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Coal. Not diamonds. Not your best friend.

December 5, 2012 in Uncategorized

“Do you really think, in 30 or 40 years, that 42 per cent of the world’s electricity is going to be generated with the incredibly carbon-inefficient coal? I think the answer is probably not.”

To market, to market to buy a fat pig. Chinese stocks have surged this morning, they have collectively gained three percent. The reasons given are that Chinese officials are going to be continuing along the path of grand urbanisation. So, thanks to that “feeling”, stocks have surged. I read something amazing, in 1978 Chinese savings to GDP was 38 percent, in 2007 it was 51 percent, check out that piece here: The New Shape of China’s Economy. OK, you say, so Chinese people have saved a little more over the last thirty years, BUT…… in 1978 Chinese GDP was 148.18 billion Dollars which would mean that total savings were then 56.3 billion Dollars. In 2007 Chinese GDP was 3.49 trillion Dollars, savings would have then been 1.78 trillion Dollars. Astonishing. I will go a step further, according to Google Public Data, savings as a percentage of GDP in China was 52.7 percent of GDP, which was 7.31 trillion Dollars in 2011. That translates to 3.85 trillion Dollars.

Which means that between 2007 and 2011, Chinese net savings grew by 116 percent. The S&P during the same time period went down over nine percent, guess who feels richer and who feels poorer? I then decided that it would be fun to see Chinese savings on a per capita basis, so I checked out the Wiki entry for Demographics of China. Let us presume that the population as per the census in 1982 was more or less the same as in 1978. So, we can work on a number of 1 billion. That same Wiki article suggests that the 2010 census saw that there were 1,339,724,852 people in China. For the purposes of this comparison, let us use 1.34 billion versus 1 billion back in 1978. Back in 1978, if I use the savings rate as per above, the average savings per capita was a mere 56.3 US Dollars. Wow. Sounds like nothing. Fast forward to 2011, that number jumps to a still not really that high 2875 Dollars on a per capita basis. It is fair to say that “things” have improved dramatically for Chinese citizens over a period of 35 years.

In Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E resources took a bit of a hit again, it has been a see saw week thus far, the Rand really firmed up yesterday. It is very noticeable the Euro Dollar cross working in favour of the European currency over the last month. There has been a weakening of two percent of the Dollar versus the Euro, part because the Europeans are pulling together and even the cynics are now believers, but part also because the Americans are grappling with the “fiscal cliff” issues. I suspect that the recent moves, the last two days or so has been supporting the Rand. Strangely however, a weakening Dollar has not brought about a stronger gold price. In fact the gold price is weaker by a percent and a half over the last two weeks. In fact, from the middle of November, jumping back the Euro, the European common currency has strengthened 3.2 percent versus the US Dollar. The Japanese Yen? I swear I have not been watching this at all, but when I checked it out, the last four weeks the Euro has strengthened by 4 percent plus versus the Japanese Yen.

Back to Jozi, stay with me whilst we hop around this morning, industrials fared better, but it was not enough to prevent a really modest loss on the day, stocks as a whole ended the session down 0.15 percent. I saw a tweet that suggested that Harmony had fallen on bad times and was set to be booted out of the top 40 when the JSE meet to have a look at the weightings of their indices. Harmony had plumbed to a four year low, last at these levels in November of 2008. But at that point, the stock proceeded to have the most heroic gains in three months. From November 21 2008, when the share price opened at 63.60 ZAR to 131.75 ZAR on the 19th of February 2009. Less than 90 days and the stock more than doubled, yowsers! In the last year however, on the 30th of November 2011 the stock was at an intraday high of 114.37 ZAR, but fast forward a year and sadly you get to a closing price of 66.65 ZAR. Phew, volatile at best, not for the faint hearted. Gold miners, I heard Peter Major from Cadiz suggesting that the Gold Fields deal to unbundle their “local” assets is a very good idea. Peter said that international and offshore investors alike could then decide what they want to own. I for one am looking forward to it, not because we have any vested interests, but rather to see what “investors” are thinking.

Stocks on Wall Street in New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W had another iffy session with the same single issue plaguing what the business networks term investors. Investors do not get worried about events that come and go. Investors do not pay too much attention to non-farm payrolls, but rather the trend over the last six months. Investors do not trade around a specific event. Investors look at earnings. Investors make investments, traders trade. There is a massive difference. After all was said and done, all the major indices ended between 0.1 to 0.2 percent lower on the day. Not a great deal of change from the prior session.

