Socialism and (A)Effects

REJOICE NGWENYA: Socialism

Think twice before plunging SA into a frenzy of state ownership

Published: 2011/01/20 06:58:53 AM

DON’T get me wrong. I hold no brief for capitalists, nor do I bear a hatred of socialists, for that would run against the grain of a true liberal democrat. But it has to be admitted that capitalism is an amazing engine that creates wealth and jobs, adding more value to all aspects of human welfare as measured by the human development index.

I also have no problem with leftist dogma as long as it is confined to infantile student rebellions.

But when political leaders who bask in the glory of capitalist gluttony start talking about nationalisation, I am tempted to portray socialism as an effigy of hell. "They disguise plunder, cleverly concealing it from all eyes, even their own, under the seductive names of fraternity, solidarity, organisation and association", as 19th-c entury French economist Frederic Bastiat described such leaders.

We Zimbabweans are the modern- day test tubes of socialist carnage. I have first-hand experience of how leftist ideologues experiment with political doctrines that subvert human dignity.

Consider the destructive "land nationalisation" — a crude ideological brand that has left us licking our wounds in an inaccessible part of the food-security dungeon. Thus, I have good reason to fear the state.

When socialists talk about "nationalisation" or "state control", they always portray an abstract scenario in which the fate of citizens is in the hands of a purportedly "loving, responsible government". Full -blown socialism tends to blossom into "Hugo Chavez -type" authoritarian dictatorship. The state, which has at its disposal a formidable arsenal and "law", tends to use coercive measures as a legitimate extension of its mandate. That "great fictitious entity by which everyone seeks to live at the expense of everyone else", says Bastiat of the state. Like US economist Murray Rothbard, I do not see how a government can successfully nationalise anything without being the aggressor that violates property rights.

Let’s face it, all human beings are social animals but not all act like animals in the negative sense. The frightful thing is that the ruling socialist elite has animal instincts — the survival of the fittest spiked with an insatiable desire for self-aggrandisement.

In my country, we were under a Marxist-Leninist spell that has accounted for all social, economic and political ills: 1-billion-percent inflation; 4- million citizens in exile; not one free and fair election in 30 years; hospitals closed due to a lack of electricity, water and drugs; 4000 citizens dispossessed of their land for "historical reasons".

If Karl Marx conceived socialism, Lenin perfected it, Stalin and Mao Ze dong gave it teeth and Zimbabwe’s Zanu (PF) packaged it.

My message to SA is that collective ownership, whether state-sponsored or co-operative, is a fallacy that promotes noncommittal behaviour, cronyism and corruption. It’s like a village well or a public toilet. No one is in charge, so no one cares, except vagrants.

Where there is a lack of private property, innovation is suppressed because there is no personal reward associated with hard work and the legitimate accumulation of assets. State intervention is largely driven by political or narrow business interests. SA’s Reconstruction and Development Programme (RDP) is nothing but vote- buying by the African National Congress (ANC) government. If it is on the ANC’s election manifesto, it will ride on the emotions of the "peasants" to justify plundering the fiscus in the name of the "common good".

Basic national economic theory dictates that socially driven budget deficits are a result of an over commitment to nonproductive activity. This "crowding out" effect manifests in a shortage of capital, high interest rates and a declining investment.

Besides, true ubuntu is a sense of pride and completeness in the ability to do one’s "own things" without uMalume (uncle) always tapping you on the shoulder. So if uMalume (the government) is going to build your house, create jobs, subsidise your school fees, pay your hospital bills, subsidise your electricity bills and build your roads, he obviously wants your vote in return. Socialism takes away freedoms. This has been proved wherever socialism has been implemented. You owe the state a favour. A large body of unemployed, complacent, urban peasants in a permanent state of expectation is slowly created. It is what the ANC Youth League refers to as a "time bomb".

When Economic Development Minister Ebrahim Patel refers to a "New Growth Path" that "does see a role for a strong and focused state, but we see the biggest job creation will come from sectors where the private sector has the key levers", it is reassuring.

