| Cobie and I like to keep this newsletter and our podcast evolving. We’d love to hear from you about what you like or dislike and what you’d like more or less of – both in the newsletter and podcasts. Market View Last week, the JSE hit another all-time high of 92,331, and the good news is that Wall Street is hanging onto it’s gains. The resurgence of Europe has probably been the one surprise for investors out of this tariff turmoil. The DAX is up over 25% year-on-year. The first 100 Days of Trump 2.0 Donald Trump has reached his 100th day in office, the landmark at which all presidents since FDR have been gauged, and the dollar already has a strong verdict. The DXY dollar index, against a basket of other developed market currencies, has given up almost 10%. This is by some way a record in the five decades since Richard Nixon unpegged the dollar from gold in 1971. Trump 2.0 has now become a mirroring outlier for Ronald Reagan’s first 100 days, when the index rose by 10%: By a curious quirk of fate, Monday was also the centenary of what’s now regarded as possibly history’s greatest currency policy error — Winston Churchill’s decision to return the pound to the gold standard in 1925. That incident laid bare that after a century of dominance, the sterling was no longer able to function as the world’s reserve currency. This doesn’t necessarily mean we should regard Trump 2.0 as a signal that dollar hegemony is over, although it lends itself to that probably overdone narrative. Roughly 90% of cross-border transactions are denominated in dollars, which is far more than would be implied by the US share of global GDP or trade. In effect, the US provides the financial plumbing for the global economy. This gives it enormous influence. In another critical difference with Churchill, there is no clear contender waiting in the wings, thanks to the euro’s institutional problems and China’s reluctance to lift capital controls. But it makes ample sense to ask whether this is the beginning of one of the dollar’s long bear cycles — and whether the loss of confidence can be reversed. Taking inflation into account and comparing against a broad range of other currencies, the dollar has a well-established habit of moving in long cycles. The current one started when confidence in the US economy hit rock bottom in the wake of Standard & Poor’s downgrade of US sovereign debt. When a market sells down, those funds have to go somewhere, and that somewhere can be very informative in terms of power shifts. I know we usually look at individual shares, like the mag 7, but the reality is that millions of shares are held in mutual funds, or by ETF companies that ‘mimic’ an index. The above graph shows that Europeans have been seeing off US ETFs in favour of other asset classes. The problem with brinksmanship – things stay broken It might come as news to the Fanta Fantasist, but life is not a TV show; you can’t do retakes until you get a result you like. When you’re in the most powerful position on earth, where markets hang on your every word, when you say things and markets, countries and people react, things break – and stay broken. Traders and Asset managers don’t know which way to turn. Look at the volatility index, the VIX, below. It has been a huge rollercoaster ride. You don’t have to be a professional to understand that volatility is an inherent sign of perceived risk in the market. While the VIX might be back at the levels we saw before the ill-fated Liberation day tariff shock, I just get the feeling that this newly emboldened and ‘experienced’ President, we are just waiting for the next shoe/executive order to drop. Remember that most of these tariff rulings have been made as executive decisions, and not – as is normal – by Congress. He has done this in 2 important instances (both of which are undergoing legal challenges, but Trump is likely to ignore those as he does with most). President Donald Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose tariffs. This law, enacted in 1977, grants the president broad authority to regulate international commerce after declaring a national emergency in response to an “unusual and extraordinary threat” originating from abroad. This is clearly being used as a mechanism to bypass congressional authority. President Donald Trump also invoked the Alien Enemies Act of 1798 (AEA) to justify deportations without due process. This law, originally intended for wartime scenarios, allows the U.S. government to detain and deport nationals of enemy countries during an armed conflict or invasion. However, Trump’s administration attempted to use it against Venezuelan nationals, specifically targeting alleged members of the Tren de Aragua gang. Again, this has been challenged in court but ignored. Japan: Upping the ante On Thursday last week Finance Minister Katsunobu Kato said the country’s U.S. Treasury holdings could be a card in its trade talks with the Washington, referring to the largest stockpile of U.S. debt held by a foreign nation. “It does exist as a card,” said Kato, speaking on a Tokyo News program, when asked if Japan’s stance of not selling holdings could be a negotiation tool. “Whether or not we use that card is a different decision.” Don’t underestimate the potential of this threat. A couple of weeks back, when the Treasuries had a ‘wobble’, Japan was widely suspected of starting to dump Treasuries – this statement brings it all out in the open. (Well played Kato). Of course, Japan would not be unscathed, but it could create a bond bloodbath in the US. Those funds would need a home – European bonds maybe? China even? At the moment, everyone is in wait and see mode, one can only hope that Powell and Bessent are getting some screen-time with the Donald. As of the end of Feb, Japan held roughly $1.13 trillion in Treasury securities (4% of all issued US bonds), followed by