The Investor May 2022

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ShareFinder’s prediction for Wall Street for the next 5 months

When dividends did not matter!

By Richard Cluver

The profitable investment relationship between the dividends paid by listed companies and the prices of their shares had long been obvious to me and I had written several books explaining how investors could exploit this to their advantage. So it was a matter of considerable surprise to me when I was invited to be the keynote speaker at an international investment conference in Australia in the late 1990s in order to explain the link.

Surely, I thought at the time, everyone in finance must understand that, in an ideal world, dividend and share price performance should be inextricably linked. It’s as basic as 123 and only short-term sentiment should explain any breakdown in their mutual performance! But how naive I was.

Today the relationship is at the very heart of the arcane subject of fundamental analysis and no analyst worth his salt would get away with professing ignorance of it. But as the 1900s were winding down amid the last death kicks of monetary hyperinflation which had for years played havoc with share markets, it is probably true to say that the great majority of analysts were at that time more passionate about their own pet methods of share market charting and most preferred to be known as “Technical Analysts.” Those who set store upon balance sheet statistics where at that time often viewed as dinosaurs.

Since I saw useful merit in both systems, I was often at that time viewed as something of a curiosity because one was expected to be an exclusive follower of either one discipline or the other. To seek, as I did so insistently, to place a value upon a security by using a cocktail of its balance sheet statistics and thus determine whether it was either over-priced and vulnerable to a future price decline or, alternatively to determine that it was under-priced and likely to offer future capital gains, and to furthermore then employ graph analysis to try and determine the likely timing of such a future price change, was seen by many of the respective cultists as some sort of heresy.

However, ShareFinder had at that time been put to the test by the Australian Stock Exchange Journal, then required reading by most Australian investors, and month after month the software had been resoundingly beating one of the doyens of Sydney stockbrokers and so the cream of the antipodean investment fraternity was anxious to meet this curiosity who had bloodied the nose of one of their heroes. The magazine, moreover, ran a cover-page article about ShareFinder which put it firmly on the Australian investor map. Furthermore, Australia had just introduced Capital Gains taxation which was beginning to play havoc with everything from the share market to house sales.

So, clearly, investors were waking up to the new reality and realising that my methodology might be the correct one to apply in the future. There was, however, some rationality in their previous prejudice and, I fear, the underlying cause of it might be returning once more for, firmly underlying share price movements back in those long ago and unlamented times was the towering problem of monetary inflation which had taught everyone that the only way to hang onto lifetime savings was to invest in hedges like property, shares, fine art and antiques. The prices of all such items had long before completely detached themselves from the reality of such things as the costs of building a house or manufacturing an item for sale.

Recently too, such traditional tests of value have once again begun detaching themselves from their long-term value to mankind because monetary inflation is once again likely to become the dominant driver of the marketplace. It has recently been reflected in such things as soaring house prices in most leading Western countries. However, at least for now, the link between corporate profits, the dividends companies pay and the prices of their shares still seems to be holding and so, perhaps, it has been no surprise that ShareFinder-constructed portfolios have continually beaten the world’s best in the decade to December 2021.

But things might well change as the inflation bug comes back to bite us! Central banks have been printing money so furiously in recent years in order to stimulate economic growth that major currencies have become nearly worthless. That is why, for example, that until the recent shock declines of Wall Street share prices, the average investor would need to wait around 40 years to see the earnings of his investments returned to him in the shape of aggregate corporate earnings. Furthermore, there is a deeply-troubling hint of another underlying problem. It is beginning to look as if a new axis of power-seeking is developing in the shape of Russia and China beginning to exploit this situation to aid their grasp for world domination.

 The graph below traces the average price/earnings of Wall Street listed companies with US inflation stripped out, unequivocally illustrating how expensive listed company shares have become.

 The following chart is a little old but it does serve to illustrate the relentless decline in dividend yields that have accompanied the central bank money printing programmes of the past 20 years:

So it is worthwhile considering whether some lessons of the past might not once again become useful to investors. Let me start by noting that several times in the past century – the last time in the 1970s – share prices completely detached themselves from their underlying long-term investment value. Invariably it was because, as inflation soared to levels not seen since the excesses of Germany’s Weimar Republic and set the stage for the rise of Adolph Hitler in the 1920s, shares became one of the world’s few means whereby ordinary folk could hang onto their lifetime savings.

Instead of any longer being viewed as a means of building long-term wealth, shares on these occasions became “Inflation Hedges” and their pricing detached itself from their traditional fundamentals of being used by large corporates in order to raise development capital and such shares simultaneously being recognized by pension fund managers and individual investors as the best means of building reliable retirement incomes.

In recent years, because central banks have printed so much cash and, in the process artificially lowered interest rates, it has become far cheaper to borrow money on the international market than to go to the expense of a share market listing; together with the ongoing costs of maintaining it. That is why the JSE shares list has shrunk so dramatically from the 850 listed at its peak in the 1990s to a current 331. Similarly, in the decade ending in 2000, an average 408 firms a year used to list on US markets; but in the decade to 2012, that dropped to just 152 a year. By 2016 the US new listings figure had fallen well below 100 and, according to analysis by Professor Jay Ritter of the University of Florida, if sustained, it will see the number of listed companies dwindle to less than 500 by the middle of the century when the famed S&P 500 might be no more. 

Back in the heyday of global stock exchanges, investors bought listed shares for the regular inflation-proofed incomes they would provide. But then central banks began their relentless habit of printing surplus money causing inflation to soar and money to lose its value as a store of wealth. Whenever this has happened, the long-term investor has become replaced by traders obsessed by the trading profits they stood to make in the short-term. So it was small wonder that in the 1980s investors lost interest in performing the intricate calculations needed to provide them with reliable price valuation. As share prices soared in the resultant speculative fever and – as recently as last year price/earnings ratios climbed above 40 – trading profits totally eclipsed dividend income……until recently when they suddenly began of represent equally impressive losses!

So, in the 1970s and 1980s the new messiahs of the share markets were the “Point and Figure” chartists whose hand-written naughts and crosses crawling across graph paper seemingly gave them the edge when market prices behaved like headless chickens. Charts, which could take some of the guesswork out of predicting tomorrow’s prices, were then offering the only reliable guidance and these new messiahs gained amazing reputations. I know all about it because I was one of them.

