| The podcast to this newsletter can be listened to here. Market View On the back of the fairly favourable reception that Team RSA got at the White House, the All Share continues to hit new highs.   Moody’s downgrade of US Blink and you missed it. The historic downgrade of US sovereign debt announced Friday night only momentarily interrupted market momentum – probably because Moody’s is the last credit rating agency to the party, with Fitch and S&P already having downgraded the US, with the S&P doing it right back in 2011. The graph of the dollar strength since this initial 2011 downgrade has been remarkable:  On the day, the S&P 500 rose 0.09% for its sixth consecutive daily gain, while bonds had a good day despite Moody’s negative judgment. After an initial selloff, the 10-year Treasury yield closed the day at 4.44%, 3.2 basis points lower for the day. Treasury Secretary Scott Bessent’s dismissal of the agency as a “lagging indicator” of US fiscal policy looks to have been right. It had no significant short-term impact. That said, Moody’s nailed a broader truth — that US debt has surged. In contrast, Germany’s post-Global Financial Crisis “debt brake” left it with space to borrow now. American debt keeps rising and takes a bigger share of the economy than China’s. Even though Treasury debt is the linchpin of the world financial system, it is now lower-rated than 10 other countries: Australia, Canada, Denmark, Germany, Netherlands, New Zealand, Norway, Singapore, Sweden, and Switzerland. So there are alternatives, even if they’re nowhere near deep enough to soak up all the money in Treasuries. As Europe embarks on extra borrowing to bolster defence, at a stronger rating than Treasuries, there could be more triple-A bonds available to buy  Tariffs are starting to impact the US economy. Trump’s idea was that the US was going to earn buckets of money from the tariffs (of course he knows the consumer pays the tariff). President Donald Trump’s weekend outburst against Walmart Inc. suggests that the issue is already politicised, to quote: Between Walmart and China, they should, as is said, “EAT THE TARIFFS,” and not charge valued customers ANYTHING. I’ll be watching, and so will your customers!!! That’s not how capitalism works. As a whole, companies have been using earnings conferences to prepare shareholders for tariffs that will have a negative impact on profits, so they aren’t expecting to pass them all on to customers. But there are limits to how much shareholders can eat. Economists seem convinced that customers won’t escape without paying “ANYTHING.” Bloomberg’s survey of professional forecasters shows CPI estimates ticking up ever since the election. They’re only a little above 3%, so this isn’t extreme, but the shift is clear.  What is alarming is what the man on the street thinks is going to happen with inflation – they are predicting (probably incorrectly to be fair) that inflation is going to go up to 12%.  Of course, this issue has become highly politicised, the graph above shows just how differently the two major parties view the inflation expectations. Clearly though, reality is creeping in and even the Republicans are coming to realise that their golden boy is more like a poor man’s bronze.  US Markets A few weeks ago Cobie anticipated that the US market rout was over – was he right? Sure, it’s early days but have a look at the US markets: If you have a look at where the money has been flowing to and from, it is not the so-called smart investors who have been piling into the market.  Instead, look to the might of retail investors buying the dip. Last Monday, when the S&P 500 initially tumbled 1% in reaction to the Moody’s downgrade, retail investors’ made $4.1 billion in net purchases of US stocks by midday to erase the losses. While fiscal and monetary policymakers, at every turn, have responded to the slightest market discomfort with dramatic reactions. That strengthens retail investors’ conviction that the market always recovers (and so, you should always buy the dip): Do retail investors possess the means to sustain this rally? Perhaps. However, it makes sense to assess their response to last week’s 90-day pause in the US-China trade conflict, which sparked the latest stage of the rally. The pause was unsurprising, but the share rebound that followed was stronger than had been priced in. You often see this when ‘retail’ investors are at play in the market. Retail investors, though, don’t usually have the deep pockets of the ‘smart’ or ‘institutional’ investors (who have no doubt joined the fray.)  RSA – The budget 3.0 ‘Finance Minister Godongwana’s revised third Budget came out on Wednesday, and various compromises and trade-offs have been necessary. The overall thrust of the third Budget shows a strong pivot in fiscal strategy towards growth and investment (which is what the DA wanted all along), which is where the basic solutions to SA’s public finance challenges ultimately lie. If fully implemented, the strong emphasis on infrastructural development bodes well for the 3% GDP growth in the medium term envisaged by the Government of National Unity (GNU). However, both the role of Operation Vulindlela and the participation of private sector investment remain key to all of this working. RSA’s debt-to-GDP ratio is to be stabilised at a higher level of 77%, there was a warning that the 2027 Budget may consider new taxes. The good news is that this is now a GNU Budget, which is not only a plus for political stability, but should also ensure its subsequent passage through the various Parliamentary processes. The government still has a long way to go to win back the confidence of the people, but this is a step in the right direction, and it seems to have avoided the disintegration of the GNU for now.  