Friday, 12 December 2008

David's analysis of 2008 and how we can prepare for 2009

The South African Reserve Bank finally started reducing interest rates by .5%. You can read the full SARB report at http://www.reservebank.co.za/

Here is some food for thought:
(perhaps a conspiracy theory?)

THE SUBPRIME CRISIS:

During the past decade the United States firstly told Freddie and Fannie, their two biggest mortage lenders to lend money to people who shouldn't be loaned money, i.e. people with bad credit records; people who couldn't get credit; bankrupt people etc. This money to be used for buying houses.

These people are called sub-prime borrowers. On March the 8th this year I wrote a detailed Blog entry called: Sub Prime Crisis; renewables; the price we pay; what you can do.

Then they reduced interest rates to 1%. At 1% people bought houses and maybe were paying $83 per month on a $100,000 house. (Compare that with South Africans who would have been paying $1250 per month at 15%).

Remember these people are already on the edge.

Then the government increases interest rates rather quickly to 5.25%. So now the payment has gone from $83 to $435.75. Now these people don't have the money, but the banks say "don't worry, your house price is increasing, so we'll take the extra out of the equity and you can pay us over a longer term." But things got out of hand and there was a mighty crash.

Now the banks got $3 and lent $100 because of their reserve ratios. In South Africa banks can lend 20x. In the USA 30%. In the olden days, NBS (Natal Building Society) had a 17.5% reserve ratio meaning they could lend 5.7x AND they required a 25% deposit, so if things got bad everyone was covered and it took a long time for repossessions to occur.

But the poor blighter in the USA has no deposit, so no buffer time.

House prices dropped 3% and the banks liquidity was wiped out! Remember they only had $3 on which they lent $100. Now the banks have to start selling to recover their investment so they start with selling all their foreign assets. Shares, Gold, etc. In the meantime the US government says: "we'll guarantee 100% of the cash you put into US treasury bills." So besides the US banks and companies who by now are also seeing red buying $ and selling forex, foreign banks and people start doing the same thing. This leads to an almighty US$ rally which we have seen in the past 6 months when the USDX (US $ Index) went from 78 to 86. See http://www.kitco.com/glossary/usd.html.

The Rand, Pound, Euro, Yen, etc, all crash against the US$.

But the fundamentals haven't changed. The US is still printing massive amounts of cash. 9.9% money supply in the past year = minimum 9.9% inflation. The USDX is still on a long term down trend. Gold as the world's real reserve currency is still on an uptrend. Central Banks have been selling Gold for over a decade. 100's of tons per annum. To keep the price down! But the price has continuously gone up because high net worth individuals and China are buying this gold.

My interpretation:

The US and other central banks decided for reasons only known to themselves that credit markets were out of control and therefore instead of telling the banks to increase their reserve ratios they increased interest rates. Only the Bank of China increased reserve ratios over the past few years. Increasing reserve ratios takes liquidity out of the system without damaging existing home owners and investors positions.

This dramatic 525% increase in the US damaged the lending and capital market so much that they stopped functioning. People and companies couldn't pay their loans. This upset the apple cart and banks started going insolvent. 22 so far in the US alone this year. Iceland is bankrupt. Take a look at an up to date list at http://www.fdic.gov/bank/individual/failed/banklist.html

So it would appear that the governments of the world caused this crisis.

Now IMHO, the crisis turned out to be much much worse than they had hoped for. Credit markets didn't slow down. They failed entirely. So central banks started reducing interest rates. The UK by up to 33% at a time, yes from 4.5% to 3% in one shot. That would be like SARB reducing from 15% to 10% in one shot. At the same time governments started printing masses of cash AND offering bailouts to banks to get the banks to lend. BUT the banks aren't lending. They are just using the money to shore up their balance sheets. The central banks haven't learned from this and instead of redirecting the funds to pay peoples mortgages they continue to give money to banks.

Let's add a bit of flavour to this discussion:

OIL:

Oil is languishing around $40 and "the cartel" want to increase this to $80 but they don't want people to complain, so they push up prices to $147 and then allow them to fall to $80. The idea being that oil prices will take 3 years to go from $40 to $80 (via $147) and because most people have short term memories and because newspapers especially have short term memories, they will say "oil has gone down from $147 to $80." In the meantime oil has actually taken 3 years to go from $40 to $80 instead of 10 or more years.

