Leading an Economic Recovery: Reflections for the Future

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Leading an Economic Recovery Reflections for the
Future
ECONOMETRIX (Pty) Ltd
Dr. Azar Jammine Director Chief Economist

• Society of Accountants in Malawi
• Global Economic Crisis Lessons for the Future
• 18 September 2009

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Perceptions of Increased Economic Stability Had
Been Derived From-

• Development of Macroeconomic Theory
• (Keynesian), but asymmetric implementation
• Improved Econometric Techniques (IT driven)
• Diversification of Financial Risk
• Development of financial theory (MM) leads to
  explosion of new instruments unprecedented
  leveraging (600 trillion in derivatives vs. 50
  trillion world GDP)
• Notion of risk diversification at micro-level
  ignores risk intensification at macro level.
• Executive remuneration process encourages risk
  taking exacerbates inequality.

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Growth of Emerging Markets

• Globalisation
• Growth of Chinese Economy
• Urbanization
• Industrialization
• Growth of Global Population
• 3bn in 1960, 6bn in 2001, 8.5-9.0bn by 2050

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Painful Adjustments in 2009

• Liquidity crisis
• 3 vicious downward spirals
• - Loss of confidence bank runs interbank
  lending dries up
• - De-leveraging, accelerated by Basel 2
• - Housing repossessions link to real economy
• Banking system the cost of the bail-out
• 2004 SEC allows 5 largest investment banks
  exemption from debt/capital cap at 12-to-1.
  Goldman goes to 40
• Commodity prices all over the place

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A New Structure of Markets Rapidly Emerged

• Massive industry-level consolidation
• swiftly followed by innovative new starts
• A one-way shift of power to the East
• Yet, the official policy response remained
  cautious limited to tinkering with the details
• Reboot the system, not replace it
• World Economic Forum, Dubai, Oct 2008
• REALLY?????

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• We Assumed markets were efficient
  self-correcting equity markets were better than
  governments at creating wealth growth
• What Went Wrong?
• Was there a failure of expertise?
• Was it the stupidity of crowds or homogeneity
  of expertise?
• Complexity trumped transparency
• The risk model was broken
• The equity culture was under suspicion
• Widespread distrust of institutions leadership

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Was This Transparency?
If you look at every one of the derivative
products, they make sense. But in aggregate,
they are bullshit. They are crap. They serve to
cheat people Gao Xiqing, adviser to Zhu Rongji,
2000
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Did Bear Market Not Really Begin in 2000?
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Loose Monetary Policy Leads to Asset Inflation
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Loose Monetary Policy Leads to Asset Inflation
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Commodity Price Bubble due to Speculation

• Underlying upward trend
• Fundamental imbalance between supply demand
• Low price in 1990s inhibited exploration
  development
• Rationalization of commodity production increased
  pricing power
• Enormous growth of urbanization increased demand
  for commodities
• However, price spike in 07/08 due to speculation
• (ETF proliferation leveraging 1/3 of oil
  demand was not for industrial purposes)

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Loose Monetary Policy Leads to Asset Inflation
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Global Economic Scenario Scylla or Charybdis

• Determination to avoid mistakes of Great
  Depression
• Unprecedented massive fiscal monetary stimulus
  (Keynesianism the fad)
• Prevent steep downturn at all costs
• However, risks involved in stimulus
• Funding through higher taxes will depress growth
• Massive government borrowing to fund deficits
  could come to be monetized
• Interest rates could ultimately rise sharply
• Cancellation of investment projects, together
  with liquidity growth sow seeds for next
  commodity price hike inflation

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7.4 Trillion Breakdown of US Rescue
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Will Coordinated Stimulus be seen to have
Succeeded?

• Undoubtedly stimulus is succeeding in preventing
  severe downturn
• Disappointment with G20 lack of detailed action
• G20 meetings, but only talk so far
• Concerns regarding moral hazard of bailouts
• Philosophical ideological conundrum regarding
  states intervention
• Fear of renewed protectionism, especially under
  Obama
• How much to regulate?
• Control of executive remuneration has not yet
  been achieved
• Will exit strategies from stimulus be
  sufficiently timely?

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Is Strength of Recovery Linked to Debt Levels?
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Global Troubles Being Stored for Later On?
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Liquidity Effect on Commodities
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Commodity Price Bubble due to Speculation

• Gold price resilience telling us something about
  potential inflationary commodity price recovery
• Emerging markets story not over yet?

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Which Scenario for Global Economy?
or
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• The true sins are greed, jealousy, envy, pride,
  fraud, theft, acts of violence emanating from a
  desire to own, because they are acts committed in
  utmost bad faith, i.e. in the belief that it is
  possible to take something away. We all live in
  one big illusion that we are this or that because
  we own this or that. The only thing we own, the
  only thing that makes us different from each
  other is the memories we have of pain and joy, of
  suffering and pleasure, of ecstasy despair that
  our lives have experienced. Thus a multi
  millionaire accountant who has added subtracted
  his fortune all his life but has felt nothing
  deeply is actually poor.
• Zorba the Greek by Kazantzakis

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Other Catalysts Which Could Break Growth

• Commodity price explosion
• Chinese political upheaval
• Global warming
• Geopolitical tensions explodes (e.g. Iran North
  Korea)

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Analysis of Historical Bear Market Rallies
Teun Draaisma (Morgan Stanley)- 19 Bear markets
with declines gt40- Median decline 57 in 21
months Median recovery 71 in 17 months 12 of 18
rallies stalled within a few months of first rate
hike gt50 of rallies give way to protracted range
trading Recent movement SP 500 1576
(11/10/07) 667 (6/03/09) -57.7 for 17
months 667 (06/03/09)
1018 (07/08/09) 52.6 for 5 months Difference
with 1932, 1974 1982 rallies- stocks were
still cheap after 50-odd rally which is not the
case now Conclusion Most of rally complete long
sideways movement in store
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Global Forecast Revised Upwards for 1st Time

• Note Growth for Sub-Saharan Africa revised
  upwards in 2010 on back of upward revision to
  Chinese Indian growth

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GDP Growth Forecasts Sub-Saharan Africa ()
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Opportunities For African Development

• Oil exploration oilfield development
• Developing agriculture through improved
  technology
• Exploring developing untapped mineral resources
• Massive potential for hydro-electric power
  generation
• Developing continents infrastructure, especially
  roads, railways, ports, etc. to complement
  resource development
• Developing services to complement these
• Africa as a pristine tourist destination
• South Africa has best physical services
  infrastructure to act as a base penetration of
  Africa

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Is SA Economy Really Lagging?
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Rand Benefits from Positive Sentiment to
Commodities
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Rand Benefits from Positive Global Sentiment
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Rand Benefits from Positive Global Sentiment
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Why SA Economy Has Disappointed
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Why SA Economy Has Disappointed
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Why SA Economy Has Disappointed
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Recovery in the Wings

• Lending to the private sector starting to resume
• Massive injections of capital into banks
• Banks become less cautious
• They have slightly more confidence in each other
• They are finding it slightly easier to raise
  capital
• Risk Appetite Jumps
• Appetite for riskier deals has resumed, but still
  constrained
• Heavily leveraged structures still being unwound
• Many Investment Banks Still De-leveraging
• Companies Still Restructuring

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Unfortunately for Africa

• Continent is likely to take a back seat whilst
  crisis rages
• Collapse in global demand sees search for
  Africas resources dissipate.... For now
• Government debt levels world wide will translate
  into less money for Africa
• Less interest in Africa means that deal flow also
  slows....it does not stop...just slows
• Improved governance macroeconomic management of
  many African countries is helping

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- The End -