Parivartan Information

We are starting to see the impact of the credit crisis - to use the current jargon - ripple through the economy. The commercial property development market has seen about 10 percentage points shaved of the credit side of the equation and added to the equity side.

Whereas last year medium size property developers could get 75%+ in loan funding on a project, talk is that they’ll now get around 65% - assuming projects go ahead. It’s a shifting of some of the risk by nervous financiers.

The big boys with solid reputations and strong portfolios can still raise whatever they need, but have had to add a couple of percentage points to their interest bills.

It’s hard to read how this will play out because property developers are still running the numbers on prospects, but we don’t know yet whether this is just out of habit and the lack of other things to pass the time with. Will they take the next step and build stuff?

The impact of these medium sized developers is very important because, like all markets, they will at least have an impact at the margin, and hence a significant impact on market momentum.

There’s a bucket full of gloom around at the moment. We are in a new age of Malthus.

He was the pastor turned fledgling economist who predicted - 300 years ago - population growth would lead to mass starvation because our ability to grow food would increase by a set amount every 25 years but the population would double. Food growth would be arithmetic; population growth would be geometric.

He was wrong, and so has every doom sayer since been. No one seems to factor in that we humans are quite smart, ingenious even.

Currently we have Global Warming, Peak Oil, and crises in Food supply, credit markets, western housing markets, China’s pollution, and the US Democratic Party. I may have missed a few.

I predict, however, that innovation will solve these problems and leave us free to worry about other things and let politicians move on to other crises.

If we are at Peak Oil, we’ll move to something else. In London in 1880 it was predicted that if something was not done about the growth in horse drawn traffic, the capital of the British Empire would be knee deep in Horse poo by 1930. The automobile saved us from that. Soon, something will save us from the car.

The phrase ‘moral hazard’ is a masterful piece of obfuscation, probably invented by a government bureaucrat or spin doctor. It  refers to the inherent danger of government’s backing or guaranteeing a private financial institution on the grounds that not to do so would endanger the economy, or a large number of citizens.

There’s been a lot of it about lately. Bear Stearns in the US, Northern Rock  in the UK and the hovering presence of the French Government over the recent trading scandal, are examples.

Clearly, with the government guaranteeing a bank against going belly up, it can take an optimistic view of the world which translates into a thousand small up side risks that cumulatively mean the bank has a big upside position, believing that there’ll never be another sunset.

Yet it is now clear that significant chunks of the financial system have been incompetent at best and downright sneaky at worst. These bankers and hangers on have lost any right to a privileged existence and protection from governments.

Nor does the argument that small investor or home owner is being protected wash too well. My pension fund has been badly hit, I might be 20% worse off since the credit markets starting creaking. It’s only a paper loss at this stage, perhaps, but it isn’t for someone who is retiring and cashing out now. In some parts of the world, especially the US house prices, are down 20%, and if you’re in a money market fund the effective yield might be now 2% vs 5% a year ago. So the small investors, John and Jane Citizen, are already paying for the short-sighted incompetence in the financial system.

I have found in life I can avoid shonky second hand car dealers and unscrupulous real estate agents by being careful. But there was no way I could avoid the consequences of shonky investment bankers because we as a society have let them run loose in the world’s capital markets. I’m betting 97% of the population is befuddled by Hedge Funds, Collaterised Debt Obligations and other financial services products branded as “innovative”, so the politicians haven’t had to worry about the system.

Right now I feel mad as hell and I’m not going to take it any more. I’m just trying to work out what to do about it. But I am starting to do little things - changing my relationship with some firms, cutting out some purchases out of pique  - that will have a ripple effect if more people are thinking this way.

The politics of the Zimbabwe situation remain on a knife edge, with reports suggesting President Robert Mugabe, humiliated and on the nose though he maybe, has decided to fight back against an Opposition that seems to have won more votes in the election. 

It’s like a soap opera, except of course it’s much more serious than that. A country is bleeding to death.

But maybe, just maybe, things have gone so far that more brutality won’t cut it this time for Mugabe. The Reserve Bank has just printed a Zim$50 million note, worth about US$1. Maybe getting a few $50m notes each month doesn’t excite the army rank and file and the public service anymore. Maybe they won’t do Mugabe’s bidding. Maybe (please God let is be so) they are fed up to back teeth with him too.

So maybe we’re a week or two away from a new administration. Word on the street is that Opposition Leader Morgan Tsvangirai is a decent bloke but no rocket scientist (unlike the smaller opposition group leader, who actually is one). He’ll have the world’s good will behind him and, according to the UK press, an aid package of $1 billion is being lined up. But he’ll need to bring in some good help.

How do you resurect a country who’s economy has been devastated by criminal mismanagement and that has a debased currency. Economists are not sure.

But, hey, let’s take some punts here. We’re looking for economic opportunity. I recognise of course that Zimbabwe has exchange controls in place and that doesn’t encourage investment, but Tsvangirai is going to have to lift them, even if only selectively at first.

If I were advising Tsvangirai, I’d be saying let’s get our export sector right. Our mines in our mineral rich country are low hanging fruit. Let’s make sure they have all the inputs they need and so we can take full advantage of the commodity price boom. Also, I’d be saying that we should let bygones be bygones and not be concerned that China helped out Mugabe from time to time. Let’s cosy up, sell them some chrome, get a little investment. Opportunity one: check out the mining stocks.

The second immediate opportunity is in tourism. Zimbabwe is a beautiful country; parts of it are Africa in the raw; and the people - Mugabe and the top brass apart - are friendly and hospitable. It won’t take much to get the tourist infrastructure back up to scratch. Maybe have an open skies policy so that Richard Branson will fly in sun-starved poms by the gross. 

And in a time when food prices are high and not looking to come down any time soon, there’s a solution to the problem of idle farms swirling around. Maybe long leases, maybe tax breaks to produce, maybe a use it or loose it policy for farms confiscated under Mugabe’s poorly implemented resettlement program.

I’m feeling better already and might put some money Zimbabwe’s way. There might be some opportunities and, heck, it’s a great cause.

Mugabe’s got to go first, of course.

Investors are in a bind.

The global credit crisis has not yet played out, as UBS’s painful 1Q loss today attests. There’s talk that Fed chairman Bernanke is dusting off his academic research into the Great Depression to see what tools he might need to apply in the months ahead. So it’s a time to sit on the sidelines, hoarding cash, waiting to see where the dust settles.Ah, no actually, because the train coming from the other direction is inflation. There are a few reasons that inflation is again spreading its wings, not least are energy and food costs. But if oil stays at around $100 for another year, it will be statistically washed out of the CPI numbers. The real, underlying inflation issue is to be found in China. Since China entered the WTO in at the end of the last Century, Chinese manufacturers and workers have been underwriting the world’s low inflation by producing goods, especially consumer goods, at increasingly lower prices as economies of scale gained traction and at prices well below what could be matched elsewhere. Those days are drawing to a close. The pressures on resources within the Chinese economy, and the weakness of the dollar are leading to increased prices for China’s exports.

The free ride is over. (There has also be some help on prices from Germany, the pre-eminent supplier of machinery, where prices to many regions are down because of the record strength of the euro against the dollar.) The world’s central banks will have difficulty crushing inflation because a) we may over estimated their ability to deal with anyway because it was really the Chinese all along, and/or b) they cannot afford the greater risk of completely drying up liquidity and activity by cranking up interest rates.So cash is not King – or perhaps it is King Cnut, who failed to order the waves to stop. The solution lays in returning to the basic necessities of life – to food and to water. Obviously the third element of basic necessities – shelter - isn’t the place to be, courtesy of the sub-prime bubble. If times get tough I’ll postpone buying the upgraded ipod or the next version of Vista (I might pass on that anyway, come to think of it). But food and water I will not pass on. And notice already how food and water prices are rising. The pressure of more people on the globe seems unlikely to change this any time soon.So here’s the deal: investors should be looking at food and food inputs (like fertiliser, ag chemicals – note too that ag land has been increasing in price) stocks, and at water stocks (suppliers, desalinators).