How Fragile Is South Africa?

In a recent piece for Foreign Affairs, Nassim Nicholas Taleb (risk expert and author of ‘The Black Swan’ and ‘Antifragile’) and Gregory F. Treverton wrote an article in which they set out some criteria for broadly measuring the fragility of any state.

There is in our country, for the first time in many years, a sense that the future will not be brighter than the present. Taleb’s fragility test is very applicable to the South African situation, as it gives an adequate framework for a summarised political and economic analysis.

An excerpt from the article:

Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility. 

Simply put, fragility is aversion to disorder. Things that are fragile do not like variability, volatility, stress, chaos, and random events, which cause them to either gain little or suffer. A teacup, for example, will not benefit from any form of shock. It wants peace and predictability, something that is not possible in the long run, which is why time is an enemy to the fragile. What’s more, things that are fragile respond to shock in a nonlinear fashion. With humans, for example, the harm from a ten-foot fall in no way equals ten times as much harm as from a one-foot fall. In political and economic terms, a $30 drop in the price of a barrel of oil is much more than twice as harmful to Saudi Arabia as a $15 drop.

For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought—and seemingly placid states turn out to be ticking time bombs. 

  1. A centralised decision making system

We live in a country, where sadly many South Africans have a natural affinity for socialism, and favour the notion that it is the role of the government to solve problems and address inequalities. In this case, the basic ideologies of those in government, and that of the majority of voters conveniently align. Virtually all major national policies are decided by the top 6 in the National Executive Committee, the effective politburo made up of the ANC elite. The number one criterion when appointing ministers and other senior officials are loyalty, unbending loyalty to the president, and to the party.

Government is a very complex system. When its size doubles (measured by staff, budget etc.), the inherent complexity of the system doesn’t double, it far more than doubles. In this case, the relation between size and complexity is non-linear. To paraphrase the analogy Taleb uses in his book Antifragile, that of a car crashing, he asks: “what causes more carnage, a car crashing into a wall once at 100 km/h, or a car crashing into a wall 100 times at 1 km/h?” A larger government is more prone to be negatively affected by shocks precisely because it is more complex. There is a larger risk of contagion within the system, the dominoes are in effect placed closer together. When there is a shock, the falling dominoes trigger the rest to fall.

The majority of provincial funding comes from national government, as do most of the provincial appointees. Provincial governments have fairly little autonomy (apart from the opposition run Western Cape). There is no mass involvement in the political process for the average person apart from placing a ballot marked with an X in a box once every five years. In South Africa, we have no congressmen, senators or local constituency MPs to contact in the case of grievances. Hence, the whole government is more centralised, the dominos are stacked closer together.

“Democracy is the road to socialism” – Karl Marx

  1. A diversified economy

South Africa has never had a truly diversified economy. During the apartheid years, South Africa had thriving mining and agriculture sectors, with the economy largely resource driven. Today, mining has largely been decimated by government policies. Firstly due to the over wielding bargaining power of unions, and the reluctance of government to take them on, and secondly due to complex new mineral rights legislation (effective partial nationalisation of minerals) and BEE ownership quotas which have made it near impossible for mining operations to function effectively, especially in a depressed commodities market. This has also caused South Africa to largely miss out on the China fuelled commodities boom of the early to mid 2000s. Politicians seem to be more concerned about doing things in order to be seen doing something (fighting perceived western imperialism in order to ‘share the wealth’ with the people) without considering the implications, which often affect the populace the most in an adverse way. The same could be said for agriculture. South Africa is now, embarrassingly, a net importer of food, despite having millions of hectares of arable land, and having been on of the breadbaskets of the world not so long ago. This decline is due to 3 reasons, all to do with government. Firstly, farm murders are unquestionably an epidemic in South Africa (while perhaps not being genocide quite yet). The disgraceful murders (often preceded by torture) have taken its toll on South African agriculture; there can be no farms without farmers. Secondly, government is too intimidated to confront unions about violent strikes and ludicrous wage demands. Bizarrely, in 2013, members of the ruling party in government openly supported the violent strikes and did nothing to discourage damage of property caused by striking farmers in the Western Cape (as part a ‘make the Western Cape ungovernable’ campaign – which failed). Thirdly, land reform and uncertainty around property rights. Many farmers have immigrated to the US, Australia or Zambia because they want to be sure that the government would protect their property rights. In South Africa, there is no certainty surrounding this issue. The vast majority of land reform thus far has been disastrous due to the lack of skills and training of new farmers who are simply given land. There are talks of ‘expropriation without compensation’. This does nothing for South Africa’s food security.

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Greece: No Austerity, No Democracy, No Capitalism

By Christiaan van Huyssteen (@cvh23)

Greece has been pushed to the brink by the mounting debt the government has to deal with. Despite

No democracy

From Zerohedge:

It should be the Greek people that are reeling by another, even greater stunner, just spoken by the Greek PM during his TV interview: an admission from the chosen Greek “leader” that Greece, as a
sovereign nation, no longer exists:


So the Troika makes it clear that countries under a bailout, such as a Greece was and is about to be indefinitely again, democracy is finished and the country becomes a sovereign ward of a few unelected bureaucrats, and the Greek “prime minister” who also just admitted he is now nothing but a puppet of Greece’s new unelected leaders, is Ok with this.

When a business or an individual has debt problems, they can negotiate new terms with their creditors, or simply default and surrender their assets to their creditors. With governments, this procedure is a little less obvious. Are the Greek people responsible for the debt, or is the Greek government? Are the people not the government? Should the government (or thepeople who voted for the government) which so liberally racked up the debt be punished? How can they? Under a democratic government there is rarely any meaningful accountability. This is why debt can become such a demon and result in a loss of democracy.

