I am not an economist but I do try and follow the markets. One of the main reasons I do so is because I have taken the choice of managing my own investment portfolio. The jury is still out on whether this was a good call on my part, but my reasoning is that I believe after all the sleepless nights studying finance and accounting that I should try and make the most of what I have learnt at least for my own benefit. I am not a guru, but in every investment choice there is a lesson to be learnt, both when things go well and particularly when they don’t, which help you arrive at a methodical manner in which you invest.

As an individual that follows the markets on a daily basis, one thing that has caught my attention is the recent extreme volatility in the markets. One area that has made me jittery has been that the volatility has been quite sudden and extreme in just a matter of days, and is still expected to linger on in the short term. A case in point would be just looking at Wednesday 26 May 2010, where the JSE moved about 3% in one day alone, and this was bouncing from a previous day’s negative movement of 2.5%! This is quite large daily movements when one considers there are over 400 companies listed on the JSE contributing to the overall return. The losses are also extended when one includes the extreme depreciation of the Rand against major currencies also in the past month, at more than 8%.

What this has done to a private investor such as myself, is to look at a few areas in my investments where I have had no protection against such extreme volatility which has lead to significant paper losses in a matter of days. On the other hand, others have taken advantage of the volatility and made significant gains from it, and I suspect derivative traders must have been on both extremes.

As I mentioned earlier on about lessons from investing, one such lesson for me in the past month has been the importance of having a diverse portfolio, not just across asset classes, but also globally. The second lesson has been that possibly just holding global equities or bonds is not enough anymore and as a private investor I should consider holding currency or gold positions as direct hedges against Rand depreciation. Once again there are a lot of choices, so the decision is not so easy and a thorough understanding of some of the instruments one can purchase may be required otherwise you may just assume further risk.
Another possible plan might be to include JSE listed companies that earn most of their income in foreign denominated currency, which can act as an indirect hedge against a depreciating Rand, such as Sasol. The logic being that as the Rand depreciates these local companies earnings would actually rise in Rand terms and so should their share price, thereby acting as a hedge. However, the negative global sentiment we are currently experiencing, has not show mercy either to these companies as they have not escaped the carnage on equities despite the Rand’s major depreciation in the past month.

I think sometimes a simple strategy of holding a cash balance in a foreign denominated currency can actually prove to be an effective hedge against Rand depreciation. However, it can also work against you considering the lower levels of interest earned abroad and additionally a possible strengthening of a volatile Rand can hurt you further.

Whatever you decide, I have now concluded that unfortunately for everyone in this world, whether you are a private investor or a man on the street, we all now need to open our eyes and to start looking at the world news beyond our borders, as what is happening globally is affecting us more directly like never before. This is no small feat, as understanding local markets is not so easy, let alone global markets and news. The world has seemingly become so intertwined, that if you are not in tune with the world markets or global news, you will not understand why the local markets and your solid local investments are so volatile when all the fundamentals in your investment strategy and fundamentals that govern this country appear to be in check!

Now, all the negative sentiment coming from the Euro-zone has translated into large paper losses for a lot of investors all the way down here in Africa! Watching an index such as the JSE losing more than 12% in the past month is really distressing, especially when there are very few asset managers that can actually beat the index regularly! Where do you put your money!?

The position is made worse if you factor in the Rand’s depreciation against major currencies, and you realise that in US dollar terms the JSE has actually lost 20% in a month from external global sentiments! If you are there sitting and smiling because you have no equity exposure, but you have other local investments (a house or flat etc) a depreciating Rand has just made you about 10% poorer in just a month and made foreigners holding US Dollars 10% richer. Of course this is just a paper loss to you, but if you pull out your calculator you actually realise just how much you have lost to foreigners in one month.

Once again this just shows how important the global sentiments are affecting you at home in Africa and eroding your wealth through no fault of your own. It also shows the importance of having positions that protect you from a depreciating currency that is very open to external factors.

I guess at this point in time, it all comes down to always having a longer outlook on your investment strategy and as well as the local and global currencies. In terms of the fundamentals in this country, I believe they are mostly in check to allow companies to succeed. In terms of the Rand, I have to consider the views of most economists as there are too many variables affecting it. In this case, they believe the Rand is heading towards R8 to the dollar by the end of this year, so maybe holding some US dollars after a Rand rally might not be a bad idea after all.

Have a great day.
Maki

Central banks control the monetary system of the world and determine when business cycles are going to change simply by increasing or decreasing the money supply in the banking system. This small group of powerful insiders know when to sell high and buy low because they determine when the market cycle is going to change. What has just happened with oil and gold prices is an example of the power brokers who rule the world.

