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)

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