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Cash isn’t what it used to be

If SA can’t get its budget deficit under control, how do investors preserve their capital?
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Warren Buffett’s famous first rule of investing is ‘never lose money’. His second rule, of course, is ‘never forget rule number one’.

Identifying investments where you can be sure that you won’t lose money in the current environment is however extremely challenging. Buffett’s Berkshire Hathaway currently has more than $130 billion in cash because it is finding it so difficult to find appropriate opportunities.

‘Preserving capital, at its core, is about maintaining the buying power of what you have,’ said Andrew Lapping, the CIO at Allan Gray and co-portfolio manager of the Allan Gray Balanced fund and Allan Gray Stable fund. ‘This is where cash comes in. A lot of people see volatility as risk, and so they find cash attractive. But the real risk is a permanent loss of buying power.’

Locally, cash has been an outstanding investment over the past few years, as inflation has averaged around 4.5% while money market funds have been returning as much as 7.5%. A 3% real return has therefore been extremely attractive. This is particularly the case as local equities have struggled.

However, this kind of real return from cash is extremely unusual. It has also quickly been eroded in the last few months as the South African Reserve Bank has cut the interest rate by 275 basis points.

Fiscal trouble

‘The even bigger risk,’ said Lapping, ‘is how South Africa gets itself out of its current fiscal position. There is a huge budget deficit, relatively high debt-to-GDP and very little economic growth.’

How does the government avoid this becoming a negative spiral from which it is impossible to escape?

‘They could cut spending extremely aggressively, but that is very hard to do in any country, and particularly hard in South Africa,’ said Lapping. ‘They could increase tax rates substantially. But, again, that’s tricky – corporate tax is going to take a long time to recover and personal income taxes are already relatively high in South Africa. Or they could increase consumption taxes. None of these are particularly palatable.’

The risk, if the country is unable to get the deficit under control, is that inflation could pick up substantially.

‘Examples of how this happens range from the relatively extreme in Argentina to the very extreme in Zimbabwe,’ said Lapping. ‘These are countries that just couldn’t control their spending. And in a case anywhere close to that you don’t want to be in cash, because money in the bank can very quickly lose its value in a high inflation environment where interest rates don’t respond accordingly.’

So many ways to lose money

How then, do investors respond? How do they preserve their capital?

‘The traditional way to protect your assets is to own real assets such as commodities, property, or equity,’ said Lapping. ‘The problem with equities is that in South Africa valuations are cheap on the face of it, but obviously there are very high risks. Equities in global markets, and particularly the US, on the other hand, are relatively highly-valued. And another sure way to lose money is to buy expensive assets.’

For Lapping, preserving capital over the long term requires buying undervalued assets, with ‘staying power’. The first obvious place to look is the local bond market.

‘You can buy South African government bonds at a 10% to 11% yield, which is pricing in quite a lot of bad news,’ he said. ‘And if inflation goes up to 8% you’re still getting a 2% real return, which isn’t bad over the long term.’

Developed market bonds, however, don’t offer the same long-term comfort.

‘Given government debt burdens and zero yields, developed market bonds are extremely risky, because you are getting no return and governments are monetising their debt,’ said Lapping. ‘At least in South African bonds you have an interest rate buffer. In developed markets there is no buffer.’

Global view

Finding opportunities in equity markets is, however, far less clear cut. Often it is about looking for the ‘least worst’ option.

‘In the global market, you’ve had just a few big winners,’ said Lapping. ‘In the US that’s the likes of Microsoft and Amazon.

‘People know that Amazon is a great company, but the price is massive and it’s not worth it,’ said Lapping. ‘What you need to find is good businesses where the price makes sense. You can’t only say I’m looking at price, because then you will buy a portfolio of junk. You also can’t just buy great businesses, because then you have a portfolio of assets at high valuations.’

There are some pockets where these opportunities may be available.

‘Where our partners Orbis are looking for value is in unfavoured areas, in places like Europe where you can buy great businesses on very reasonable valuations because there is so much uncertainty.’

There are some similar opportunities in South Africa, although they are harder to find.