When I launched my ShareFinder software with its artificial-intelligence-powered price prediction system I arguably became South Africa’s most talked-about analyst. Such was the demand upon my time in the early 1990s that I was forced to give up the job I loved as a newspaper editor in order to devote myself full time to those who were beating a pathway to my door. But at least I had real science behind me as attested by a prediction track record which has remained well above 90 percent for the past 20 years. But apartheid South Africa was small fry. Many of the global leaders of the price prediction industry were to take on the mystique of witch doctors. Some of the most intensely-followed chartist figureheads of that era reputedly locked themselves away in windowless darkened rooms far removed from radios, TV and ticker tapes so as not to allow events so diverse as an incipient war or the new sunshine of a spring day to influence their decision-making.

It was a crazy time. But then, as Atlanta Federal Reserve board member Michael Bryan recently reminded us, “The Great Inflation was the defining macroeconomic event of the second half of the twentieth century. Over the nearly two decades that it lasted, the global monetary system established during World War II was abandoned, there were four economic recessions, two severe energy shortages, and the unprecedented peacetime implementation of wage and price controls. It was, according to one prominent economist, “the greatest failure of American macroeconomic policy in the postwar period.”

In 1964, US inflation measured a little more than one percent a year and it had been in that vicinity over the preceding six years. It only began ratcheting upward in the mid-1960s and reached more than 14 percent in 1980 before eventually declining to average only 3.5 percent in the latter half of the 1980s. In developing countries like South Africa inflation was a far worse problem reaching an all time high of 20.70 percent in January of 1986. 

It took nearly 20 years of bitter global austerity to eventually tame the problem enabling South African inflation to fall to a record low of 0.20 percent in January of 2004. Sadly, however, the privations South Africans had to endure then were largely obscured for the South African man in the street because they occurred simultaneously with the death struggles of apartheid when so many saw the financial constraints of the period as the price of ‘the struggle’

 In part the reasons for The Great Inflation can be traced back to the political policies of the United States and the Great Depression which unleashed unprecedented levels of global unemployment in the 1930s. Thus, in an effort to ensure that such unemployment pain never again returned, the US Congress passed the Employment Act of 1946 which declared it a responsibility of the federal government “to promote maximum employment, production, and purchasing power” and provided for greater coordination between fiscal and monetary policies.

Wikipedia defines this act as the seminal basis for the US Federal Reserve’s current dual mandate to “maintain long run growth of the monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Back then it was generally believed that permanently lower rates of unemployment could be “bought” with modestly higher rates of inflation.

The Employment Act in turn had its roots in the World War 2 agreement hashed out by forty-four nations in Bretton Woods, New Hampshire, during July 1944 in order to provide a fixed rate of exchange between the currencies of the world and the US dollar which was in turn supposed to be linked to gold. But the Bretton Woods system had a number of flaws in its implementation, chief among them the attempt to maintain fixed parity between global currencies that was incompatible with their domestic economic goals.

Furthermore, as the world’s reserve currency, the US dollar had an additional problem. As global trade grew, so too did the demand for U.S. dollar reserves and, for a time, the demand for US dollars was satisfied by an increasing balance of payments shortfall. However, as foreign central banks accumulated more and more dollar reserves, the supply of dollar reserves held abroad grew to exceed the US stock of gold, implying that the United States could not maintain complete convertibility at the existing price of gold — a fact that would not go unnoticed by foreign governments and currency speculators.

As inflation drifted higher during the latter half of the 1960s, US dollars were increasingly converted to gold and, in the summer of 1971, President Nixon was obliged to halt the exchange of dollars for gold and, with the last link to gold severed, most of the world’s currencies, including the US dollar, were now completely unanchored in an irredeemable paper money standard which culminated in the Arab oil embargo in October 1973 during which crude oil prices quadrupled and monetary inflation soared, seemingly out of control.

As businesses and households came to anticipate rising prices, any trade-off between inflation and unemployment became a less favourable exchange until, in time, both inflation and unemployment became unacceptably high as the world got used to the ugly new era of “stagflation.” Compared with 1964, when US inflation was one percent and unemployment five percent, by 1974 inflation was over 12 percent and unemployment above 7 percent. Furthermore, by 1980, inflation was near 14.5 percent, and unemployment was over 7.5 percent.

Enter Paul Volcker as chairman of the US Federal Reserve Board whose solution was to target the growth of monetary reserves rather than the Fed funds rate as its policy instrument. He was later quoted as explaining that “My basic philosophy is (that) over time we have no choice but to deal with the inflationary situation because over time inflation and the unemployment rate go together.… Isn’t that the lesson of the 1970s?”

Introducing credit controls in early 1980 he caused interest rates to spike upwards and, as lending activity fell, unemployment rose and the economy entered a brief recession between January and July. But Volcker continued the fight with a combination of higher interest rates and even slower reserves growth which sent the world into a deeper recession from July 1981 to November 1982.

As a result US unemployment peaked at nearly 11 percent, but inflation continued to move lower and by recession’s end, year-over-year inflation was back under 5 percent. In time, as the Fed’s commitment to low inflation gained credibility, unemployment retreated and the world economy entered a period of sustained growth and stability.

The Great Inflation beast was tamed but, since politicians and the central bankers they appoint failed to learn the lessons of the 1980s, it has begun to rear its ugly head once more. That is why share prices have again lost their links with the basic elements of monetary value like productivity and innovation which alone deliver REAL growth.

Perhaps because it’s the working man rather than leaders and politicians who bear the real pain of monetary irresponsibility, what is abundantly clear is that Volcker’s successors did not take to heart the lessons of the 1980s. By the late 1990s the printing presses were back in action once more, first to rescue Pacific nations following the collapse of the Thai Bhat which was, in turn, one of the principal causes of the stock exchange boom that was to become known as the “Dot Com Bubble.”

Fearing a politically sensitive recession following the bursting of the bubble, the Fed printed more money which inevitable stimulated what was to become known as the “Sub-Prime crisis” and the failure of a number of Wall Street Banks. Again then, and once more in the fight against Covid 19, the money presses roared and for a time it looked as if the central bankers had got away with their irresponsibility. For much of the time the Fed had been printing money, a flood of cheap consumer products had simultaneously been pouring out of a rapidly-industrialising China and this had the effect of damping down the inevitable flames of inflation.

