Crypto, Blockchain and the Future of Finance

Bitcoin, blockchain, and cryptocurrencies are words that are so often used nowadays that we feel we know and understand them because they are so familiar. However, people have very different ideas about how they actually operate and the implications in our lives. Let’s have a look at the ideas and try to make some sense of it all.

Cryptocurrencies, despite the name, are not actual currencies. For thousands of years countries have issued currencies as a medium of exchange, and today we have the US Dollar and the SA Rand as examples. These are regulated and backed by the government, which means that they are legal tender and serve a vital function in the legitimate economy. In contrast, cryptos as they are commonly known, are not backed by anything and are not legal tender.

Cryptos are not currencies – try to buy a pint of milk or pay your tax with them. Cryptos are not investments – at best they are speculative, like betting on the races. Cryptos are not a store of value – how can they exist 100 years from now?

Similarly, cryptos are not investments. While some people have made fortunes by trading in various crypto instruments, most of the money has been made by the people who develop the products and run the trading platforms. We regard an investment as something which creates income streams, like property, bonds, and equities. Crypto does not do this.

Are cryptos a store of value? Over the centuries many things have been regarded as stores of value especially so-called hard assets like land, commodities, and gold. All of these are tangible assets and are rare and enduring. Cryptos are not tangible, and they are not rare because they can be created in a few hours. Nor are they enduring – think of how many digital files, photos, and music playlists you have lost in the last 10 years – now think about whether any cryptocurrency will be around in 100 years.

So, what are cryptocurrencies?  There are now more than 16,000 different cryptos, each invented by its own backers and all trying to exploit the speculative mania. More and more countries are either banning or restricting the ownership and trade in cryptos. Some analysts believe that they are a giant Ponzi scheme ( Possibly the best view is from the Governor of the Bank of England who said “They have no intrinsic value. Buy them only if you’re prepared to lose all your money.”

We argue that cryptocurrencies are best left to the speculators. So, how will this new technology affect our everyday lives? This is where it becomes more interesting.

The technology behind cryptos is blockchain, which is a distributed and secured database or ledger which creates a transparent and secure record of transactions. Blockchain has potentially disruptive applications in many areas including insurance and banking.

Governments are coming to recognise the potential benefits of developing their own digital currencies. Fifty-six central banks including the US Fed and the SA Reserve bank, are now researching or developing some form of digital currency. These are called Central Bank Digital Currencies (CBDCs). In essence, a digital US$ will work in tandem with the traditional US$ and, at least initially will not replace it.

CBDC’s could drastically reduce transaction costs and enable central banks to fine-tune monetary policies

The cost of financial transactions, especially for low-income earners is extremely high. A worker in South Africa who wishes to send R100 to his family in Malawi will see at least R25 disappear in costs. Government grants and pensions also cost enormous sums to distribute to their ultimate beneficiaries. Digital currencies offer the potential to drastically reduce these costs by creating a direct link between the central bank and the citizens without having to go through layers of intermediaries. In addition, economists and central bankers can coordinate monetary policy and welfare benefits in real-time, instantly funneling money into the pockets of those who need it.

CBDCs offer the potential to eventually abolish cash and reduce money laundering and large-scale criminal activities. In the developing world, many people do not have bank accounts. Now digital currencies will allow everyone with a cell phone to have easy access to banking.

But digital currencies also have a serious downside because they provide a feast of data for technocrats and surveillance-happy police. The risks that come with putting this kind of power in the hands of an authoritarian state bent on social control—or perhaps any state—seem to outweigh the benefits. But it’s happening all the same.

China’s digital currency, the digital yuan (eCNY) is still in its testing phase and already has more than 250 million users who transact on the central bank’s official app. At the Winter Olympics, it was opened to international users for the first time. Nigeria was one of the first countries in the world to launch its digital currency, the eNaira which went live in October 2021.

CBDCs will have international implications on the financial system and could upend the US Dollar’s dominant status as a reserve currency

For the last 80 years, the US$ has been the world’s reserve currency. This may change in the next few years as CBDCs will allow settlement of transactions in their own currencies, which opens the prospect of there being several reserve currencies that are acceptable for international transactions. It is likely that the first two rivals to the US$ in this arena will be the Euro and the Yuan.