The public is misled into believing that "speculators" are pushing these prices up, but that is untrue. The masses of oil contracts on the open market are bought and sold, in fact traded like at an auction, by the oil majors themselves, the oil pipeline and anyone else like governments who buy oil for their armies or their power stations. They are all in on the action.

But what happens. The sub-prime crisis unfolds and everything is sold, including oil. So instead of oil going up, it is actually going down and may go under $40 in the near future and stay there for a long time. It is currently close to $50 and that by itself is pretty amazing. The oil barons are upset because they are losing close to 10 Billion a day, but so what. At $147 they were making 20 Billion a day. If they spent it on fancy islands in the gulf and the tallest building in the world and now they don't have money, that's their problem. I read somewhere that when people start talking about building "the tallest building in the world" and that building is twice as high as anything that has gone before, then that is the time to start going defensive, ie buying gold; selling property and selling shares.

Buying gold:

BTW, if you want to buy some gold and don't want to store it under the bed, buy the Gold ETF (Exchange Traded Fund) on the share markets of the world. You usually get 10 "shares" for every ounce of gold, so you can start with as little as R800. On the South African Share Market it is called NEWGOLD. There are also organisations outside share markets like Goldmoney and e-Gold that hold gold on behalf of investors.

ETF's allow one to buy all manor of things like Gold, Silver, Oil, Wheat, that one wouldn't normally be able to buy and invest in without being a bank or a large investor. Indexes like the top 40 index and others are similar to ETF's.

Back to the story:

Just in case you are gloomy at this point, I should state that since 2002 our top 40 has grown by 18% compound annually, even though it has crashed 45% this year. Shows how much greed there was in the market - and also how much internet money was sloshing around. I call this internet money, because it really doesn't exist. The central banks just make it available by building aircraft carriers and running big wars and less cynically by major infrastructure projects like stadiums and other white elephants. This requires payments and eventually this money filters its way to you and me.

Think of it this way: why can't the Olympics always be held in the same place? Or why can't three places be chosen? eg the UK, USA and China? They are all pretty central. They all have loads of hotels and infrastructure. My answer: because the governments of the world need to keep pumping unnecessary money into the system to keep the apple cart from falling over. Of course this increases inflation which hurts you and me and the governments pretend its our fault and increase interest rates.

CARS:

So now we get to the big three car manufacturers: Chrysler, Ford, GM. In the 1990's, the Californian government started a program where they said that a large percentage of cars should be electric. This forced the big three to start investing in electric car manufacture and for a number of years they built these cars. But they didn't sell them. They put them out on lease.

Then these same companies, supported by the oil Czars, took the case to the California high court and the Federal Courts and won their case. ie California doing what they did was "illegal." The big three then recalled their cars and crushed them. Yes, crushed them. If you think I am mad and have nothing else to do except write long blog entries, you might be right, but also read http://www.electrifyingtimes.com/ev1crush.html and http://www.pluginamerica.org/saveev1.htm or search for crushing electric cars in Google.

Recalling these beautiful electric cars and crushing them made the big car and oil barons laugh as they were increasing their income at the expense of our beautiful world. They don't deserve to be supported!

Now their businesses are bleeding $5 billion a month and they don't have long before they declare bankruptcy, so they fly from Detroit to Washington in their Gulfstreams at a cost of $20,000 per trip whereas they could have flown first class for $900 or economy for $300. This shows that they don't care, but in any case they ask for $25 billion. The US Congressional Committee and Fed laugh at them and tell them to come back in a month with a better proposal and they better not come in their jets. In fact they would be wise to ground their jets.

So these three show up and ask for $25 billion and they are given $15 billion. They promise to clean up their act and start producing more efficient cars and electric cars!!! Remember that in America the average car size is 4 litres. They just love their V8's. In the rest of the world, I wouldn't be surprised if the average car size is 1.6 litres.

Worse than this, these guys have a net wealth of over $25 billion, so they could bail out their own companies. But unlike us, they aren't interested in doing this. Why? IMO, because they see their businesses going out of business in any case, so why take the risk.

Note that I think that the directors of every company or bank that central banks lend money to should immediately be stripped of all their assets and should earn the same money as a normal factory employee. Their assets which the governments can hold as collateral until the markets improve, can then be sold to defray these massive trillion dollar investments.