 I well remember how then Fed chairman Milton Friedman was lionised in the financial press at the time as the genius who, using modern tools like computer analysis, was able to fine tune monetary policy in order to avoid the bitter harvest that had always accompanied artificial increases of the money supply…..that was until the sub-prime crisis made it clear that nobody understood the complex mathematics behind the Black Scholes equation and the massive effective monetary expansion that bond derivatives made possible. The graph below, courtesy of the Financial Times, tells the whole story:

Now money is a commodity just like oil, foodstuffs and designer clothing and if you produce too much of it its value declines. That is what inflation is all about. Phenomena like the Chinese economic miracle can tame the consequences of irresponsible monetary policy, but you can’t keep a lid on things forever and now the genii is out of the bottle! Here, courtesy of the New York Times is America’s inflation history over the same period:

 So, it is panic stations in the hallowed halls of the world’s central banks. Everyone knows that the only way to tame the inflation monster is to introduce new recessionary conditions by raising interest rates and, since in the long term there is an unbreakable bond between interest rates and dividend yields – the fundamental truth which I began this column by stating – share prices have to fall as bond yields rise and money is effectively withdrawn from the system.

But there are knock-on effects. How do you allow a recession to happen when something like the war in the Ukraine is cutting off global food and fuel supply chains in the aftermath of the devastating economic consequences of Covid 19? That might be to risk an all-out depression in which advocates of a return to the monetary discipline of the Gold Standard might arguably gain the ascendance and in the process negate a century of monetary evolution. Furthermore, since Russia and China currently hold the world’s greatest stockpiles of gold, might these two totalitarian dictatorships collectively try to grab world domination through effective control of the monetary system?

Cynically too, political parties tend to lose power when recessions occur – not to mention the even harsher reality of children dying of starvation in developing countries like South Africa. A cynical view of that fundamental truth might be that in a more normal global monetary era the ANC’s grossly inefficient government methods would have long ago seen them dispatched from power. Arguably it is only the tidal wave of surplus of money that has been swilling over the planet that has allowed South Africa the questionable luxury of such ham-fisted administration. But everyone knows the ANC’s days are done anyway!

So far as the wise investor is concerned, provided the whole world order is not swept away in the incipient monetary crisis, what we are seeing is an opportunity. Those who saw it coming and prepared for it by building up cash reserves will be able to buy in at the bottom.

Happily for readers who have the ShareFinder system to guide their investments, they are able to construct graphs like the following which projects that the Wall Street bear market is likely to continue until at least the end of February 2023 as illustrated by the smoothly-curving green projection line which turns red as it moves into the future.

 In the short-term, as depicted by the mauve projection line, the first wave of this bear market is likely to be over as early as today because the panic has been a little overdone and so a counter-wave is probable. But the recovery is likely to be short-lived and early July should see a resumption of the bear trend.

Here in South Africa, Blue Chip shares – which are the only ones you should consider holding in such crisis times – are likely to enjoy a much shorter bear phase because they are considerably undervalued by global standards. You can expect them to continue falling in price until late August. But then a long recovery appears likely.

I wonder what that early upturn implies. ShareFinder has been consistently better than I in foretelling the future so, if I may speculate, perhaps by August we will know that Cyril Ramaphosa has a clear run for a second term of office which will give him two years to vanquish the RET forces of darkness and set South Africa firmly on a path to recovery, Let’s hope that is what the ShareFinder graph is foretelling!


By JP Landman

Steve Jobs famously said that one can only connect the dots backwards. We connect the dots on government’s economic policy since 2018. The dots tell us what has been done, not what will be done nor what has been promised. They help us to distinguish between daily headlines and longer-term trends. (I apologise in advance that this read is longer than usual – there are just too many dots!)

A stable macro-economic framework is one of the five key pillars of growth. (See, for example, the report from the International Growth Commission on which Trevor Manuel also served.) This simply means sustainable fiscal policies (reasonable deficits and debt) and sound monetary policy (curbing inflation).

An independent reserve bank is crucial for stable, non-political inflation targeting and control. The South African Reserve Bank’s (SARB) independence came under severe attack. At the ANC’s NASREC conference in December 2017, a resolution was adopted to nationalise the SARB. Eighteen months later, in June 2019, then-Secretary General Ace Magashule pushed the envelope and called for ‘quantity (sic) easing’ and a change in the mandate of the SARB. Ex-president Zuma joined the fray and tweeted that a change in mandate was ANC policy and if not implemented, government could be recalled. The Public Protector published a report on changing the mandate of the SARB. Julius Malema and the EFF tried to make political capital about nationalising the Bank. Connect all these dots and they suggest a total onslaught on the SARB.

However, 48 hours after Magashule’s June 2019 statement, the ANC Top 6 issued a statement affirming the mandate of the Bank, confirming the role of the minister of finance in setting inflation targets and stating clearly that nothing would change. Magashule, part of the Top 6, had to swallow his words.

The statement also dealt with the ownership issue, saying: ‘It is our desire for the SARB to be publicly owned. However, we recognise that it will come at a cost, which given our current economic and fiscal situation, is simply not prudent.’ The noise around the SARB died down; even the EFF went quiet and the SARBs independence and stature has since only grown.

Connect all these dots and June 2019 was the month the tide turned on the SARB.

Fiscal policy

The first dot on the fiscal policy page was made in February 2019, before Covid-19, when the president made a commitment in the State of the Nation Address (SONA) ‘… not to spend our way out of our economic troubles’. That was three months before the general election and a spending splurge was predicted by the chattering classes. In the event, spending in that year was only 0,3% above the ceiling set by Treasury.

The commitment to fiscal discipline was severely tested over the following three years with the Covid-19 pandemic, load shedding, massive Eskom and other SOE bailouts and the destabilising effect of the July 21 unrest.

Given these pressures, what do the dots suggest on that fiscal commitment?

