The economic effects of South African xenophobic violence

As you know: Xenophobic violence is spreading across South African low-income settlements RAPIDLY.

The targets of the violence are illegal immigrant laborers from neighboring African countries like; Zimbabwe, Mozambique, Malawi etc. There are around 5 million illegal immigrants in South Africa; of which an estimated 3 million come from Zimbabwe.

"They took our jobs, our houses and our women..." - thats what the perpetrators of the violence say

The reasons for the attacks according to the perpetrators of the xenophobic attacks:

1. The immigrants caused a housing shortage by increasing the aggregate-demand for low-income housing (in an environment where there is constrained supply of low income housing), and, are fueling corruption in the allocation of recently built low income housing units.
   
2. The immigrants bid unskilled-level occupational wages down; by flooding South Africa with the supply of low-skilled labor (in an environment where demand of low-skilled labor is growing slowly) a.k.a : 'They took our jobs'.
3. The immigrants contributed to the increased incidences of negative social vices e.g. prostitution, rape and highly organized crime.

...That's what the perpetrators of the violence say...

I foretold all these events in January and people are wondering how I knew: I kept my eyes open and the warning signs were too bold. The time line I predicted was accurate, however I underestimated the scale of the events...

"If the South African economy were a listed company with publicly traded stock, I would be short-selling it..." - thats what I say

The current wave of xenophobic attacks will definitely affect the South African economy negatively.

The extent of the adverse economic effects is largely dependent on:

• How rapidly the attacks spread & how long they continue to persist
  
• How well the South African government manages to contain the attacks + how well the South African government addresses the underlying causes of the attacks.

Generally speaking, the following negative economic effects might be observed:

1. Decreased productivity: especially in mining and construction industries in South Africa; as they heavily rely on low-cost immigrant labor (that would have been displaced by the attacks). Supply-side disruptions (of South African construction labor markets), may impede progress thats being made on 'World Cup 2010' related construction projects. Supply-side disruptions (of South African construction labor markets), may also limit the South African government's ability to address the low-income housing shortage i.e there will be a construction worker labor shortage that negatively impacts progress on low-income housing development projects: This may fuel more social unrest i.e. more xenophobic attacks (as the low-income housing shortage catalyzed the initial wave of xenophobic attacks).
   
2. Increased foreign investment outflows and decreased foreign investment inflows; as foreign investors generally shy away from investing in (and or withdraw capital out of) regions that are perceived to be highly politically volatile i.e. where the political risk / risk of social unrest is high. Investor confidence in the South African economy will nose-dive (how rapidly? I don't know). This may impede economic growth and development in South Africa.
   

One man's crisis is another man's cash cow...

South Africa is one of the world's biggest gold producers and the world's largest platinum producer.

Widespread xenophobic attacks would; 1) Cut the supply of labor to South African mines, resulting in production delays and/or reduced production 2) Increase the per unit cost of production of gold and platinum group minerals, as a reduced supply of labor (where demand remains constant) would spark a rise in general mine-worker wages.

Otherwise stated: The price of gold may soar to new heights because of these disturbances. To investors in gold investment vehicles, this is means $$ !

Get Ready for the most turbulent market period you'll ever see!

Note: Part 2 of 'Malevolent Money' will be posted when the timing is right. Keep visiting =)

Brace yourself for the most turbulent market period of your life! During the next 10 years you'll see strange things happening in the markets. Currencies, equities, bonds and commodity markets; will exhibit behaviors that have never been seen before. The oncoming events will not just be strange--they'll be stranger than you can ever think/imagine! There will be a massive re-alignment of markets.

Note: To explain the driving force behind the change, I'll briefly introduce Moore's Law and use it explain how the technological landscape will change rapidly to the point of shaking financial Markets:

...The number of transistors that can be inexpensively placed on an integrated circuit exponentially doubles every two years...

In 1965, Intel co-founder Gordon Moore observed that the number of transistors that can be inexpensively placed on an integrated circuit exponentially doubles every two years. This observation is what is known in the field of computing as Moore's Law.

Inventor Ray Kurzweil's abstraction of Moore's Law shows us 2 things:

1. 'Moore's Law like progress in technology' applied uninterruptedly for the last 100 years i.e. during the whole 20th century--even during recessions and 2 world wars.
2. The trend that Moore observed--doubling of transistor density every 24 months--has been maintained in recent times and is showing exponential growth i.e the exponential trend is growing exponentially (read again if it makes no sense).
   