Big business have been selling too much oil, cars that are too big and unnecessary, eg SUVs like X5s and ML63 and Porsche Cayennes and others. It is so unnecessary to drive a 4+ litre car but it has been promoted. My 1.4 litre Renault Clio has more than enough power for what I need and if I need to go off road, I'm sure that I could find an adequate car in the 2 to 3 litre range. Plus governments should put rules in place stating that off road vehicles must be used off road at least 30% of the time to avoid a 50% petrol tax.

Note that the big three might just be able to pull off an additional 3 to 6 months of operations, giving them enough time to save their businesses, because they already have the plans and production lines to make the electric cars. And they have had them for decades!! But people must not buy any more new petrol cars until we see electric vehicles being produced at prices we can afford. Electric cars are currently sold at a premium to normal cars, but in fact perhaps cost a 1/3rd to 1/2 as much as petrol cars and use no petrol.

SO WHERE TO NOW?

Start investing in your future. Start doing what you have always wanted to do. Don't spend your money frivolously, but if you see that there is a better future work towards it. This is what I am doing with my new renewable energy business.

Try to understand what is happening in the world as I am trying to. And share what you have learned.

Be there for your friends some of whom are suicidal right now and don't know what to do. Ask every one of your friends if they are ok and tell them you are there for them 24 hours a day. If they live in a R2m house which is now worth R1.2m, tell them it is not their fault. The banks with their lawyers, actuaries, chartered accountants, lawyers, etc, knew exactly what they were doing when they lent this money, when they gave 120% mortgages without deposits. Tell your friends that they are protected by the new credit act and that credit consultants can be appointed to help them.

Tell them that the best thing to do might be to walk away from their current nightmare scenario, keep their family and their job and perhaps have their income paid to a friend. The bank can sell the house, the car, the private jet. After all, these people only had the illusion they owned them. All the bank wanted was the interest and ownership of the assets - they have both of these - if the assets aren't worth what was lent, it is the bank's fault, not the borrower's fault! For decades they got it, but instead of investing for a recession or a rainy day, they spent most of the money, including doing the most stupid thing of all time, buying back their own shares, which increases the share price, thus giving the directors their huge profits on their share option packages. Well none of that is working anymore.

The private person knows what's going on.

PREPARING FOR 2009:

Read The Goal; The Power of Intention; The Power of Now. Watch The Secret DVD; the Majan Calendar prophesies. Go for long walks with your families and spend time off line with your friends. Facebook just isn't the same as a good hug and conversation over a coffee or a glass of wine.

If you can, keep paying your bond. If you cannot afford it, but can afford 25% less, renegotiate with the bank. They'd rather have you paying something than paying nothing for six months and then repossessing the house. Under normal circumstances they would repossess, but under these circumstances they can't sell the house, so they'd rather keep you in it.

It seems to me that the reason the SARB are holding our interest rates artificially high compared with the rest of the world whose interest rates are close to 1% is that the South African stock market has not been entirely destroyed yet. We have been resilient because South Africans are the most resilient people on the planet. We have been protected by exchange control, by FICA and by the Credit Act. Believe it or not, but we have. So we aren't falling apart.

However, there has been a slowdown. Jobs have been lost. Bonuses have been put on hold. Companies are making losses. Salary increases have been deferred. So there is pain in sunny South Africa. Many companies in South Africa have strong balance sheets and incredible employees, so we can and will survive. Strong balance sheets mean that companies can make losses for a few years and still survive. Making losses isn't the main problem. The main problem is cash flow. A strong company can still have a positive cash flow whilst making losses - and therefore survive.

I believe that decreasing interest rates in South Africa will not increase inflation in the current environment! The reasons are: people aren't getting bonuses or salary increases and many are already at the limit of their borrowing, so decreasing interest rates by up to 5% (30% less than now) will help people to balance their budgets and also allow businesses to balance their budgets. It will help food, clothing and other prices to go down, thus meaning that things get cheaper. This is not an inflationary environment. Inflationary concerns with respect to interest rates shouldn't be a factor in South Africa at the moment.

But if the big three car companies go out of business or if there is a major restructuring of production from petrol to electric vehicles, millions of jobs worldwide will be on the line. Although in the broader scheme of things this will be temporary (under 5 years) as "structural unemployment" means that people will get retrained to build electrical cars instead of petrol ones and that micro-power will become the norm, so we cannot be complacent in South Africa.