UK For those of you who listened to last week’s podcast, you’ll know I am currently in the UK. On Wednesday, UK inflation jumped more than forecast to its highest rate in over a year as households were hit by a raft of price increases, prompting investors to pare bets on rate cuts from the Bank of England. Increases to energy, water and other administered prices pushed inflation to 3.5% in April from 2.6% a month earlier, the Office for National Statistics said Wednesday. It was the highest rate in 15 months and above the 3.4% forecast by the BOE. Services inflation, watched closely by the BOE for signs of underlying price pressures, accelerated to 5.4% from 4.7%. The central bank had expected a rate of 5%. Core inflation, which excludes energy and food, climbed to 3.8% — the highest since April last year. Traders slashed bets on further interest-rate cuts, favouring just one more quarter-point reduction by the end of the year. Markets also see just a 50% chance of a cut in August, from 60% before the data. Inflation is now well above the 2% target, and the BOE expects the rate to accelerate further to a peak of 3.7% in September. That’s a fresh blow for Prime Minister Keir Starmer, as households face a renewed cost-of-living squeeze at a time when US President Donald Trump’s tariffs are weighing on the economic outlook. While we are talking about the UK, they have quietly overtaken China as the biggest holder of US debt – perhaps the role of Starmer and Trump a few weeks back should be reversed – but clearly the US doesn’t think the UK has the ‘wherewithal’ to threaten to dump bonds.  US – Airforce one debacle It’s all about appearances and Ego. President Trump wanted a quick solution to his Air Force One problem. The United States signed a $3.9 billion contract with Boeing in 2018 for two jets to be used as Air Force One, but a series of delays had slowed the work far past the 2024 delivery deadline, possibly beyond Mr. Trump’s second term. Now Mr. Trump had to fly around in the same old planes that transported President George H.W. Bush 35 years ago. It wasn’t just a vanity project. Those planes, which are no longer in production, require extensive servicing and frequent repairs, and officials from both parties, reaching back a decade or more, had been pressing for replacements. Mr. Trump, though, wanted a new plane while he was still in office. But how? “We’re the United States of America,” Mr. Trump said this month. “I believe that we should have the most impressive plane.” The story of how the Trump administration decided that it would accept a free luxury Boeing 747-8 from Qatar to serve as Air Force One involved weeks of secret coordination between Washington and Doha. The Pentagon and the White House’s military office swung into action, and Mr. Trump’s Middle East envoy, Steven Witkoff, played a key role. Soon after Mr. Trump took office, military officials started to discuss how the United States could buy a temporary plane for Mr. Trump to use while Boeing’s work creaked along, an investigation by The New York Times found. But by May 11, when the president announced on social media that Qatar would be providing the plane to the United States, he characterised it as “a GIFT, FREE OF CHARGE.” There are lingering questions about how much financial sense the still-unsigned deal would make, given the costs of refitting the plane for presidential use and operating it over the long run, or even whether the plane could be ready for Mr. Trump to use before the end of his second term. The outlines of the arrangement that emerged have also drawn condemnation from both Democrats and Republicans in Washington, as well as ethics lawyers, who said it looked either like Mr. Trump himself was taking the gift or that the Qataris were using it to curry favour with the administration. And it remains unclear exactly how a plan that Pentagon officials and others inside the administration initially assumed would involve buying the plane from Qatar morphed into a proposed gift by the Middle Eastern nation.  Chinese batteries In a surprising move, that no doubt infuriated the Donald ( if he even bothers to keep up with market affairs) Chinese battery giant CATL shrugged off being blacklisted by the Pentagon and the ongoing turbulence in Sino-US relations to produce the biggest public listing in the world this year. The largest maker of electric-vehicle batteries gained 16% on its debut in Hong Kong after raising HK$35.7 billion ($4.6 billion) with its offering. CATL supplies batteries to the likes of Tesla, Volkswagen and Mercedes-Benz Group and has a market share in the electric-car segment of roughly 38%. But its rise hasn’t come without obstacles. The company was put on a Pentagon blacklist in January based on allegations of CATL’s links to the Chinese military — something the company has denied repeatedly. The listing has cemented the company’s founders, top investors and executives