...More technological breakthroughs in the next 20 years, than in the entire 20th century...

In his abstraction of Moore's Law, Ray Kurzweil also predicts that there will be more technological breakthroughs in the next 20 years, than in the entire 20th century. This means that there will be advances in computational capabilities that will alter everything we can think of.

The rate of advancement will be (assuming the Moore's Law trend extends into the first half of the 21st century) so great, that the resulting technological progress will shake financial markets. Here's why:

The investment decisions of most asset managers are based on financial/economic models which assume either perfect/complete information.

Empirical evidence shows that the assumption of perfect/complete information is unrealistic: Implying that the current prevailing prices in financial markets are somewhat 'flawed', as they are determined by the activities of market players that have imperfect and incomplete information.

...Moving on

The amount of information available to market players increases as hardware and software technology improves. Otherwise stated: the amount of information available to market-players is (highly) positively correlated to the rate of technological progress.

The rate of informational efficiency of financial markets has a direct relationship to the rate of technological progress.

Mathematically the preceding statement can be expressed simply as;

IEffm = k.tp

Where:
IEffm; The rate of informational efficiency of the financial markets
k; is a constant
tp; is the rate of technological progress

...In an environment where there is an increasing rate of technological progress, there will also be observed an increasing rate of informational efficiency in financial markets...

Given an exponentially increasing rate of technological progress (according to Ray Kurzweil 's abstraction of Moore's Law): it is safe to argue that the rate of informational efficiency of the financial markets is also increasing exponentially. Which means that the assumption of perfect/complete information in financial markets is increasingly beginning to hold.

...Our journey towards absolute informational efficiency (of financial markets) will be rapid, as we are approaching a period of rapid technological progress...

An exponentially increasing rate of informational efficiency of financial markets implies that there will be a never-ending-exponentially-growing flood of information.

As market players get more (and better) information, they adjust their portfolio positions accordingly... But given that they are going to face a never-ending-exponentially-growing flood of information; how frequently will they change their positions?

Answer: Very often!

The caveat is: they won't be able to change their positions fast enough, to match the rate at which the never-ending-exponentially-growing flood of information approaches them. This will be the source of great market turbulence!

Brace yourself--for the strangest behavior you'll ever see in financial markets; super-booms, super busts, irrational prices, market panic, extreme volatility and things we can't imagine with our current knowledge--you'll see it all. You have been warned!!!

A New Paradigm for Financial Markets

George Soros made an interesting point in his book 'The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means': financial markets are human!

He advocates for a new paradigm for financial markets--I agree that there is a need for a paradigm shift!

But THEN he also advocates for increased regulation of financial markets... The problem with that: MOST REGULATORS DON'T HAVE A CLUE OF WHAT FINANCIAL MARKETS ARE OR HOW THEY FUNCTION.

I believe what's needed at this stage is an overhaul of financial models; to 'make them human'. I made this point in issues 12 & 14 of The Price Report:

My contribution from Issue 12 of 'The Price Report', dated 18 September 2007:

Why Models are ugly--and how we can make them better looking

In this and future articles, I’m hoping to open up a debate among readers of The Price Report. My thesis? In essence, that while there are endless financial models, probability analysis methods and other mathematical and statistical tools used to forecast market events: it is in the understanding of people and how they make decisions that real market understanding lies: figure these out and you’ll be able to predict market events with a frightening degree of accuracy!


Read any financial publication from the last six weeks or so, and there will be one phrase you are sure to encounter at least once an article if not once a paragraph. It is the US “sub-prime mortgage market”. The phrase is usually used within the context of a discussion on the financial turmoil that occurred in the global markets “because of the poor performance of the US sub prime mortgage market”. But was the poor performance of the sub prime mortgage sector the REAL reason why the global markets are experiencing such distress at the moment? And the real reason why the UK is seeing a run on a bank for the first time in 30 odd years?

It seems to me that the crisis is less to do with the ‘market’ than to do with the market players who somehow failed to foretell, and prepare for, the oncoming catastrophe, despite the fact that in hindsight it looks so very obvious.

So why did they fail? Because they made the wrong decisions. And why did they make the wrong decisions? Now we get to the heart of the matter. They did so because their decisions were based on inaccurate methods or on the employment of sub-optimal tools.

