| The newsletter podcast can be listened to here Market View , The JSE The JSE hit a major milestone last week – it finally breached the 100,000 mark. The FTSE/JSE All Share Index reached a historic milestone of about 100,000 points around July 23, 2025, marking a significant landmark for the market. This was a milestone reflecting 65 years of growth and resilience in South Africa’s capital markets. Recent trading is showing slight fluctuations around this milestone level (this often happens, called a ‘resistance level’ – purely psychological, of course, with the index hovering near 99,000–100,000 points in the days following the peak, reflecting some market profit-taking or volatility. The markets are a reflection of thousands of individuals with their emotions deciding what they think of the environment they are trading in. Year to date it has been a story of a resurgence in mining stocks driven by a cheaper Dollar. AngloGold, Impala, Northam and Sibanye are all up by more than a 100%. In some cases, these stocks though have mostly just played catch up to now reflect positive returns over a 3 year period. The JSE remains among the best-performing global markets of 2025, especially in US dollar and rand terms, driven by solid underlying company performances and investor confidence. Long may it last.  What is the role of central banks? All this talk around the FED and Powell Including an embarrassing failed ‘gotcha’ moment from Trump (here) let’s just play devils advocate here and look at the real role of the FED, or any central bank for that matter, and whether or not Trump is right (shocker!) and are the FED unnecessarily sticking to higher interest rates. (Note that once the above gotcha moment fell flat, Trump backed down on his threats to fire Powell. If this is the way Trump ‘tests the waters’, heaven help us all.) The role of the Federal Reserve (the Fed) is to act as the central bank of the United States. The main aim of a central bank is to provide price stability and full employment. In the case of the FED, these goals are set by Congress and guide the Fed’s monetary policy decisions. Think of it as the economy’s air traffic controller—its job is to keep everything running smoothly without crashing into inflation, recession, or financial panic. Here’s what it actually does, broken down: Perhaps the best-known role of a central bank is the setting of Monetary Policy, i.e. controlling the money tap. The other major financial policy is Fiscal Policy – setting of Taxes, which is done by the treasury. Both have the same effect on the consumers and businesses; they either take money out of their pocket or put it back in. We all know by now that central banks set the interest rate, which translates via financial institutions to the interest rate you are either charged or paid, depending on whether you are borrowing or investing in the money market. (Government Bonds are governed by the free market and their ‘coupon rate’ is set by trading activity and are integral to the ‘money supply’ of the nation. They are loosely correlated to the central bank interest rates. (Corporate bonds in RSA are very closely linked to the interest rate via JIBAR – The Johannesburg Interbank Rate.) Remember that JIBAR will be replaced by ZARONIA sometime in 2026. The transition plan involves replacing JIBAR with the South African Rand Overnight Index Average (ZARONIA), which has been endorsed as the preferred alternative near risk-free rate. The FED sets interest rates to stimulate or cool down the economy. Inflation is one indicator of an ‘overheated’ economy. Too much money chasing too few goods – a supply and demand issue. We saw this in the pandemic – thanks to the stimulus cheques, there was plenty of disposable income sloshing around, but there were supply issues, leading to the spiking of inflation we saw across the world, but certainly in the US. Taxes, like VAT and Tariffs, can also result in a once-off increase in prices, and this is what is worrying the FED. This sort of inflation is a once-off increase and isn’t like sticky inflation, like increased wage expectations. Of course, there is nothing to say that even a once-off price rise like this won’t result in wage pressure. Some economists have estimated that only about 20% of goods and services that go into the ‘domestic consumption’ basket are impacted by tariffs, which will dilute their effect. It’s difficult to find any consensus on this issue, but the impact on inflation of tariffs has been estimated between 0,3% and 3%. The Central Bank is also involved in supervising and regulating Banks, so that they don’t go rogue and default (as some did in 2008). They are also the ‘lender of last resort’ when things go pear-shaped and institutions need emergency funding. The last thing any economy needs is a ‘run on the banks’ due to perceived illiquidity. They also facilitate payments, keeping the financial systems in the economy well lubricated. From the government’s perspective, the central bank’s role is to maximise employment and stabilise prices (aka low inflation). That brings us to today’s impasse in the USA. The FED (and yes, it is a committee) wants to keep the interest rates higher because it believes that tariffs are going to lead to an inflation spike. (Their reputation was severely damaged by their faux pas during the pandemic, labelling inflation as ‘transitory’ and delaying the rise of interest rates by months.) So far, tariffs have had a minimal impact on inflation, but could that be coming down the pipe?  