In the 2020/2021 financial year government broke the three-year wage agreement on civil servants’ increases. Consider the politics: Cosatu unions had helped Ramaphosa become president. It’s no small matter to break a negotiated agreement with your supporters. On top of that, in 2021 it was followed by civil service increases considerably below inflation. We will see what happens this year, but for two years increases were held tight.

Another dot is that extra spending due to Covid-19 and emergency relief was substantially (not fully, since debt was taken on as well) financed by cutting other expenditure – the (in)famous re-prioritisation of expenditure. There is not a department or agency that has not seen its budget cut. The economy shrank 6,4% in 2020 when Covid-19 first hit. Government spending to off-set the impact of Covid-19 was about 5,5% of GDP. Well with in the rule of thumb that expansionary spending can be equal to the contraction. That dot confirms no splurging. (Government aimed to spend 10% of GDP, but that did not actually materialise as the bank guarantee scheme did not take off as planned.)

In my view, these decisions were no mean achievement given the context. Of course, the favourable terms of trade from commodities helped the fiscal position. But it came after the tough decisions were taken. No wonder then that Moody’s changed their outlook this April from negative to stable.

All this must be seen against the very different pattern of dots of Zuma’s attacks on Treasury in 2016 and 2017. Remember weekend special Des van Rooyen in 2016, the dismissal of Pravin Gordhan and Mcebisi Jonas in 2017, the overwhelming evidence of state capture…? In South Africa we now take stable macro policy for granted because we have it. But it did not happen by itself.

Structural reform

Beyond macro policy, the single most important pattern of economic policy dots concerns government’s commitment to structural reform.

The first big dot came in August 2019 when Tito Mboweni published the Treasury paper on structural reform. It was met by general howling and condemnation, even from some in business. Six months later, in February 2020, the president quietly declared in SONA that the Treasury paper ‘is now cabinet policy’. By October 2020 there was a dedicated unit in the Presidency working solely on promoting structural reform. The Economic Recovery & Reconstruction Plan largely reflects the Treasury paper – and is now generally accepted government policy. All departments defer to it. Structural reform has become the key economic policy of the Ramaphosa administration.

The biggest reform is playing out in the so-called network industries: spectrum/telecommunications, transport and electricity.  Digital migration and the concomitant spectrum release has been completed after 10 years of delay. (In the first eight years the delay was due to political ineptitude; in the last two years it was due to private sector resistance.) It is now done and dusted. The auction netted R14,4 billion for the Treasury. If that is not a bright dot, I do not know what is.

Dots outside government are investments by Google and a Facebook consortium in undersea cables linking South Africa to the wider world, more than doubling all current capacity. Inside the country, MTN, Vodacom and Remgro subsidiaries are all extending fibre connections beyond the usual areas into poorer communities at affordable prices. R2,5 billion has been put in the budget for the South African Connect project, which aims to bring broadband access to all South Africans, prioritising rural and under-serviced areas.

Next came railways and harbours. Two years ago, the policy on railways and harbours was still one of state-run monopolies. Change started slowly, then accelerated. First, regulating functions in both railways and ports were separated from operations. Next, infrastructure was separated from operations to determine proper charges. That opened the door for private operators to enter railway and port operations. The physical separation took about 18 months. Then, in April 2021, the president announced that a new pier will be built in the Durban harbour by the private sector in a R100 billion project.

Since then, Transnet has issued requests for proposals for a new manganese terminal at Ngqura in partnership with the Coega Development Corporation, as well as one for a liquefied natural gas terminal in Richards Bay. In April 2022, Transnet Freight also opened bids for slots on the container corridor between Durban and City Deep in Gauteng. (There is an entirely predictable tussle on terms and conditions; see the paragraph below ‘Have a heart’.) Work is also being done to upgrade the railway line from Tshwane to Gqeberha to facilitate vehicle exports that currently go by road and through the congested Durban. It is a R7 billion project.

Energy reform

The biggest reform of all is taking place in electricity. Not just the biggest, but also the most important, since load shedding is by far the largest constraint on the economy. Fixing electricity is more important than crime, education, corruption and every other ill inflicted on South African society. In the last two years I have written seven times about the big reforms in electricity and will not repeat it. Here I want to focus on load shedding and overcoming that.

The supply shortage causing load shedding is 4 000 to 6 000 MW. How much of that will be covered by current procurement? Link the dots and note the trend:

  • In April 2018, 27 independent power producer (IPP) contracts from Bid Window 4 that were suspended by Brian Molefe in 2016, were signed. South Africa’s renewable programme could restart. The last 500 MW from that Bid Window is now being connected to the grid. Currently, 93 completed projects have added 6 855 MW to the grid. Imagine load shedding if we did not have that!

  • In August 2020, the emergency or ‘risk mitigation’ programme was launched, 1 200 MW was awarded to the now infamous Karpowership. Thankfully, that deal appears to be stuck, but 800 MW given to other operators are in construction and will be connected to the grid.

  • From October 2020, municipalities were allowed to procure their own power. In June 2021, Johannesburg Metro opened bids for 220 MW from solar and gas. In February 2022, Cape Town opened a bid for 300 MW. Eight other municipalities are working on it but have not opened bids yet.

  • In April 2021, Bid Window 5 for 2 600 MW renewable power was opened and the 25 successful bidders were announced in October 2021. Financial closure has happened and the 2 600 MW can be connected to the grid by 2023/2024.

  • In June 2021, the president lifted the threshold below which a license is not needed from 1 MW to 100 MW. Several private companies have signed agreements to procure power from renewable producers. Examples include Amazon in Cape Town (which gets 10 MW solar power from the Northern Cape), SAB (which signed an agreement with a black women empowerment group for electricity from gas generated from the biomass of a dairy farm), and BMW (which already gets a small quantity of power from a biomass plant). 58 projects are currently being pursued by 12 companies for 4 500 MW. The big ones are the mining companies. Anglo signed an agreement to switch to 100% renewable power by 2030; Sasol is pursuing 900 MW. Eskom has made land available for renewable operators to put up plants below 100 MW on Eskom land. This list goes on, but this paragraph illustrates the galvanising effect of the president’s 100 MW announcement. This is where the real action and innovation in power generation is. Eventually, most dots will be here.