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This Week In Zerohedge Charts – The Start Of Something Bigger?

By Christiaan van Huyssteen (@cvh23)

Some interesting (scary?) charts that has appeared in Zerohedge over the past 2 or so weeks:

 (All the charts are from Zerohedge, who in turn got it from other places. Click on the heading to view the source. My comments follow at the end.)

Stock Indicator Suggests Big Move (Lower?) Coming

One indicator we do like to keep an eye on is the ADX, or Average Directional Index. It is essentially an indicator of the strength (or lack of strength) of the prevailing trend over a specified period, regardless of the trend’s direction. A high number indicates a strongly trending market and a low number reflects a lack of trend. The traditional default look-back period is 14 days so we tend to stick with that. Interestingly,recent readings of the 14-day ADX applied to the S&P 500 have been among the lowest of the last 65 years, indicating an extremely “trendless” market.

On several days over the past 2 weeks, the ADX reached a reading of 9. Since 1950, there have been just 42 total days – or ¼ of 1% – that saw the ADX that low. Expanding the net to readings of 10 or lower yields 145 days, still less than 0.9% of all days since 1950.

adx low strength

The Last Time This Happened, Chinese Stocks Crashed

Chinese stocks are the most expensive relative to bonds in almost six years.For the first time since June 2009, Bloomberg notes, the earnings yield on the Shanghai Composite Index has dropped below the yield on top-rated corporate debt… and just like in now, stocks rallied 100% in the preceding year beforeplunging over 20% in the next month, and further still in the ensuing months.Already we are seeing Chinese stocks faltering – with a disappointying post-rate-cut move – which leads on analysts to note, “the market will enter a correction phase, and it will be very volatile,” and comments by officials have raised concerns that PBOC will “quickly erode its credibility.”

Chinese bonds vs equities

The US Is In Recession According To These 7 Charts

The evidence continues to mount…

“Most since Lehman” has become the new meme for macro-economic data in the US as day after day brings another lacklustre superlative to be dismissed with some excuse by the cognoscenti of sell-side economists…

US macro surprise

 Of course, that is aside from anything related to aggregate jobs that is spewed by the government’s official ministries of truth… (do not look at this chart)

Job Cuts

So here are seven charts that scream “recession” is here…

Retail Sales are weak – extremely weak. Retail Sales have not dropped this much YoY outside of a recession…

Retail Sales

And if Retail Sales are weak, then Wholesalers are seeing sales plunge at a pace not seen outside of recession…

Wholesale Sales

Which means Factory Orders are collapsing at a pace only seen in recession…

Factory Orders

And Durable Goods New Orders are negative YoY once again – strongly indicative of a recessionary environment…

Durable Goods

Which is not going to improve anytime soon since inventories have not been this high relative to sales outside of a recession.

Wholesale Inventory Sales

And just in case you figured that if domestic prosperity won’t goose the economy, Chinese and Japanese stimulus means the rest of the world will save us… nope!! Export growth is now negative… as seen in the last 2 recessions.

Export growth

And deflationary pressures (Import Prices ex-fuel) are washing upon America’s shores at a pace not seen outside of a recession

Import prices

But apart from that, given that US equities are at record highs, everything must be great in the US economy…

Employed population

Peak Picasso – Did The Art Market Just Flash A “Sell” Signal For Stocks

Like any trend in an unhinged market, it’s next to impossible to predict when the confidence will peak. Based on previous peaks, it could (should) be any time,warns Jason Goepfert, president of Sundial Capital Research.

sp 500 vs picasso art

The Last Two Times This Happened, Stocks Crashed

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Some Stock Market Myths That Aren’t Myths – A Warning

By Christiaan van Huyssteen (@cvh23)

From 702:

4 beliefs about shares that keep you from growing wealthy

Many people don’t invest in shares, because they believe one or more of the following misconceptions:

  1. Investing in the stock market is tricky
  2. Investing in shares is like gambling
  3. Investing in shares isn’t for those earning a low income
  4. Investing in shares can make you rich, but you need to know a lot and have the time for research

Investing in the stock market over longer terms is nothing like gambling

If you can put aside R300 per month then you can invest in the stock market!

If they’re honest, most employed South Africans will admit that they can afford to save R300 per month, which is all you need to start investing in an index tracker such as Satrix. We’ll discuss index trackers in an upcoming article. For now, just know that it’s a way to own shares in the very best South African companies. And you need only R300 per month.

You don’t need to know anything to invest in shares and you don’t have to do any work. I have a fund manager who makes all my investment decisions. I never check my stocks and spend, maybe, ten minutes a month on my portfolio.

A good portfolio should contain some equities naturally, BUT encouraging people who don’t understand some of the basics of investing to invest a day after the markets hit an all time high is a classic warning sign. When you get to a point where everyone from your hairdresser to your grandmother is giving you a ‘hot tip’, then you should be scared. Don’t invest if you don’t understand the risks, if you don’t respect markets, or if you don’t know what you are investing in. I don’t think it is entirely responsible of 702 to give this kind of advice at a time when the stock market has just hit an all time high.

Are these ‘misconceptions’ really misconceptions?

  1. ‘It is tricky to invest’

It is not technically tricky to invest. If you have money, you can make a phone call and invest money.

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Expect More Quantitative Easing By The Federal Reserve in 2015

By Christiaan van Huyssteen (@cvh23)


The Federal Reserve will end its bond buying (money printing) this month, despite the US and world economy still being fundamentally weak.

This is bad for equity investors, particularly in emerging markets such as South Africa. But do not despair, the Fed will soon realise the simple fact that there is no recovery (see here, here and here) and start running those printing presses again. This will be temporarily good for those in the investor class. But common sense will tell you that at some time this will lead to a very serious financial crash.

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