‘The risks here are more acute,’ said Lapping. ‘For instance, banks are very cheap, but they are leveraged financial institutions and bad debts will no doubt go through the roof. But we do think that selected industrial stocks like Tiger Brands or AVI, which are pretty defensive companies trading on valuations well below their long term averages, are interesting. These are businesses that should survive and don’t have much debt. Logistics company Supergroup is another well-run business, which is the type of thing that you have to try to find.’

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Get money overseas now!!!

I am not a boffin but I have bought preference shares that give me over 10% after the 20% tax, I would love some comments as to weather I have done right or wrong. I would appreciate some comments

If the investor is willing to lend money to a company, to buy its bonds in other words, then buying pref shares is a good option. Bondholders stand before pref shareholders in case of bankruptcy, therefore pref share is riskier than bonds but less risky than ordinary shares because the pref shareholder will receive his dividends even if the ordinary shareholder has to go without his dividend.

The pref share reacts like a debt instrument and the capital value is sensitive to interest rates. The price tends to rise as interest rates go down and vice-versa. The pref shares are supposed to show a capital appreciation during the time that local interest rates were cut. The capital value also reflects supply and demand of course. If investors lose confidence in the company and dump the shares, they will also dump the pref shares because they will doubt in the ability of the company to honour the payment of the dividend.

In the payoff ratio between risk and reward, pref shares fit in the middle between corporate bonds and ordinary shares. If that is your risk profile, then pref shares are perfect for you. Congratulations!

I think it’s a great, underrated asset class. At current prices you are locking in yields 5%+ above prime .prefs also took a knock, when Covid hit. Companies are freezing normal dividends.REITs are also holding back cash. Money in the bank is paying are easily locking in yields of 10pc+with pref shares. Normal dividends are probably going to be held back for upto 18 months. Add in the div tax rate, vs marginal tax rate on bond yields, I agree they are a no Brainer.

Cash is king and always will be. Especially in South Africa.Fund managers etc hate that and will use any argument to get control of your cash to invest in their schemes. Returns are not that important. Protecting the principal is. So safety first always.You will never make up the amount you lost in a crash so best is to not lose money and keep it in cash.

Hopefully you do not provide financial advice for a living.

You lost me at – “Returns are not that important”

As an investor, over time, there are periods during which one should be in cash and periods when one should be invested in equity. This is what the article is about. When the investor is worried about the negative effect that inflation may have on the value of his cash, then he should realise that he is holding the wrong kind of cash.

The only kind of cash that protects purchasing power during times of currency devaluation, such as we are currently living in, and will be exposed to for the foreseeable future, is gold. This is supposed to be common knowledge but in reality, this is the best-kept secret in the investment world. When equity investments are too risky due to economic shocks to the system, like covid and lockdown, or when valuation become stretched due to share-buybacks that are funded with cheap credit, then the investor finds refuge in cash, and that cash is gold.

When the investor is exposed to inflation or hyperinflation, both resulting from the deliberate act of currency debasement, then it implies that the investor does not fully understand the system that determines his purchasing power.

Fiat currency is not cash, it is a debt token. The entire purpose of inflation and currency debasement is to debase debt, to destroy the value of debt. It is understandable, therefore, that when governments are forced to handle runaway debt levels, they will have to also devalue debt-tokens. The world went off the Gold Standard in 1971, simply because the USA has defaulted on its gold-denominated debts. The USA cannot default on dollar-denominated debts because they can, and they do, print the money to service the debt. They simply create more debt tokens to repay the old debt.

Gold is a commodity with scarcity value. It is an accepted means of exchange, store of value, and unit of account. Gold is money. Fiat currencies are debt tokens. Inflation cannot destroy real money but it does destroy debt tokens because that is what inflation is supposed to do.


Sorry, but not with you on gold. Your gold god is denominated in an evil currency like dollar for good reason = it is useless as a currency. Granted, the yield on dollar is approaching the zero yield that gold has always had…

Gold proved it has no safe haven status in Iraq War One and subsequent global events.