When Cecil john Rhodes died, he left a series of wills in which he wanted to set up a secret “society of the just”, based on the Jesuit Society, to carry out his vision of a world united under British rule. Interestingly enough, he worked very closely with the British and French Rothschild families to finance the merger and consolidation of all the various South African diamond and gold concessions. One of his directives was to educate well selected men (and recently, women) from key colleges and universities from around the world, in the philosophy of bringing the world under British rule. These people are known as “Rhodes Scholars” and include former President Clinton and many others in government.
Regarding the power of central banks, if you will take a piece of paper money out of your wallet — any denomination — you will see these words, “Federal Reserve Note — This note is legal tender for all debts, public and private.” You might ask yourself why the paper money does not state that it is a note from the Treasury of the United States? If the Federal Reserve is not the Treasury, what is it? The Federal Reserve is a “central bank.” To put it in every day terms, it is a private corporation which claims to provide a service to the people of the United States by providing the money used in our banking system.

When Congress refused to renew the Bank’s charter in 1811, the War of 1812 ensued, and in 1816 Congress re-chartered the bank with a capital stock of $35M. “From 1816 to 1828, it was the sole arbiter of the financial affairs of the nation, both public and private. Its power in politics was immense and it swayed elections as well” (Walbert, 11).
Whoever controls the volume of money in our country is absolute master of all industry and commerce….and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.

Needless to say, the move to re-establish control over the economy of the United States did not abate. Between 1840 and 1913, there was much done to try and re-establish a private corporation to control our monetary system.
Three years later in 1913, the central bankers took action. This time the people involved in this effort included some of the wealthiest people in America: Senator Nelson Aldrich (grandfather of David Rockefeller); Jacob Schiff and Paul Warburg of Kuhn, Loeb and Company, an international banking house; Piatt Andrew, Assistant Secretary of the Treasury; Henry P. Davidson, Senior Partner of J.P. Morgan & Company; Charles D. Norton, and Frank Vanderlip, President of National City Bank which today is CitiGroup. The passage of the Federal Reserve Act of 1913 was done through chicanery. Those in the Senate who favored the Act did not go home while those that were against it went home for Christmas. In a special session convened with quorum, the Act passed at 11:45 p.m. on December 24, 1913 — an evil act of bondage for the American people.

Today, only five countries in the world are without a central bank: Iran, North Korea, Sudan, Cuba and Libya. All of these just happen to be on former US Presidents George Bush’s “Evil of Axis” list.

So the question begs. What was the real reason for the recent Global Financial Meltdown. Look closer at the companies involved and the history, and the picture will become clearer.

Regards

Wilbert Chaniwa
Founder
Nexus Business Network

The Reserve Bank dropped their key repo rate by a further 1% today, led by the extremely weak economic data released 2 days ago. The repo rate is now 7.5% whilst the banks prime lending rate drops down to 11%. As most countries across the world have continued to lower interest rates during this harsh economic climate, there is suggestion that todays slashing of interest rates in South Africa could be the last cut we will see in a while. Some analysts predict that we will have one more rate cut in June and it will only be a 50 basis point drop and then from there we will not see any further cuts as the MPC (Monetary Policy Committee) would have done all it can.

We heard Maki’s views yesterday with regards to the recession in South Africa. Today it is now official that South Africa is in a recession according to the statistics released. South Africa’s real gross domestic product (GDP) dropped on a quarter-on-quarter basis by -6.4% in the first quarter of 2009, from -1.8% in the fourth quarter of 2008.This signals the first recession in 17 years for South Africa. Before the release of these figures today, analysts had predicted growth to decrease by 3.9% so considering that it came in at 6.4% was a big shock.

The global financial crisis has wreaked havoc and it appears to be the most popular subject to read about. Since everyone is talking about it daily, I might as well look at why this is such a hot topic and whether indeed SA is in a recession.

To get the technicalities out of the way; for SA to be in a recession it requires for there to be two consecutive quarters in reduction of the gross domestic product (GDP). This has not happened in 17 years until now.

In the 4th quarter of 2008, SA’s GDP dropped by 1.8%. This was the first drop in a decade. This is what brought about the alarm bells that SA may have been heading for a recession if the first quarter of 2009 showed another contraction as well.

In the 1st quarter of 2009, the SA economy is expected to contract following The Reserve Bank governor Tito Mboweni’s, comments in the past week that this would be the case. As governor, his view is held highly as he is responsible for the monetary policy in this country.

Some people blame him for his late reaction in decreasing the interest rates when the local and global economy had already started showing signs of a slow-down last year. Some economists expected for him to have been more proactive by reducing interest rates before SA was in a recession, instead of only gradually reducing rates now when the economy is officially in recession.
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In this my first financial article of many to come I would like to just touch on the subject of the rand and its apparent volatility as seen by many especially in recent times. I will try not delving into too much detail in terms of statistics and numbers; I am sure all that is readily available even on this website for our more numbers-orientated readers.

The first thing that springs into mind is the most obvious factor that is impacting on everyone at the moment whether personally or those close to you. That is the credit crisis. If you had not heard about that as yet, you should remove those blinkers, as it has hit home recently here in South African when the official statistics showed that SA is in its first recession in 17 years.

The credit crisis has stemmed in it a crucial ingredient called fear! People all over the world have been pulling their money from economies and institutions that they perceive to be risky following the spate of bank failures in the US linked to the subprime crisis in that country that spread like a wild fire to other European nations. Unfortunately for us, this means being in the third world country this has indirectly impacted on us also. Investors, in such trying times will move their money from risky assets and economies, and put them into perceived safe ones. What are the safe options these investors would consider?

Well treasury instruments especially the US bills and cash would be the first point of shelter in terms of protecting your capital. Therefore SA loses out on the foreign direct investments as money is taken out of the economy by investors dumping Rand shares and instruments for US treasury bills and US Dollar denominated cash deposits. With such a massive outflow one can only imagine the depreciating impact it has on the Rand.

The Rand can be seen to be a somewhat floating currency dependant to a certain degree on the free market forces making the currency even more susceptible to fluctuations especially when significant global events occur. The other risk here is the exposure to currency speculators who have many ways of gaining from a volatile currency in the same manner equity investors gain from volatile stocks. Although there are some limitations to speculative activities due to some of the exchange controls that are in place in SA, unscrupulous dealers can always find a way to circumvent these (such as use of derivative instruments).

The potential for political unrest or uncertainty definitely is something that foreign investors keep an eye on. Lets face it, a lot of investors were sceptical of Jacob Zuma’s corruption case outcome and as well as the outcome of the elections. Fear of uncertainty or drastic changes, may cause foreign investors to pull their money out of the SA economy and with it causing the depreciation of the Rand. A good example is when someone who is influential such as Trevor Manuel resigned last year, albeit for a day or two, the markets and the Rand had a mini-crash upon hearing such news. This is not just a local event, as the same would have happened when the influential and long-term serving FED’s Alan Greenspan retirement was announced in the US.

Inflation statistics actually affect the Rand as well because of purchasing power parity theorem, which shows that higher than expected inflation would cause a devaluation of a currency. This “Triple P” occurs in order to eliminate the problem of arbitrage. SA inflation has been problematic especially due to prices of food and wages which have proven to be sticky downwards. The problem with inflation is that as prices increase in rand terms, they may not be increasing at the same rate as in US dollar terms. Therefore this is what results in one currency, the rand, depreciating faster than the other (the US dollar). If this market correction did not happen, then arbitrage opportunities would exist and would be exploited until the problem has corrected itself, i.e. the Rand has depreciated.

The rand quite recently has been strengthening and this is mainly attributable to the improving global sentiments. Investors are becoming more confident that the steps taken by the US and European countries to stem the global financial rot is working. This bodes well for us in third world countries since confident investors, means more risk appetite and these investors start to move their capital back into SA stocks and other third world economies, causing currencies such as the Rand to strengthen. The general trend seen at present is the US stocks recovering now and this feeds into the SA markets and the Rand. It also helps that the South African big four banks have survived well through these trying times without any need for bailouts. This once again sends positive signals to the foreign investors that South Africa does not have the same financial rot as the western countries, and brings in confidence for investments propping up the Rand.

However, trying to guess what the Rand does next is something that I doubt anyone can do precisely. The best approach in my view is considering the factors that mainly affect this currency and trying to forecast how these factors will play out in the future to reach a conclusion where the Rand will be in the upcoming months or years. But the only problem is that some of these factors are unpredictable, therefore your guess is as good as mine! Have a good day.

Maki

Some good news going into the long weekend. The South African Reserve Bank’s monetary policy committee (MPC) has cut the key repo rate by 100 basis points. This brings the rate down to 8.5%, with the prime lending rate dropping to 12% from 13%, with effect from May 4. The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers. Since December 2008, interest rates have come down by a total of 350 basis points.