Newsletter – Week 14 – Have interest rate cuts stalled?

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Market watch:

The JSE has been on a more positive trajectory recently, but still trading in that band between 70,000 and 75,000 that it’s been in for the last 9 months. We don’t really expect any change before the elections next month. Wall street is also softening but still at a healthy 16.18% y-o-y.

The DJT meme stock

I don’t know if you remember the Gamestop (US) stock debacle back during the recession which gave rise to the moniker of a Memestock. That is a stock with very little intrinsic value that is hyped up on nonsense so that “retail investors” (unsophisticated investors) all pile in and more savvy investors ‘pump and dump’ the stock and make a killing.

The debut of the former US President’s Social Media platform (Truth Social) on the Nasdaq is on track to follow the familiar pattern. There was plenty of warning before the stock dropped but that didn’t seem to stop the MAGA diehards from buying the stock – perhaps in the mistaken belief that DJT himself could sell at the top and find money to pay his hundreds of millions in fines. (Spoiler alert, he can’t touch the stock until 6 months have passed – by which time the Election day of 5th of Nov will be a few days away). 

At its high after opening DJT stock was trading at $78bn. It has very little in the form of financials as it was borne from a merger between Digital World Acquisition Corp, a special purpose acquisition company and Trump Media and Technology. There isn’t much in the firm of financials which means that any valuation is based on the promise of future earnings. In the case of this company though, the website tugs at the American nationalistic heart strings in the hope that this will garner support. The SEC S4 filings make clear, that if the stock price remains above $17.50 for 20 out of 30 trading days, Mr Trump will receive an additional 36 million “earnout” or bonus shares. Based on recent prevailing stock prices in the range of $45-$50, these earnout shares could be worth an additional $1.5 to $2 Billion. Consequently, his special stock earnout clause will go into effect, unless his stock drops by more than 50% from current levels in a few weeks.

At the very least, the stock, Trump Media & Technology Group (NASDAQ Ticker: DJT), has exceeded all normal stock valuation metrics. From a traditional valuation perspective, there is no publicly traded company, out of 66,000 publicly-traded companies that can compare to this stock. To be clear, there is nothing even close. This is uncharted territory and a testament to the fact that the 30% of the American population that are Trump cult followers are prepared to do almost anything to try and get this person back into the White House.

It is now trading a $46Bn (which is still hideously overpriced by normal standards). Truth Social only has 9m followers. Why not short the stock – even half-savvy investors have cottoned onto this and you’d have to pay a 500% premium for this privilege. 

The lesson that can be learned from this sort of meme stock is not only buyer beware (don’t buy a share when you haven’t looked at and digested the financials) but tame your FOMO. If you think it’s a great prospect (and you are one of our clients) please contact Cobie and he will give you a ‘professional investor’ answer. This is DJT hype looking a lot like the fluff and nonsense that led to the downfall of WeWork – beautifully covered in a docuseries on Apple TV+ (Jared Leto and Anne Hathaway) – appropriately called WeCrashed.

The FED and interest rates

One surprise coming out of the Fed rate hike campaign is that the trend of  house price increases have been hardly impacted at all.

Prices surged when COVID took so much inventory off the market, but even as the country and the housing market normalized and mortgage rates went as high as 8%, growth returned to around 5% to 6% per year — without any correction.

This year-on-year rise in housing prices – way above inflation over that period, let alone salary increases – is making it increasingly difficult for Gen Z’s and even Millennials to get into the property market – but can this last forever?

U.S. housing is owned by older people — 90% of whom are over 40 years old, and 74% are owned by people over 50. As the baby boomers age, they will downsize — and it’s estimated that some 45 million homes will come on the market. That’s a huge supply given that the peak number of existing-home transactions was 7 million and that the current rate of sales is just over 4 million. There may be a supply glut in family-sized homes, but those boomers are not going anywhere (just yet).

US Jobs

For all intents and purposes — and by most economists’ predictions — job growth was supposed to slow by now, as the pandemic recovery grew complete. The US labour market also was supposed to weaken under the pressure of 11 interest rate hikes. Instead, on Friday, yet another jobs report defied expectations. Employers added 303,000 jobs in March, the Bureau of Labor Statistics reported. The unemployment rate fell to 3.8% from 3.9% the month before.

Friday’s jobs report not only highlights the US labour market’s remarkable resilience in the face of high-interest rates and elevated inflation but also shows that amid this enduring strength, inflation pressures are easing.

Annual wage gains slowed to 4.1% from 4.3%, a trajectory likely welcomed by the Federal Reserve in its efforts to tame inflation but yet a still-strong rate to help Americans recapture earnings that were decimated by the pandemic and high inflation.

Inflation and interest rates

What’s the latest thinking on interest rate cuts? (Remember here in RSA, we are unlikely to see any interest rates until the US starts to cut theirs). Last week  Fed speakers discussed inflation and rate cuts. Kashkari and Goolsbee (non-voters this year) both talked about how the Fed may not even need to cut in 2024. It looks increasingly likely that rate cuts are going to be postponed to Q3 or even Q4. 

What’s happening with inflation and interest rates around the world? India held rates steady at 6.5% (inflation is still over 5% but is slowly declining). Japan’s yields rose to 0.21% – the highest in over a decade. March’s inflation print for the EU came in lower than expected at 2.4%. The high (and rising) price of oil is still putting inflationary pressures on oil. The ECB is expected to cut rates in June. Turkey which is part of the EU is a stand out case:

Headline YoY inflation in Turkey increased to 68.5% from 67.07%. MoM inflation decelerated marginally.

Back here at home, the South Africa Central Bank (SARB) Gov Kganyago stated that he was discussing lowering the inflation target from its current range of 3% to 6% with the Treasury Dept (probably to be more in line with the global target of 2%). He would not pre-commit on the path for interest rates believing that forward guidance is not a useful tool.