as some of the wealthiest people in the world. Four Chinese businessmen, including Chairman Robin Zeng, have amassed a combined fortune of more than $73 billion, mainly derived from their stakes in the company, according to the Bloomberg Billionaires Index. Author: Dawn Ridler  This week’s focus: Bonds and Deficits You might have seen the latest US Bond downgrade by Moody’s from Aaa to Aa1. The Moody’s downgrade is actually the last of the rating agencies to downgrade US debt with S&P having done so in 2011 and Fitch ratings in 2023. Back in 2011 the move by S&P took the market by surprise and stocks sold off heavily with the Dow Jones down more than 630 points on the 8th of August 2011. Despite the US no longer having the coveted AAA rating by any of the large agencies, US stocks seemed to have been unfazed by the move. Moody’s cite (as did the other ones): Rising Government debt, persistent deficits, coupled with a high interest burden, making debt servicing more expensive. They also mention political gridlock as successive administrations have failed to solve the problem. This is a major concern for the Trump administration, and they know that bringing the debt burden and deficits under control will leave the US vulnerable in the future. You can see this when Trump visits other countries. He is in deal-making mode and this is something which he has learnt over many years as a property developer. Look at his week in the Middle East as an example. Here he did tech deals and signed another agreement for Boeing. He knows that economic activity will invariably raise revenue, create jobs, and bring in taxes, which is sorely needed to pay down debt. More broadly, the administration is trying to do three things. Firstly, they want to extend the tax cuts from 2017. This in itself will reduce income by about $4.5 trillion over the next decade, but they also know that the inevitable pain of dealing with the US budget deficit will need to be made more palatable. Reducing taxes will not only do this but may even attract new investments to the US in search of lower taxes. At the same time, spending cuts need to be activated. Here you have seen DOGE being most active, and if this doesn’t have the desired savings effect, there will certainly be more to come. You can also see how the administration is pulling away from its long-term security obligations so that defence spending can be reduced. This is why the Trump administration is keen on peace across the world and NATO paying a larger chunk of their own defence bill. Trump needs the savings, and if the world is at war, he knows he won’t achieve this. And then there is the tariffs. This is a tightrope. Get it right and the administration will bring in extra Dollars. The number that has been thrown around seems to be $2 trillion over the next decade of extra revenue. Get it wrong, and inflation will spike with an unsavoury recession…. Not an ideal outcome given it’s only the start of Trump’s second term. This is why the administration is critical of any company that threatens to raise prices as has been the case with Walmart. After the downgrade, equities didn’t sell down aggressively but the price pressure in bonds continued. US 10-year yields spiked to over 4.50%, driving up the borrowing costs yet again. The fact that the US bond market has been downgraded is actually meaningless because bonds across the world are referenced against each other. The gold standard was always US bonds, but the fact that the most liquid bond market in the world has been downgraded needs to be assessed against other bonds. Take South African bonds as an example. If these are downgraded, investment flows will be directed to other markets. But if the gold standard (US bonds) is downgraded, there isn’t really another market which will absorb the kind of flows the US market has offered in the past. I have maintained that the only fixed-income asset class investable in the US is short-term treasuries. Any instrument with a longer duration is exposed to the US government’s refinancing activity, and it’s trying to correct its fiscal deficit. This is murky at best and the instruments used can change by the day. This is not a risk worth taking. Author: Cobie Le Grange EXCHANGE RATES: The Dollar has now dropped below 100, and after the recent passing of the ‘Big Beautiful Billionaire Bill”, which will add trillions to the debt despite slashing Medicare and Medicaid, the dollar is likely to continue to soften.   The Rand/Dollar closed at 17.88, back where we were in December. (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, 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 R24.14 up a touch on last week (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, 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 R20.27, up a touch on last week too (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, 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 $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, $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 $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, $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: Kick Start your own Retirement Plan NEW You matter more than your kids – in retirement NEW 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 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 |