Simon Shares

Day 28 of lockdown.

• Oil, negative pricing? I thought I'd seen it all when interest rates went negative, but no ~ oil says "hold my beer". I Tweeted about it. Short version, don't now suddenly decide you are an oil trader.

Overnight WTI Oil (West Texas Intermediate) traded at a negative $40. Yip -$40, traders were paying you to take their oil off their hands. Totally wild and now everybody wants to be an oil trader. But some caution before you jump in. 1/

— Simon Brown (@SimonPB) April 21, 2020

 

• Bye-bye SAA. Staff have essentially been given termination letters for end April by the business rescue practitioner, payment subject to the sale of assets and this is the worst time ever to be selling airline assets. But public enterprises minister, Pravin Gordhan, has other ideas, a new “financially viable airline”. This in the middle of a pandemic when US airlines got US$25billion, and they want more? But here's the fun part, while the minister and government is insisting no new money, the business rescue practitioner actually has less power than usual. This is because the Public Finance Management Act applies and this gives the minister a final say on major decisions and the sale of assets or a liquidation would certainly be considered a major decision?
• Standard Bank (JSE code: SBK) gives gives us a first quarter 2020 update. "In 1Q20 earnings attributable to ordinary shareholders were 27% lower". While providing for bad debts on a forward looking basis, they specifically said " virus related stress had to a large extent not emerged yet and bad debt provision raised were based on best estimates.".
• ETF: Same index, different price?

Upcoming events;

• 6 May ~ The economic data so far, what's it telling us?
• 13 May ~ Know your derivatives: CFDs, indices and FX
• 20 May ~ Trading 101: Getting started in trading
• 21 May ~ Solvency and liquidity in the time of COVID-19
• 28 May - Garth McKenzie

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Going BIG

R500billion announced by the president on Tuesday evening. We await details from the finance minister, but some highlights. 10% of GDP and some 25% of the February budget total spend.

But it not all real money, some of it is soft loans, others tax relief in delayed payments.

• R130billion ~ budget reprioritisation
• R40billion ~ UIF, they have R42billion excess reserves.
• R70billion ~ tax breaks, relief and deferrals.
  • The monies will still need to be repaid, but it helps cash flow over the next few months.
• R200billion ~ loan guarantees
  • Banks issue the loans with state under writing them. This is an easy and quick win directly into mid size and smaller businesses and banks have the processes already in place with just a few tweaks needed.
• R60billon left over and actual new spending is some R100billion. The R60billon we can cover that from the IMF easy enough. BUT for example tax breaks hurt SARS cash flow, so more fluid then just R60billion needed.

The biggie is the increase of social grants, child grants ultimately an extra R500 a month and all others +R250 while a new unemployed grant at R350. This is to run till end October, in theory - but we'll still be in the midst of a COVID-19 pandemic then, so it will have to be extended.

Basically we have implemented a basic income grant (BIG) and it will be impossible to take that away any time. How do you say to poor hungry people, no more? Even when the pandemic has passed? Simple you can't and you don't.

For those who think a BIG is communist or evil, go check the research. There is lots starting from the 1970s in the USA and Canada, they work and they are cost effective. How do you help a poor person? Give them money. How do you help a homeless person? Give them a home. Surely there is nothing anti-capitalist about caring about the deeply less fortunate and having a little less of our luxurious lifestyles to help them? And the concerns that they will 'waste or drink' the money is simple not true. Every research shows the incidence of waste is actually lower in groups receiving state aid. As for the theory that women get pregnant in order to receive the child grant, again research has disproved that every single time. There is zero evidence to support that theory.

Lastly on social grants, we have a world class system that is also one of the largest in the world and it works. Further theft is pretty much impossible as the recipient knows what they due and if it not there, hell to pay. Now sure as we saw with Cash Paymaster Services, charges and 'extras' can get messy. But not the actual hard process.

It won't be enough, we'll have to do many more. Likely this will take us into the third quarter at best (note the extra grants end in October and COVID-19 is expected to peak around September for South Africa). But eventually we'll need well in excess of R1trillion, I think maybe some R2trillion to take us into the end of 2021.

• For reference the US did US$2trillion and have now passing another bill.
• Now sure, we're not the US and we don't have their balance sheet nor is the ZAR the worlds reserve currency. But we're trying to save a country here.

How do we pay for the R500billion? Well as per above, majority of this is not real money. But short answer is we borrow and print money, especially for the next rounds we'll have to do later in the year. US$4billion is available for South Africa from the IMF (via the rapid financing instrument, here are the T&Cs of those loans) with pretty much no strings attached, that's almost R100billion. Is that all a risk to the currency and inflation, indeed it is.

But firstly if all countries are doing the same, we're all in the same boat and it becomes moot?

Also understand inflation, it means every Rand a person has is worth a little less in terms of what it can buy. Now the rich have the most Rands so end up paying the most, and why not pay up a little to help save the country? Certainly I happy with that as one of the rich.

The president also promised 'structural reforms' and 'radical economic transformation' which is trying to work both sides of the fence. We'll see which side he really ends up on in the end, but don't forget Minister Mboweni, he not going quietly into any night. He did speak a bit on essentially a new way of doing things, on that he's right.

Post COVID-19 the world will be a different place and we as individuals need to give serious thought as to how we want this new world to look. Then we need to start making it happen otherwise before we know it, we'll all be back to the same old same old.

A concern is about the actual process and fears of looting of the monies. Not unfounded considering our recent past. But thoughts on this.

• We have a new administration, this is not the Zuma government, sure still the ANC - but markedly different. Close your eyes for a second and imagine COVID-19 in South Africa under President Zuma.
• Secondly, what's the alternative? Let people starve?
• Thirdly, as per above grants are pretty much corruption free, except for the actual process now managed by the Post Office.
• Lastly, there is actually little hard cash, some billons to municipalities for water, but not that much in real Randelas.

One questions is does this 10% of GDP offset the expected 10% or so drop in GDP? The answer is no, it means maybe we only drop by the expected 6%-10%, not more.

As a last aside, the president said that the 2% repo rate cut adds R80billion into the economy in lower debt repayments. This is massive and helps middle to upper LSMs with their prime linked debt. Unsecured debt of the lower LSMs is not linked to prime, rather it regulated by the usury act, but that's why the increased social grants.

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