Johan, I find your posts quite informative but on this one, we have to agree to disagree. I understand that the consensus of the established academic and emotional debate is on your side, but the consensus on the factual debate (Austrian Theory) is on my side. I am willing to live with that, as long as my bottom line proves me correct. I don’t need to win debates, I need to make money though. I have no particular affection for the yellow metal, other than the value it adds to my bottom line. Profitability is the scoreboard. Portfolio growth determines the winner of the debate, irrespective of what our preconceived ideas my be. I wish you all the best.

I hold a well diversified portfolio of currencies, gold, shares and bonds. That having been said, when all these lose their value….covid 19 lockdowns have taught me a new lesson. Invest in whisky, cigarettes, bullets and bully beef. Cigarettes and alcohol alone would have netted a 3 fold increase in value. All of them can be traded, sold or bartered. All comes down to diversification.


Perhaps my negativity toward resources is based on the crooks that tend to run resource companies multiplied by the weird thing that resources (a kg of whatever) are mainly (99.9999% by annual turnover) traded by people that have absolutely no interest, intention or reason to ever own that kilogram in its physical form. Basically a tulip.

Let’s say I manufactured something properly useful like a magnetic bearing. In my market I do not find a bunch of idiot suits in investment banks or kids in their mom’s basement trading in bearing futures. A bearing has a defined benefit and little speculative value.

How many times is one kilogram of gold traded? I would venture that a kilogram mined in 1920 has by now generated multiples of its cost and multiples of its intrinsic industrial value just in broker commissions, storage and insurance “value”. Basically the gift that keeps on taking. I think I read that the average barrel of oil is owned 16 times between extraction and being burnt. Gold is for me no different than a clump of coal or a barrel of oil except that both coal and oil have an economic value I can derive and use today from their calorific value.

Equities? I can very well correlate share prices to the future value of cash flows allowing for the weird stuff that happens in all families. Gold has no cash flow and cash flow is King.

You raise some interesting points. Buyers and sellers of commodities who need to hedge their risks are responsible for the largest proportion of the volume of transactions on the futures exchange. They are effectively buying insurance. Speculators provide liquidity to hedgers.

The general insurance industry is highly successful and generates very high transaction volumes on car and house insurance because people need to offset their risks. The insurance company and his re-insurer provide liquidity in this market. Calculate the number of insurance contracts on property and companies that manufacture bearings.
The fact that futures contracts are traded many times is an indication of efficiency and liquidity in that market. The volume of transactions enables participants to offset their risk at low spreads. The company that insures your car never takes possession of your car. Similarly, commodities are not delivered on the futures exchange. The buyer and the seller exchange their positions before closeout and they take out new insurance in the further months. They roll their position to stay insured against risk but they do not deliver on the exchange.

The futures market developed because participants needed an efficient mechanism to offset their risk. It is called a derivative market because it follows the supply and demand factors in the underlying spot market (the real market). The real supply and demand determine the movements on the futures market.

Gold is a commodity, I agree, but money started as a commodity. Fiat money can never come into existence without being tied to a commodity first. The fact that we had a gold standard fist, and then, after a default by the Nixon Government, gold-backed money regressed into fiat currency.

Anything can act as money as long as it acts as a means of exchange, a store of value and a unit of account. The dollar and rand act as a means of exchange only. Fiat currencies do not act as a store of value or a unit of account because of currency debasement. Gold and silver developed over the ages to be accepted as the only reliable means of exchange, store of value and unit of account.

The fact that Berkshire Hathaway, that do not pay dividends, shows an increase of 567% in terms of the USD since the year 2000, but in terms of gold, it is negative by 44%, illustrates my point. The dollar is not a reliable unit of account. Investors are being fooled by debasement. The miraculous returns are not due to Mr Buffets brilliance, but due to actions of the Governor of the Federal Reserve! This is exactly the problem when we calculate value or growth in terms of fiat currencies. We are pulling the wool over our own eyes.