Change is coming, and developing countries like South Africa will not want to be left behind, because the advantages of CBDCs are so compelling. The difficulty will be managing the loss of personal privacy in such an environment.



Inflation Can Destroy Your Savings

Inflation Can Destroy Your Savings

Over the past few years, it seemed that inflation had been tamed throughout the world. Now it is back in the news and back in our lives. Experts are divided on whether the recent surge in prices is a temporary phenomenon or the start of a longer-term trend of structurally higher inflation.

We have a look at these arguments because understanding the effects of inflation on your investments is vital to preserving and growing your wealth in real terms. The South African inflation rate is now 4,9%, in line with long-term trends, while in the United States inflation surged to 6,2% last month – the highest in 30 years.

The developed world’s enormous monetary stimulus packages in response to the pandemic more than made up for the incomes lost to widespread shutdowns, without making up for the supply that those incomes had been producing. The result is higher inflation.

Initially, it was expected that the rise in inflation was the result of strong growth in the global economy recovering from the Covid shocks of the past 18 months, and would be short-lived. Now the US Federal Reserve believes that inflation will be transitory and should start to fall in the New Year, but it will remain higher than it has been in the recent past.

Energy prices have surged over the past 6 months, partly due to the global recovery, but also due to other factors including problems in transitioning to greener alternatives. Oil, coal, and natural gas still provide the base-load power essential for electricity grid stability and their prices have more than doubled in 2021, further increasing inflationary pressures.

Savers and investors feel the effects of inflation in several ways, but primarily through the erosion of spending power – if your lifestyle costs R100 today and costs R150 in 10 years’ time, you want your investments to keep up so that you can still afford the lifestyle you desire.

Nowadays, nearly everywhere in the world, government debt is enormous. The interest on this debt needs to be paid, and naturally the lower the interest rate, the lower the cost of repayment. We can understand then, why governments want ultra-low interest rates and are even happier if those rates are below inflation – negative real rates.

Low-interest rates with high inflation are known as financial repression and destroy savings.

Investors on the other hand want interest rates above inflation otherwise their investments cannot keep up with the rising cost of living.

Most developed countries now have negative real interest rates of 3% pa, which means that for every year you leave your money in the bank you would lose 3% of your spending power. Here in South Africa interest rates for a bank deposit are around 4% and inflation is now 5%, which locks in a loss of spending power of 1% every year, before taxes. So, the lesson is that cash in the bank alone is not a viable long-term solution for most investors.

Investing a portion of your portfolio in equities is an inflation-beating strategy over the long term.

While the stock market is volatile, the JSE has returned more than 12% pa for the past 120 years, which is on average 7% higher than the inflation rate. Having a portion of equities in your portfolio is an essential strategy to maintaining the purchasing power of your portfolio over time.

Speak to your financial advisor about how to balance your risk profile and the realities of long-term investing.

Rutherford Model Portfolios (FAQ)

Rutherford Model Portfolios (FAQ)

Frequently Asked Questions

What is a model portfolio?

Our model portfolios are a professionally blended combination of market-leading unit trust funds which are designed to provide a broad diversification of asset classes and management styles to help investors consistently achieve their target returns.

Why are model portfolios now international best practice?

Many clients around the world experience poor investment returns even when stock markets have performed well, and this is usually a result of inconsistent fund selection. The professional approach of model portfolios provides more dependable investment returns.

How are Rutherford model portfolios different to what I have now?

Our model portfolios benefit from a rigorous fund selection process and ongoing rebalancing to ensure optimum asset allocation at all times. You should therefore enjoy better long term returns and lower volatility.

How will they lower my risks?

Our model portfolios are always aligned with your risk profile you do not have the risk of being over- or under-exposed to any one type of asset. You will essentially own a basket of assets which are well suited to your financial objectives and stage in life.

What performance can I expect?

