ARTICLES

The Moment of Truth

It is becoming very evident that South Africa is now facing a “moment of truth”. Following the mini-budget of end-October, it is clear that the fiscus has exhausted most of the normal and politically acceptable methods of dealing with its growing debt problem. Taxes are at an all-time high and borrowings are rising steadily to untenable levels. Various highly-respected experts have pointed to the fact that we are now entering a national debt-trap and that radical action must be taken. CEO of Sibanye, Neal Froneman recently pleaded for the government to adopt investor-friendly policies to attract investment. He pointed out that many aspects of South Africa – mostly within the government’s control - have the effect of scaring investment away. These are things like the interference in visa regulations, the third mining charter, the uncertainty around land redistribution policy and the high crime rate. At the same time the recent paper by Michael Sachs, formerly of the Treasury, calls for immediate action to avoid further debt – mainly through the reduction of the civil service and privatisation of various state owned enterprises. But the government is unwilling or unable to take these measures because of their fear of a union backlash. This pattern has been followed by many countries in Africa to the North of us. Government spending runs out of control while tax collections become less effective and less efficient. Then, once the country’s borrowing capacity is exhausted, it comes to the cross-roads. Either it must radically reduce government spending – which usually has negative political implications – or resort to expanding the money supply. Most of the African countries that have reached this point have opted to engage in what is euphemistically called “quantitative easing” (Q/E) resulting in the rapid debasement of their currencies and the complete loss of their international credit ratings. Inflation, in the final analysis, is really a subtle, undisclosed form of taxation. And it is not a new idea. The Romans invented it. They would periodically call in all the gold coins in the realm on the pretext of reminting them with the new Caesar’s image. They would then melt them down and add 20% of lead before re-minting and handing the new coins back to their citizens. Of course, when they were done, they were left with 20% in the bottom of the pot – which they used to finance the next Punic war. In those days it was known as debasement and today we call it inflation – but it is the same thing. The only organisation that can significantly increase the money supply is the government. So, if they “print” 20% more money, then we will have 20% more cash chasing the same goods and services in the economy – in time, that means that the prices of those goods and services must increase by 20%. So, the government prints more money which they then spend – and the rand in your pocket goes down by 20% in terms of its purchasing power. That is taxation – subtle and undisclosed – but taxation, nonetheless. Resorting to this type of increase in the money supply to solve South Africa’s immediate problems (such as Eskom’s runaway debt) is very tempting. The problem is that it is very addictive. Once the government has relaxed its control of the money supply once, it will be that much easier to do it again – and the “cold turkey” of radically cutting government expenditure will be conveniently avoided. Over the past 25 years of ANC government, the Reserve Bank has managed to keep a very tight control of the money supply – despite the vigorous efforts of Jacob Zuma and the Guptas. Together with the judiciary, it was one of the very few organs of state that avoided state capture. And the relative stability of the currency has been one of the great achievements of the ANC during that period. It would be a great pity to abandon that now – and yet the storm clouds are gathering. The only alternative is radical and unpopular actions which will bring the government into direct conflict with the unions and the residual of “rent-seekers” still holding sway within the ANC.  

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately