The Other Side Of Job Creation

It astonishes me to see how everyone buys the ‘job creation’ story the state and media sells them, without considering the bigger picture. What I believe most people fail to ask is how many jobs were not created elsewhere, where there is a greater need or bigger demand. In order for new businesses to flourish, it will require reallocation of capital and people and their skills to higher yielding industries and businesses. This process is very important to the agility and livelihood of a healthy economy, where unproductive businesses close down to make way for new ones that can use the resources (capital and people) better, because they can better provide things people really want at prices they’re willing to pay. When government (and the labor unions) intervenes in this process, they waste capital by not directing resources to the most desirable industries and businesses, and applying it to their political agenda.

Consider this about private businesses: If they fail to produce in the cheapest and best possible way those things which people most need, they suffer losses and are eliminated from the economy. Other businesses who know better how to deliver the right things, at the right price, replace them. This is how inefficient businesses get eliminated from the economy, a kind of survival of the fittest. If you take the wrong decisions in business, you get punished very quickly. Do it long enough and you’re out.

Now consider this – government’s ‘capital’ comes from tax or debt. Debt is just borrowing against a government’s future income, that in turn comes from tax. Therefore, ultimately, all government’s income comes from tax. But in government’s case there is absolutely no incentive or threat to use it efficiently. Because government doesn’t get eliminated from the economy when it makes the wrong decisions about how and what to use resources for, it continues to do so at a much greater cost to the economy.

With every new ‘job creation’ project government funds, that same amount of money was previously taken away from productive businesses. Because of government’s inefficiency and misallocation, it is very likely that a lot more could have been done with the resources elsewhere, including hiring people. Also, based on what criteria does government direct resources? Yes, a lot of it is probably for the “greater good” and altruistic in nature, but an enormous part of the criteria is determined by political, emotional, subjective and selfish factors.

Another thing I find quite amusing to read is how the competition commission hunted down and punished the latest business cartel that is hurting the man on the street by manipulating prices. What is a cartel other than a type of monopoly? And we all know how much our beloved socialist government loves their state controlled monopolies: Eskom, Transnet, Telkom, PetroSA and Infraco. And what they don’t already control under these state enterprises and government departments, I’m sure they are planning to take over soon. By the sounds of it, mining and banking is next on the cards. So on the one hand government continuously seeks to end anti-competitive behavior, but on the other it’s recommended as the best solution to the nation’s problems. If there’s one thing the South African economy needs is more competition, but not only in the form of a reactive central watchdog that runs around trying to police the 3 or 5 big players in each industry. Instead we need to focus on growing the size, quality and number of entrepreneurial businesses in each industry.

At this stage government and the labour unions, are blocking the free readjustment and reallocation of resources to new businesses that can use it to better produce that what is required more. Government sucks more resources out of the economy, in the form of tax for their ‘job creation’, and labor unions force artificial labor costs on businesses. Instead of addressing the true underlying problems of our economy, government chooses to prop up ailing industries and expand the public sector. In the long run this will do very little to solve the dysfunctional structure of our economy:

1. There is poor separation of concerns between the labor unions, Cosatu, and the government. Cosatu helps the ANC government stay in power. Let’s not forget they were the big reason Zuma was elected as president, and election after election tell their members to vote for the ANC. This makes government unlikely to make the necessary labor and economic reforms, needed to pursue a true growth strategy.

2. Labour unions and the ANC government must accept, that it’s impossible to keep all current jobs, with increasing salaries, and have meaningful success in creating new businesses. Rather focus on creating new businesses, making current ones more competitive and allowing labour to adjust to the industry’s natural cost and employment structure. This means there will be jobs lost, before new ones can be created.

3. The ANC government must also realize that the free market economy is better at determining how to use resources. Resources are still wasted in a free market economy, but not for long. Expanding the public sector payroll, increasing grants, and so forth, requires more tax money, which in the end defeats their original purpose of improving living conditions.

Government Covers Up Underlying Problems by Increasing Public Sector Employment

By April 2010 the private sector (excluding agriculture) lost some 377,000 jobs from a peak in October 2008. Since then the private sector has only been able to add a 94,470 jobs, and the public sector added 106,503 or 53% of 201,000. In July 2011, private sector employment has grown 0.5% since a year before, and the public sector 3.3%. I’m just wondering what all these new government employees are doing? What are they creating that other people need? What new industries, technologies,and specialized skills are they mastering?

National departments’ wages also increased by 11.3% for the year to July 2011, and increased by more than 10% for the past 2 years. Private sector wages only increased by 7,4%. So clearly the place to work in South Africa is at government departments. This has to mean that these people are making the most important contributions to our economy, or does it? The figures seem to suggest they own specialized skills that are in high demand, because not only is the country hiring more of these people, but we’re also paying them more.

To get a picture of the SA government’s debt, I quote a sentence from the SA Reserve Bank’s Quarterly Bulletin for December 2011: “As a ratio of gross domestic product, national government’s total gross loan debt increased from 35,4 per cent to 37,3 per cent during the period under review.” So quite an innocent figure really, especially considering that America’s debt to GDP is 100% and Greece’s is 150%. But as in all things finance, it’s the trends that reveal the truth. In 2007 this figure was 27.4%, and except for 2008, has grown every year since then. Makes one wonder if South Africa isn’t maybe Africa’s version of a Greece in the making?



Keep An Eye On Investec Bank And Zshares Govi ETF

Many people have asked why the South African Rand is so weak currently, when the financial crises is primarily a western problem. I think there are several factors that is causing the Rand weakness (and please let me know if you think there are any that I’ve left out, or that you think is incorrect):

  1. Investors are in dire need of cash. The credit crunch is forcing them to sell whatever assets they have in order to salvage their cash flow. This is maybe another reason gold has struggled to surge over a $1000 per ounce. All the leverage that the previous housing bubble provided is being removed from the markets.
  2. Investors are pouring their money into the traditional de facto safe haven asset that is US government bonds (treasury bills and notes).
  3. Hedge funds need to sell assets as clients take their money out of these risky funds, that often stops short of almost gambling with their money.
  4. A long list of stop losses are unwinding, which triggers a new wave of selling.

Looking at point 2 it should be clear not to underestimate the importance of bonds, and especially government bonds, during a bear market. During a strong bull run, like we’ve had over the past 5 years on the Johannesburg Stock Exchange (JSE), nobody tends to take notice of them. But when the bears arrive, bonds become an ever important asset that should definitely take up a larger part of one’s portfolio.

In South Africa investors have a few options to trade bonds and bond based securities:

  1. Trade in the spot market on the Bond Exchange of South Africa (BESA) or the JSE’s Yield-X.
  2. Trade in the futures market on Yield-X.
  3. Trade in the options-contract market on Yield-X or Justrade.
  4. Trade in Investec’s Zshares GOVI Exchange Traded Fund (ETF) on the JSE itself.

It is Investec’s Zshares GOVI ETF that I’d like to introduce here today, as it will enable small investors to gain exposure to the bond market. The GOVI ETF saves you the time and effort of opening another trading account at a bond broker since it’s traded on the JSE, and from R10 per “share” you gain access to the bond market. Zshares GOVI will list on the JSE on the 21st of October 2008. As the name suggests it tracks the total return of BESA’s GOVI index of government bonds.

Zshares GOVI has the following characteristics:

  1. No cash distributions are made, since all coupons and bond maturities received on the underlying government bonds are automatically reinvested by acquiring additional bonds in the same proportions as the index constituents.
  2. Total Zshares GOVI Return =  Price Performance of underlying bonds +  Reinvested coupons and bond maturities +  Fees earned on any bond sale and repurchases (ie: repo’s).
  3. It’s an ETF and units trade live on the JSE.
  4. All underlying government bonds are bought and sold on BESA or Yield-X.
  5. Transparent index methodology.
  6. Portfolio rebalanced in line with GOVI index rebalancing.
  7. Transparent portfolio composition. The fund’s composition is available on Investec’s Zshares web site.
  8. Trade settlement guarenteed by the JSE, making it a very safe investment.
  9. Very importantly it has a very low cost: The annual management fee is 0.2% to 0.25%.

This is a wonderful tool, that will give small investors an easy way to make bonds a part of their portfolio.

Investec Bank (INLP)

As a moderately eager income investor, I like keeping a few preference shares in my portfolio. One share I have been watching over the past 5 months is Investec Bank’s preference share (INLP) on the JSE. Currently it’s the 8th highest dividend payer on the JSE, based on historical dividend payments. It was recently priced at R78, with a P/E of 1.38 and a Dividend Yield (DY) of 13.12. Its chart is indicating an oversold position, without any indication of a turnaround, so it will most likely become even cheaper. R78 is also its current support level, and I expect it to trade sideways for a while.

I believe South African banks are very solid, and should weather the financial storm relatively well. Regardless, they’ve become part of the global fire sale of stocks. INLP is a non-redeemable, non-cumulative, non-participating preference share. Personally I prefer to invest in cumulative preference shares, so that the dividend payments are guaranteed (unless of course in the situation that the company goes bankrupt). So that’s the only disadvantage I can see with this share. But with a P/E of 1.38, and technical indicators predicting that number to shrink even further (although I’m no expert in technical analysis), you can’t go wrong to put in your bid for it when the trend changes into a bullish one (which could be a long time from now).