People are still getting their knickers in a knot, as the rhetoric from Washington. DC. 38o 53′ 42.4″ N, 77o 02′ 12.0″ W seems to not really be changing and heading towards a conclusion sooner. But fear not sports lovers, because if you do not understand the issues facing Americans, check out The Fiscal Times. There is more than enough gumpf there for you to get your teeth into. I wonder what will happen to this domain when the “event” passes.

I love it when people are passionate about their point of view. The other day, two to be exact, we had this little piece in our linkfest:

    Another thing that I often wonder about is whether the negativity from our industry peers is as a result of people being under pressure. Not a week goes by nowadays without us seeing the headlines about job cuts, and bonus cuts in our sector. Headlines like this: Citigroup Securities Unit Said to Cut Bonuses, 150 Jobs. Surely if you worked in an industry that had negative public perception, and your job was not exactly safe, your outlook on life would be less rosy than before. Oh, and another thing that I absolutely love, next time some person at a gathering suggests that bankers and banks are to blame for the financial crisis, just ask, “how so and why?” I would love to know the answers

I did ask the question, so I had set myself up for this type of answer from Nick, who is passionate no doubt on this subject. His answer:

“how so and why?” “HOW SO AND WHY?”
1. The crises was started from a housing bubble that burst. A bubble created by sub-prime lending. This is fact.
2. How about the fact that sub-prime lending is also called PREDATORY lending, offering loans to people who can’t pay – you can’t get more evil than that.
3. How about the fact that Goldman Sachs offered sub-prime loans and simultaneously bet against them, shorting their own customers – immoral much?
4. How about the fact that Barclays and other banks were caught manipulating the LIBOR rate for profits – banks cheating others yet again.
5. How about the fact that bank chief’s salaries are unreasonably high compared to the rest of their employees?
Now you’re going to say the poor should never have taken on a loan they can’t afford. Yes, but they were SOLD the loan. They were gamed! Bankers made them believe they could repay.
Not even lawyers are hated as much as bankers dude. No-one has a forked tongue quite like a banker. But you knew all of this very well Sasha. “how so and why?” Honestly…

Clearly the question had Nick so upset that he set about with a detailed answer of my question. Throughout history there have been many moments when “bankers” mistakes, private losses were socialized, because society itself realised that the alternative (letting the banking system fall) would be a worse outcome for the current political dispensation. Let me rephrase, perhaps it is the other way around, politicians realize that the alternative, letting the banking system go would lead to economic hardship and more radical politics. Which would mean that their chances of getting re-elected would diminish dramatically, and their political parties chances of getting into power would be years away, the example of the Republicans post the Great Depression is a good one. The roots of Fannie Mae and Freddie Mac are from the Great Depression. Government wanted people to own houses.

OK, so the problems around subprime lending, the fault is placed squarely on the lenders, the banks and the entire banking system. All sorts of weird and wonderful loan types (check Adjustable-rate mortgage) were invented for consumers that were cashing in on the housing bubble. There was a great piece, a great piece by David Faber of CNBC titled The House Of Cards. Not the British thriller series, but rather the causes of the subprime crisis. David visited Vegas, interviewing ex Fed chairman Allan Greenspan and even crossed the Atlantic to Scandinavia to interview a small towns treasurer, who had invested in Mortgage Backed Securities, to get a higher return and as such upgrade the town. The town lost. Politicians wanted rates low, even though technically they can’t influence the Fed. The reason politicians wanted low rates was because they wanted home ownership to increase, the happier your population, the more chance that they are happy with the status quo.

Josh Brown (I know, you probably are getting tired of me quoting his book) says in Backstage Wall Street that in his mind Joe Public started to speculate in the property market because they were disillusioned with stocks. Equally home ownership reached nearly 70 percent in 2004, up nearly ten percent from 1990. Everyone wants to live in their own home, everyone wants roots. But not everyone has a proper credit score. No sir, some people have terrible credit scores.

In the Wikipedia piece, titled Financial crisis of 2007–2008, there is the following paragraph that could or could not be your point of view:

    “The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of government policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.”

The point that I was trying to make to everyone is that bankers were one of the folks in the chain of events. Government (staffed with elected people, looking to hold onto power) encouraged home ownership (people buy homes). The Federal Reserve (smart people, economists) kept rates low to recover from the dotcom period. Loan seekers (people who often live beyond their means) lied to unscrupulous loan officers (people looking for more money quickly) who were working on a commission basis. Banks (staffed by people making decisions based on their bonus outlook) were happy to extend the business because it was profitable.

