Reader Mail: Chilling Comments & More on South Africa

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Reader mail:

Hi Dan,

I had an interesting conversation with my best mate who is a risk manager of a very conservative local insurance company that provides cover for local government entities here. We were discussing the liquidity issues globally, especially in bonds. He casually made the chilling comment that they can’t mark to market their bonds that they are holding as part of their contingent liabilities. There is simply no market for them to price. They are AAA rated.

This time last year, their reserves were 240% of projected liabilities. They are now down to 10% off a mandatory report to APRA, effectively the end of their business if they have to report… A 10% down move in the market will do it for them. 140% contingent liability reserves is the reporting mark for them.

I have very little doubt about the veracity of his comments. This company is also incredibly conservative. They are not a retail insurance fund. If this sought of company is so close to having their capital ratio seriously impaired, how many more in the financial and related industries here are?

Personally I’m selling my IAG shares and moving my gold certificates into allocated storage at the Perth mint tomorrow. How about an article on the safety of deposits at Australian banks?

I thought we were looking squarely at inflation with M3 growth around 20%, but they are going to have to work very hard to keep it growing as credit dries up rapidly. It’s happening a lot faster than most suspect. Are your sources indicating this? In my opinion, monetary growth can turn on a dime as most of it is debt related. Will we see deflation?

Regards,

David

–Commonwealth CEO Ralph Norris was on the ABC yesterday, reassuring investors that there was more growth to be had. But where? Banks will have to more prudent in the future, loaning to more conservative consumers and businesses. Earnings growth will be hard to come by, we reckon.

–And more on South Africa. We are headed there a week from tomorrow and will tell you what we find when we land.

Hi,

Interesting comments on South Africa in your DR 13 Feb about the power crisis. I passed this on to a friend who has just come back from SA on business, and his views appear to be diametrically opposed to those of your correspondent; so here ’tis for what it’s worth:

Having been over there as recently as October and having gone to several heavy industrial sites, such as Engen refinery, Mondi Paper, and SASOL Sekunda, and having been in close contact with my friends there who are selling our devices to such big companies, I’d say the report is heavily biased and exaggerated. In fact I’d call it real crap. They are not running out of coal: they just can’t produce it fast enough to sell it to China! The coal moves to the power stations by train, not truck. The power blackouts (“previously lit periods”) reflect the huge demand on capacity in these booming conditions. They are producing and selling gold as fast as they can, working round the clock, seven days a week. Just a one day stoppage of the gold mines recently (power problems) caused the gold price to jump about $20… such is the global (Chinese and Indian driven) thirst for South Africa’s gold production.

Now the moot point is why is the Rand still sliding? It should be heading for the angels. Two main factors are what I’d bet on: the usual flight of capital, or outbound currency movement driven by imports – purchases of equipment etc to serve this production boom; the S A govt may be “printing money” to keep the country’s workers’ pockets well lined with the local currency, by maximising return on exports in Rand terms.

Yours,

Chris

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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