Blogger Dave Shell puts it better: "Governments do not create jobs, people create jobs. What government is mandated to do is to provide the space within which individuals with vision and energy and a desire to roll up their sleeves and get down to work can create wealth for themselves and those whom they employ and the country as a whole." Yet it seems President Jacob Zuma , hounded by his left-leaning partners, has little room to manoeuvre.

But SA is luckier than Zimbabwe because the Convention for a Democratic SA left a legacy of honest debate. However, if it is true that the Congress of South African Trade Unions, the ANC Youth League, the South African Communist Party and all their leftist sympathisers determine who rules SA, SA may well experience another "refined" form of nationalisation.

There are 35-million South Africans who want bread on the table, so they ought to think twice before plunging the country into a frenzy of state ownership. Central and provincial governments must play a "limited" role as regulator. Laws that encourage freedom of investment, ownership and innovation should be their focus.

People must appreciate the difference between political manifestos and reality. Private sector-driven industrialisation encourages full employment and an expanded working class that pays taxes, buys property and saves money to drive domestic capital. Small- scale industry grows the middle class that supports consumption and manufacturing. Social safety is possible only when the fiscus is healthy. Corporate social responsibility encourages investment that prioritises housing, health, environment and social welfare.

What happened to the RDP, the Growth, Employment and Redistribution plan and the Accelerated and Shared Growth Initiative for SA? My answer: governments don’t deliver, they devour.

- Ngwenya is the Zimbabwean founder of the Coalition for Liberal Market Solutions.

Source

Wesco AGM Notes: Golden Advice from Charlie Munger

Notes from the 2010 Annual General Meeting of Wesco Financial, chaired by Charlie Munger.

I recommend reading the document as it's filled with genius that only Munger could provide.

Key Comments:

Who else failed us? The academic types thought that diversification was the secret to success. Diversification may be a way of avoiding disaster but does not represent a path to success. A person is not much of a teacher if all he or she can do is prevent disaster. This is why he calls it de-worsification. BRK owns things they know a lot about [instead of blindly. The concept of beta or volatility is asinine. It isn’t always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn’t and why.

Gilford Glazer [a longtime friend of his], came back from the war and went to HBS. But his father’s little machine shop needed attention and he asked them to defer acceptance for a year so he could help his father. After a year he contacted HBS and asked for another year. The guy from Harvard then asked him how many employees he had last year at this time. He answered 50. Then, when he asked him how many employees he had now, the answer was 900. The Harvard guy laughed and told him he didn’t need to go to business school. That kind of approach is no longer present at HBS. They were probably wiser then than they are now.

Charlie thinks GS has the best morality and best wisdom of all of the banks. Accordingly, the government should not jump on the bank that is the best. The government just stumbled into this SEC investigation and it is not an appropriate response. He thinks the world would work a lot better off without this stuff [derivatives]. It worked well without them before.

The George Washington of Singapore, Lee Kuan Yew, decided to marry the smartest girl in his class. Their son is now the PM of Singapore. He was a very practical man. He didn’t want people dying of Malaria so he drained all the swamps and didn’t care if a little fish went extinct. He didn’t like the drug problem and he looked around the world to solve the drug problem. He found the solution in US by copying the US Military’s policy. Any time you can be tested and if you fail you go to jail. If something was going to grow like cancer he would check it hard with the wrath of God. He turned a country with no resources or agriculture into a prosperous country, starting from 0 mph. We need to pay more attention in our country to the Singapore model.

There is Alice and Wonderland and nut case accounting in the US. These people need to be thrown out and people who think more like Lee Kuan Yew need to be installed. Jamie Dimon of JP Morgan is actually complaining about this but he is the only one. Charlie takes his hat off to him but his derivative book needs to go away. He should not run a gambling parlor next to a legitimate business. Actually, in recent years, some of our banks actually bought casinos. “Why run a casino in drag when you can run a real casino?” When it comes to casinos, maybe we should have these things but we should minimize them. Casinos work so well--no inventories and no accounts receivable. It’s like god gave you the ability to print money. But real casinos have huge CAPEX and asset requirements. On the other hand, on Wall Street they can create a casino without those requirements. How many of us could resist those temptations to print money?