  • During the weekend of 23 April 2022, news broke that the unit in the Presidency dedicated to help implementing structural reform has succeeded in getting some restraints removed that hinder below 100 MW projects. This is new territory for everybody, and as the various players move along, more reforms will follow.

  • In April 2022, Bid Window 6 was opened for another 2 600 MW renewable power. The closing date for bids is 11 August 2022. This can be connected to the grid by 2025.

  • Note that all the money for this new power generation comes from the private sector.

The dots above add up to more than 11 500 MW that will be connected to the grid by 2025. It excludes the 1 200 MW from Karpowership. Compare that to the 4 000 to 6 000 MW deficit. As sure as I am writing this, more Bid Windows will open this year and next. I am only listing the dots that are already on the page. Of course, 1 MW of renewable power is not the same as 1 MW of base load, but still, the gap is being narrowed considerably. Load shedding will not be a permanent feature of our future. Mistakes have been made and delays occurred, but the trend is absolutely clear.


A key element of economic recovery is more infrastructure. I have been cautious on this issue, simply because so many ducks have to be put in a row. It now looks as if I may have to shift my stance – the ducks are lining up.

 The first is the budget. Infrastructure spending by government entities increased by a healthy 22% in 2021/2022, enough to overtake the numbers recorded in the two years before Covid-19. Investment spend is set to increase a further 15% over the next three years. Transport and logistics (roads, railways, and small harbours) get the biggest chunk, and water and sanitation the second biggest. (By the way, a very competent and experienced civil servant, Sean Phillips, was appointed Director-General of the Department of Water and Sanitation in December.) The third biggest chunk goes to energy to expand power-generation capacity. Noticeable big projects include Phase 2 of the Lesotho Highlands Water Project to supply Gauteng (R32 billion) and the project on renewable energy and water saving in government buildings (R55 billion). The latter will be done by the private sector with its capital on a build, operate and transfer basis.

The second is an innovation, the Infrastructure Fund, which blends public and private money to facilitate infrastructure investment. After a three-year struggle it at last became operational in 2021. This year Treasury put R4, 2 billion into the Fund, with another R13,3 billion to follow over the next two years. Over 10 years, Treasury will contribute R100 billion. (One wonders if some of the money from the spectrum auction will go there…?)

Seven projects adding up to R21 billion have been approved by the Fund, which will contribute R2,6 billion of the money, with the balance coming from the private sector and development institutions. It shows the leveraging impact the Fund can have. The seven projects include social housing and student housing projects and two water projects (the Olifantspoort & Ebenezer Water Supply Scheme and the Mokolo-Crocodile River Water Scheme, both in Limpopo). 

A third duck getting into the row is the deliberate effort to build skills. Last year government admitted that it simply does not have the capacity to run infrastructure programmes. A dedicated unit, Infrastructure SA, was established to build a pipeline of projects – in the process building skills and capacity. National Treasury, through its technical advice service, is helping to build skills at both the Infrastructure Fund and at Infrastructure SA.

Infrastructure SA’s work also involves unblocking policy and regulatory obstacles to infrastructure development. An example is getting land re-zoned by a municipality to build a school. Currently, it takes an inordinate amount of time. (The same problem exists in getting land rezoned for renewable energy projects.)

Connect the dots of political will, more money and building capacity, and infrastructure spending is likely to increase considerably.

Growth dividend

Treasury modelling suggests that these structural reforms should add about 1,7% to GDP growth. If we take our current growth ceiling as about 1,5% it means that growth can go to 3,2%, which is double our population growth.

Allowing the private sector into the network industries and financing infrastructure is new territory for South Africa. We grew up with state monopolies in the network industries. The tradition is more than 100 years old. Converting to private sector participation requires new rules and practices. Developing them will necessarily take time. Who takes the risk? Who does the maintenance? What is a reasonable return? Over what period? These are the details that need to be thrashed out. Naturally it involves a process of negotiation and arm twisting between old monopolies and new private sector players.

On toll roads we have developed successful partnership models. It happened through an intensive process of having all the parties in the same room, the engineers, bankers, operators, builders, lawyers, and policy makers. The same will now be happening in energy, railways and harbours. It is not necessary to go hysterical when the process plays out and it seems like the parties are far apart.

The trend is clear: the genie is not going back into the bottle of state monopolies. We will learn how to have a ‘mixed economy’ in the network industries.

Employment stimulus

A separate page in the economic report book concerns short-term relief measures on unemployment.

In October 2020, the president set the goal of 800 000 public employment jobs. This must not be confused with civil service jobs. They are temporary jobs paying a stipend of R 3 500 per month. To date, 850 000 people have been employed in this programme, of which more than 500 000 have been employed in education as teachers’ assistants, cleaners and janitors in schools. More than 80% are young people and 60% are female. The number is set to rise to one million this year. There is enough money in the budget to sustain the programme for three years. Will it solve the country’s unemployment problem? No. Will it contribute to alleviating poverty and put some food on the poorest tables in South Africa? Yes.

The programme is now being expanded beyond government by using the capacity of NGOs and community organisations who work in areas like urban agriculture, early childhood development, public art and gender-based violence. It is expected that 50 000 jobs will be created that way.

Other dots are:

  • the expansion of the employment subsidy, making it easier for smaller businesses to employ young people;

  • the platform for young work seekers, which now has more than 2,3 million young South Africans registered, of whom 600 000 have been placed in jobs;

  • the revitalised National Youth Service, which will recruit its first cohort of 50 000 young people this year;

  • 10 000 unemployed TVET graduates who will be placed in workplaces, starting this month; and

  • Home Affairs having hired 10 000 youngsters to digitise records.

These dots will not resolve South Africa’s unemployment problem of nearly 12 million unemployed people. To lower unemployment substantially we need to increase the size of our economy. That is where the structural reform measures come in. But these employment measures provide young people with the work experience they need to take their first step into the labour market. They also bring much-needed relief while unemployment is rife.

So what?

  • It was a former editor of The Economist, Bill Emmot, who said ‘… like all instant analysts, the journalist is constantly at the risk of over-interpreting the short term and under-rating the longer-term trends. What is needed is a longer view.’ The dots help us to see the longer-term trends.