I firmly believe that algorithms, probability analysis and financial models are all deficient in that they give one-dimensional forecasts of the market. They neglect or under-emphasise the role of human-beings in the market-place and how different ‘buyers’ and different ‘sellers’ make different decisions (specifically buy and sell decisions) when confronted with the same environmental stimuli.

The market consists of ‘buyers’ and ‘sellers’ with different personality profiles and different motivations. These investors don’t all act in a uniform, ‘rational’, ‘profit-maximizing’ or ‘pain-avoiding’ manner – as most models assume.

The state of the market at any point in time, or rather the prevailing price of an asset in the market place at any point in time, is a function of the human beings that populate markets and different human perceptions of their environment and events, human interactions, and differing human needs and wants.

...This means that there is a clear need – for financial models that are more accurate in predicting real events in the market place: financial models that factor in the human component of markets...

The most critical component of any market, is the component of human beings within it. If we posses greater understanding of our fellow investors, of how they make decisions– often under conditions of great stress and inevitably somewhat limited understanding something which means they aren’t always rational - and how they interact with each other in the marketplace, we’ll be able to better understand market dynamics and predict market events more accurately.

So how can we respond to the shortcomings in our methods? By merging of the disciplines of finance, economics, mathematics, statistics, marketing, sociology and psychology. Such a synthesis across different disciplines would create financial models that incorporate human subjectivity and variety, how we differ as investors and how we interact within markets. This, in turn, would determine anticipated events in the market place. Such models would be more complete, and will give more accurate predictions of events that have a likelihood of unfolding in the markets. I’m not suggesting this is going to be easy, but in the next issue of The Price Report I’ll explain how I intend to make a start on creating a financial model that incorporates a human component.

My contribution from Issue 14 of 'The Price Report', dated 16 October 2007:

A financial model that accounts for the human factor

In Issue 12 of The Price Report I discussed:

1. How financial models, algorithms and statistical tools employed for market analysis give inaccurate or one-dimensional forecasts of future prices and future market events, because they neglect or under-emphasise the most important and basic aspect of any market—which is the human beings that populate the market.

2. How there is now a need for financial models that factor in human variety and a need for financial tools, or methods of analysis that acknowledge that different market participants have different motivations and personality profiles.

3. That all market participants may not act in the ‘uniform’, ‘rational’, ‘profit-maximising’ way that traditional models assume. Financial planners are conscious of human variety, differing motivations, different personality profiles and how these shape investment decisions made by their clients. Yet the majority of economic models and financial models still assume that human beings act in a ‘uniform’, ‘rational’, ‘profit maximising’ way, as homoeconomicus, even as all financial players acknowledge that there is a huge variety of motivational factors acting upon market participants. As individual investors, we defy crude labels.

4. That a synthesis across the disciplines of economics, finance, mathematics, statistics, marketing, sociology and psychology is needed to create financial models that are more accurate in predicting future market events and future prices.

In this piece I’ll discuss possible ways of constructing financial models – specifically asset pricing models – that factor in the human component of markets.

So how does one start the construction of an asset pricing model that factors in a human component?

I believe that the best starting point is the one I identified in my previous article: that the prevailing price of an asset in the market place – at any point in time – is a function of: different human needs; different human wants; different human perceptions of events in their environment; and different human interactions within their environment.

Mathematically this can be expressed as:

Pt a = f(Hn, Hw, Hp, Hi)

Where:

* Pt a – Represents the prevailing price of Asset ‘a’ in the market, at a specific point in time – denoted by the letter t, which could be measured in seconds, minutes, days, or any standard. Pt a is expressed in a standard unit of currency e.g. dollars, pounds, yen etc.

* Hn – Denotes human desires, up to and including point t in time; which are critical for survival. These are basic human needs according to Maslow’s Hierarchy of Needs i.e. the first two levels of Maslow’s hierarchy of needs. Hn basically represents physiological ‘needs’ (e.g.food, shelter) and security ‘needs’ (e.g. safety and freedom from harm/threats).

* Hw – denotes human desires, up to and including point t in time, which are not critical for survival. These desires can be basically described as ‘human wants’. According to Maslow’s Hierarchy of Needs, this includes the three top tier ‘needs’, namely, social ‘needs’ (e.g. approval, belonging, love), esteem ‘needs’ (e.g. recognition, self-esteem, recognition) and self-actualization
‘needs’ (e.g. self-discovery, achieving the best you can, or being the best person you can be)

* Hp – denotes human perceptions of events in their environment (both the micro and macro environment), up to and including point t in time. These influence human decisions within the market place, particularly ‘buy’, ‘sell’ or ‘hold’ decisions.