Each model portfolio is designed to achieve a target return, taking into account a specified amount of risk as defined by your personal risk profile. This means that you will have a clear idea of the expected returns of the model portfolio before you invest.

How to achieve my investment goals?

Humans have evolved to follow the herd (and so we end up buying yesterday’s winners) and this behavioural bias leads to poor investing habits, which is why really disciplined investors like Warren Buffett are so famous. Model portfolios provide a professional and disciplined framework, which will help you achieve more consistent returns and reach your investment goals.

Why is diversification so important? 

One of the key benefits of our model portfolios is a high level of diversification.  The various asset classes (such as property or cash) perform very differently over market cycles. Our investors gain access to all the core benefits of multiple asset classes and fund manager expertise, with the added layer of diversification through our blend of fund managers.

Do I have to change my investment?

No. Using model portfolios is only a fund choice, so your existing RA, Living Annuity, Endowment or TFSA stays exactly the same – only the fund selected changes.

Looking to Structure your Business or Family Wealth Offshore?

South Africans love South Africa!

That is an undeniable truth. The country has its problems - but it is our home.  And for many of us, leaving the country is just not an option. Our families are here. Our friends are here. Our businesses are here. Our lives and hearts are here.

The spate of unrest and subsequent looting that was triggered by the incarceration of Jacob Zuma has however demonstrated that our country is becoming increasingly vulnerable.  And while we live here, and continue to want to live here despite the challenges, there is no reason for us to be completely exposed to this vulnerability.  

It is entirely possible for a family or a business to remain in South Africa while benefiting from international income streams through a company or trust that is situated in another country.  In the case of Mauritius, it is possible for an individual or a family to obtain their residency through a company there as well.  While we all hope we never have to use it, it does provide us with peace of mind to know that we have a plan B in the unlikely event that we will need it.

It is somewhat of a misconception that setting up offshore is for the very wealthy or large corporations. A small business can also take advantage of the laws and regulations in a suitable jurisdiction

For many of us, the idea of creating a presence outside of South Africa is an exotic concept or it seems like a risky venture.  The reality is that it is a fairly straightforward process. And there are many laws and agreements with other countries which, in fact, encourage South Africans to do business outside of South Africa’s borders. And doing business and investing outside of South Africa opens up a whole new world of opportunity - quite literally.  To illustrate, the GDP of South Africa in 2020 was $ 306 billion.  The world’s GDP was $ 84.54 trillion.  That means that we limit ourselves to participating in only 0.36% of the world’s activity by not being part of the global economy.

Knowing how to structure your assets offshore could be the most important aspect of going offshore

The key to unlocking this world of potential is to structure your affairs in South Africa and abroad correctly.  Choosing the right partner to guide you every step of the way is therefore very important.

We can highly recommend a company based in Mauritius called Heimdall. They are unique in that they specialise in both the South African tax and exchange control issues, and trust and company set-up and operations in Mauritius. We have found that their depth of experience and professionalism enable our clients to easily create international family and business holdings.

If you would like to hear more about international investing, or offshore structuring, please contact us: This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it.

Developing Economic & Financial Trends

It has often been said that the onset of the Covid-19 pandemic brought with it a period of introspection where focus shifted from the wider world to the here and now.  We battened down the hatches and concentrated on family, trying to stay safe and working out how to continue earning a living. While we have been taking it one day at a time, it’s easy to lose track of the bigger picture and feel a growing disconnect with the outside world, financial markets and global economic trends.

Here are a few highlights of noteworthy developments on the South African front and further afield. As South Africans we are often hyper aware of all our problems, but give ourselves little credit for the positives.

The commitment of the Ramaphosa government to stimulate growth through structural reform is steadily shaping up.

Fast broadband is the backbone of a modern economy. Telkom and eTV are using the courts to block the opening up of additional spectrum needed to allow for widespread 5G, but they are clutching at straws and political and commercial pressure for the spectrum release is strong. Meanwhile MTN is spending R300 million on new fibre services and a Google and Facebook consortium are building new undersea cables that will encircle Africa and come into operation in 2022.