MICRO-POWER and RE (Renewable Energy):

We need interest rates at 5%. We need 50% rebates on personal "micro-power" power stations like in Germany. We need Feed In Tariffs at R4.20, not R2.80 as the government is talking about and we need them NOW. Note that these rebates and feed in tariffs are much less than what the government would spend on nuclear and coal powered power stations which we don't need. (Read my essay on The Nuclear vs Renewables Debate to see how I got to R4.20)

Green Rebates and Feed In Tariffs have been available for almost 30 years worldwide. If the government was really serious about this, they could pass the legislation in February 2009 instead of who knows when. They could copy from Germany or Australia and just change the words Germany or Australia to South Africa and change Euros or Dollars to Rands. Simple and it won't cost the taxpayer millions in wasted parliamentarians time and huge legal bills for drafting new legislation AND worst of all, delayed time as our blue planet rapidly goes black.

We need business confidence to be restored in South Africa. In my humble opinion, only business confidence determines the long term exchange rate. If foreigners believe that South Africa will make it they will invest here. If they see a favourable economic climate with low real interest rates they will invest here.

If at the same time the government should slap a 100% tax on every private vehicles above 2 litres that will force people not to buy these vehicles. People who need them for some reason will be able to apply to government before buying these vehicles explaining why they need them, e.g. to pull a horse box or for farming. 4x4 trails which damage our mountains and beaches and cause unnecessary pollution should be outlawed. Kyalami and Killarney race tracks should be closed except for vehicle testing. Electric vehicles should be given state subsidies and taxes should be reduced to zero on these vehicles. The Joule should be ready in 2009, not 2010. I'd like to buy one. See http://blog.wired.com/cars/2008/10/south-african-e.html. South Africa must not lose this technology. Please.

If you are worried about Formula One, consider that Honda has stopped their formula one program and others will follow soon. See http://news.sky.com/skynews/Home/Business/Honda-Pulls-Out-Of-Formula-One/Article/200812115172879?f=rss

South Africa has invented helicopters, electric cars, the thin film solar panel (the greatest invention ever in South Africa), and so much other equipment and yet we sell this technology to foreigners and then pay them royalties to use our own inventions. What stupidity. This must be stopped.

INVENTIONS:

Inventions made in South Africa, even with foreign investment, must be kept local. This will create millions of jobs. Our interest should be in making and keeping our home, in South Africa, beautiful and unspoiled. SASOL should be closed down as soon as it is practical to do so, for example in 10 years time once 1/3rd of our cars run on electricity. SASOL's main output is carbon dioxide. It produces oil as a by product! If SASOL wants to remain open, they need to take the huge "super-profits" and redirect it to eliminating the carbon dioxide emissions. Internet sites state that Secunda is the world's single biggest emitter of carbon dioxide. This bears thinking about and resolving.

TREES:

The government's program of cutting down our natural protected forests like Silvermine, Tokai, Cecilia, etc, must be stopped immediately. This is NOT protecting the environment. These trees cannot be considered to be aliens. They are as natural to Cape Town as the 5 million people who live here. These trees, planted by our great grandparents and in many cases 100's of years ago by people with incredible foresight, are natural monuments. They don't use water. The water they get is from rainfall. Our drinking water comes from dams in the Hottentots Holland mountain range East of Cape Town. Trees leach toxins from the soil. They bind the soil together and prevent erosion. They provide shade for beautiful mountain walks and picnics. The have an incredible fauna and flora. They absorb carbon dioxide which is stored in the trees and they release oxygen which we need to breath. Cutting them down is a crime against humanity. Humanity will and is dying without its trees. Worldwide.

Intuitively I feel like the world's seasons and weather patterns are changing and becoming more extreme, not just because of global warming and pollution, but because of cutting down trees! I wish I could prove it.

WHAT IS SUCCESS?

Success should be defined as "living off grid" or "becoming carbon-negative." Success shouldn't be defined as living in a fancy house, or driving a luxury vehicle or owning a rolex. If you are off grid already, then being able to buy these things is a bonus.

LOVE:

I wish you everything of the best for 2009 and let us go forward together restoring our world to its beautiful climate and keeping it green for our children.

Love
David

No comments: