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I trust this finds you exceptionally well as the year has really picked up speed and is flying by at a pace that (years ago in my school career in a Friday afternoon Maths class) I would not have imagined possible. The first quarter April (almost December in length) break is now over and it is some five short weeks to the winter solstice.

Once again, there is so much to say that, I don’t know where to start, what to include and what to leave out (the people that give me my material – SARS, world governments and politicians and world populations etc) are working full-time to provide a rich and fascinating tapestry.

Europe. Ah, Europe. It is beyond doubt that Europe is in serious trouble and the population is not helping matters (e.g. the French voting Sarkozy out is NOT going to make the fundamental problem go away). The fundamental issue remains that one has to live within one’s means and the multiple changes of political guard (currently, and still to take place in Europe) is not going to make that go away.

There is still a LONG way to go. This is where, to my mind, democracy shows its greatest failing where the populations listen to the people telling the nicest story (albeit the story is potentially impossible to crystallize, as promised, due to significant legacy circumstances and/ or parameters/ practical realities e.g. money).

But don’t take it from me, take it from David Kotok (an American whose thoughts run along the same lines as mine when referring to government):
We are back from Paris. The head is filled with new info. For the publicly available portion of the conference, see the GIC website, The remaining comments will be my personal “takeaways” from both public and private conversations. By Chatham House Rule and Jackson Hole Rule, these words are attributable only to me. All errors are mine.

1. In my view, the situation in Portugal is unraveling. This may be the second shoe to drop in the European sovereign debt saga. Now that Greece has paved the way, the speed of unwind with Portugal may be much faster. I do not believe the markets are prepared for that. Runs are affecting Portuguese banks. Euro deposits are shifting to other, safer countries and the banks that are in those countries. Germany (German banks) is the largest recipient. Remember, deposits in European banks are guaranteed by the national central banks and the national governments, not the ECB. There is no FDIC to insure deposits in the Eurozone.

2. The issue is that Greece was supposed to be “ring-fenced.” Notice how European leaders have stopped using that word. Their new word is firewall. If a second country (Portugal) restructures, the sovereign debt issues become systemic rather than idiosyncratic. That becomes the second game-changer. Systemic risk needs big firewalls. We learned that the hard way with Lehman and AIG, which were systemic, vs. Countrywide and Bear Stearns, which were “ring-fenced” – or thought to be ring-fenced at the time.

3. A game-changer was the use (not threat) of the collective action clause (CAC) by Greece. CAC altered the positions of the private sector. It rewrote a contract after the fact. That is why Portugal’s credit spreads are wide: the private-sector holders of Portuguese debt know that a CAC can be used on them, too. The same is true for all European sovereign debt. A re-pricing of this CAC risk is underway.

4. Private holders of Greek debt had several years to get out before the eventual failure. Those that did not get out were crushed in the settlement. Greece is now a ward of governmental and global institutions like the ECB, IMF, and others. It is unlikely to have market access for years. This is another game-changer. In the  old crisis days, the strategy was to regain market access quickly and restore private-sector involvement. In the new Eurozone-CAC crisis days, the concept is to crush the private-sector holders, and that means no market access for a long time. Instead, we will have ongoing and increasing sunk costs by governmental institutions. Caveat: government does not know how to cut losses and run. Government only knows how to run up small losses until they are huge. Witness Fannie Mae in the US. Witness the sequence that allowed Greece to fester for years. Government does not know how to take the “first loss,” which is usually the smallest lost. Government does know how to run up moral hazard.

5. The term moral hazard means the action is done today and the price is determined later, after the chickens come home to roost and crap all over the coop. That is the nature of government everywhere. By the time the chickens return, the political leaders have changed. Those who took the moral hazard risk are gone. Those who inherited their mess are blamed during the cleanup. That is where we are today in Europe. Hence, the political risk is rising daily. Elections could change these governments, and the new governments may repudiate the actions of the old ones. We expect more strikes and unrest. That is how elections can be influenced.

6. European debt-crisis issues are lessons for the US. They belong in the political debate. Both political parties are responsible for our growing debt issues. Bush ran up huge deficits. Obama continued them. Each party blames the other. Neither takes on the responsibility of their actions. We shall see how this evolves between now and November.

I am more pessimistic about peripheral Europe than I have been. All that my co-author Vincenzo Sciarretta and I wrote in our book several years ago is now being reversed by policies. In the beginning, the Eurozone benefited immensely from economic integration and interest-rate convergence. Now it faces disintegration and divergence. Reverse the chapters in the book and play the film backwards.
Can Europe find a stabilizing level and resume growth’ Time will tell. Meanwhile, political leaders and central bankers are going to be tested again.
Excerpt ends.

As I haven mentioned before, the points above are extremely relevant – by way of example, David Cameron and the Conservatives picking up the poisoned chalice from Labour, Obama from Bush etc.    The above should thus be read with the following extract from Cees Bruggemans which explains the  difference between structural versus cyclical dilemmas: A country (or a family) can face two different types of crises. A cyclical crisis is typically temporary and due to a business-cycle recession. When the problem that caused the recession is dealt with, the economy comes back and employment returns to normal.

