Friday, January 30, 2009

Brace Yourself Sheila ... I Don't Know How Big This Thing Is Going To Get

For a while now Trevor Manuel and the like have indulged us with rhetoric like, "Don't worry South Africa had strict banking regulations and didn't partake in the sub-prime loans fiasco." "South Africa will be spared."

Folks this is a load of excrement, and the cracks are starting to suggest a different scenario may play out.

Allow me some latitude here.

Sub-prime mortgages, and we have written about them before, was basically the provision of loans to folks that ordinarily would not have met the usual credit rating criteria. Even with lax oversight, this was either a deliberate fraud or based on the false premise that real estate growth would continue to grow at a rate that would enable you to flip your property, make a profit, settle your mortgage and do it all over again. Of course this is merely a Ponzi scheme as it is dependent on a few things, the rate of defaults remaining small and capital growth remaining robust. Neither of these two factors were sustainable.

Now, as far as South Africa is concerned apparently we never indulged in cheap credit, again this is a load of excrement. I personally bought a house with a 100% mortgage, and I didn't even have to verify my income, and I am sure many of you did too. Okay that may have changed with the new Credit Act but many of these loans are already in the system. Have we seen a fallout? Not yet. But that isn't my big concern. Not all of this is due to lenders not being able to service their debt. Much of it has to do with leverage, in other words the amount that is loaned relative to the amount of security. Which brings us to derivatives investors.

You have heard of them, the big swinging dick cowboys that believe they have some kind of magic touch when it comes to hedge funds which use futures, short sales, options and whatever else grabs their fancy to make a buck.

When Mom or Pop want to play with derivatives we have to ensure that we have sufficient money deposited with our brokers to cover a potential downside. With options that isn't so bad because you simply let the option expire and lose the premium, but let's concentrate on futures.

A future is an agreement to buy or sell an underlying asset at a future date. This is best understood by envisioning a corporation that needs to plan ahead but doesn't know what fuel will cost in the near future, for example. To secure the price they will enter into a futures contract. Most investors dabble in Stock futures, where the end result is the exchange of cash. Now, because a future in an obligation to deliver, the downside risk is managed by marking-to-market. In other words at the end of each day your brokerage account is rebalanced, based on the margin requirement (your initial deposit) and the new value of your futures, and you either have to pay money in or not. This happens daily for poor Mom and Pop, and the amount of leverage is controlled by the amount of margin you have to deposit.

Along comes big swinging dick, guess what happens? The rules no longer apply. Big swinging dick gets to indulge in forwards and futures trading without the same restrictions. He doesn't need to have the same safety deposits and he doesn't mark-to-market daily because big swinging dick apparently has assets to back the position. Yeah, right.

Well we only discover who was swimming naked when the tide goes out. The huge collapse in the banks and various other investment houses is due, largely, to over-leveraged positions. Is South Africa immune? No ways.

ABSA has just taken equity positions in four companies to the tune of R1.4 billion, due to defaults on their futures margin positions. What the fuck? They window dress it with, "Well now we will be able to give them strategic advice". Arseholes wake up, it isn't your core business. What you are trying to do is salvage some of the money you have lost. What you should have done was impose the same restrictions on these big swinging dicks as you do to Mom and Pop, and this would never have happened in the first place. You shitheads have simply raised your liabilities and acquired unsustainable businesses. This comes after the shit at the derivatives dealer Dealstream and I imagine a lot more of this is about to crawl out of the woodwork. Guess what Mr. Manuel, most of these deals haven't been declared, as they aren't regulated, so you have no clue how much of this rot is out there. Mr. Shames (what is it with related surnames?), the SA hedge fund spokesman, where are you now that there is blood in the streets?

My take on this is South Africa is probably in for a few more nasty surprises, and it's going to hurt.

5 Opinion(s):

WHITEADDER said...

Vanilla Ice - you are right. Plenty foul stuff still waiting to see the light of day. Just looking at the population figures : about 50/55 mil. ? who knows? and about max 6 mil. individual tax payers. Yet the ANC is dishing out more promises to the great unwashed. Company profits in retreat, imports lower, purchases down - so where from will this ANC geniuses get all the bucks to pay even for the small portion of their promises that they will try to keep ?

Anonymous said...

What's your take on the US $? Think the Feds will go down to zero interest? If so, do you think there will be a flight from the dollar? But where to? If the currency of last resort tanks, then where do you put your money? Just asking. You seem to know what you are talking about.

He of difficult days said...

buy gold... Kruger coins

Vanilla Ice said...

In response to Anon 08:31. Yes, I know the terrain well. The reality is that nobody has a crystal ball. The gyrations you see in the global markets is due largely to speculation, simply because the markets cannot determine the state of the global economy. So what to do? Firstly, you need to take a longer term view of this. Where will we be in 5 years time and where will you be residing? If you will be in South Africa you need to establish an internationally diversified (USD AND Euro) portfolio since I think the Rand is going to be a victim. If you are not is SA, you still need to establish a well diversified portfolio because the national crises are going to produce similar currency gyrations. Currently the USD remains the currency of choice and I have faith that the US will sort itself out, albeit because they have no choice. They are an innovative nation and I think they have made some disastrous decisions but 5 years from now I think it would have sorted itself out, with us living with the residual effects. If you can't diversify and are worried about you job, then your portfolio should be in cash as you will need the funds.

Anonymous said...

Best then to take your money offshore using your R2 million allowance per adult and keep it in US $ if you intend to stay. That way it can't fall back into local institutional hands.

Theoretically you can cash in your retirement annuities if you officially emigrate, but whether that will hold in practice in the future is another matter.