* Hi – denotes human interactions within their environment, up to and including point t in time. Human interactions can basically include all social exchanges, which occur among human beings within their environment.

Note: The above-illustrated function is not plot-able using conventional methods, as it has five variables – conventional geometrical dimensions accommodate a maximum of three variables, on the standard 3 dimensional x,y,z axes. This means that one would need a 5-dimensional ‘hyper-space’ to graph the above-mentioned function – which can ONLY be done using hardcore engineering/mathematical software!

…The easy part is done, now to the messy business…

According to July estimates of the World Population by the C.I.A World Fact-Sheet, the world has a total population of approximately 6.61 billion people. So if the prevailing price of an asset – at any point in time – is the function of different human needs; different human wants; different human perceptions of events in their environment and different human interactions within their environment, what does this mean?

Does it mean we have to find out the needs, wants, and perceptions of 6.61 billion unique people to be able to forecast the price of an asset using the function I introduced?

Luckily it does not.

According to Stuart Litchman, the author of ‘How to Make Lots of Money for Anything FAST’ and creator of the artificial intelligence system called Arintel, there are 12 subconscious ‘personality types’ that are invariant around the world.

Firstly, this means that we ONLY have to analyse 12 ‘personality types’ instead of analyzing 6.61 billion unique ‘personality types’. Why? Because if you met a random person on any street, in any part of the world, from any culture, you can be sure that their ‘sub-conscious personality type’ belongs to one of the 12 clusters that Litchman identified.

The only difference between cultures is the proportion of each cluster you’ll encounter.

In the next issue of The Price Report – assuming Tim invites me back – I’ll explain how I intend to incorporate the 12 unique sub-conscious personality types into the function I’ve just introduced.

So why are most morden day democracies doomed to fail?

This is part of an essay I wrote on why most liberal democratic systems of governance fail. My initial intention was to get it published in a political journal, but I realized that it would be better for me to start a blog--to allow for the viral transmission of my ideas:

What Happens when democracy fails?

A narrow definition of ‘failure of democracy’ defines it in terms of; flawed electoral administration / practices, lack of freedom of press and lack of the ‘rule of law’.

I believe that such a definition is deficient and unreliable, because lack of freedom of press; flawed electoral practices or the lack of the rule of law; don’t always cause 'undemocratic governance' or 'democracy failure'.

When the aforementioned conditions are prevailing there is the absence of the environmental factors that facilitate majority rule, but it doesn't necessarily mean that there is an absence of majority rule (or that there is democracy failure).

I believe that it is possible—however remotely—for majority rule to exist in the absence of freedom of press; when flawed electoral practices are prevalent, or; when there is a general lack of the rule of law.

In my opinion democracy fails when all of the following conditions are satisfied;

• When the ‘majority’ is systematically and progressively stripped—through legislative means or the application economical pressure—of its right to freely determine its own destiny. This right can be stripped by the government in power, or can be stripped by external forces e.g. other governments through sanctions, or, terrorist groups etc.

• When an increasing proportion of the key decisions being made by government, reflect more of the wishes of the ‘people in power’ and less of the desires of the ‘majority’ that they represent.

• When there is a progressive decline in social welfare, which can be wholly attributed to policy decisions made by the 'people in power'. For the democratic system of governance to have failed under this consideration; it’ll have to perform worse than the previous form of governance (e.g. monarchy, a dictatorship etc) in the allocation of resources and social welfare.

Possible causes of Failure

1) Excessive Individualism in an environment characterized by depleting natural resources and slow adoption of technology:

I firmly believe that all forms of governance fail because of human nature. Human beings are inherently selfish, and, most of their actions serve to achieve self-preservation and self-gratification.

At times, individual pursuits compromise the welfare of the broader society. In a laissez faire capitalist system, the main assumption is that the welfare of society as a whole is served through the free pursuit of individual interests.

However, in global environment characterized by depleting natural resources and slow adoption of technology; the human trait—of self-preservation and self-gratification—may inspire excessive ‘cutthroat’ competition for the control of natural resources. Excessive ‘cutthroat’ competition on a broad scale can undermine the foundations of a democracy; as individuals progressively seek ways of influencing the democratic process—in a bid to gain greater control of resources.

In an environment with excessive ‘cutthroat’ competition, those who are best positioned—intellectually, economically and politically—to manipulate the democracy to serve their individual interests, will swiftly do so.

