To my mind

Finweek English Edition - - Front Page -

ONCE THE TEA ladies start buy­ing shares you must know the bull mar­ket is head­ing for an im­plo­sion, they say. If those self­same ladies start of­fer­ing their views on the ter­ri­ble state of the mar­kets the bear mar­ket must be ap­proach­ing its lower turn­ing point, or so we hope.

Un­for­tu­nately, things are far more com­pli­cated.

It’s an open ques­tion whether re­cent events, such as the gov­ern­ments of coun­tries such as the United States and Bri­tain – the world’s fi­nan­cial cen­tres – buy­ing their banks’ shares in a des­per­ate res­cue at­tempt, have changed ir­re­vo­ca­bly the na­ture of the free-mar­ket sys­tem. But the mil­lion-dol­lar ques­tion re­mains: When will the mar­kets reach rock bot­tom? Not even re­spected economists or ex­pe­ri­enced in­vest­ment an­a­lysts have the an­swer to ei­ther of those ques­tions.

We’re hear­ing plenty of talk that the mar­ket now of­fers won­der­ful buy­ing op­por­tu­ni­ties for long-term in­vestors. To cor­rob­o­rate their views, ad­vo­cates of that school of thought cite the fact that War­ren Buf­fett, the world’s leg­endary most suc­cess­ful value in­vestor, re­cently bought an ex­cep­tion­ally large in­ter­est in a bank.

The clos­est to a “sci­en­tific” stan­dard of mea­sure­ment in­di­cat­ing whether the tim­ing is right to start pick­ing up knocked-out shares at bar­gain prices is the so-called Vix in­dex, ex­plained by Vic de Klerk (see page 17), him­self an ex­pe­ri­enced mar­ket player. That in­dex, which mea­sures mar­ket volatil­ity, shows that shares cur­rently (at the time of go­ing to press) have a 16% like­li­hood of mov­ing up down. With such high volatil­ity it ob­vi­ously makes sense to con­tain your buy­ing ap­petite for the time be­ing.

In the same way, it stands to rea­son that in this cli­mate you shouldn’t em­bark on a sell­ing spree. That kind of emo­tional re­ac­tion will not only mean you’ll be sell­ing at an enor­mous loss but that when the mar­ket starts climb­ing – without any warn­ing – you’ll also be left out in the cold, un­able to share in the new pros­per­ity of the new run, nor­mally char­ac­terised by prices spik­ing sharply.

Though there’s no ques­tion of banks in SA hav­ing to be res­cued from their predica­ments by Gov­ern­ment, the fi­nan­cial tur­moil caused by First World banks – due to the greed and self-en­rich­ment of highly paid ex­ec­u­tives and in­ad­e­quate con­trol mea­sures – will be felt here.

Eco­nomic growth will fall world­wide, partly due to the fact that the in­fected fi­nan­cial mar­kets will have to be sub­jected to strict dis­ci­pline. How­ever, this es­sen­tial fo­cus on re­stric­tive fis­cal and mon­e­tary pol­icy will mean the em­pha­sis will not be on the stim­u­la­tion of eco­nomic growth. That will ob­vi­ously have a fur­ther neg­a­tive im­pact on com­mod­ity prices. Bad news for SA. In ad­di­tion, the in­ter­na­tional cri­sis has caused the rand to plum­met, af­fect­ing in­fla­tion­ary ex­pec­ta­tions neg­a­tively.

Some good news for punch-drunk in­vestors and con­sumers is that in­ter­est rates aren’t likely to rise soon, even though that’s nor­mally the ac­cepted course to counter in­creas­ing in­fla­tion­ary pres­sure. The fall in the prices of re­sources, and of crude oil – which has al­ready fallen by more than 50% in US dol­lar terms – will dim the ex­tremely wor­ry­ing warn­ing lights of inflation, es­pe­cially since the lat­est dra­matic fall in the rand’s ex­change rate.

The mon­e­tary pol­icy mea­sure of higher in­ter­est rates, re­lent­lessly ap­plied by SA Re­serve Bank Gov­er­nor Tito Mboweni in re­cent times is, like proper con­trol of banks and the in­tro­duc­tion of the Na­tional Credit Act, formed part of the healthy con­trol mea­sures that safe­guarded SA against the mess of im­plod­ing fi­nan­cial ser­vices com­pa­nies in which large por­tions of the rest of the world find them­selves.

In the cur­rent ex­tremely volatile times, such a cau­tious ap­proach and mod­er­a­tion should stand in­vestors in good stead.

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