Magnificent 7 now the Magnificent 4?

Cracks are starting to appear in the magnificent 7 AI focused stocks  with the leading-light, Nvidia (NVDA) continuing its battle to get past the 900 level again on Friday despite gaining nearly 3%. On Wednesday, shares closed lower after news of an earthquake in Taiwan that disrupted operations for its foundry partner, Taiwan Semiconductor (TSM).

Nvidia stock appears to be hitting resistance around 900 after its massive rally. That is denting its relative performance when compared with the S&P 500.

Each of the so-called Magnificent Seven stocks—Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla—gained at least 49% in 2023 and powered the broader market higher. The stocks are showing much more divergence in 2024, with Nvidia and Meta continuing to move sharply higher, while Tesla is the biggest decliner so far this year on the S&P 500.

That means investors need to do their homework and be selective in ways that weren’t required last year, when a bet on the Mag 7 as a whole was a winning strategy. The fundamental performance of each company was “drastically different,” making it hard to classify them as one group. One example of how the market previously ignored fundamentals is Apple. The iPhone maker cut estimates each quarter last year, and still shares neared 50% growth for the year. That’s been course-corrected this year as Apple fell 11% in the first quarter. Tesla, which saw its stock price double last year, has faced a particularly difficult stretch as consumer demand has waned, forcing the maker of electric vehicles to cut prices in the U.S. and elsewhere to stimulate sales, which has cut into profit margins. Meanwhile, competition in the EV market is intensifying, particularly in China. 

The magnificent 7 has shrunk to be just the magnificent 4, Nvidia, Microsoft, Amazon and Meta. At last, investors are starting to look through the hype and are trying to find the true long-term potential for AI. (If you missed the bubble, this is not the time to have FOMO). 

While Amazon has been one of the stalwarts of the IT sector (and a member of the magnificent seven) they are trimming staff from their core (and most profitable) business, the AWS cloud-computing.  On Wednesday they announced that they will be cutting hundreds of jobs in this division as well as their stores and general IT.


Daniel Kahneman

The finance world was a place of numbers and ratios before the arrival of Daniel Kahneman. He died two weeks ago at the age of 90 and was really known for his work in behavioural economics for which he won a Nobel prize in 2002. Most of the finance world relied on numbers alone before behavioural economics. It was all about who could understand numbers better to ensure more productive decision-making. But the nagging problem in the finance world was that mistakes which inadvertently lead to losses were still evident. 

The actuaries and accountants had an answer for this… more numbers. But invariably people in finance are hired by those who have already carved out a career in the field. They prized above all else academic brilliance and then in the chosen fields which emphasize numbers. But still market crisis led to finance professionals asking after the fact how they could not see this coming.

It was Daniel Kahneman who pointed out the problem. It’s you.

Behavioural economics places at its centre the psychological, cognitive, emotional, cultural and social factors which drive how we make a decision. I was 28 when the field of behavioural economics was introduced. There was a lot of scepticism about the field at first, but when someone wins a Nobel prize perhaps one should at least take note of what they are saying. And so slowly the field of behavioural finance grew.  

Making oneself aware of the biases which we use in decision-making allows us to guard against them, and allows us to identify these when making investment decisions.

The 5 major types of biases that effect our decisions are : Overconfidence, hindsight, familiarity, confirmation and naive diversification.

Take heuristics as an example. Heuristics are a ‘rule of thumb’ which we use every day and where we judge the likelihood of an event based on how easily it comes to mind. When combined with Hindsight bias, it leads to investment conservatism for those who have lost money investing especially if this was a painful experience, but can also lead to a management team in a company overspending on an ambitious project just because they had success in the past.

The sunk cost fallacy appears when you keep investing in an idea just because you have already spent resources on it. Think of Woolworths attempting to buy David Jones in Australia. An ambitious project became a black hole probably because of the sunk cost fallacy. This is part of the reason why today, I would rather watch an ambitious company from the sidelines than as an investor than buy the shares.

Humans are naturally irrational. Most of us believe we are better drivers than what we actually are, as an example. As an investor, it is tempting to attempt to rely on our perceived abilities when making asset decisions (overconfidence bias and the Dunning Kruger Effect). And because we can justify almost any idea to ourselves one would inadvertently make mistakes.

For these reasons, having an investment process is critically important.  It’s an unemotional way to look at a company and assess its business without attempting to understand its prospects. Why discount prospects? Because management is paid to sell their company to you as an investor. They will paint a rosy picture even if this does not exist (look at the DJT meme stock we talked about above).If the investment process is built to stress test a company one is forced to look at the state of a company and how it has sold its product/service through time even under difficult circumstances. Quality companies will immediately stand out from the crowd if you know what to look for. The process is important because it treats all potential investment ideas the same and guards against our immediate behavioural biases. Ultimately, we have Daniel Kahneman to thank for this.

Author – Cobie Legrange


The dollar was stable at 104.29. For a change, I have inserted the DXY graph since inception and it tells a very interesting story. For instance, the dollar is at it’s strongest in over 2 decades at the moment, but nothing like the highs of the 1980s.

The DXY Index:

The Rand/Dollar closed up at R18.68 (R18.99, R18.76, R18.72, R19.15 ,R19.30, R18.97, R19.03, R18.80,  R18.78, R19.03).

The Rand/Pound is  up a tad at R23.61 (R23.93, 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 R20.25, (R20.56, 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 again at  $90.87 ($86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33).

Bitcoin was down a touch at $68,804 ($64,681, $69,078, $68,340, $62,315, $54,649, $52,510, $47,195, $ 42,897, $41,608, $41,680).

Articles and Blogs: 

Costs Fees and Commissions NEW
The NHI and what do 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.