The Case for Cuts Just a quick reminder, if Trump wants to fire Powell, it has to be ‘for cause’ or negligence. Last week, he was trying to leverage the cost overruns on the FED building improvements to do that, but almost everyone saw right through that. A rash move like that would be deeply destabilising to the markets, and Scott Bessent knows it. So, why exactly does the administration think it so important to cut rates? With inflation above target, the economy otherwise looking healthy, and stocks, Bitcoin, and gold at or near records, there is little to no evidence that financial conditions are too tight. When he was running for election in 2016, Donald Trump argued that rates needed to rise. Now, it is hard to see a case that he can consistently call for rates to drop all the way to 1%, at least as it concerns the Fed’s mandates of inflation and employment. Prior to the Global Financial Crisis (GFC), real rates were generally this high:  The reason lies exclusively in the need to finance the US deficit – it has nothing to do with inflation or consumers battling to afford the much higher mortgage rates. The deficit is eye-wateringly high, and a good reason to worry. Even at a lower deficit, the interest payments would be worrisome, but at these high interest (and bond) rates, they are eating up a huge chunk of the fiscus every year, against the background of Trump lowering taxes.  The thing is, it is not part of the Fed’s mandate to minimise the federal government’s borrowing costs. This is at the core of the standoff between Trump and Powell. Congress and the presidency are supposed to do that by balancing expenditures and revenues. That explains why the pressure has redoubled on the Fed in the weeks since the bill passed, with no more orthodox attempt to limit long-term borrowing costs. The Fed cannot set long-term yields, that is done by the market, and it hasn’t attempted to do so since the Treasury-Fed Accord of 1951 gave it independence after years of manipulating interest rates to fund war debts. And it also gives the White House a reason to push for higher tariff rates. If Trump wants to cut taxes for his billionaire Bros, then he has to top up the fiscus somewhere – he thinks it’s going to be from tariffs, and unfortunately, swathes of the US population still think that those tariffs are levied on the exporting countries. Tariffs Reality – Is the 1/8 deadline going to be TACO 2.0? Maybe, but businesses can’t run their companies by the seat of their pants and change direction on a whim, as Trump seems to think that the US economy can. Inventories bought in the first quarter are running out, margins have been shaved, and now we get to the pointy end of the reality – prices are going to have to go up. In time, sure, manufacturing can move to the US, but this is not Hogwarts, you can’t wave a magic wand and suddenly those facilities are built and people are trained. Then there is the uncomfortable reality – the raw material inputs are probably tariffed too. If it’s going to take 3 years to build replacement capacity, after which there could well be a new admiration and tariffs are all reversed, and now you are lumbered with a white elephant producing goods at far too high a price? There is very little doubt that unless we see a complete 180 very soon, we are going to start seeing an impact on earnings, which will negatively impact markets (see Cobie’s piece below). Already, the mentions of tariffs in earnings calls has skyrocketed. ‘nearshoring or friendshoring” (using locations for goods transhipped from China) might have worked in Trump 1.0, but not anymore. Language has been added to tariffs of these Asian countries that specifically target transhipped goods. One unintended consequence is that countries outside of the US are now starting to view the US as an untrustworthy trading or strategic partner, so Trump is effectively driving much of the diplomatic effort straight into China’s arms. Let’s look at the internal dialogue of a hypothetical US company – it might go something like this: What is my position relative to my competition? If I’ve got minimal imports from outside the US, then I’m less exposed. If my competition has more tariffed import components, they’re more exposed. I’ll happily watch them get their margins squeezed or watch them up their price, and I rise my price and eat their market share, maybe even inching my price up a little. Who wins? Certainly not the US consumer  |
