Thursday October 22, 2009 - 13:21:09 GMT
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Black Swan Capital - www.blackswantrading.com
Trouble Brewing in South Africa?
China's Economy Expands 8.9%, Increasing Pressure for an End to Stimulus (Bloomberg)
China‚Äôs September data suggest that the long-term overcapacity problem is only intensifying (China Financial Markets -- Michael Pettis)
‚ÄúIt would be fantastic for the entire country from coast to coast,‚ÄĚ she said. ‚ÄúIt will be great for TV and keep everybody riveted. It would be two centerpiece teams, two icons, two legendary franchises that could have at it. Of course, we will win.‚ÄĚ
Jamie McCourt, Los Angeles Dodgers CEO, on potentially facing the Evil Empire in this year‚Äôs World Series
Congrats to the Phils!
FX Trading ‚Äď So Long to Netshitenzhe AND Manuel?
You can look at crude oil lately; or you can look at the Reuters-Jefferies CRB Index. Either way you‚Äôre probably going to come away with the idea that commodity prices have been rising. Here‚Äôs a chart of the CRB: [Chart not available in text format.]
Looks a little extended to me.
But anyway ... this is just one sign of the continued risk appetite that‚Äôs driven most markets. Predictably, the commodity currencies have been hugely benefited throughout this move.
The Australian dollar is a freight train, climbing higher, and cannot be stopped. The Brazilian real is much the same, despite a hiccup earlier this week in reaction to a tax- related decision. Year-to-date the Aussie has gained more than 31%, the real has gained more than 25%.
Not quite as impressive but still substantial, the South African rand has ratcheted higher by 21% versus the US dollar this year. This comes after the rand earned the distinction of worst performing currency in 2008.
But a look at the rand in the last few days reveals some relative weakness. Sure, it could simply be that traders felt the rand has become overextended. Today, though, the reasons for weakness are obvious: the rand is getting hit on decisions and speculation surrounding a political shake-up happening under the fairly new South African President, Joseph Zuma.
Markets are showing initial concern over a potential shift within Zuma‚Äôs cabinet to a more left-leaning stature; one supported by unions and those who played an important role in supporting Zuma‚Äôs election.
The two names drawing the attention are Trevor Manuel and Joel Netshitenzhe.
Netshitenzhe resigned, and that prompted speculation Zuma had gotten the wheels turning for a move to appease ‚Äúlabour and communists, who are allied with the ruling African National Congress and helped bring [Zuma] to power.‚ÄĚ
Manuel is the former Finance Minister who sat through an unprecedented period of growth in South Africa. He also supports policies that are geared towards driving businesses to succeed. He is not liked by the trade unions. His opponents want government to spend more money on welfare and job creation and want to implement tax cuts for the poor. It is possible we see Manuel resign in the near future despite the consensus view that he represents a balance within Zuma‚Äôs administration.
We happen to see the potential for this major political shift the moment Zuma took office. In fact, we wrote extensively about it in our Emerging Market Currencies newsletter. But up until now the markets seemed closed off to the risks that might come with such a shift. Below are three pieces of what we wrote in the April 23rd issue of our now discontinued Currency Strategist newsletter:
How does effective one‚Äźparty rule (and increasingly communist‚Äźlike at that) square with the term ‚Äėdemocracy‚Äô? We believe there is trouble brewing in South Africa despite the hopes and dreams of multicultural worshipping journalists everywhere and the expectations that newly elected President Joseph Zuma will bring much needed change for the better for people who have been battered so badly. The county‚Äôs currency‚ÄĒS.A. Rand‚ÄĒseems to continue to defy rising political risk and a fading economy ... reflecting optimism.
‚ÄúWhat is the leader of a party that currently holds 72 percent of the seats in South Africa‚Äôs parliament doing in such a place? He will become president on April 22 whatever the people of Springbok do. The problem is that he fears a demoralizing snub from the voters and has good reason to. The Rainbow Nation inaugurated by Nelson Mandela is not living happily ever after, and he, Jacob Zuma, is not exactly a reassuring figure,‚ÄĚ writes Peter Hitchens, in the April 20th edition of The American Conservative.
Mr. Zuma was a straight up communist in his past life (when the ANC was tightly linked with the Soviet Union; Mr. Zuma received ‚Äútraining‚ÄĚ in Moscow or East Berlin during the cold war, when the South African Apartheid regime flourished, according to Mr. Hitchens‚Äô research). Mr. Zuma a member of the Zulu tribe. His leadership in the ANC has been controversial (eight years of court battle and now miraculously cleared of corruption and rape charges). He is a powerful, engaging, and evangelical‚Äźlike figure. The kind of strongman we‚Äôve seen many times over leading various African countries. Big promises to the people, but lacking the ability to deliver, has often been the MO leading to despotic regimes and failed states across Africa. Zimbabwe comes rushing to mind. In fact many have concluded South Africa is on the path to becoming Zimbabwe‚ÄĒthe failed state with a so‚Äźcalled democracy that has been destroyed by the despotic Robert Mugabe.
How long will it take for a powerful populist leader within an effective one‚Äźparty‚Äźruled State to get his way on Constitutional changes to spread the wealth? We don‚Äôt expect it will take too long.
Problem is the wealth is drying up in South Africa, as it is everywhere. And many promises have been made to a whole lot of very desperate people who still believe the ANC can deliver. Utter poverty, coupled with unimaginable levels of crime, soaring AIDS rates, and increasing inability for the state to deliver even the most basic services to its people is a recipe for social unrest, especially with an official unemployment rate of 21.9%.
The country‚Äôs whites (and a widening class of black executives) at least have wealth and the ability to shield themselves from some of the massive crime in South Africa, unlike poor blacks. But they too have had enough it seems. According to The Economist, an estimated 800,000 whites have left the country since 1994 and ‚Äútaken their skills with them.‚ÄĚ Incompetence and corruption dominates in industry and government across South Africa. Those beholden to the ANC get the best jobs regardless of their skill level. The core wealth of the country is being eaten away from the inside out.
It could get ugly.
Is it soon time to short the South African rand based on growing risks -- political and economic? You can stay tuned in to news and potential in South Africa and other emerging nations with our Emerging Market Currencies newsletter ... in case you‚Äôre interested.
John Ross Crooks III
Black Swan Capital LLC
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