  • More space is being made for the private sector in energy, railways, ports and infrastructure funding. The monopoly model that South Africa has grown up with for over 100 years is changing fundamentally.

  • This is an important new trajectory for more investment and higher productivity.

  • For six years South Africa has suffered from declining per capita incomes. It turned around in 2021 (thanks to the low base Covid-19 created). More investment and higher productivity can lift growth by 1,7%, enough to put South Africa back on the path of rising per capita incomes. It is a tipping point.

  • At the second investment conference in 2019 the president said: ‘The man who moves a mountain begins by carrying away small stones.’ That summarises his style. Over the last two years the stones have systematically become bigger. The mountain will move.

Did You Catch Charlie Munger’s Zinger?

By Thompson Clark
Smart Money Monday

Did you catch billionaire Charlie Munger’s zinger at Berkshire Hathaway’s annual investment conference?

Last week we talked about CalPERS’ inane criticism of Munger’s partner, super investor Warren Buffett, for serving as Berkshire’s CEO and  chairman. In Charlie’s words:

“It’s the most ridiculous criticism I’ve ever heard. It’s like Odysseus comes back from winning the Battle of Troy and some guy says, ‘I don’t like the way you held your spear.’”

Instead of harping on the guy who’s delivered 549% returns to shareholders over the last 20 years, maybe try emulating him. After all, the straightest route to success is to follow the most successful people. If you want to become a better golfer, do what Tiger Woods does. And if you want to become a better investor, do what Warren Buffett does.

  • Today, we’re looking at what Buffett is buying and how we can play along.

Buffett has been gobbling up stocks, purchasing at least $50 billion in common stock since the start of the year. That includes a hefty slice of energy.

Let’s start with Chevron (CVX), which has been on a big run over the past 12 months.

Berkshire bought a stake in Chevron in late 2020. And it’s purchased an additional $20 billion worth of shares this year. That brought Berkshire’s total stake in Chevron to $30 billion, making the oil major one of its top 5 holdings.

Berkshire’s second energy bet is Occidental Petroleum (OXY).
Buffett first got involved with Occidental in 2019, through $10 billion worth of 8% preferred stock, with warrants, to help Occidental fund its acquisition of Anadarko Petroleum. Berkshire still owns that preferred stock today.

He’s also buying up Occidental common stock—seemingly adding to the position daily. Berkshire now owns 15% of Occidental, with an equity stake worth $9 billion.

Altogether, this puts Berkshire’s oil and gas bet at $50 billion. That’s a serious bet, even for Berkshire.

  • I agree with Buffett: Oil and gas is a good place to be.

I’ve mentioned that here in Smart Money Monday before.

The oil and gas producers have found religion. That is, they’re not producing just to produce. They’re only producing if the returns are there. Why deploy capital if there’s no return?

That means higher earnings and likely higher stock prices.

Energy has already been on quite a tear this year. The Energy Select Sector SPDR Fund (XLE) has climbed 46% year to date. It’s crushing the S&P 500, which is down 13%, and the Nasdaq 100 ETF (QQQ), which is down 21%. That’s serious outperformance.

Even after that run-up, energy companies are still cheap. Majors like BP (BP) and Chevron trade for mid-teens earnings multiples and have 4% dividend yields. Medium-size player Pioneer Natural Resources (PXD) is even more interesting, with a current dividend yield north of 10%. All these companies are generating tons of free cash flow and acting rationally.

Energy is still a good place to be. Buffett likes it, and so do I.

The size of the firm does not matter!

By Brian Kantor

Professor Brian KantorMuch notice is being given to the disruption of supply chains by lockdowns and by war in Ukraine. With hindsight, producing more of the essential components in-house or holding larger inventories to avoid relying on just-in -time delivery would have been a superior, that is less costly choice to have made.

But very few firms are fully integrated. The steel mills are likely to outsource their sources of coking coal and the gold mines their sources of power -for obvious reasons- outsourcing is expected to be cheaper. A continuous comparison will be made of the expected costs of in or outsourcing all the different operations that lead to the final delivery of any product or service supplied. Such decisions help to determine the optimum size and scope of any enterprise. Less can well be more for shareholders.

All firms are defined by some mixture of in-house activity and goods and services contracted for. Even the accounting and human resource function may be outsourced to specialist service providers as easily as the company canteen. Decisions to outsource may hopefully mean a better focus on what are properly understood to be the essential ingredients for any thriving business. The objective should be to be realistic and prescient about how best to release the key competencies that make the firm competitive and are its essential reason for being and surviving. Strategic decisions to in-source that make the firm larger and less specialised – or outsourcing to other firms- that makes it smaller and more specialised – cannot be outsourced.

Technological change alters the optimum size of any firm. That the decision to outsource the IT function to the computer cloud is seen as the right decision now, would not have been feasible twenty years ago. Then firms with heavy demands on data collection and processing would have had no choice but to invest in mainframes and tinker with legacy systems with large in-house IT departments. That may be very difficult to abandon. The operators in the cloud can reduce the danger of excess or deficient computing capacity by attracting a well-diversified customer base.  The market share gains of one customer can offset the losses of another competing with it, so adding to the predictability of the demand for an outsourced service or component. Such a pooling of business risks can be a great driver of economies of scale and allow the concentrator to offer competitive terms to a more specialised operation.

A similar explanation fits the component manufacturers who supply a variety of competing assemblers of appliances or automobiles whose core capabilities may be in the design and marketing of their badges – not in in-house manufacture at which they may not excel. Every entrant into the burgeoning electric vehicle industry is having to answer the important question – how much of our production could or should we outsource? The answer Tesla provided- producing its own batteries in its own very large factories with very substantial and fixed overhead costs – may no longer best serve the purpose.

The enhanced scale of the specialist provider may also facilitate R&D on a scale that any inhouse department could not justify and could leave the integrated firm behind in the development of intellectual property – that can be hired on reasonable terms from the inventors. Firms no longer have to run their own warehousing and distribution systems. The delivery of goods produced is increasingly outsourced to specialist logistic providers who can deliver more cheaply or more conveniently to a variety of customers than can a firm hope to do running its own trucks and warehouses.  They can fill the return legs. Sales online to a global market have been made possible not only by the internet but by outsourcing delivery to the specialised courier.

