of “Rand falls on <insert news item/data point/rumour>” headlines.

Because you can get two headlines explaining the same movement, attributing it to different things, on the same day.

Like today.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.