Newsletter – Week 11 – Is US inflation really coming down?

Market watch:

The JSE has returned to it’s factory settings – crawling along sideways only to make sudden movements up or down, just when you don’t expect it. This is somewhat different to the US markets which just keep on going up – with some indications that investors are looking through all the AI froth and asking the important question – just where and how is AI going to add real value.

Nvidia, the poster child of AI that we have spoken about often in this newsletter seems to have topped out:


The US government’s war on TikTok has been simmering for a while now, with some states banning it outright. A bill was introduced to force TikTok to disinvest from China or be kicked out of all US app stores has now been put forward, and is one of the few bits of legislation that appears to have bipartisan support.

The unprecedented speed with which the TikTok bill passed through the (lower) house should give everyone in the US pause. It is a slippery slope. If they can force an international company with a substantial market share (estimated 170 m – half of the US population and 6 million small businesses) to sell their company to US interests on the pretext of homeland security, then who is next? Oh yes, they’ve already done it with Huawei and cell phones.

The Rooi Gevaar is in full swing, and yes, Xi has got nobody but himself to blame with his increasingly bold colonialist and authoritarian moves. (There is a very good BBC podcast on this HERE). Known as the “Protecting Americans from Foreign Adversary Controlled Applications Act”, in a vote of 352 to 65. The legislation would require TikTok’s parent company, the Beijing-based ByteDance, to sell TikTok within six months to maintain access to U.S. web-hosting services and app stores. It is unlikely to see such a speedy pass through the Senate (and would still need to be signed off by Biden – who appears to be in favour of the deal).

The CEO of TikTok, a Singaporean, Shou Zi Chew testified recently in front of the Senate but refuses to be drawn on potential CCP influence. The most valuable aspect of TikTok, which has potential buyers in the US salivating, is the algorithm, but the source code will never be disclosed to a potential buyer/shareholder. The Chinese also have a blanket ban on technology export, just like the US – so this part-purchase if never going to happen. Do the lawmakers really want to tick off millions of young voters? I wouldn’t!

The algorithm, at this point, leaves all the other social media platforms in the dust. There is very little doubt that there will be a protracted constitutional challenge if this bill becomes law. In an election year, I am surprised that any official up for re-election would want to annoy the millions of creators by getting behind this bill. Seven million small businesses and creators use this platform as a main source of income – and messing with anyone’s rice bowl is unwise. 

The Belt and Road initiative

China has made no secret of its global expansion ambitions, and is impervious to Western concerns of Neo-colonialism, human rights abuses and pushing poor countries into a debt trap. Unfortunately as the West demonstrates donor fatigue, China stepping into the Western vacuum in Africa and the East, and it is also doing the same in South America, most notably Panama. The Panama canal is being impacted by years long drought which is making the passage (which makes use of locks and a large fresh-water lake) increasingly difficult. China has already built a deep water port in Peru.

The Belt and Road Initiative (BRI) known within China as the One Belt One Road or sometimes referred to as the New Silk Road, is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and international organizations. It is considered a centrepiece of the Chinese leader Xi Jinping’s foreign policy. The BRI forms a central component of Xi’s “Major Country Diplomacy” strategy, which calls for China to assume a greater leadership role in global affairs in accordance with its rising power and status. It has been compared to the American Marshall Plan. As of August 2023, 155 countries were listed as having signed up to the BRI.  The participating countries include almost 75% of the world’s population and account for more than half of the world’s GDP. Interestingly, Argentina has now withdrawn from the initiative – as has Italy (probably due to EU pressure to ‘pick sides’. )

In 2017, China joined the G20 Operational Guidelines for Sustainable Financing and in 2019 to the G20 Principles for Quality Infrastructure Investment. The Center for Global Development described China’s New Debt Sustainability Framework as “virtually identical” to the World Bank’s and IMF’s own debt sustainability framework.

For many impoverished countries, China is the best available option for development finance and practical assistance.  Western investors and the World Bank have been reluctant to invest in troubled countries like Pakistan, Cambodia, Tajikistan, and Montenegro, which China is willing to invest in through the BRI. Generally, the United States and EU have not offered global South countries investment comparable to what China offers through the BRI.

China is the largest bilateral lender in the world. Loans are backed by collateral such as rights to a mine, a port or money. This is the rub – when countries can’t pay the loan the port becomes Chinese property – according to the Chinese this has not happened, but ‘recollections may vary’. For China itself, a report from Fitch Ratings doubts Chinese banks’ ability to control risks, as they do not have a good record of allocating resources efficiently at home. This may lead to new asset quality problems for Chinese banks where most funding is likely to originate. Additionally, two state-owned banks oversee China’s foreign loans and development.

In August 2022, China announced that it would forgive 23 of its interest-free loans to 17 African nations.

The loans had matured at the end of 2021.

Real Estate

Real estate, especially commercial property,  as an investment asset class has been under pressure for years and residential real estate in South Africa has been bumbling along, rarely beating inflation in the last decade, and the job of realtors/  estate agents has also changed quite dramatically.