Their first mover advantage enables them to progressively gain greater influence within the democracy. Otherwise expressed: the first-mover has a ‘runaway train’ of capabilities—within the democracy—that yields exponentially increasing rewards; in a self-reinforcing cycle that doesn’t allow other agents to catch-up.

The majority will inevitably loose its right to determine its own destiny, to a politically manipulative group of individuals, (oligarchs) that is trying to gain more control of depleting natural resources. Hence, it can be argued that unchecked laissez faire capitalism—in an environment characterized by rapidly depleting natural resources and slow adoption of technology—may contribute to the collapse of democratic systems of governance.

2) Implementation of a democratic system; when the potential leadership of the society is not adequately empowered—economically and intellectually—to participate in a democratic political system of governance:

I have observed that the main cause of failure in young democracies—particularly in the developing world—is a leadership that is incapable of administering a democracy effectively. This may be caused by educational deficiencies and/or, lack of experience in the administration of advanced political systems.

There are a lot of political parties—especially in infant democracies—that do not have formal on-going programmes of coaching and educating their leadership (on issues of democratic governance and administration).

Most politicians in parties like these, only have experience with democratic procedures at party level; which are fundamentally different and vastly less complex to administer (when compared to democratic governance procedures at a national level).

When such a party wins a democratic election, it usually ‘assumes office’ rapidly (where a more gradual transition to power would have suited). The party assigns it’s key political figures to strategic positions in government—without (or with negligible) training on the administration of a national democracy.

The likelihood of mal-administration of a democracy by such a government is significantly higher; as the government generally lacks the skill-set required for managing—efficiently and effectively—such a complex system of governance. More often than not, the government makes costly mistakes in the administration of the democracy; which results in the failure of the democratic system of governance in their respective country.

This is best illustrated Plato’s Ship Analogy, taken from his book; The Republic

In this analogy, Plato likens the state to a complex and high-priced ship:

“For a ship, to accomplish a safe and successful journey, it needs an expert navigator at the helm; a captain who knows the capacities of the vessel, geography, meteorology, water currents, navigational astronomy, supplies management, and other related matters. An ignorant and untrained person at the helm of a ship would endanger vessel, cargo, crew, and passengers alike. “

This analogy simply implies that a state needs competent leaders at the helm. The leaders have to be intellectually competent and possess the skill-set required to administer a democracy efficiently and effectively. If there are incompetent / inexperienced leaders at the helm of a democracy, it is bound to fail.

3) Democracy that’s too inclusive usually fails in an environment characterized by an accelerated rate of change:

There is such a thing as 'too much democracy', especially in an environment characterized by accelerated-rates of change (i.e. political, economical, social and technological change).

In such a dynamic environment, a highly inclusive form of democracy—where the majority is consulted on the majority of key policy considerations—consultation takes-up a significant amount of government time and material resources (that could otherwise have been put to more efficient uses).

There is increased policy-lag-time, which increases the likelihood of implementing policies at sub-optimal time i.e. when it’s too late. When policies are mistimed, this essentially means that the will of the majority is being exercised at the wrong time; which may negatively impact social welfare. This, in essence, is another cause of failure of the democratic system of governance.

4) Lack of the willingness (by the majority) to participate in democratic processes;

Democracy may not function effectively, when the majority is unwilling to exercise its right to self–determination (through democratic mechanisms like elections and referendums).

If the majority of eligible participants within a democratic system do not exercise their right to suffrage, then democratic mechanisms like elections will only reflect the wishes/choices of the minority that has participated i.e. the will of the majority will not be served through democratic mechanisms.

There are many underlying factors that may cause a display of apathy towards democratic mechanisms (by a majority);

• The majority’s lack of faith in the democratic systems ability to solve its problems, and or, the ruling government’s ability to manage a democratic system objectively.

• Great negative environmental pressure that threatens the survival of a majority; may cause the majority to become pre-occupied by problems of survival; to the point of showing great apathy towards anything that doesn’t immediately eradicate an imminent threat to its survival.

• My belief is that there are cultures that are more passive than others, and, that voter apathy shows strong positive correlation to culturally-influenced-passiveness. If the passiveness is deeply ingrained in the fabric of the society, and, if the society is highly conservative; then democracy has a high likelihood of failure.

This is just part of the 1st draft of the essay--it is a work in progress and lacks the support of empirical evidence.