Johan I don’t think you understand gold and the role gold has in international finance. Comparing gold with coal or oil is odious. Gold is not a simple commodity. Commodities have a declining marginal utility. Not too long ago there was too much oil and too little demand. People had enough oil for their needs and the price collapsed. The same thing can happen to any commodity be it copper, platinum or wheat. Gold is different. It has the slowest declining marginal utility of all metals. There is 100 years’ production sitting on the earth surface in vaults, safes, under mattresses and on fingers. Yet people cannot get enough. Gold is the ultimate currency and governments know it. When bonds, shares and the mighty US$ crumble, people will turn to gold. Gold does not pay dividends but it is a store of value. In 1968 one ounce cost R28. Now it cost north of R30000. That’s appreciation for you.

Sensei, the thing with gold bulls is they are very selective in the dates they choose to support their mission. You compared Buffet vs Bullion since 2000.

How does the performance of golf look since 2010 or 1980?

Anyway – people either are in love with gold, or not. I have never used gold in my portfolio.

I get what you meant about efficient markets etc with gold futures and non-participants being short or long gold. What worries me is that the synthetic market is thousands of times the real market (as it is in oil or soy or pig ears or whatever but as it is NOT in massive and critically important goods such as computer chips). Why is there no need for an efficient market 10,000 times the size of the actual market for AMD or Apple or Intel chips??? At some point things go south in derivatives (like oil futures in March being negative price). At some point a big counterparty is going to default and then we are back to the financial crisis.

But that is the point of my contribution Johan. I am not suggesting the investor should be in cash permanently. There are times during which we should be invested in equity and then there are times we would be much better off sitting on the sidelines in cash. Therefore the referral to certain time periods.

Even if the investor did not switch between equity and gold over the past 50 years, the investor who bought gold would be about 3% ahead of the investor who held the DJI over that period in terms of CAGR.

We should keep in mind that the management fees(TER) are more or less equal to the average dividend received after tax in the unit trust fund. Gold does not pay a dividend but neither does equity investments after correcting for management fees. We don’t need to pay management fees to a portfolio manager if we want to buy gold.

Thank you for the opportunity to have this debate.


We can play this game all day long. There is absolutely no point at which anybody could have bought gold and beaten buying Apple shares on 9th March 2009 at $12. I could have donated all the dividends and still beaten gold into weepy miserable pulp.

It has very little industrial value.
It has no yield.
It needs insurance to own.
It is an absurdly volatile “store of value”. Basically a complete joke of the term store of value.
It is not nearly as rare as people imagine : it is ONLY rare to extract at cheaply. Gold is physically abundant within our planet. There are dozens of rarer elements available at a fraction of the price of the gold . Scarcity is a complete farce. Perfectly round beach pebbles are much rarer – they ain’t valuable.

We may as well quantify the value of albino ostriches. Roughly the same economic logic

This is a nice chat. Great to see no one slanting the government or being super negative.

As to the discussion I guess the key is that every class of shares and gold and cash all have their time.

But the underlying thought I have is that everyone here is putting aside money (not wasting/spending). My view is that each of the various assets have their place but I hate paying advisor commission.

So am keeping cash,and will probably put some in bonds. Then I am waiting – in a month or two I will buy into some smaller unlisted businesses in the private sector.

Over the years that has outstripped all the official investments I have ever made.

To be fair, shares aren’t what it used to be.

cash, women, men, morals, religion, ALL not what it used to be.

only politics are stable … … …

Assets and cash.The advertising platforms is flooded with cars,motorcycles,machinery,basically anything is for sale.People need money to buy things and pay bills/debt.The municipality won’t except your bigscreen tv as payment.

“Cash isn’t what it used to be”.

That’s because most of it has been stolen by the you-know-whos. What’s left over has been devalued because of the same you-know-whos.

A while ago Sensei posted something about deflation exporting, and (if my memory serves me correctly) the black dollar, and how this gives the USA the power to suck the value out of emerging markets and unfairly enrich their economy. I wish I could explain it but I don’t really understand it. Does Sensei have any further thoughts on this?

Well, I’d like to hear Sensei’s thoughts too, but in the meantime, let me add to your question. As I understand it, a country can only export deflation by importing less, exporting more, or loaning more money to other countries. In that way the country can attempt to deflate the currency of the country they trade with. From a SA perspective, we are on an increased level of all of these factors vis-a-vis almost all countries that we trade with. We will, therefore, increasingly become receivers of deflation. Does that mean that we, inevitably, will be pushed towards hyperinflation, or is that just too simplistic a view?