| US Inflation update As much as some pundits may deny it, the US CPI print seems to provide evidence that tariffs are boosting prices of exposed goods. For the raw apparel sector, the threat businesses face is existential. They’re not high margin and depend on high volume, for which they depend on a foreign supply chain and they’re starting to raise prices.  This Oxford Economics chart above divides the impact on core inflation in the US, depending on whether goods are exposed to tariffs. Increases for other goods remain well under control; those impacted by tariffs are beginning to rise in a big way. The Oxford analysis above, which focuses on tariff-exposed goods, indicates that the new tariffs, if fully implemented, would reduce US GDP growth by 0.1 percentage point this year and 0.3 percentage points in 2026, thanks to a rise in core inflation. The dilemmas for companies and central bankers, aren’t going away. (Remember that most services, including that booming AI sector, do not have this significant tariff exposure that you’re seeing in consumer and business goods).  Japan It’s not just US exceptionalism that has taken a beating this year. The same can be said for Japan’s status as the exception to all economic rules. The Japanese voters have just rubbed that home by depriving the long-ruling Liberal Democratic Party of a majority in the upper house in the weekend’s election. It had already lost its hold over the lower house, leaving Japan’s traditional hegemonic party without control of either chamber of the legislature for the first time since 1955. Shigeru Ishiba, who took over as prime minister last year, says he intends to continue, and must now put together a new coalition. At the time of writing, with the breakdown of seats still unclear, prediction markets think his chances of survival, still bad, have improved marginally: Make no mistake — this is about so much more than the tariffs: The ruling LDP’s foundational raison d’être was to be America’s independent but loyal agentand this core is exactly what is being disrupted — the emerging realities of America’s new national priorities, economic agenda and undemocratic leadership style are, simply put, unacceptable to the Japanese people, thus undermining LDP credibility. In some ways, the voters are ratifying bond markets’ verdict. Thirty-year Japanese Government Bonds yield as much as 3% for the first time in more than two decades. The pandemic seems finally to have broken the country’s long Ice Age:  That can be seen most clearly in inflation numbers. Outside of a couple of ill-judged sales tax hikes, which automatically drove up inflation for a while, Japan’s inflation has barely ever exceeded US CPI in the last four decades. That’s where it is now:  It shouldn’t be surprising that Japan’s electors are acting like those in most every other country in the developed world, and punishing the politicians who allowed this to happen. This is undoubtedly one of the reasons the Biden/Harris ticket failed (despite Trump significantly contributing to the stimulus cheque largesse that got the ball rolling in the first place). That’s one critical way in which Japan is no longer so exceptional. Another is in economic growth. Japan’s population is falling, so overall gross domestic product can be misleading. Judged by GDP per capita, Japan was ahead of the US and Germany well into the 1990s, and kept pace until after the Global Financial Crisis of 2008. Starting with the “Abenomics” policy adopted in 2012 by the late Shinzo Abe to shake Japan back into life, that changed. It weakened the yen, and in dollar terms GDP per capita sharply parted company with the other two big developed economies: This election is not as dramatic as others of the post-pandemic era, and no full-throated populist alternative is on offer as yet. But it looks like we should assume that Japan has completed normalizing, and not in a good way. It’s no longer immune to inflation, and the populace doesn’t like that. Author: Dawn Ridler  Q2 Earnings Earnings season is upon us again and so far 86% of companies are beating estimates by an average of 782bps. The expected growth rate for earnings is now going up again which is good news for stocks. The real issue markets took with the tariffs at the beginning of the year is that they would have impacted earnings greatly. For now, though earnings for the most part is not only holding but actually expanding. Remember that much of the S&P500 is being driven by tech companies which are at the forefront of the AI revolution. These stocks are going to benefit from renewed US legislation favouring them, announced during last week. The US wants to make sure that it leads in supercomputer clusters and chip design/ manufacturing. This is the backbone on which the AI revolution will take place. There are, though, companies which are experiencing tariff headwinds. Take Enphase Energy as an example, which announced last week that they expect a 3-5% margin headwind due to tariffs. The company specialises in the design, development, manufacture, and sale of home energy solutions primarily for the solar photovoltaic industry. This sent the stock down by 