China’s $784 billion, according to the U.S. Treasury. Japan holds Treasuries as part of a special account that can be used to fund currency interventions. Kato’s remarks are a big deal. In typical Eastern fashion officials rarely participate in the tit for tat we might have become used to in the West, especially out of the USA, Trump version 2.0. They know that misspoken words can have an unexpectedly big impact on markets. In addition to that, Treasuries trading has been tumultuous over the past month as investors reacted to the heightened risks from the trade war. This may be a reminder to some economic history buffs, but U.S. bonds, stocks and even the dollar tumbled during a previous episode almost three decades ago when then-Prime Minister Ryutaro Hashimoto said Japan might sell U.S. debt and buy gold if the yen remained volatile. He quickly backtracked, given the outsized reaction and issued a statement saying he’d been misunderstood. On the other hand, the Japanese ruling party’s policy chief Itsunori Onodera, said in April, that: “as an ally, we would not intentionally take action against U.S. government bonds, and causing market disruption is certainly not a good idea.” Good Cop/Bad Cop? As Theodore Roosevelt said, ‘speak softly and carry a big stick’ — and Treasuries are a big stick. Japan has definitely opened Pandora’s box by mentioning Treasuries and potential trade deals in the same sentence. Maritime traffic One of the ways pundits have been watching the impact of tariffs is by watching maritime traffic, and anyone can do that here : . The picture above is a screenshot of traffic on Friday. Green arrows or dots are freight vessels. The purple are cruises – sounds like a good place to be! From a global perspective, the sheer volume of traffic past the Cape is noteworthy. Egypt are losing about $7bn a month in lost revenue through the Suez (thanks to the Houthis). Let’s zoom in a bit (Friday 2/5/25). This is the coast of California, the 4th biggest economy in the world after US, China and Germany (bigger than Japan). Now let’s look at the east: Americans are going to start seeing empty shelves in the coming weeks while this tariff war rumbles on. Amazon sent a shot over Trump’s bow last week by announcing that they are going to be displaying the tariff on all products bought on Amazon – Trump was truly miffed, and called it a ‘hostile act’. The heads of these retail giants are probably going to have more impact on Trump than Heads of State. Trump’s approval rating (36%) after his first 100 days are lower than any other president modern history. Trump – making Europe great again This ‘new era’ in EU/US relations began when Trump made it clear he was ready to dump NATO, Ukraine and Europe when it came to military backing. He probably did them a huge favour. Europe had become complacent when it comes to military spending, especially post the decades-long 9/11 revenge where Europeans went into bat for the US at a huge cost (conveniently forgotten by Captain Bonespurs). The tariffs are widely expected to jack up prices in the US, but they could lower inflation across the pond. The reasons are multiple, ranging from a possible influx of low-priced Chinese exports into Europe to the recent rise in the value of the euro. Aside from the benefit to consumers’ pockets, lower inflation will give European policymakers room to cut interest rates if the economy needs a helping hand — whereas the US could find it hard to lower borrowing costs if the world’s biggest economy needs a boost. There are already signs that some companies will pass on the costs of the tariffs to American consumers, rather than absorb them. For example, the Adidas CEO said earlier this week that cost increases due to higher tariffs “will eventually cause price increases” in the US. Outside of the US, “there is no reason” to raise prices because of the levies, Bjørn Gulden later added. It is interesting to note that the impact of US tariffs introduced in 2018, during Trump’s first term, suggests an inflation bump is on the way. A 2019 study, co-authored by Mary Amiti at the Federal Reserve Bank of New York, found a “complete pass-through” of those tariffs into the domestic prices of imported goods. Unsurprisingly, even non-tariffed companies might raise their prices. Domestic producers raise their prices when their foreign competitors are forced to raise prices due to higher tariffs. It’s called capitalism. While Trump has already implemented an additional 10% tariff on goods imports from almost all countries, as well as much higher tariffs on some sectors and a gigantic duty on imports from China, the European Union has so far only threatened limited retaliatory tariffs on US goods. The EU may yet put in place a stronger response, which could raise the prices of imports from the US, but the impact on European inflation would still be a lot smaller than what’s in the cards for the US. That’s because, in contrast with Trump’s maximalist approach, Europe would be “only putting tariffs on a single country’s imports. De Minimis imports If you’ve ever imported from Shein or Temu, you would probably have fallen under the South African De Mimisus ruling (under R500), for small orders, exempting you from Tariffs – but that loophole was closed in RSA last year, and the US is following suit this month. The looming demise of a tariff exemption on inexpensive Chinese goods is causing big e-commerce players to hike prices and threatening the business models of smaller online retailers that deliver millions of products each year to U.S. consumers. The so-called de minimis provision in the US that exempts packages of $800 or less from duties is scheduled to end just after midnight Eastern time last Friday for goods made in China and Hong Kong, after President Trump in early April ordered the end of the policy. The change will leave most