Some of those changes are thanks to technology, but there has also been a self-empowerment movement where people feel that they can DIY. In South Africa the qualification is only NQF 4 (high school level) to become a realtor. This trend also applies to travel agents. Commissions that used to be a standard 7% in RSA, are now less than half that – if you even choose to use an agent at all. I encourage my clients to upskill themselves and DIY to save themselves hundreds of thousands of rand.  

In the US things are quite different – and like a surprising number of other things – behind the times. Up until recently, not only was 6% commission the norm but both buyers and sellers had agents, and sellers were expected to pick up both costs (i.e. 12%). This ‘norm’ has been overturned by a new anti-trust (anti-competitive) ruling and now buyers and sellers will pick up their respective costs and, for the first time, buyers do not have to use brokers at all. Frankly, it feels like this sector is long overdue for a major disruption.

This ruling has not been welcomed by the agents, where the barriers to entry have been notoriously low and average remuneration well above average, but is going to bring down the overall cost for buyers. This change is likely to result in a  25-50% drop in commission. 


Producer price index

The Producer Price Index is an important indicator to keep an eye on because it can give us a warning of inflationary pressures coming down the pipe. The PPI measures price changes at an intermediate point between production and sale to consumers (middleman), reflecting costs passed on to businesses by suppliers. 

An increase in PPI indicates that the prices of goods and services used as inputs for final products are rising, which may lead to higher prices for consumers in the form of cost push inflation. This phenomenon typically has a 2-3 month lag before impacting the Consumer Price Index (CPI), a measure of inflation experienced by consumers. 

According to the most recent PPI data,( released on March 14, 2024), the Producer Price Index for final demand rose 0.6% in February, following an increase of 0.3% in January and a decrease of 0.1% in December 2023. On an annual basis, prices for processed goods for intermediate demand declined by 1.8%.  Noteworthy increases in PPI were observed for several commodities and services, with the most significant rise being a 15.9% jump in diesel fuel prices. Other notable increases month-over-month include gasoline (up 4.2%), commercial electric power (up 3.6%), basic organic chemicals (up 2.8%), jet fuel (up 2.7%), and natural gas to electric utilities (up 1.8%).

US Inflation and earnings
Last week US bond yields jumped higher after PPI came in hotter than expected. PPI was recorded at 1.6% y-o-y in February from 1% in January as goods prices advanced lead by gasoline prices. This acceleration has inflation watchers observing carefully as headline inflation (CPI) accelerates to 3.2% y-o-y from 3.1% in January. The good news though is that if one strips out gasoline and food prices, inflation seems to still be on its downward trajectory.

Markets are in the process of taking all of this in. Remember that the Western world has not had to contend with inflation for a very long time. Below is the 20-year trend line of US inflation. Look at the level now in relation to its history.

The reality of higher for longer inflation due to a post-globalised world has not yet made its way into mainstream financial modelling. Not only is the cost of capital shifting but asset allocators now must contend with bonds being a viable asset class. This is a lot to contend with leaving analysts asking what the fair price is to pay for equities especially if one looks at them in relation to bonds. Sure, financial models take the cost of capital into consideration but as the old adage goes… rubbish in.. rubbish out…. or more accurately if you are unsure of the input parameters, chances are good that one inadvertently makes a mistake without even knowing.

In October last year, active managers had a 25% allocation to equities which has now jumped to more than 100% (due to leverage). The consensus thus is to be long equities. Given the disarray that US bonds are finding themselves in due to its Treasury needing to refinance a large chunk of its debt book, this is not surprising. But once this has settled down perhaps the classic 60/40 portfolio (60% equity and 40% bonds) may return to the global financial scene.
Jurrien Timmer, an analyst at Fidelity shows the following graph of the real S&P500 over time and how both changes in earnings and P/E interplay to drive markets. Of late we have seen an expansion of P/E in the hope that earnings will also follow through.


In markets, I am observing that as long as companies keep to their stated earnings guidance, investors give the stock price support. Guide even slightly lower and shares sell down immediately. For long-term investors, this can pose decent entry levels. Ultimately quality companies will grow their earnings.. it’s just a matter of time.     


The dollar was up 103.45 and still trading sideways as it has for most of the last year. 

The DXY Index:

The Rand/Dollar. 

The rand/dollar closed the flat on R18. 76 (R18.72, R19.15 ,R19.30, R18.97, R19.03, R18.80,  R18.78, R19.03). It is encouraging to see the rand hold its strength despite some dollar strength. 

The rand/pound is  better at R23.90 ( R24.06, R24.18, R24.47, R23.61, R24.03, R23.87, R23.86, R24.15.)

The rand/euro closed the week at R20.43 (R20.47, R20.71, R20.93 R20.38, R20.51, R20.38, R20.40, R20.72.)

Brent Crude: Brent closed the week up sharply at $85.33 ($81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33).

Bitcoin was up yet again at $69,078, ($68,340, $62,315, $54,649, $52,510, $47,195, $ 42,897, $41,608, $41,680).

Articles and Blogs: 
New-Normal for Retirement? NEW
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.