These opportunities to outsource essential inputs in production or service provision are a huge boon to the entrepreneurs whose barrier to entry was traditionally limited access to capital- understandably – given their unknown potential. By outsourcing – by staying lean and capital light and highly focused – the start-up’s plans to compete become more viable. Good for them their customers and very good for the economy that hosts them.

Hardening of the Economies

By John Mauldin

Atherosclerosis, or hardening of the arteries, occurs when substances like cholesterol accumulate and impede your blood flow. This keeps your body from delivering nutrients where needed. Left untreated, it usually doesn’t end well.

Something similar is happening to the global economy.

Like atherosclerosis, it’s been building toward a crisis for years. Central bank policy errors, fiscal mistakes, trade protectionism, inadequate infrastructure investment, COVID-19, Russia, and more all blended into a toxic brew that is now blocking our financial circulation.

We talked about all this at the Strategic Investment Conference. As with bodily atherosclerosis, curing our economic condition may require lifestyle modifications. But in one sense, it will be even worse: We’re all going to get the cure whether we want it or not. We’ll get its side effects, too… and you can bet there will be many.

China Panel: Extended Lockdowns

China is one of our key economic arteries. Worse, it’s very hard to bypass, so the country’s current self-induced COVID lockdown is a critical blockage. Our China panel—Emily de La Bruyere, Bill Bishop, and Louis Gave with Jacob Shapiro moderating—wrestled with that question. They reached a quick, unanimous conclusion, too. They think Beijing will stick with its “Zero COVID” strategy, whatever the cost.

Emily noted, astutely, that the government is implementing a variety of steps to mitigate the economic impact of the country’s extensive lockdowns. For instance, they’re allowing some companies to operate in a “closed-loop” system where the workers stay onsite and have no contact with their families or the public. The fact that they are making these efforts means the broader policy isn’t going away. Further, they are clearly shifting the impact outside China as much as possible, thereby minimizing domestic pain.

Bill Bishop agreed, based on his monitoring of Chinese leadership statements. They continue to push slogans like “persistence is victory” while punishing anyone who doubts the policies. They will make tweaks and adjustments, but the Zero COVID strategy won’t change. Leadership seems to believe that letting COVID spread would be even more damaging to the economy. (And given their low uptake of low-quality vaccines, they may be right.)

Given how dependent the rest of the world is on Chinese exports, this will probably add to inflation pressure everywhere. Lower Chinese purchases may offset some of this, but not all. And in the long run, China is helping end the same globalization that enabled its growth.

Louis Gave looked at it not only as an analyst, but as a business owner with a presence in China. From the SIC transcript:

We have an office in Beijing, we have an office in Hong Kong, and running a business out of China just gets harder and harder. None of your ex-pat staff wants to stay there. All your ex-pat staff says, “Look, I haven’t seen my kids who are in US colleges or European colleges for two years. I want out. I don’t want to live here anymore.”

I think that’s going to be a big hurdle going forward. Who’s a senior manager at, I don’t know, at Apple or Peugeot or Volkswagen, who today puts their hand up to move to China? Two or three years ago, it was an exciting adventure. You’d move to China, and it’s a country moving, it’s a 5,000-year-old culture, it was extremely exciting. The excitement’s gone.

Xi Jinping may be perfectly fine with this. He would prefer the Chinese version of capitalism be run by Chinese people, not ex-pats, particularly now that China has acquired enough skills from those ex-pats to do things on its own. Having foreigners underfoot is less helpful than it once was.

However, this points to the theme Louis and others mentioned repeatedly. As globalization fades, the world is fragmenting into national and regional economic blocs. These economic blocs will also be financial and currency blocs. It isn’t just the flow of goods on the line; capital flows are being blocked, too. That will mean big changes in the coming years.

Zulauf: Vicious Cycles

I asked Grant Williams to interview Felix Zulauf, whom you may know from his long presence on Barron’s money manager roundtable, and they quickly exposed more hardening of the economies. Felix began by talking about his work on cycles.

The economic and financial markets aren’t linear. They go through long-term cycles, within which are shorter cycles, all of which have peaks and valleys. Understanding where you are in the cycles is key to anticipating what will happen next. This is currently harder than usual because two big events—the pandemic and now the war—interrupted the cycles in unprecedented ways.

Felix sees these cyclical breaks as key to our problems. COVID restrictions disrupted normal supply and demand patterns, causing enormous damage that still isn’t fixed. Highly optimized, efficient businesses can’t always add or reduce production quickly. That led to shortages of some goods and services and an excess of others. These had unequal effects but caused a lot of pain for a lot of people.

Governments and central banks tried to reduce this pain, but it’s hard in the first place, and they lacked the right tools and talents. Their interventions may have prevented even worse outcomes. Nevertheless, they generated yet more problems: stimulus payments, QE, and low-interest rates enabled spending that generated supply chain snarls and price inflation, which the Russia-Ukraine War would later aggravate.

Felix thinks this inflation will persist into the mid-2020s. Inflationary psychology is now embedded in the economy, and he doesn’t see Jerome Powell as another Paul Volcker. But he also doesn’t foresee 70s-style stagflation. It will be “something else” that will destroy confidence in both institutions and currencies. Then people will turn to gold.

Marks: Pendulum Swings

I interviewed celebrated fund manager Howard Marks. He picked up on the cyclical theme as well but described it as a “pendulum.” Here’s a snippet from the transcript.

To me, the concept of the pendulum is extremely important. Human thinking does not stay centered at what my mother used to call “the happy medium.” It usually swings from too much in one direction to too much in the other, from greed to fear, from optimistic to pessimistic, from risk averse to risk tolerant, and excessively.

I like to point out that in the real world, things fluctuate between pretty good and not so hot, but in the markets, they tend to go from flawless to hopeless. The swings are overdone. Whenever human thinking and psychology are involved, I think A, the pendulum swings, and B, it usually swings to excess.

