Monday, January 30, 2012

South Africa's M3 now buys less Coffee, gold and other stuff; did Bernanke dilute our whiskey?

The previous two articles I did on the purchasing power of residential property, and the JSE Top 40 got me wondering: how much value could we purchase if we were to trade in the entire South African M3 money supply for commodities? I compiled some graphs and found the answer to be very interesting.    

So, if we were to trade M3 for commodities; would we get more, or less in commodities?  That is the question I attempted to answer in this posting.

M3 Money Supply

To provide a bit of background; M3 refers to the broadest measure of the amount of money in circulation in an economy (this is according to Simply put our M3 money stock is a measurement of all the cash and electronic money available in the South African economy; our entire supply of money. 

It is an accepted fact that the central banks of the world are able to expand monetary bases (print money). That means that governments, along with their central banks, can manipulate the amount of money that circulates in their economies.

The US is a good example; and man have they expanded their money supply since the big financial crisis of 2008. Take a look at the following chart of the monetary base of the US (this provides an estimate of the cash in hand and money at reserve at the US banks, i.e. their monetary base). 

Adapted from data:

Wow! I think it is rather obvious that Uncle Sam has been printing a lot of money since 2008.

But what about the situation closer to home, in good old South Africa. What has our monetary base been up to? Have we 'created' any money?

To find out, I compiled the following graph, subtracting M1 base currency (notes and coins) from M3 money supply. I wanted to see if any money was created in a broad sense (apart from notes and coins). So let's see: 

Adapted from data:
I think I am correct in saying we had a nearly parabolic increase in the RSA money supply since 1999/2000.

[Also: notice the extreme volatility present in the chart from 2008 to 2010, which have coincided with the financial crisis].

But, are there any negatives to extensive money creation? Well yes, there may just be one; a monster named INFLATION. I don't think inflation should become a problem if we had real inflows of real wealth into a country. But if the money was created from nothing, inflation must be expected.

You may gather that I don't trust this money printing business much, it's a personal gripe.  But, many economists argue that money creation only becomes a problem when it leads to  excessive inflation. And hey, the guys managing our global economy know what the're doing, right?

But money creation requires us to keep a tab on inflation and we have to measure inflation against something. So, how do we typically measure inflation? We typically use a measure called the Consumer Price Index (CPI).

I inherently distrust the CPI

Note: my personal distrust of CPI flows from a perceived problem of incentives.  Governments that print money should be expected to have vested interest in reflecting low measures of inflation.  By understating inflation governments could increase the money supply more, thereby funding government obligations and liabilities, through money creation - without raising taxes (A less controversial policy choice). 

The Corrupt Barman

Think about a corrupt barman, diluting the bottle of Johnny Walker behind the bar; while still  charging you yesterday's price for your tot of whiskey. That should give you a fair idea of how inflation works, less bang for your buck! 

Low CPI may mask the actual destruction of purchasing power through excess money creation and corresponding inflation. Some call inflation brought about in such ways 'stealth taxation'. So, I am saying that governments may have very real incentives to understate inflation, especially the CPI, and that's why I don't trust it.

Within this context, I decided to measure the value of South Africa's M3 Money stock in commodities. The basic question asked was:  how much value could we purchase with our M3 money stock when we measure the value of M3 commodities (not in Rand)?       

How much, in commodities, would our entire stock of M3 have purchased?  

Ok, so let's say we have gone completely insane and decided to trade in the entire M3 money supply of South Africa for different commodities. What then would our M3 be worth in commodities?

The following series of charts, I compiled, will give you an idea of the value of our M3 stock over the past 20 years measured in things like gold, silver, maize, soy, and fuel. I used the data gathered from for this analysis.
Our M3 data was gathered from:  

I have divided the commodities into 5 categories, in an attempt to make the information easier to digest. 

[I am not suggesting that the uses described for the commodities in the categories were exclusive. They were merely chosen for broad categorization purposes]. The categories were chosen as follows:   

Stuff that shines: Gold and Silver
Stuff to eat: Food
Stuff the build with: Wood, Steel, Copper   
Stuff to travel with: Energy and Fuel
Stuff to grow other stuff with: Fertilizers 



Gold has had a staggering growth in price over the past decade. This growth is reflected in the chart above. In 2005 our M3 money stock would have purchased about 350 million oz of gold.

By the end of 2011 M3 was valued at only about 150 million ounces of gold. A drastic decline of 57.14% Notice that measured in gold, our M3 has appreciated in value from 1980 until 2005/2006. It started to depreciate in value from 2006 onward. Yes indeed, M3 now buys less in gold.  

Silver has historically been a more volatile investment than gold. So how much silver could our stock of M3 have purchased over the last couple of years? 

M3 money stock in oz of silver

January  2005:    22.9 billion oz of silver
January  2009:    19.5 billion oz of silver
August   2011:       7.6 billion oz of silver  

A 67% drop from the high in 2005; M3 now buys less silver. So, in Gold and Silver - real money - our M3 money stock has declined in value.

Next up I'll consider 'stuff we eat', M3 valued in food prices. 



M3 Money Stock in Tons of Bananas:

January 2005:       404 million tons
December 2007:  378 million tons
January 2009:       213 million tons
August 2011:        319 million tons

Compared to the high of 2005 our money stock appears to be valued somewhat less in banana (404 tons to 319 tons).  Overall, the chart seems to have stayed within a broad trading range.      


Our M3 money stock measured in pounds of beef: 

April 2008:        221 billion pounds
August 2011:   169 billion pounds

From June 2002 to round about January 2008, we find that M3 has appreciated in beef (reflected an up trend). From January 2008 to August 2011 it appears that M3 has started to  depreciate when measured in beef. Has M3 started to lose value when measured in Beef? 


Our M3 money stock appears to have appreciated in value, measured in chicken. The trend appears to be a trend of appreciation.  I found this very interesting, maybe one of our readers could tell us why M3 would show such a continual appreciation when measured in chicken.

See the actual data below:

Our M3 money stock measured in pounds of Chicken  

April 2006:             294 billion pounds of chicken
December 2007:  319 billion pounds of chicken
August 2011:         346 billion pounds of chicken


Maize appears to be another highly cyclical commodity. This is reflected by the highs and lows of the chart. However, the drop in value from June 2010 to Aug 2011 appears to be very pronounced. A depreciation trend might also have formed since 2005 (where M3 started to show a general decline in value when measured in maize).

Keep in mind that maize is an important ingredient in much of the industrial food production industry.  We should thus expect rising maize costs to have a knock-on effect on the prices of other food stuff. 

M3 Money Stock measured in Tons of Maize: 
April 2006:     1.85 billion tons
July 2007:       1.50 billion tons
Jun 2008:        803 million tons
Jun 2010:        1.70 billion tons 
Aug 2011:       987 million tons

Coffee (Robusta) 

Next up my favorite commodity. It appears that M3 measured in coffee has declined significantly also since 2004.

M3 measured in Pounds of Robusta Coffee:
October 2004:    450.3 Billion pounds of coffee
March 2008:       178.6 Billion pounds of coffee


Looking at M3 measured in wheat a short-term pattern of depreciating value appears to exist. Wheat was relatively cheap in 2005 and 2010, increased in price during the big financial crisis of 2008.  Now our M3 money stock buys less wheat than in 2010 and 2005.

M3 Measured in tons of wheat
Apr 2006:     1.1 billion
Mar 2008:    497 million
Jun 2010:     1.6 billion
Aug 2011:     936 million


Measured in soybean, our M3 money stock has also shown a decline in value especially since April 2006.

M3 measured in tons of soybean
Apr 2006:    952 million
Jul  2008:     441 million
Mar 2010:    756 million
Aug 2011:    626 million


Sugar is another important element in the western industrial food chain (perhaps to our detriment). When measured in sugar, we see that M3 has steadily been declining in value since 2006/2008

Sunflower Oil

Sunflower oil shows an interesting and volatile trend. Our M3 money stock was worth a lot in sunflower oil from Jan 2006 up to about Jan 2008. However, since Jan 2008 M3 seems to have been declining in value when measured in sunflower oil.

So let's look at some commodities used for building processes.


Wood: soft logs

At this point it seems like M3 remained relatively stable and appreciating, when measured soft logs.


M3, when measured in copper appears to have been declining in value.  Since the first semester 2009 M3 has dropped very much in value when measured in copper.

Wood: hard logs

Hard logs tell a story of depreciating value. M3 measured in hard logs spiked in 2010 where M3 was valued at 1.085 billion cubic meters of hard logs.  In August 2011 M3 would have bought only 680 million cubic meters of hard logs.

That is lower than the average value which existed between June 2004 to July 2008. It appears that M3, measured in hard logs, is declining in value. The trend may even be reversing to a trend of depreciating value.

Hot Rolled Steel

M3 measured in hot rolled steel has declined slightly since 2010.  The chart seems to reflect increasing volatility.  At this point M3 still buys a lot of hot rolled steel. However, if global production was really in an uptrend (as the news services would like us to believe) shouldn't this chart reflect a decline in value as hot rolled steel becomes more expensive? Which it has not.  


Triple-Superphosphate and Potash

Next up, let's look at two common types of fertilizer used in the agricultural sector: Triple-superphosphate and Potash.

The charts below seems to indicate that our M3 money stock, measured in these two fertilizers, is worth less than it was during the period of 2002 to 2007.


Gasoline, Crude Oil, and Jet Fuel

The following three charts appear to be nearly identical. M3, measured in these three fuel commodities, moves in a sideways range from 2000 to 2008. It then jumps in value during  2008/2009 and then starts to decline (implying M3 being worth less when measured in fuels).

Notice than our M3 money stock would have purchased much more fuel in 98/99 compared to today. Jip indeed, fuel has gotten more expensive. And we are due for another increase this week.  

It's Index Time !!!

My final chart is an index I compiled from 21 commodities considered so far for this posting.  I simply added all the aggregates of M3 measured in various commodities together and divided by 21 for each year.  In theory, this should give us a sample of the general value of our M3 money stock measured over a population of commodities.

I used MS Excel to include a polynomial trend line on the chart. The trend line seems to agree with the general idea that more money printing will devalue the money stock in purchasing power. 'Curiously' the start of the depreciation of M3 found on the chart corresponds rather nicely with commencement of the US Federal Reserves Quantitative Easing programme.


Note that this research has various limitations.  I am tentatively proposing in this posting that a further decline in the value of M3 may be likely. But additional research is needed on this topic. Maybe by people paid to do this full-time. 


I have attempted in this posting, to show that even with big increases in money supply, both in local and US money supply, we may not be better off. It appears that our money stock has declined in value when measured in many of the commodities considered. Perhaps the old maxim that 'throwing money at problems rarely solves anything' is indeed true.

Troubling to me is the high depreciation of M3 when measured in wheat, maize, soy and sunflower oil and sugar. Over the long-term, M3 may also be declining in value when measured in oil, fuel and other fossil fuels (which seems to give support to the idea of appreciating energy prices and peak oil). If my results are true, we should expect to pay more for many things.

Our Johnny Walker, has been diluted!

Some commodities have not reflected a decline in value at this point; specifically chicken, beef, banana, soft logs, and hot rolled steel.

To venture a guess on whey that is: beef and chicken may still be heading for a decline, spurred by the higher input costs of wheat and maize. The polynomial trend-line for beef seems to be pointing down. Hot rolled steel has application in construction and in the US, for example, total construction spending has declined since 2006. I expect this to be a global trend. Logically, I would expect prices of this commodity to be low at present, representing more value.

Measured in real (non-fiat) money; specifically gold and silver - our M3 money stock has declined much in value. I think it is fairly accurate to suggest that M3, now is worth less than it was before the big economic crisis of 2008.

To conclude then, it seems to me like all the global money printing has not made us better off. South Africa as a whole may now have to accept buying less bang for our buck. We may have to deal with the diluted Johnny Walker, what do you think?

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.    

Thursday, January 19, 2012

The workplace of "tomorrow" - a view from the 1990's

Finding work that needs doing
– Considerations of the workplace of tomorrow

Since we are on the topic of finding work that needs doing in changing global contexts – Critical Task #1 of the Integrative Life Planning model – we will further investigate five statements describing the workplace of tomorrow from the (1990’s) perspective of William Bridges:

1. In the organisation of the 21st Century, there is less emphasis on work and an increased emphasis on tasks and assignments:

This is an interesting notion, and may sound a bit awkward at first. In the work of Bridges it was suggested that in future there would be a shift towards tasks and assignments. Since the time of the statement goes back to the previous decade and millenium, his future has become our today.

The kind of working environment we find ourselves in will obviously influence the appropriateness of the statement in current times, but I am sure not too many will be challenging his notion. At this time we have all become accustomed to the idea of working in project teams, working towards a specific goal, and working in teams that have been put together based on the required skills set for that task. Yes, the work still gets done, but the manner in which this is now achieved, is quite different.

In these times where we need to accept and manage change in both organisational and personal spheres, we are bound to identify groups and individuals who have not been able to get comfortable with the idea that the nature of how they do what they do has changed. From the perspective of ensuring that all our staff stay on the bus, it is imperative for decisionmakers to realise staff need to be approached differently. The old notion of job security as we knew it, has gone for good. The challenge now is to be smart about how we treat staff in these uncertain times.

2. Workers will still be performing tasks, but they will be required to create tasks, i.e. for projects, and will therefore be required to become more entrepreneurial:

In line with the first statement, Bridges continues by stating that the workplace of the future will be a place where workers will all need to become more entrepreneurial in their approach to their work lives. Evidence to support the idea that his statement from the 1990’s has come true is readily available; the implications for workers is also an issue worth a thought. Think back to the typical workplace of today: people will be selected to join task teams with the intention of reaching a certain goal. To ensure that we remain relevant and in demand in our organisations, all employees are in some way required to reinvent themselves on a regular basis. The key concept to grasp is that not everyone is equipped with the interest or personality to become full-fledged independent contractors – the largest percentage of people in the corporate arena will probably feel uncertain when presented with an opportunity to go it alone.

Since the time that Bridges put his thoughts to paper, a new word has been entered into the dictionary: intrapreneur. This is quite fascinating, as the definition given is that it refers to an employee of a large corporation who is given freedom and financial support to create new products, services, systems, etc. and does not have to follow the corporation’s usual routines or protocols. Even though this definition may not be fully operationalised in all business operations, there is certainly a move towards view on staff.

Organisations will do well if they empower all staff, regardless of their work level, to act in the manner suggested by the definition. This can only be achieved sensibly if staff in those roles are sufficiently skilled and trained.

3. The actual place where work will be done, will change. No longer will work be limited to the office, but will it spread to other locations:

At the time when Bridges published his questions, he could not have had any idea just how right he in fact would be in future! Originally the statement was written so as to include working at home, on planes, in hotel rooms, and almost anywhere else. This has all come true, but the manner in which this is now achieved, would possibly not been fathomed by Bridges or other writers of the time. The introduction of the internet had taken place in the 1990’s, but the impact of social media, smartphones, the cloud, and tablets, could not have been imagined!

So, in keeping to our main topic, which is looking at changes in the workplace, I think we can all agree that Bridges was absolutely correct in anticipating this change. Our challenge now is to ensure that technology is used constructively and not as a mechanism to create further and deeper division.

4. Every person will be regarded as a temporary worker:

The shift has started to take place. In my previous postings on the topic, it was mentioned to what extent the world of work has changed: the time where a job for life was almost guaranteed, has come and gone; all workers, regardless of their age, training, experience, and the like, have to consider themselves as contract workers. With the move in the world towards businesses becoming smarter, and leaner and meaner, the false security of a job for life has now been removed from the landscape. Thus, Bridges also saw this one coming. Want to know the sad news? More than twenty years down the line, there are still large numbers of people worldwide who have not made the required mindshift and have been found wanting in terms of the right skills and attitude when their organisations start laying off their employees.

5. Workers will start forgetting about work and will think more in terms of finding work that needs doing:
All of the points raised above can in some way be summarised by this last statement. In a time and place where the old notion of job security has changed, an attitude of it can’t happen to me has to be seen as reckless and irresponsible; in the words of Bridges, all workers have to become what he referred to as vendors - marketers – of their own goods and skills. The first challenge one has to meet is staying in touch with changing trends and demands in the workplace. Therefore, one needs to identify what could be described as unmet needs. Secondly, one needs to position yourself in such a way that the market you are addressing, will see you as the supplier of their demand. This is perhaps the tricky bit?

In conclusion, I think the original work of Bridges has shown tremendous insight. The final challenge remaining at this time, is to ensure that all employees are able to anticipate the shifting landscape, and that they take some kind of control in these tumultuous times.
Let us see if we are able to further identify some of the markers on this new road.

Based on the work of Sunny Hansen: Integrative Life Planning: Critical Tasks for Career Development and Changing Life Patterns

Wednesday, January 18, 2012

Finding work that needs doing: Understanding changes in the workplace

At the completion of any cycle, whether in the business or our personal lives, we are often called to take some time and think about the proverbial chapter just completed. Since we have just completed the old year and have been given a taste of what 2012 has to offer, I guess it would be fair to say that this process is currently being played out in the lives of many people and businesses.

Towards the end of last year we were talking about the need for us to find work that needs doing – if you can recall, this forms part of the first critical task according to the Integrative Life Planning model of Hansen (1997). Let us continue looking at some of issues related to this first critical task.

We have said it before, but it needs to be said again: the world of work has changed, and all workers will need to realise that thinking differently in this ever-changing landscape is no longer a choice. A key challenge organisations are faced with, is finding ways to manage their employees in these new times where old ways of doing have been replaced by a new mindset of workers. If one starts looking into related literature on the topic, we will be able to find many examples showing us how employment patterns have changed, how the availability and nature of work and work patterns have changed, and how the link between work and famliy has shifted.

One significant example of the availability of work can be seen on the International Labour Organization (ILO) website. The ILO is suggesting that the number of migrant workers in the world is so numerous that, when brought together, they would be equal in number to the world’s fifth most populous country! If we apply our minds to the challenges brought by these astonishing numbers, it becomes clear in no time that current policy and practice is simply not offering sufficient strategy in terms of dealing with this challenge.

Another example of changes in work patterns, can be seen in the number of American citizens above the age of 65 (previously called retirement) that are still working; this number has almost doubled since the early 1980’s. According to Mark Penn (Microtrends), there currently are 5 million people in the USA over the retirement age of 65 that are still working! At this time, I am wondering what the 2011 South African census will reveal on this issue.

Penn continues to spell out the possible implications of an increase in this number; for one, younger workers now have to compete with even more people for a piece of the same economic pie. Previously, succession planning was less of a headache for companies; with the above-mentioned shift being seen in more and more companies, it goes without saying that a new approach and perspective has to be found.

Taking an even closer look at the changes in the workplace, we see that there are even more perspectives that warn us of looming chaos! In the words of Giddens, a British sociologist, the world is characterised by chaos; this can already be seen in what he refers to as the world being a “risk society”; according to this perspective, there are three important sociological trends we need to take cognisance of: globalisation, de-traditionalisation, and social reflexivity. The latter trend, in the work of Giddens, suggests that it is the move towards reflexivity that is making it possible for people to cope with change and uncertainty.

In our attempt to understand how the workplace is changing, we have already looked into some closely related issues. If I may remind you, we have already spent some time considering what has been called the bigger picture and changing global contexts, we have taken a cursory look at how we can promote the constructive use of technology, and also how to approach new thinking on preserving the environment. Putting all of the above together should help us understand how we need to approach the first critical task spelled out in terms of the Integrative Life Planning model.

To conclude our current discussion, please allow me to leave you with 5 statements on the workplace of tomorrow (today?):

1.In the organisation of the 21st century, there is less emphasis on jobs and an increased emphasis on tasks and assignments

2. Workers will still be performing tasks, but they will also be required to create tasks, i.e. for projects. This implies a shift towards becoming more entrepreneurial in their thinking.

3. The actual place where work will be done, will change. No longer will work be limited to the office, but will it also spread to other locations.

4. Every person will be regarded as a temporary worker.

5. Workers will start forgetting about work and will think more in terms of finding work that needs doing.

Take a few minutes to ponder the above; next time we will be looking at these statements in the context of the 21st Century and will assess what the implications for career planning and development will be.

Based on the work of Sunny Hansen: Integrative Life Planning: Critical Tasks for Career Development and Changing Life Patterns

Is the 'Silent Stock Killer" Hunting our stock portfolios? A look at the fundamentals of the TOP 40 Index

In my previous post I suggested that the JSE Top 40 Index may be heading for a crash. I looked at a very long run technical chart that suggested that the SA stock market is basically on the verge of  massive crash. 

Have I been proven wrong? Short term coverage seems to say so.  In a technical research chart, released yesterday, by one of the big brokerage houses in SA, it was indicated that the JSE Top 40 index had broken a historic technical resistance level. 

Such a confirmed breakout suggests a very positive upward move for the market, which does not look good for my previous technical analysis.  Yet, in all fairness, yesterday's move still has to stand the test of time.  So we'll just have to wait and see.  

However, I am still concerned about the index. In today's post I want to present the findings of some research I did on the Top 40's fundamentals. What I did was to analyze the historic Price to Earning multiples of 39 of the 42 Top 40 shares. I also looked at earnings per share (EPS) histories of 22 of the 42 shares (selection favored shares with 10 years or more EPS  and PE histories). 

I used these numbers to develop annual PE multiples and an average annual EPS histories*. 

A bit of context ...  

But first a bit of context: briefly explained the PE multiple/ratio indicates how much investors are willing to pay for the earnings of a company. For example a stock with R1-00 EPS and a PE multiple of 10 will have a market price of R 10-00 on the stock market. A stock with a PE or 15 will cost R 15-00, and a stock with a multiple of 5 will cost R 5-00.   

Why is this important? Certainly for many reasons, but in this post I want to look at ways how a share's price can fall in the context of PE and EPS. 

Basically, there are two ways for a share to drop in market price 1) through a shrinking EPS and 2) through a shrinking PE.

Lets say the share in our example above still has a PE multiple of 10 but the EPS shrank to 50 cents; now our share will be valued at R 5-00 (10 x R 0.5).  Or, lets say the share's EPS is R 1 but the multiple shrank to 5, in such a case the share is also valued at R 5-00. Both a drop in EPS or a shrinking multiple imply a drop in the market price of shares. 

But, what happens when the both the EPS and the PE shrinks? Lets say our share has an EPS of R 0.5 and a PE of 5, in such a case the share will be valued at only R 2.50 (R 0.5 x 5). The reverse is also true; shares may go up in value when the PE multiple expands or when earnings expands. 

To profit in stocks

So, to profit in stocks it is necessary to watch the PE multiples and EPS of stocks carefully. Note that markets trade a different multiples at different periods of time.  

Jim Cramer of CNBC's Mad Money explains that the multiple is expected to shrink when interest rates are raised and is expected to expand when interest rates are lowered. 

Why? Simply because savers (e.g in the money markets) and bond holders earn greater profits in high interest rate scenarios. When interest rates are raised, the risks associated with stocks look less appetizing to investors. Consequently investors downgrade the valuation on stocks resulting in lower PE's (all things being equal).     

Beware of the 'silent stock killer'

A shrinking multiple can kill the market prices of stocks, even when earnings (EPS) remain stable. Cramer calls the shrinking PE multiple the "silent stock killer".  If both earnings and the PE multiples shrink stock investors may be in for a double whammy!

So, now that the stage is set it is time to consider the following chart of the TOP 40's averaged PE Multiples since 1992. I used the data obtained from Standard Bank OST for my calculations.  I averaged the annual PE's of 39 stocks for each year since 1992 and plotted the data on the chart below: 

Click to Expand
The numbers I ran seem to suggest that since 2003 the Top 40 has expanded from  a PE of 9.1 to a PE of 15.6 prior to the 2008 market crash. During the crash the PE multiple shrank to  9.8. Thereafter, the multiple expanded again from 9.8 to 16.5 in 2009 -2010. However, the last numbers available to me shows that the multiple has since 2010 to date again started to shrink. The average multiple at 2011 was at 15.1 close to the mean average of 14.4.    

So it is likely that the Top 40's PE multiple may be declining.

But, what about the average EPS? To answer, I did a similar exercise averaging the annual EPS of 22 of the 42 companies of the Top 40. 

[Note that we have to interpret these numbers with caution since it is a smaller sample and the 2011 earnings data for many of the companies are not available yet. I had a sample of 12 companies for 2011's to work with. So the EPS average, in this case, might not be as reliable. However, the sample does point to the possibility that the earnings of the Top 40 companies may be under pressure for 2011].  

Refer to the chart below:

Click to Expand
Notice that for 2010 the average EPS was R 9.44 and for 2011 it was 9.33; suggesting a potential drop in EPS. 

The Repo Rate at 5.5 % is very, very low 

Next, we have to consider interest rates. To do this looked at the RSA Repo Rate.

According to the "Repo Rate is the rate at which commercial banks can borrow money from the Reserve Bank".

In a crude explanation of the Repo Rate's function, we can say that the lower the Repo rate, the more people and companies can afford to borrow, and the greater the supply of money will be in South Africa.

So, at low interest rates, more money is available to chase goods, services, and investments (such as stocks).  

Testing Cramer's idea mentioned above; I have plotted the average annual PE's of the TOP 40 (in red) along with the averaged annual RSA Repo rate (in blue) on the chart below.  

Click to Expand
The following things struck me looking at the chart. 1) The Reserve Bank has dropped the interest rates to a historic 10 year low in response to the 2008 recession.  

[It seems to me like they cannot drop rates by much more. At some point they have to start raising rates or face run-away inflation produced by all the excess money supply that has been created].  

2) Even at the historically low interest rates the Top 40's PE Multiples had still started to indicate possible decline. 

How is this possible I wonder? If the market is facing a PE decline in the low interest rate scenario, what will happen if the Reserve Bank starts to raise the Repo rate (which they have to do at some point).  

In conclusion ... 

This posting concludes a number of posts I did on the economy and 2012.  When considering stock investments I like to think in terms of upward pressure and downward pressure.  The question we have to ask ourselves is which on the of the two pressures are more likely to win.  My bet is that downward pressure will win in the medium to long term.

It is clear to me that we may be facing a possible scenario of shrinking of PE multiples, which may erode the market price values of shares, even if earnings remain stable (which appears not to be the case). My research also seems to suggest that corporate earnings may be coming under pressure again. If both earnings and PE's comes under pressure, buying and holding shares may not be a good idea. 

Many may disagree with me, but I think that the JSE is being kept alive on stimulus through low interest rates and global money printing, not through actual value. In value the index may have actually declined.

Will the market's prices follow suit, I guess only time will tell ... 

Posted by Gerhard van Onselen. Follow me on Twitter, Linked In or Google Plus

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just this  source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.  

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design ... "
F.A. Hayek - The Fatal Conceit 

Tuesday, January 17, 2012

JSE Top 40 - Long-run Technicals Seem to Point to a Fall

In one of my previous posts I looked at how much value we can buy with one share of the JSE Top 40 Index. The numbers I ran seem to suggest that while index prices were going up, the value we're able to buy is trending down. This is bad for stocks, but understandable due to the high prices of commodities.  

For today's posting I decided to open the technical analysis/charting toolbox again, this time considering the JSE Top 40 index. What does the technical chart suggest? It suggests that the local market may be heading for a downturn. 

Just to be clear, this is not set in stone.  Technical analysis is not always right, and there is much debate on whether it works. I like to look at technical charts in context of the market fundamentals.  

So what do we know about the markets at this point? Here are some things to consider. 