Banks (filled with the same people) sold the loans to Wall Street Investment banks (same guys staring at the bonus pool, eat what you kill types) who then repackaged them as securities. Investment Banks (staffed with the greedy people) then sold the securities to folks seeking higher yields (people who needed a better income in a low rate environment). The securities were rated by the ratings agencies (who were staffed with smart people tasked with rating bonds or securities investment grade), often themselves not seeing the risks. Talking risk taking, the regulators (staffed with government employed people) failed to pick up any conflicts of interest at the time. Also, the law makers (elected officials, people too) failed to see the crisis coming, this was quite well deflected by themselves. These are all people in the chain of events. Not just the facilitators of the loans, the people who requested the loans, but the investors couldn’t get enough of the mortgage backed securities themselves. If you are looking for a good read around the whole time, Michael Lewis has a great book which I read, The Big Short.

People caused the financial crisis. People who lied and were greedy. People who did not pay attention. People who were looking out for their own bonuses, instead of what was ethical. People who thought that good times would continue. People guarding the regulatory gates who fell asleep. All people. That was my point, not just bankers were to blame for the financial crisis, but rather a whole collective chain of individuals who made judgement errors.

A bank would not extend a loan if they did not expect someone to pay it, that would be dumb business, all loans are extended in good faith from both sides of the equation. As a result of the banking crisis, loans to individuals have become much harder, rightly so. The issues of remuneration, that lies in the hands of the shareholders is my belief. The issues around the Libor fixing scandal, that is plain criminal, those folks should be prosecuted and dished out the sentence they deserve. Where were the regulators and law makers whilst this was happening allowing something as important as a decided rate amongst an elite group to decide something as important as Libor? Several steps behind. As for Goldman being on both sides of the trade, there is a serious case of poor ethics here, perhaps even criminal, as well as an element of hedging too. That was wrong. There was a whole lot of wrong doing by a whole host of people. That was my point, not just bankers were to blame, but they were a soft target as a result of having paid themselves enormous pots of money, from paper gains. Greed. Greed is both very good and very bad.

    Byron’s beats

    A couple of years back Sasha found this article which derived the term Mesofacts. It was coined by a fellow called Samuel Arbesman who now has a blog called Here is the definition of a mesofact from the website.

    “When people think of knowledge, they generally think of two sorts of facts: facts that don’t change, like the height of Mount Everest or the capital of the United States, or facts that change a lot, like the weather or the stock market close. But in between there is a third timescale, with its separate category of facts: facts that change slowly, or mesofacts. This middle, or meso-, scale, of facts are the most interesting and yet the most slippery with which to be acquainted. These change over the course of a single lifetime but we tend to nonetheless view them as constant.”

    Here at Vestact we base our investment philosophy very much on finding mesofacts whether it be an investment opportunity or a warning sign to get out or stay out of certain investments. With that in mind I came across this Reuters article titled Tighter regulation pushes miners to cut thermal coal exposure. The article interviews Marcus Randolph, head of BHP’s coal and Iron Ore operations. This is what he said: “Do you really think, in 30 or 40 years, that 42 per cent of the world’s electricity is going to be generated with the incredibly carbon-inefficient coal? I think the answer is probably not.”

    At this stage coal is the world’s top fuel for power generation because it is cheap and there is lots of it, especially here in SA which has really helped us with electricity supply over the decades. But like Marcus Rudolph I certainly agree that coal use is going to decline, Rio Tinto also said they will slow spending in the sector.

    So what do we do as investors? BHP Billiton are one of the world’s biggest coal miners but fortunately they also see mesofacts. You see, if you invest in good companies with good management teams they do the hard work for you. Although it was badly timed Billiton bought billions of dollars worth of gas assets, what I believe will be coals main replacement. Divesting from coal, investing in gas, shifting and adapting with the times. Our other investment with coal exposure is Sasol. If you read yesterday’s message you will know that they are planning ginormous expansions into gas so they are already on top of it.

    The last coal dependant entity which affects our lives is our very own Country. That is why, as someone who is very environmentally conscious, I support fracking. Of course all the relevant provisions and safety’s must be worked out but unfortunately for the Karoo farmers, unless there is an alternative found, gas is the future.

Crow’s nest. Righto, the index just clocked a new all time high this morning. We are rocking again. Stocks are up nineteen and a half percent for the year, collectively. Whoa. That is better than anyone predicted at the beginning of the year.

Sasha Naryshkine and Byron Lotter

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