There is a pendulum with regard to offshoring, for example. If you go back 60 years in this country to when you and I were boys [he was talking to me, and we are basically the same age], virtually everything we consumed was made in America. And then, over time, back about 60 years ago, there were a few, literally I think, a few Volkswagens and what we call Datsuns imported to America. Fast forward to the ‘80s, the Japanese car makers were forced to sign on for a voluntary limitation of imports of something like 1.6 million cars a year. And sourcing, manufacturing, et cetera, went from Japan, which was cheap and became expensive, to China, which was cheap and became expensive, to Bangladesh and Pakistan.

We used to make 80% of the world’s semiconductors. Today we make few, if any, and most… 80%, I think… come from Samsung in Korea and from Taiwan. Taiwan’s the big one. But the pendulum swung very strongly toward offshoring and importation because it was cheaper, and people make these decisions on one dimension and its cheapness, but the recent events—the supply chain complications of the last year and a half—have shown that there are things that matter other than cheapness.

I think the pendulum will swing back somewhat with regard to critical goods, not baseball caps and t-shirts that are made in Bangladesh, but with regard to critical goods like semiconductors, where people will say, it’s not just cheapness… we also have to worry about safety and security of our supplies. And so, we’re going to bring, for example, semiconductor fabrication back onshore. And we’re starting to see this. Both Samsung and Intel have announced new domestic fabrication plants.

He said all that matter-of-factly, but it has enormous consequences. US offshoring generated the giant trade deficit that gives the US dollar its global reserve status and finances our domestic debt. Can we reverse it? Maybe, but it will take time. And it will lead to a vastly different kind of economy than most of us can remember.

Howard went on to describe another pendulum in Europe involving energy. The issue there wasn’t so much price as a desire to protect the environment. They tried doing this with renewable energy sources like wind, solar, and nuclear. It turned out not to be enough, and some people didn’t like the nuclear plants. That led some countries, mainly Germany, to import most of their energy from Russia. We know where that dependence led, and now the pendulum is swinging the other way. Having secure energy supplies is outweighing the green concerns. All these pendulum swings create investment opportunities, the kind Howard adeptly identifies and jumps on.

Finally, we talked about political extremism and Howard’s work on the “No Labels” organization. It is growing more important as we face a possible economic crisis. He thinks the Fed will keep pushing until something breaks, and then may push even more. Getting through it will require the kind of cooperation that, at this point, is almost nonexistent in Congress. I say “almost” because the bipartisan Problem Solvers Caucus is actually working to find solutions. These will require a dirty word: compromise. That’s unpopular in both party bases, so Howard says the real challenge is to create an environment that fosters problem solving.

Wood: Innovation Wins

Since we’re talking about problems and solutions, I’ll end this letter with Cathie Wood. Her firm’s funds have struggled lately, but that’s normal in her space. The simple fact is that many of the technologies and companies she invested in became their own bubbles. Anyone remember Amazon or Microsoft in 2001? But great buying opportunities. I don’t think we are there quite yet, but when the Fed hopefully kills the inflation monster, those tech stocks will be the Amazons and Apples of the future.

Cathie looks for innovation because that’s what solves problems. Innovation is inherently risky. Sometimes the solutions don’t work, or you need a long time to make them work. Impatient investors don’t like that part, but it goes with the territory.

Cathie talked about three top problems she thinks technology is ready to solve: inflation, energy, and supply chains. These solutions will help countries become more resilient and less vulnerable to these global contagions. She pointed out that innovative solutions are, by definition, different from the current standards. That draws criticism, but it’s also what makes them work.

Tesla, for instance, started out doing something new with electric vehicles. The automotive industry’s vast supply chains weren’t set up to do what Tesla needed. This forced the company to become vertically integrated—something business schools usually say is a terrible mistake. Tesla had to bring almost everything in house, at least in its early days. That’s been costly, but now it makes the company less dependent on outside suppliers. That is allowing it to expand quickly while much larger, global brands race to catch up.

My partner Ed D’Agostino, who was interviewing Cathie, pushed her on that point. He said US equity markets don’t like vertical integration, and it often draws in activist investors who push for change. Here is Cathie’s response.

This is the way innovation often evolves. If you look at the early days of cell phone manufacturing, for example, I think many people are surprised to learn that Qualcomm felt compelled to build its own phones because it wanted to speed up adoption, and nobody believed that cell phones were going to take off the way they did. Tesla had to do the same thing. And we’ve talked to Tesla about this. You know, the cell phone industry, of course, evolved so that it wasn’t so vertically integrated after all. And I do think Tesla is thinking that with time, as supply chains become more, shall I say, commoditized, it probably will move away from verticalization.

But there’s one thing that could prevent it and which would present it with an incredible barrier to entry, and that is if Tesla is successful at evolving the first national autonomous taxi platform, it will have done so because of its AI chip—artificial intelligence chip–this is the equivalent of Apple designing its own chip for smartphones because nobody thought of that or believed smartphones could happen. Apple redefined the industry.

Tesla’s doing the same in the transportation industry with autonomous, and what we’re finding out with the use of artificial intelligence and given the importance of safety when you’re talking about autonomous driving, you have to titrate the cars very carefully using the data and all of the sensors. It’s a very delicate balance, and it changes from car model to car model. So we think that these years of vertical integration could extend if Tesla becomes successful in the autonomous taxi platform market.

Again, this is something with macro consequences if correct. Millions of driver jobs—taxis, delivery vehicles, long-haul trucks, and more—are at stake. Can Tesla develop chips that will push goods through the economy more efficiently than human drivers? I think we will find out. And if it’s not Tesla, it will be someone else.

Cathie went on to talk about technology and “precision agriculture” solving many of our food challenges. Intelligent farm equipment can increase crop yields while using less fuel, fertilizer, and other inputs.

Reading the transcript, I was once again struck by the parallels between the economy and our human bodies. The automotive industry is racing to make the economy’s circulatory system work better, eliminating arterial blockages and helping “nutrients” flow better. Meanwhile, the agriculture industry is using technology to expand the supply of nutrients that keep us healthy.

My biggest personal investment is a private company that will completely change the agricultural space. They can literally help a plant or crop evolve multiple traits like resistance to herbicides and disease, or to be more nutritious, more productive, and less reliant on fertilizers and chemicals. It isn’t GMO, but more a way of speeding up the evolution that would occur over centuries. Combine that with precision farming? Game changer for the ag world and cheaper prices and abundance for everyone.

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