1) The Eurozone is in trouble ...
2) The US expanded its M1 money supply from about 800 billion to about 2.4 trillion USD since 2008, basically keeping their economy alive on debt... this makes high inflation very likely.  
3) US debt burden is massive; see US debt visualized
4) Global GDP growth appears to be slow ...
5) Commodities showed strong growth and money follows growth ...  

Technicals suggest a crash is likely ...

With that out of the way, let's consider the following Technical monthly chart of the JSE Top 40 Index.  I applied a long term Moving Average Diversion Conversion Indicator (MACD - basically an indicator that measures momentum - the strength of a market uptrend or downtrend):

Click to expand
Remember, we are only considering a technical chart for information on probable market moves. Some things are evident: The index has tested the current resistance level, the highest red diagonal line, (a price ceiling) for some time and is trading in a trading range, between current support and current resistance lines.

The Crash of 2008

Consider the descriptive comments on the MACD indicator before the crash of 2008. It is likely that the previous strong bull run (an upward market move) started in 1998 and gained momentum in 2003 after a short consolidation (look for the red downward pointing arrow below the label "bull market 03 -08" on the chart.

Consider what the Top 40 Index did at the arrow labeled with "Crash! 08". Most certainly we all remember what happened in 2008 when the market crashed, crazy times.

Important to look for is the cross over of the black line over the blue line in a downward direction on the MACD indicator (The crossover occurs at the arrow labeled with "MACD Bearish Signal!"). Such MACD crossovers are commonly regarded as signals of a changing market movement.

The market confirmed the indicator with the recession of 2008 where the index lost a lot of points.

MACD Bullish Signal and Price Recovery

The chart suggests that the price recovery and upward trend started in Mid 2008. Notice that the MACD confirmed the recovery and upward trend with another crossover; where the black line of the MACD crossed over the blue line in an upward direction.

Current MACD Bearish Signal

At the end of 2011 the MACD experienced another MACD crossover (look for "MACD Bearish Signal NB!'). This crossover suggests that a strong and lengthy downward move is probable.

Historic support levels are indicated on the chart at Support 1 and Support 2 (there is another potential support level at around 23000 points not indicated on the chart). Support levels are like mattresses that break the fall; these are levels in the market where bottom buyers are expected to halt the decline of prices. In the 2008 crash the market found support at the level denoted by the label "Support 1".

If/when we experience the next big downtrend; I expect the market to find support at either around 23000 points (best case scenario); Support Level 1;  or support level 2 (worst case scenario). Such moves would entail massive losses.


So, the technical chart, I considered, shows that it is probable for the market to experience a crash in the long run. Since Technical Analysis is not always correct, I decided to do some additional research on the Top 40 Index.  I considered historic PE ratios and earnings, I'll cover these in my next posting.

Read my next post to see what that research suggests.

Any thoughts or comments, please share below.

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)


I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.   

Friday, January 6, 2012

SA Property Market - Your house now buys much less coffee, gold and oil

A friend asked me earlier this week what I thought about the property market in South Africa. 

Indeed, that is a complicated question.  After scanning a number of articles online, it seems like the prevailing expectations for SA's property market is that it will keep going up. 

One website I looked at expects a compounded growth rate of 11.25% until 2050 for our property market.  

If that is correct, the price of the average home in SA should grow with R 112,500.00 each year for the foreseeable future (assuming the average home cost R 1 million ZAR and excluding the complexities of compounded growth averages). 

So, it seems to me like many if not most people expect house prices to keep going up. Some may expect some weakness, but overall the expectation is that property prices never go down.  

Consider the following chart I have compiled from nominal house price data on the average south African home, obtained from

Looking at the chart, it is not hard to see why most people expect house prices to keep going up, staggering growth is evident. 
Click to expand
A common reason suggested for continued growth is that South African property was traditionally under priced when compared to the rest of the world. It sounds logical, that being the case, prices should keep going up until some form of fair value is reached, economics 101! 

Talking about fair value. I think it is important to realize that even if things go up in price, it doesn't necessarily mean they are going up in value.  To illustrate my point, I took the average house prices above and divided them with historic commodity prices since 1995 (commodity prices were obtained from 

This tells a different story. It appears that if you were to trade your house for cash, and convert that cash, into commodities, you'll actually be losing a lot of value.  

Consider maize for example: 

In 2005 the average house was worth 1081 tons of maize. Today it is worth only 510 tons of maize.   

Soybeans: in 2005 the average south African house was worth 513 tons of soybean; today it is worth only 326 tons.

Robusta Coffee: in 2005 the average home was worth 258492 pounds of coffee. Now, at the end of 2011 it is worth only 129385 pounds of coffee.  So compared to past value, your house is worth much less in cappuccino today! 

Crude oil suggests a similar story. Trading your house for crude oil? Bad idea, in 2004 you would have received 2366 barrels of crude oil for the average South African home, today priced in oil, you'll only get about 1489 barrels of crude for the same house.   

What story does gold tell us? The trend appears to be similar. In 2005 you could purchase 248 oz gold with the average home.  Today, the average home will buy only about 86 oz of gold.  

If I am reading the info correctly (correct me if I am wrong); in value, the high point for the South African property market occurred in 2005. 

Now rising house prices do not necessarily lead to increased value (it probably reflects only US and European monopoly money circling the globe).  

Assume you bought the average house in 2000 for R 310,686-00 cash, and held it until 2005. In 2005, based on the data, the house would have been worth about R 704,353-00 in nominal terms. Let's say you sold the house in 2005 and switched to gold.  In 2005 you could have purchased 248 oz's of gold with the average house.  

If you held 248 oz's of gold since 2005 of gold and sold at today's market price, you could have sold your gold for R 3,290,454.08. 

So, by staying in the property market, has the average property investor lost the opportunity to make and additional R 2 million rand since 2005 on the average house, by not switching to commodity investments?     

Why will house prices keep going up? 

Much credit to the economist Peter Schiff for bringing this basic question to my attention.  The questions that Schiff has for people assuming that house prices will always go up are:  

1) Why should people buy when they can rent more cheaply? And, 2) which fundamentals are going to drive house prices higher?  

Also what is the premium on ownership worth? Is it the premium on ownership that will drive up house prices? If so, was the premium on ownership really worth more than the lost opportunity to pocket and additional R 2 million on the average SA house since 2005? 

The Cash Flow Argument

Yes, but what about cash flow? Gold does not pay you rent does it, you may wondering? True, I agree wholeheartedly that properties with good cash flow are some of the best investments out there. 

Yes, but most residential property investors I know do not own cash flow positive properties. Look at our family home as an example. 

Our house was last valued at R 1,250,000.00 million. Let's say I win the lotto and purchase the house cash. I'll then only be able to rent it out for about half its bond repayment value, say about R 6000-00 to R 7000.00 (not sure, I am assuming here).  

So, conservatively my annual rental income yield is only 5.76% (R 6000 x 12 = R 72 0000/R1,250,000 = 0.0576). Assuming, of course, that nothing on the property breaks and I don't have to pay taxes, rates, etc. 

Since, I cannot buy a home cash at this point I'll have to mortgage the home. I'll then have to pay a deposit of 10- 20 % and my bond will cost me about R 11,500.00 per month (roughly estimated at 1% of purchase price). With rental of R 5000, R 6000 or even R 9000, it does not really produce cash flow positive investment, does it? 

So all I can hope for is capital gains and hoping for capital gains is not the best strategy.   

Let's take an even more preposterous position, let's say I am a ga-zillionaire able to buy each and every house in SA at average prices. Since I cannot stay in each and every house I bought, I'll have to rent them out. 

Then, I'll still only get in order of 5.67% rental income from my investment (excluding all the added costs associated with ownership). How many ga-zillionaire investors will settle for a return of 5.67% or less? That does not even beat CPIX inflation.  

So, for prices to go up in the residential property market, sellers would have to find buyers who'll pay even more for a negative cash flow asset. Maybe I am missing something, but that's just crazy.  

So, now I ask again, why should the prices keep going up? That charts above show us that houses are actually falling in value when measured in gold and other commodities. 

My concern is that the masses in the South African (and global property) market are going to start to question the current premium paid for home ownership, which appears to be very very high, when measured in lost opportunity.  

Mortgage Lending Graph

Another concern I have is that mortgage lending growth has slowed ... a lot! Check out the following graph taken from the Exceed Group's market report September 2011.

Assuming that the graph above is correct, mortgage lending growth has contracted to levels below those in 2000! Doesn't that suggest that the supply of money to buy houses at the current prices is severely restricted?  If so, shouldn't house prices be coming down, instead of going up? 

Sellers may be trying to sell at legacy prices, they were used to in 2005 - 2006, but are those prices realistic? 

It seems to me like the free market does have a solution for restoring to property/rent income yield; 1) by raising rents, or 2) through falling property prices.

A drastic drop in commodity prices should restore value. 

If rent increases are often controlled by contracts, and if all the quantitative easing money printed since 2008 continue to drive up commodities, then why should we expect property prices to keep going up?        

To tell you the truth, I won't be entering the property market just yet. Seems to me that there is very little true upward price pressure, and much more downward pressure.  Assuming that prices will always go up is a highly dangerous position often found near the top of a bubble.

The SA Property market may have been undervalued, but it is also very possible that the global property markets were overvalued. If that is the case, we might be screwed!

Thanks for reading. Please share your insights below.


I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.    

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)