Tough Times Lie Ahead: Think About Your Financial Future

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As we weather the current storm of power blackouts by a failed monopoly provider of electricity, perhaps it is time for South Africans to reflect on what comes next. It is clear that government cannot sustainably provide the capital Eskom requires without destroying what’s left of the economy through tax increases. At the end of the day, taxpayers will still be liable for some if not all of Eskom’s R450 billion in debt, but it will be impossible to do this and also build the new plants and upgrade the old ones, that are required for future economic productivity.

The only possible solution now is attracting private sector investment into the energy sector. This is long overdue. Perpetuating Eskom’s monopoly has left our economy vulnerable at a time when the outlook for the global economy doesn’t look promising. Apart from the much-talked-about inverted yield curve, the fact that the US Federal Reserve is still struggling to raise interest rates more than 10 years after the global financial crisis is a serious cause for concern.

Not to mention the trade war between the USA and China, with more countries seemingly adopting the madness of protective tariffs.

The South African government is bankrupt and the widening debt service costs coupled with the decline in tax revenue has left the country more vulnerable than it has been in a long time. There are too many potential flashpoints for conflict as South Africans become poorer and therefore more desperate. Populist politics is likely to gain even greater levels of support, given the 70% of able-bodied young people that are unable to find jobs.

So what can you do to protect yourself?

The first step should be to start thinking seriously about how to preserve your wealth, whether it is currently held in a pension fund, land, stocks etc. Educate yourself about what is going on in the world and make your own decisions. You cannot afford not to understand the world of savings and investment on your own, in times of crisis some financial advisors might be tempted to give self-serving advice.

Central banks across the world, including in China, have been buying up gold at record levels. Russia has changed the composition of its reserves by increasing the proportion held in gold while simultaneously reducing the proportion held in US dollar assets.

“The dollar is the most widely held reserve asset but, according to International Monetary Fund statistics, gold comes third, accounting for 11% of global reserves. Having been net sellers until 2000, central banks have been net buyers ever since. In 2018 alone, central banks bought 651 tonnes of gold, up 74% compared to 2017 and the highest level since 1971.” – Isabelle Strauss-Kahn, Former lead financial officer, World Bank

If you will remember, 1971 is the year when the entire world left the gold standard following the dollar which was and still is the global reserve currency. It is possible that central banks are anticipating a similarly fundamental change in the global financial system. It is not just the central banks of America’s enemies that are doing this, Poland is also going on a gold-buying spree and is also repatriating its gold from the Bank of England.

The Dutch central bank recently released an article on their gold holdings:

“Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis. That is why central banks, including DNB, have traditionally held considerable amounts of gold. Gold is the perfect piggy bank – it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.” De Nederlandsche Bank, https://www.dnb.nl/en/payments/goud/index.jsp#

It is interesting that the DNB would release such a statement given that US government bonds have long been considered a relatively risk-free asset. In fact, so many people believed that the US dollar was a good enough store of value that they abandoned precious metals like gold for US government paper. The DNB seems to be hinting that this may have changed.

What could have changed? Well, if you look at the low-interest rates that the USA and most of the world adopted after 2008, the printing of money in order to prop up the prices of assets like stocks but mostly government bonds. If you also consider the fact that the US government accumulated more debt during this low-interest-rate period, to the point now where their government has accumulated $22 trillion in debt, a third of all the world’s sovereign debt which stood at $66 trillion as of the end of 2018, according to Fitch.

From the above facts, it is clear therefore that the gold-buying central banks are not without cause for concern. If the US government requires continued funding of its debt by the private sector and foreign central banks, with no way to pay off the debt, while simultaneously depressing yields on those bonds in order to avoid significant tax increases in the USA, at some point the risk-to-reward calculation will not make sense for private investors. If private investors are no longer willing to hold US treasury bonds, the dollar itself and all dollar assets such as US stocks may be in trouble.

As we sit in Eskom-created darkness, also think about the future if there is to be a light at the end of the tunnel. South Africa’s economic indicators are terrible but this does not mean the rest of the world is perfect. In fact, it means that we South Africans are even more vulnerable to economic shocks. Think seriously about how to position yourself in an uncertain world.

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