A stable power grid is essential for long term growth. Gwede Mantashe has appointed seven preferred bidders for the production of emergency power and further successful bidders will be announced later in the year which will cumulatively generate the 5000 MW deficit that is causing load shedding. Notwithstanding Government plans, private companies are also forging ahead in the energy sector – Gold Fields is finalising plans to construct a 40MW solar plant at its South Deep gold mine, which will comprise 116 000 solar panels and cover 118 hectares, roughly the size of 200 soccer fields. BMW, Amazon and Sasol are already sourcing electricity from independent power producers. Changes in legislation allowing for the generation of up to 10MW without a licence should see load shedding being resolved in the not too distant future.

Major upgrades of harbour and rural bridges are in progress. A new container harbour in Durban with a R100 billion investment over 10 years will increase efficiency and productivity significantly. Another R100 million is being spent upgrading Western and Southern Cape fishing harbours that have been neglected for years. The 41 rural bridges being constructed across several provinces will certainly make rural living easier.

The suspension of Ace Magashule has been somewhat of a political watershed and has already been well received on the international front.

On the political front, it does appear that the battle against state capture and corruption is at last bearing fruit. The recent suspension of Ace Magashule was a watershed and shows that President Ramaphosa’s position is steadily getting stronger. Below the high-profile headlines, it is important to note that an additional 68 ANC members from eight provinces, who are being charged with a range of criminal offences, must all step aside. Corruption is deeply embedded in SA but there are encouraging signs that the tide is now turning.

These structural and political reforms will release constraints in the economy, attract investment and perhaps most importantly of all, boost confidence on a national and international level.

In the US President Biden is moving fast on projects he has been passionate about for many years.

Joe Biden has reversed the US position on climate change from the Trump administration and signed the Paris Climate Agreement as one of his first acts as President. Since then, he has pushed through legislation limiting the use of fossil fuels and proposes ambitious policies designed to make the US a world leader in green energy.

In March Biden signed into law the $1,9 trillion American Rescue plan to counter the effects of Covid-19 for lower-income families. The Federal Reserve continues its own stimulus policies as it has for the past decade. He has proposed further massive government spending policies of $4 trillion to revive the US middle class and rebuild crumbling infrastructure.

The US national debt is now at 130% of GDP. The additional stimulus programmes will only increase this problem*. In order to start balancing its books, the Biden administration has resolved to substantially increase taxes on wealthy Americans by increasing marginal tax rates and closing tax loopholes. US company tax will also be rapidly increased, and those multinationals that use tax havens are firmly in the sights of the US tax authorities.

*(For interest, SA’s national debt is at 80% of GDP – similar to Germany’s.)

If passed into law this will be the largest raft of government spending programmes since Roosevelt’s New Deal of the 1930s. The swing from Trump’s highly conservative policies which largely benefitted the rich, to Biden’s far more socialist agenda, is happening with incredible speed. The repercussions will be felt throughout the world.

The Rand has been one of the world’s best-performing currencies over the past year.

We all like to follow the Rand, and it is a volatile currency. Currently, the Rand has strengthened to the R14.10 level against the US$ from as high as R19.00 last year and R15.80 five years ago.

Over the long term, the Rand/$ exchange rate is influenced largely by the commodity cycle and the broad US$ cycle, while political shocks in South Africa tend to move the exchange rate in the shorter term. For example, in 2011, the commodity cycle was strong and the US$ was weak, so the Rand strengthened to R6.00 to the US$. While in 2001 at the time of the Dot Com bubble, the commodity cycle was weak and the US$ was strong – so the Rand weakened to a high of R12 to the Dollar.  

This shows that the Rand is not a one-way bet, and many investors have had their fingers burnt as the Rand has strengthened and remained strong for several years at a time.

Beware Cryptocurrencies

Lastly, since cryptocurrencies are always in the news these days, this perspective from the Governor of the Bank of England, Andrew Bailey is relevant. “…..they have no value. I’m going to say this very bluntly again – buy them only if you’re prepared to lose all your money.”

The macro trends we have briefly discussed may not affect your investments this week, but over the long-run structural reform in both SA and the US will have a profound effect on the markets and your investment portfolio.

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