10% in the premarket. Not great for the stock but not enough to impact the S&P500. So for now, the S&P500 is tracking a very strong recovery from the lows in April. Jurrien Trimmer from Fidelity asks what happens to stock markets after a 20% drawdown. Here are his findings:  It’s important to note that despite a market falling by 20%, it is not a foregone conclusion that it will recover quickly. The black line indicates the post-tariff experience from earlier this year and tracks one of the strongest recoveries on record. Why is this the case, given that valuations are already stretched? I think there are 2 reasons for this. The first being that the western world has entered a debt refinancing cycle where new debt is used to finance old debt. Debt is no longer used to grow an economy but to ensure that older debt is serviced. I have written about this extensively in the past. In this world, the influence of government on public markets becomes palatable. The government wants to ensure that no further debt burden is placed on them from the public. A crashing market is going to require more welfare dollars and hence ensuring stability in markets become a Federal issue. Servicing the debt pile requires lower interest rates and bond yields. This is why Trump is piling on the pressure at the FED to lower interest rates. This calls into question the independence of the FED. I have come to realise that a government under pressure will ensure that the rules are manipulated to ensure longevity. If that means the Treasury becomes the FED’s overlord.. so be it. To manage the debt pile better also requires less expenses by the government. This is why Trump has pulled the funding for international welfare projects and large Nato involvement and why he is calling for peace between Ukraine and Russia. America simply just doesn’t have the money anymore to fund all of this. The markets know that the government will make liquidity available when it is required, and hence markets continue on their happy way. Remember, markets prize stability and if the government provides this through a steady hand on the liquidity pump, it makes for an investable future. The second reason is the AI revolution. I have written extensively about this in the last 2 weeks. Google’s results shed light into what is actually happening at a company which is at the forefront of the revolution. Google Cloud grew by 32% y-o-y. It only consists of 12% of Revenue at present but is set to become a major driver in future years. Within this cluster, GCP grew even faster. Google Cloud Platform (GCP) is a suite of cloud computing services offered by Google that enables businesses, developers, and enterprises to run applications, store data, and manage workloads on a secure, scalable, and high-performance infrastructure. More than 85,000 enterprises, including LVMH, Salesforce and Singapore’s DBS Bank now build with Gemini, driving a 35x growth in Gemini usage y-o-y. In order to maintain this growth rate and to ensure that the Google product remains viable, the company has also announced an increase in Capex spending. If you see these growth rates, suddenly, what happens to the US economy becomes a distant backdrop. The irony is that the US government is very happy with this. It will create the next push for growth, which will inadvertently help the government repay their debt. Author – Cobie Le Grange EXCHANGE RATES:  The Rand/Dollar closed at R17.76 (R17.72, R17.90, R17.58, R17.89, R17.99, R17.92, R17.77, R17.95, R17.88, R18.04, R18.16, R18.39, R18.64, R18.89, R19.12, R19.10, R18.36, R18.21, R18.18, R18.20, R18.71, R18.35, R18.38, R18.41, R18,67, R18.38, R18.73, R18.03, R18.05, R18.11, R18.21,)  The Rand/Pound closed at R23.88 ( R23.76, R24.22, R24.08, R24.49, R24.22, R24.35, R24.05, R24.18, R24.14, R23.95, R24.16, R24.40, R24.82, R25.10, R25.01, R24.73, R23.78, R23.55, R23.52, R23.50, R23.53, R23.19, R23.12, R22.85, R23,16, R22.93, R22.80, R22.99, R22.98, R22.72, R22.99, R22.73, )  The Rand/Euro closed the week at R20.86 (R20.61, R20.93, R 20.70, R20.91, R20.74, R20.68, R20.24, R20,37, R20.27, R20.13, R20.43, R20.78, R21.21, R21.52, R21.72, R20.93, R19.95, R19.72, R19.83, R19.72, R19.41, R19.20, R19.29, R19.02, R19,35, R19.31, R19.23, R19.09, R18.87, R19.19, R18.85, ,)  Brent Crude: Closed the week $68.29 ($69.21, $70.58, $68.27, $67.39, $77.27, $74.38, $66.56, $62.61, $65.41, $63.88, $61.29, $65.86, $67.72 $64.76, $65.95, $72.40, $72.13, $70.51, $70.33, $73.03, $74.23, $74.51, $74.65, $76,40, $77.60, $79.98, $71.00, $72.38, $75.05, $70.87, $73.86, $73.99).  Bitcoin closed at $118,139 ($118,214, $117,871, $108,056, $107,461, $103,455, $105,017, $105,643, $104,049, $103,551, $104,615, $96,405, $94,185, $84,571, $84,695, $82,661, $83,074, $84,889, $82,639, $83,710, $85,696, $96,151, $96,821, $96,286, $99,049, $104,559, $104,971, $99,341, $97,113, $97,950, ). Articles and Blogs: Difficult Financial Conversations NEW Kick Start your own Retirement Plan NEW You matter more than your kids – in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |