Monday, 10 March 2008

Essay written in November 2007 - note how things have changed

Hi all

We are witnessing world history and who knows what effect this will have on our businesses. I thought you might be interested in the following:

Gold is almost at R5,500 an ounce with the Rand pretty stable and currently R6.48 to the US Dollar. Gold is currently $838.35 an ounce (up 2% so far today) = R5,432 an ounce. Silver is currently $15.87 (up 8% so far today- but been trailing gold somewhat lately) = R102.84. Both all time highs in Rands.

USDX (US$ Index, a measure of the US $ in terms of 5 other major currencies, eg Yen, Pound, Euro, etc) still plummeting after following through its 30 year baseline at 80 (currently 75.324) in September when Bernanke (the Governor of the USA Reserve Bank, called the "Fed" (Federal Reserve) over there) dropped interest rates because of the sub-prime problems and record housing foreclosures in the USA. For the first time in many years internal politics superceded external politics.

We are almost at gold's (nominal) all time high around $850 set in 1980! But gold's all time high in real terms is $2,278 (accounting for USA inflation since 1980) which is potentially R15,000 if the Rand Dollar doesn't change! (See http://www.zealllc.com/2007/cpigold2.htm for more information.)

Although South African gold shares are suffering, internationally the HUI (unhedged gold index) is at an all time high. The Gold-Oil ratio is at about 8.8. Oil is at $95.38, an all time high. The average long term Gold-Oil ratio is 15.3 ($838.35/$95.38), so theoretically gold should be $1,459. This tells us the amount of gold one needs to buy a barrel of oil.

The international oil stocks index (XOI) and oil are at all time highs, but this is due to a speculative driven parabolic increase since early 2007 (up about 90% in one year), so oil is due for a correction, possibly down to its 200 day moving average around $70, which is still a 40% increase this year. Interesting though, the price of petrol in Rands is up "only" 20% from R5.66 to R6.76 since January 2007 which shows the real strength of the Rand increase this year compared with the Dollar. If the Rand had stayed where it was, we'd be paying R10.75 per litre.

Notes

An ounce is roughly 29 grams, so gold at R5,500 per ounce is roughly R159,000 per kg. Gold mines usually quote income and costs in kgs.

HUI (unhedged gold mining companies index): What does it mean?

The hedge book represents sales at a "forward" (future) price of gold, eg 40% of production sold at $400 an ounce is not good if gold is at $850 an ounce, but the hedge is important if you are starting a new mine as the lenders want to ensure you get a "lowest price." Major gold miners have been dramatically reducing their hedge books for the past few years so that they can immediately feel the effect of gold price increases. The main reasons South African gold shares haven't increased as much as their counterparts overseas is the depth we need to mine at; the cost of labour, especially in terms of labour strikes (come on guys, pay your people more); and the huge cost increases in terms of machinery, etc. But the machinery cost increases have effected miners worldwide, so should not be the major reason for blame in South Africa! Note that small miners or newly listed miners usually need to hedge part of their production to satisfy the lenders that there is a minimum price that they will get for their commodity, eg gold.

Sub-Prime:
This is not about lending at 3% under prime, but rather about lending to people with bad credit histories, eg people who have been blacklisted or bankrupt or where with .5% interest rate increases won't be able to repay their mortgages! Huge increases in bond interest rates in the USA from 1% to about 5% (a 500% increase in repayments) in the past couple of years required to prop up the Dollar and prevent foreigners from dumping Dollars led to huge internal problems in the USA. Bernanke had to make the tough decision to reduce interest rates to save the average American knowing that foreigners would sell Dollars. The benefit of this though is that this makes USA goods cheaper which should make USA cars cheaper than their equivalent European cars in South Africa.

Note that I have tried to deal with the facts and leave out my own opinions on where the current situation might lead us.

Please note that I am not a financial adviser or trader and am not giving you this information to suggest that you buy or sell shares and or commodities. I am simply a spectator on the world stage, trying to make sense of the bigger picture at work here. Those of you who know me personally will know that I have no idea who the South African rugby teams are or who will win Big Brother. I did however enjoy the world cup and kept watching out for hookers but didn't see any Any decisions you make as a result of reading this email are entirely up to you.