Structural problems are more difficult to deal with. Structural unemployment is a more permanent level of unemployment that’s caused by forces other than the business cycle. It can be the result of an underlying shift in the economy that makes it difficult for certain segments of the population to find jobs. It typically occurs when there is a mismatch between the jobs available and the skill levels of the unemployed. Structural unemployment can result in a higher unemployment rate long after a recession is over. If ignored by policy makers, it can then even lead to a higher natural unemployment rate.

Structural unemployment can be created when there are technological advances in an industry. This has happened in manufacturing, where robots have been replacing unskilled workers. These workers must now get training in computer operations to manage  he robots and employ other sophisticated technology, in order to compete for fewer jobs in the same factories where they worked before. ( But structural unemployment may also be caused by government policies that make it difficult or even uneconomic for businesses to hire workers. Typically these policies are put in place by well-meaning if economically ignorant politicians (nobody wants to create unemployment), but the problems are there no matter what the intentions were.
Excerpt ends

The above is particularly relevant in (for example), the Greek or Spanish unemployment figures where the proportion of unemployed youth (under 26s) is in excess of fifty percent. Young, resentful, unemployed youth with nothing to lose – that could lead to a “European summer of discontent”, if not this year, it is certainly possible in the forth-coming years. The above should also be looked at in the South African context where well meaning (but frankly, bloody stupid) politicians have created a labour environment which discourages employment.

Once again, there is too much to talk about and I haven’t space for the USA – suffice to say that the presidential race has taken everyone’s eyes off the ball and there are a few non-negotiable milestones approaching which will require real American ingenuity to keep the ship on course.
I pointed out last month that government had to extend the COIDA/ Workmens Compensation (Department of Labour) submissions from their 31 March 2012 deadline to 31 May 2012 due to delays in issuing the returns (read not clever enough to print and mail the forms in time). As of 10 May, the forms are still not available due to “Service temporarily unavailable, please try again later”.

We then move on to the ongoing disaster/ national embarrassment that is the Companies and Intellectual Property Commission (CIPC) – following the theme of previous correspondences, we desperately await/ seek a redeeming feature but have hitherto been bitterly disappointed. Should we find something that works, we will keep you posted.

As per my correspondence last month, SARS started mining new depths of poor service delivery/ incompetence, evidenced by the letter that I received which (a) told me that a tax payment was overdue, (b) thanked me for having made the payment, (c) threatened legal proceedings if I don’t make the payment and (d) advised that I have a right object to the assessment.

As noted, I kindly donated two hours of my life to the cretin and drew big pictures, whilst typing really slowly so they could understand that:
(a) the tax payment is not due when the return is submitted (b) I had not made the payment but I had attached the payment instruction proof
(c) most lawyers will only commence legal proceedings when a breach or default has taken place (d) that I completed and submitted the information – the numbers are from MY accounting records,ergo it is not an assessment as such and(e) as a matter of course, it is generally bad form to issue a letter which both (a) thanks the counterparty for the payment and (b) threatens to sue them for non-payment. Unless, of course, one is looking to (a) save paper and postage or (b) successfully demonstrate that one is very mentally challenged and completely incompetent.

It beggars belief that the tax money we pay is paying this idiot’s salary.

In an all-new mining venture from SARS this month, we’ve started receiving repeat assessments. To set the scene: tax return submitted, assessed
and payment made/ refund received in August 2011. The world has moved on eight months. A new notification is received that a new assessment has been issued. What is this, one asks oneself’I know I did that last year and it was completed, finalised and signed off in toto’ Could it be that some new information has come to light, a greater refund is owing, a larger payment is due’ What could it be’ One has to check the assessment, because if there is a problem, the client needs to know immediately. However, as it happens, the assessments received (which we have had to re-open, re-check and re-file received (and put a note on file which reads something along the lines of Wednesday, Thursday, Friday’)) have been exactly the same as the notifications received at the initial time of assessment. Just the date has changed.

I sit and I think to myself how wonderful it must be to be in sheltered employment, with no fear of consequence, no consideration of bankruptcy,
guaranteed annual increases and no job description of any sort – merely to do stuff which keeps you busy all day with no thought/ consideration or even cognisance of the millions and millions of Rands that these incompetent retards add to the business overhead in South Africa.

As has been previously mentioned, SARS have added a truly vicious and malevolent beast to their arsenal known as an IT14SD. This is a reconciliation which requires reconciliation between the payroll numbers on the financial statements to the payroll reports (IRP5s and EMP501s) and a reconciliation of the VAT inputs and outputs (to cost of sales). This is an incredibly labour intensive reconciliation and I am seriously considering advising clients that rather than (say) us or the client spend a week of their life at great expense, performing the reconciliation, SARS be told that it is too expensive and takes too much time and therefore an invitation be extended to SARS to rather come and perform an audit, which will be, for the client, a much cheaper way of doing things……. It bears thinking about.

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