shipments, including those carried by FedEx or United Parcel Service, subject to the new 145% base tariff on all Chinese products, as well as additional levies based on the nature of the products. Steep fees on packages containing merchandise from China shipped via the international postal network kick in at the same time. About 1.36 billion shipments using the de minimis provision entered the U.S. in fiscal year 2024, up from 637 million four years earlier, according to U.S. Customs and Border Protection. The average package was $60, so we’re talking about $81bn in imports. At 145%, that is a wack of tariffs! Inevitably, these imports are going to slow down dramatically. People are probably going to wait and see what happens in the next couple of months. Author: Dawn Ridler Lost in the wilderness Some really interesting developments have unfolded in the US economic landscape last week. The US administration is living in a parallel universe to the real economy, and one has to wonder at what stage they realise this. Take the Chinese trade tariffs at 145% as an example. The Trump administration felt vindicated by raising tariffs as it felt the US had the blunt end of the deal when it comes to trade. The tariff hike led to the Chinese retaliating, which the Americans thought they shouldn’t do. It is almost unbelievable to think that a Sovereign nation attacks another, and that retaliation wasn’t thought to be an option. The Americans are now waiting for the Chinese to make a deal with them, but they are clearly offended, and as their pride is on the line, no deal is forthcoming. Mr Bessent, who seems to be tasked with having to make a Chinese deal, seems to think that the Chinese have to make a deal. They are not receiving the US Dollars they used to, and they are running unsustainable levels of government debt. US exports have been declining for years, and are now under 20%. Mr Bessent last week indicated that very soon the Chinese economy will lose between 5 to 10 million manufacturing jobs. This, in his opinion, is enough of a reason to be forced into deal-making mode. But the Great Chinese famine, which occurred between 1959 and 1961, saw millions of Chinese die as the then government attempted to move the economy from an agrarian society to that of a socialist system. I think the Chinese understand hardship and if you add national pride to the mix, the Americans may be waiting a long time to make a deal. Look at the Zero Covid regulations – how many Americans would have coped with that? Already, President Trump last week had to walk back some of his auto tariffs. It seems that imported car parts will carry a tariff but this is not to be added to the steel and aluminium tariffs. The red tape that is being created must be keeping officials awake at night. Cars that consist of 85% US content won’t carry a tariff. As Dawn mentioned above, in a press briefing last week, it was suggested that Amazon will start carrying a pre and post tariff price. Amazon denied that they will be doing so but not before the Presidential spokesperson called this: “a hostile and political act by Amazon” She accused Amazon of partnering with a Chinese political propaganda arm, reminding me more and more of George Orwell’s 1984 novel. Ideologically, the Trump administration, it seems, is hoping to reduce or keep taxes where they are at present. This, they hope in conjunction with lower oil prices and a cheaper dollar, will boost the US economy. Tariffs will provide the extra Revenue lost through the reduction in taxes. But will inflation play along? The dispensation is quick to point out the inflation fiasco during the Biden term (created by both Trump and Biden), but inflation may not stay as anaemic as they think. 33% of the US economy is made up of goods retailing. Here, prices are definitely going to go up. Services make up the remaining 67% of the economy, and will those costs be contained? No one knows for sure and that is why I continue to call Trump 2.0 a financial experiment. Polls suggest that the average American believes he is doing a terrible job after his first 100 days on the job. The dispensation seems to think things are going to turn around, but I would probably say that China would need to play ball for this to happen. I don’t think the emotional impact of the US decision was ever quite thought through. Mr Bessent seems to think that things will play out textbook style but once you factor in the emotions at play reality may be far from this. Author: Cobie Le Grange EXCHANGE RATES: The Dollar is still trading at or below the 100 level on the DXY The Rand/Dollar closed at 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, R17.58, R17.60, R17.66, R 17.41, R17.48, R17.12, R17.42, R17.85, R17.82, R17.71, R17.85, R18.32, R18.26, R17.95, R18.23, R18.20) The Rand/Pound closed at 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, R22.72, R22.89, R22.75, R22.93, R22.90, R23.20, R23.44, R23.41, R23.13, R23.39, R23.28, R23.32, R23.34, R23.00, R22.63, ) The Rand/Euro closed the week at 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, R19.09, R19.07, R19.05, R19.19, R19.12, R19.47, R19.79, R19.72, R19.80, R19.70, R20.01, R19.94, R19.58, R19.74,) Brent Crude: Closed the week at $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, $75.57, $78.67, $77.95, $71.96, $74.68, $71.47, $76.99, $79.05, $79.09, $79.43, $77.56, $85.03, $83.83, $84.86, $85.22). Bitcoin closed at $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, $90,679.47, $79,318, $68,277, $66,989, $62,876 , $62,267, $65,596, $62,603, $54,548, $57,947, $63,936, $59,152, $60,847, $61,903, $59,760,). Articles and Blogs: To catch a falling knife NEW Income at retirement NEW 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bibgo 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 |
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