Regards
David

Saturday, 8 March 2008

Sub prime crisis; renewables; the price we pay; what you can do

Dear friends

For those of you who don't know, the sub prime crisis is where banks and other financial institutions lent money to people with bad credit records or people who couldn't otherwise get loans. These loans were then "securitised", i.e. packaged as triple A rate loans and then sold off to other investors. How does this happen? Well lets suppose you are the bank. You lend money to someone who can't pay or who might not be able to pay. You lend R1 million. You then take all these loans and put them into a big loan of R1 billion which you then sell to another investor. OK, it's not a loan from your point of view. It's a BOND because you are asking someone else to lend you the money so that you can lend it to the person who can't afford the repayments. The other investor sees that you are selling GOOD DEBT because YOU (the bank) have a good credit rating! The small print says that you will only pay interest on this debt if your customers pay you. Further small print says that this is never going to happen because if it does happen you will get your money back because you will sell the houses. The buyer gets their money back or walks away no worse off and without any debt and the bond holder gets their money back. All good and well if house prices are going UP!

I watched the congressional hearings in the USA about this problem last night on Bloomberg where they interviewed the top 7 (I think there were 7) CEO's about their companies performance and executive pay.

I was shocked that 18% (EIGHTEEN PERCENT) of new home owners with new mortgages did not make their first month's repayment in 2006. Yes, you read that correctly, almost 1/5th of people could not afford to repay the bonds that were given to them - from the very first month onwards.

I was also shocked that these directors earn between $100 million and $200 million per annum regardless of how their companies perform!

I was also shocked that only 5% of the USA's working population receive the benefits of proper inflation adjusted salaries and that the other 95% are effectively earning less and less every year. Sounds like South Africa - and is a potential recipe for another "French Revolution."

I was also shocked that in a separate news report, the USA has lost over 130,000 jobs in January and February this year, yet the unemployment statistics have gone from 5% in December 2007 to 4.8% in February 2008. The reason for this we are told is because of people leaving the employment system and other "structural adjustments", e.g. retirees.

More shocking news is that besides the bailouts that the American and European governments have given their banks and the huge write-downs that banks are writing down (Citigroup, an American bank, wrote off the value of ABSA AND STANDARD BANK last quarter which gives give you some idea of the scale of the problem), the US government is giving "tax rebates" to the population and the cheques will be arriving in May and June this year. The total "rebate" is $150 billion; that's $500 for every adult and child in the USA. When Mugabe does this it adds to inflation. What do you think happens when this happens in the USA. It adds to inflation!

If you don't believe me read: http://www.moneyweb.co.za/mw/view/mw/en/page55?oid=185098&sn=Detail

And eventually people are taking trillions of their currency to the local shop in wheel barrows to buy a loaf of bread. Sound far fetched? It happened in Germany in the 1930's. It happened in Yugoslavia in the 1990's. Its happening in Zimbabwe in the 2000's. It's called hyper inflation and is something we need to protect against.

The USDX which is the US Dollar Index which is the US$ against a number of other major currencies dived below 80 for the first time in 30 years in August 2007. In December 2007 Gold in US$ went above $800 an ounce. Gold is almost at $1000 an ounce and is expected to rise substantially this year.

See gold and USDX graph at http://www.zealllc.com/2007/goldusdx.htm

There is an inverse relationship between the gold price and the Dollar. This used be the case for the Rand.
See: http://www.zealllc.com/2005/glogold.htm This is a bit of an old graph, but you get the picture.

The price of oil "seems" high because the US$ is falling. If South Africa had electricity our rand would be climbing with most of the rest of the world's currencies, but because of the electricity crisis the rand is falling fast.

So whilst the price of petrol in Europe and Australia is constant, the price of petrol is going up dramatically in South Africa.

At the same time we are told that this is inflationary and that therefore the interest rate in South Africa has to go up again. However with electricity costs expected to go up 25% this year; fuel costs 30%; interest rates already up 26% (14.5% / 11.5%) a huge amount of discretionary spending is leaving the South African economy. The total value of house sales is already down and car sales are plummeting. We have been brainwashed into believing that interest rates are the ONLY way of taking excess liquidity out of the market, yet petrol price increase; electricity price increases; interest rate increases; all take money out of the economy. However, if at the same time the government prints money to pay of its huge industrial expansion program including things we need like railways and traffic intersections and things we don't need like new stadiums, then interest rates ALSO need to increase. However, why should we pay for the government's mistakes? The reason is because we voted in the government and therefore we are taxed in all sorts of ways that whilst we THINK we are free, in fact, we are spending a vaste amount of OUR money on taxes in one way or another. These taxes make our government rich and perhaps don't make our country as rich as it should be. This isn't only a South African phenomenon, but since the Magna Carta arrived which said that the king had to share his wealth, this is how the redistribution has happened.

So I hear you say: is there a way out of this mess?

Before I answer this question let me talk about what you owe on your house and your psychological situation: if you have a house valued at R1.3 million and a bond at R1.5 million, IT IS NOT YOUR FAULT. It is the bank's fault. They have the staff who know what the future will bring and they know what you can afford now and in the future. The big four banks in South African have provided for something like 20 Billion Rand in their balance sheets for EXPECTED defaults. They realise that people are going to default. How do they know this? THEY lent the money!! And they knew what you earned when they lent it to you. In South Africa one has been able to borrow 20% more than the value of one's house for many years. The reason we are told is that house prices always go up. But there are cycles when they go up and cycles when they go down. If you happen to need to sell your house during a down cycle and you want to sell the house for 1.3 million, but you owe 1.5 million then you need to find the other R200,000 somewhere. That somewhere might be your pension money or borrowing from a friend. Over the past few years I have lent R40,000 to friends. I am happy to do this. I know that I may never get the money back. In some cases, I have bartered to get something back instead of the money.

Mirjana and I are careful and spendthrift. We don't miser our money, but nor do we waste it. We got out of the rat race, explained below, long ago and whilst it looks like we don't have much, we don't have much debt and that is the main thing. We are all brainwashed into believing that we need to leverage our assets by borrowing, but all that borrowing does is stress us out and cause us to spend less time with our families and more time for ourselves and our children(!) in hospital. Think about it. You might seem to be richer than the guy next door, but what is your net debt position at any time? Or perhaps more positively what is your net cash positive position at any time? Are you cash positive? Do you have credit card debt where you are charged interest on your credit card? Do you have overdrafts that you cannot pay tomorrow? Did you just INVEST in that expensive new suit, watch, camera, car, house, lawnmower, holiday, that you possibly did not need, but want to keep up with the Jones's? If your friends expect you to keep up with them, THEN THEY ARE NOT YOUR FRIENDS. Your friends are the people who like you the way you are. Be that in a small house or a big house. And maybe because your friends know that you can't go to the fancy restaurant or don't have the money to entertain them, then the "well off" friends pay for you to spend time with them because they love you unconditionally.

Absolutely. All we need is a very small, yet very big, mind shift. Yes, everything happens in Paradoxes.

We have been trained to believe that we need to spend money on important things like new cars (the bigger the better); expensive Mont-Blanc pens (yes they are nice); designer clothes and watches, etc. We are also constantly bombarded with news that nuclear is safe and that nuclear is unsafe. Yes we have heard very little over the past few years about renewables. These are the renewables: solar water heating; solar energy provision using photo-voltaic cells which convert solar heat from the sun into electricity; wind power; geo-thermal (from the ground); hydro-electric; where we take the heat from the ground and use it to heat our houses or convert the heat into electricity; wave energy (we have a big ocean with huge power potential). In Milnerton all the wind is wasted on a windy day!

My neighbour drives around in his brand new Mercedes which is possibly costing him R8000 even if he paid cash for it. Yes, there is something called "COST OF CAPITAL." Even if you pay cash for something you should consider it's cost of capital, ie what you would be expected to pay if you borrowed the money. Why? Because you are effectively borrowing the money from yourself.

We have been conditioned into believing that renewable energy is EXPENSIVE. But what is more expensive? Polluting our beautiful planet with SCARCE resources called oil, methane, food which is converted into energy thus dramatically increasing our food prices and adding to massive worldwide inflation; buying cars when we really don't need to car; etc? Or paying for renewals to get ourselves of the national grid?

Base load power stations will always (for the next 100 years) be needed to power industry and shopping centres. But we can power our own houses NOW using renewable energy which if you look at the bigger picture is MUCH CHEAPER than oil energy. Cheaper than Nuclear Energy! Cheaper than COAL energy! How is this possible?

All these NORMAL energies pollute our very very small, beautiful and fragile planet. It takes a massive amount of energy to give you your petrol for your car. It takes a massive amount of energy to give you the car! That is why energy hungry industries get cheap electricity. It is so that that can make you cheap products that use expensive consumables which then make the owners of these companies money.

And the shareholders of these companies are the owners. And all they want is profits, share growth and dividends. They aren't interested in saving the planet! How do I know this? Warren Buffet said "the only think that is important for a director is to be beholden to his shareholders". If this bankrupts a country or puts people out of work or gives us inferior products or gives us poor quality products or pollutes the environment, it is subordinate to keeping the shareholders happy!

If I changed my mind a very small amount and decided that I should spend my money on renewal power at say R4000 per month instead of spending that R4000 on something else, then all of a sudden renewable power becomes cheap. If someone finds a way to give you the ability to make your own solar panels and wind turbines or provides a kit for you to do the installation, then it might be only R1000 per month to take yourself off the grid. I and some of my colleagues and friends are working on this as we speak.

People in "THE KNOW" say that wind power is very inefficient as it only produces power for 18% of the time assuming that it is erected properly and is in an area which has the proper wind speeds. However, this 18% is misleading because a normal base load power station which runs 24 hours a day, 365 or 366 days a year is only 30% efficient!!! The reason for this is because the turbines are only 30% efficient. If an engineer could make the turbines 60% efficient, we wouldn't need any new power stations for the next 20 years. And getting this energy from the North of the Country to the South of the Country along high energy transmission lines is also wasteful, so perhaps by the time we get the energy we only get 25% of the coal power burnt. Note that Koeberg currently provides less than half of Cape Town's power needs.

Another thing to consider: if everyone was happy with their cars in South Africa and everyone who needed a car bought second hand cars in the next 2 years, there would be enough cars to go round in South Africa. There are hundreds of thousands of used cars available all over South Africa. This means that power can be taken away from car produces and given to companies and individuals where the power is needed the most. Think about it. Note that where-ever power is reduced people are going to lose jobs. If managed properly, the government would take R100 billion and make it available to the end user or consumer or home owner or person who lost their job instead of given it to the inbetween bank or company to enhance their balance sheets. South Africa can really do this if WE want it badly enough.

Let me end by telling you about a dream I have had for the past few years. It is called the CASTLE project.

I will write about it soon.

Feel free to forward this to all your friends.

Regards
David

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Evil flourishes when good men do nothing (Edmund Burke)

Repair Yourself / Repair Jacob

To my dear long term friends and new visitors, who hopefully will become long term friends:

In 2004, I created a group of people called the Tikkun Jacob Forum because I hypothesised that each of us need repair and that our oldest book, the Bible, could lead us to this repair.

Tikkun means repair. In the Bible Jacob becomes (is renamed) Israel (Genesis 32 vs 29). Jacob is renamed Israel by God after he strives to find God. I believe that we are all on an iterative path from Jacob to Israel, ie I move from Jacob to Israel in my understanding and then seek to enhance this understanding by moving from Jacob to Israel again and again in a process of rebirth or enlightenment or in my way of life or in my behaviour. I liken this to an Olympic athlete who achieves his best place of 4th in a race, but is satisfied with this place knowing that it is his personal best and he can do better. Even when the athlete achieves Gold, he can still do better, and so he tries to find other ways of bettering himself, either training harder, finding a new costume, finding a different exercise, practicing other skills so that he can enhance himself as an Olympic athlete. I understand that athletes cannot compete without judges and justice and that justice, righteousness and peace go hand in hand. I understand that a judge should always seek to find a compromise solution as this will always be the best path forward in the give and take and potential win-win nature of life.

I now extend this "I" to "we" and make the assumption that this is something that everyone wants to do. So please reread the second paragraph substituting I for we and me for our.

In the process a group of people was formed and I now wish to turn these discussions into a blog so that I can share what we have learnt with a wider audience.

In Hebrew, Peace is translated as Shalom. Shalom is used as a form of greeting meaning Hello and Goodbye. Shalom comes from the world Shalem which means whole. In achieving Peace we achieve Wholeness. It is my ambition in this Blog that we achieve Shalom and Shalem. Note that GoodBye is an abbreviation for God Bless You. I bless you in your coming and your going and pray that you will return to share in this mission of Repairing your personal world again and again.

This blog will also deal with issues related to how we can make our homes better places; our friendship circles better places to be in; our living environments better places and eventually our very small, unique and beautiful world a better and more beautiful place.

I will sign using Love instead of Regards and extend unconditional love to everyone who arrives at this blog.

If you wish to read more about me and some of the things I am interested in, please go to http://www.orbital.co.za/text/whatwedo.htm and http://www.orbital.co.za/text/davidsthoughts.htm.

Love and Goodbye
David