Guys, I am just a fellow traveller on the same road as you. I try to make sense of things in order to profit from them. When we try to figure out where to invest and what to buy we should keep in mind that Emerging Markets, like South Africa, outperforms the developed markets during times of a weakening dollar, and underperforms during those times when the dollar moves stronger. To a certain extent, the health of the economies of the Emerging Markets is a function of the Dollar Index then.

The US economy is that largest and the dollar is the major reserve currency. Commodities are priced in terms of the dollar. When the dollar moves weaker over a period of a decade or longer, it results in wider profit margins for commodity producers and increased tax revenue for their governments. A weaker dollar also makes it easier for Emerging Markets to service their dollar-denominated debt. Even local currency debt is easier to service under conditions of a weakening dollar.

During times of sustained dollar strength, we experience Emerging Markets financial crises. We saw the Latin American Debt crisis in the late ’80s after the dollar strengthened by 70%, and the Asian Financial Crisis of 1997 and the Russian Crisis of 1998 after the dollar strengthened by 50%. Now we have an Emerging Markets crisis once more. Venezuela, Argentina, Brazil, Turkey, most African and South American countries and South Africa are in bad shape after the dollar strengthened by 35% since 2001.

Inflation and Deflation are manifestations of credit expansion or contraction. The US enjoys the exorbitant privileged of printing the reserve currency. That means they can print fake money to buy real goods from the rest of the world. Through the petro-dollar system, the US “exports” their inflation to everyone who needs dollars to buy commodities. In a similar fashion, during times of credit contraction, they “export” their deflation to everyone who uses the dollar as reserve currency. By keeping our interest rates relatively high, South Africa acts as a deflation magnet. Our currency is relatively strong relative to the state of the economy and we lose our ability to compete on the world market.

The socialist spending, the detrimental political policies of BEE, cadre-deployment, SOE monopolies and the nationalisation op property plus the criminality of the ANC force South Africa to be a deflation magnet for the world.

Thanks Sensei.
It is interesting how China and USA compare. I feel inflation/deflation exporting has everything to do with the wealth of nations and the seismic shift in wealth that occasionally occurs. The UK did this to India in the 19th Century through a merchant system: They would tax the Indians to trade. Then they would use the same tax money to use to buy the goods the Indian traders were selling. They could then sell the goods in the UK at reduced prices and making an enormous profit at the same time. Does one have any doubt that a lot of the old money in England hasn’t come from this theft – other than their privateering exploits on the high seas.
Essentially the UK exploited the Indians because the Indians never knew better.
The same thing is happening now. There are systems in place impoverishing us. Systems which we don’t understand. I feel China has exploited this system well in sucking out the guts from the industrialised West. The Chinese have also had QE, at the same time pegging their currency. Maybe a lot of Tencents vooma comes from this rather than any brilliant management. In any case, this is no doubt the cause of the ruction between USA and China.
In my mind, the outcome of these “resource shifts” are determined by demographic tectonic shifts.
The West has, starting with Germany in the 1830’s, being losing her fertility. It turns out, this is not just the West, but everyone. The environmentalists don’t need to worry. Global populations are going into PERMANENT decline in about 30 years. We humans are currently at our population’s peak. Economies in the future are going to exist with stale growth, forever.
The only nations which will stand out will be nations that can attract immigrants.
There are few countries that can actually do this. And this will become especially critical as populations that are the usual sources of immigrants start to go in decline too and their people stay at home. So after 2050, there are only a handful of countries that are going to perform relatively well.
Perhaps this is what the ruction is about. As the USA has started to realise that China, due to her one child policy, has a serious population problem, not to mention her demographic bomb of old people. In other words, the next century belongs to the USA again. The USA is better at attracting immigrants. Who wants to go to China?
The global shift in wealth may start to be tugged back to the USA.
However, what this means for everybody else I don’t really know.

End of comments.





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