Don’t go where the big boys have to be. You don’t want to look at the drug pipelines of Merck and Pfizer Go where there are inefficiencies in which you can get an advantage and where there are fewer people looking at the stocks. Go where the competition is low.

Read the full notes here (courtesy Inoculated Investor)

RE:CM on Economic Moats

Buffett: "So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn't necessarily mean the profit will be more this year than it was last year because it won't be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that's tenuous in any way - it's just too risky. We don't know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses - or virtually all of our businesses - have pretty darned good moats. And we think the managers are widening them. Charlie?"

Munger: "How could you say it better?"

Buffet: "Sure. Have some peanut brittle on that one."
From the 2000 Berkshire Hathaway annual meeting

"We suggest the margin of safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one."

Benjamin Graham

Every once in a while a news item comes along that makes one sit up and take notice such as the shock announcement that Kumba Iron Ore has decided to rescind its agreement to sell iron ore to Mittal Steel at cost plus 3%. Another example is that Hulamin announced that BHP Billiton is not only ending the very attractive (from Hulamin's perspective) pricing agreement for aluminium, but that they will completely stop supplying Hulamin with aluminium.

The consequences of this news are important for the future of the SA economy. Two very large and important businesses, namely Kumba Iron Ore and BHP Billiton, have decided to end long-standing contracts. These contracts have effectively subsidised the competitiveness of a portion of South Africa's exports, at the expense of the two businesses' shareholders and taxpayers. The two events highlight the difference in time horizons between the capital investment decisions of business, which is often very long-term, and government's efforts to attract investment to meet their own objectives, which is often quite short-term. This discrepancy in time horizons always carries the potential to permanently destroy significant economic value. Although we have our own views about how government should attract investment (and avoid rent seeking behaviour), these are largely irrelevant from an investment standpoint. No one knows how government will act.

Key Thoughts:
• There are very few businesses with true moats.
• Moats are not absolute and vary in strength.
• "In the long run everything is toasters." The historic return of a business is not necessarily an indication of the future as businesses seldom earn a positive economic return indefinitely. When assessing the strength of the moat, even more important than the level of excess returns is the time period over which it can be sustained.
• Stick to what you know. Investors can reduce risk and improve returns by focusing their efforts on companies for which they can predict the future economics.
• A competitive advantage based on less permanent arrangements requires a higher margin of safety.
• Management plays a central role in investment outcomes.
• Rising electricity costs are a reality and will have a major negative impact on profitability and the feasibility of new and existing capital projects in South Africa (in the case of price taker industries like many resources companies) and inflation (in the case of quality businesses that are able to pass on such effects to customers).
• When government facilitates an advantage for business it should ensure that it is lasting. If it does not, the government's own (legitimate) objectives will suffer.
• In the long run the SA economy will most likely be better off if government focuses on bringing down the cost of doing business while the private sector decides on where to allocate capital.

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Michael J. Burry: How did nobody see this coming??

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.

Meanwhile, home buyers, convinced by recent history that real estate prices would always rise, readily signed onto whatever mortgage would get them the biggest house. The incentive for fraud was great: the F.B.I. reported that its mortgage fraud caseload increased fivefold from 2001 to 2004.

At the same time, I also watched how ratings agencies vouched for subprime mortgage-backed securities. To me, these agencies seemed not to be paying much attention.

By mid-2005, I had so much confidence in my analysis that I staked my reputation on it. That is, I purchased credit default swaps — a type of insurance — on billions of dollars worth of both subprime mortgage-backed securities and the bonds of many of the financial companies that would be devastated when the real estate bubble burst. As the value of the bonds fell, the value of the credit default swaps would rise. Our swaps covered many of the firms that failed or nearly failed, including the insurer American International Group and the mortgage lenders Fannie Mae and Freddie Mac.

Read the rest of this Op-Ed piece here...

Genetically Modified Food - The Solution to World Hunger

The technology will have wide-ranging effects, from helping farmers draw less irrigation water to lowering insurance premiums and boosting land values in drought-prone regions.

Key Thoughts:

- Expected to boost yields in dry environments by at least 6%

- Agriculture accounts for 70% of global fresh-water use, Monsanto CEO Hugh Grant says in an interview. Reducing irrigation not only contributes to more sustainable farming, it’s a “game changer” that will boost profits and help feed a rising world population

- Monsanto also is engineering crop seeds, including cotton, wheat and sugar cane, for drought tolerance, and the company and BASF are donating drought-resistant maize technology to farmers in sub-Saharan Africa through the Nairobi- based African Agricultural Technology Foundation.

- By expanding the maize- growing region, the technology can help grow more grain to meet government targets that call for tripling use of biofuels including ethanol, which is made from maize in the US, by 2022

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Jerome Booth on Emerging Markets (Forbes.com)

Forbes: How do you define emerging markets? You've got a unique definition of that.

Booth: I define it by risk perception. All countries are risky and the emerging markets are the ones where it's priced in.

And the opposite of course is a developed country where the domestic investor base doesn't even think of their own sovereign risk. So I don't think it's a surprise that Iceland is a developed country. It wasn't that people couldn't have worked out that there was a problem. A 13-year-old probably could have typed in IMF.ORG and worked it out in 2006. Likewise Greece, which today has a probably larger risk of default, sovereign default, in the next one year than any major emerging market. So it's really about risk perception. And that's the particular way I define it.

Forbes: Now political risk. How do you define political risk and why do you find that higher in so-called developed countries than your bailiwick of emerging markets?

Booth: Well political risk is everywhere, but I think it's on the increase in the developed world, whereas I think in the emerging world. For example, last year you had Indonesia and India, two examples of elections where the domestic the electorate returned the existing government's, prior reform governments because they understood that this was an external shock. They don't have credit crunch. And they didn't blame their politicians, but they also understand the importance of continuity. Whereas in certainly my country and a lot of the developed world I think you've got a massive increase in political risk. You've had several pieces of retroactive legislation. You've got measures really which are denying the scale of the credit crunch. Nobody should talk about the credit crunch in the past tense, you see. All the academic research on this is pretty clear. It will take many years to delever.

And political risk is everywhere. Political risk is when there is a risk that a road project as a private equity investor, say, the government or a local government will change the terms of the deal before it's completed. And that in some sense is often as high in a developed country as it is in the emerging world, frankly.

Watch the video here

A Life Assurer's Worst Nightmare - Incorrect Assumptions

Like the sub-prime crisis faced by banks, the risk of people living for up to 20 years after retirement seems to have crept up on an industry using historical data to calculate people's chances of an early death.

Pension funds and insurers say the mounting burden of protracted pension payments is concentrated on a small group of providers: them.

Global private sector liabilities for pensions are at about $25 trillion (R180 trillion), according to a January Pensions Institute report, which cited estimates that every extra year of life expectancy at age 65 adds about 3 percent to the value of some UK pension liabilities.

Several factors - the market crash brought on by subprime lending, new solvency rules for insurers due in 2012 and the stampede of baby-boomers to retirement age - are adding urgency to providers' efforts to spread their exposure.

If that seems like a small group, the evidence is it's the population segment most likely to grow. There are about 450 000 centenarians in the world today and experts estimate that there could be 1 million by 2030.

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Average Industry ROIC

Harvard Professor Michael Porter, using data from Standard and Poor's as well as Compustat, has calculated the profitabilites of various industries over the 1992-2006 period, some of which are shown below:

Courtesy Baral Karsan