Newsletter – Week 17 2024 – Confusing times

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Market watch:

The JSE continues to tread water as the US markets slide. There are some signs that China is starting to buy commodities again – which will be good news for us, watch this space. 



US Market’s topping out and AI maturing?

Alphabet Inc.’s (aka Google) surprise issuance of its first dividend is now putting pressure on Inc. to follow suit, as it is now the last of the Big Tech companies that does not pay its shareholders a dividend. Oddly, this change in policy was NOT announced to great fanfare but was buried on the second page of their first-quarter earnings. Alphabet will begin paying a 20 cents-a-share dividend starting in June.  They are following the example set by Meta Platforms Inc. (Facebook) META, which stunned Wall Street in February with its fourth-quarter earnings when it said it would begin paying a dividend. Many investors wondered if Alphabet or Amazon would be next among the Big Tech giants to follow their lead – now we know.

In most cases, the beginning of a dividend is a sign of a maturing company that has reached middle age, and its big growth days are over. However, both Facebook parent Meta and Google parent Alphabet are currently on a strong growth trajectory in both of their businesses, much of which comes from internet ads. But both are also increasing their capital spending to build up more AI infrastructure in terms of data centres, hardware and software. Alphabet said it spent $12 billion in capital expenditures in the first quarter and this trend is expected to continue. This is mostly being spent on AI. Think of that for a second. One company has spent $12 billion in a single quarter on a technology they hope will bring an edge to their business. Where else in the world can one single company spend that much? Big tech has created a moat around their businesses by virtue of the amount of money that can be spent on new ideas.

Investors punished a disappointing forecast from Meta Platforms The Facebook parent’s stock tumbled over 10% on Thursday after its report. A sales warning saw shares of industrial bellwether Caterpillar fall 7%.

More broadly, S&P 500 companies that have topped analyst earnings estimates this quarter have seen their shares outperform by a median of just 0.2%. This is an indication that the market is topping out. In contrast, those that have missed earnings estimates have had their shares lag by a median of 4%, the biggest such underperformance for misses in at least eight years. The wind may be changing.  


Tax season affecting US Money market

We have spoken about this on the podcast, but the US tax season always has an impact on the market liquidity as thousands in the US payout their savings to the IRS. The US does have a Pay as You earn equivalent but, like here, higher-income earners usually save for tax and this tax payout increases every year 

While money-market funds’ total assets fell over $100BN, on a non-seasonally-adjusted (NSA) basis, total bank deposits crashed by a stunning $258BN as Tax-Day cometh. That is considerably more than the $152BN decline last year but less than the $336BN plunge in 2022…

In the graph below the April tax season changes are circled. 



Japanese Yen

We’ve been looking at the Yen quite intently for the last few months, and it once again collapsed on Friday to fresh record lows (158)  following the Bank of Japan meeting. The market realizes that Japan is following a policy of benign neglect for the yen. This is a complete 180 degree switch in their stance in the past. The possibility of intervention can’t be ruled out if the market turns disorderly, but it is also notable that Governor Ueda played down the importance of the yen in his press conference as well as signalling no urgency to hike rates. We would frame the ongoing yen collapse around the following points.

Let’s take a deeper dive into this unusual situation…

Yen weakness is simply not that bad for Japan. The tourism sector is booming, profit margins on the Nikkei are soaring and exporter competitiveness is increasing. True, the cost of imported items is going up. But growth is fine, the government is helping offset some of the cost via subsidies and core inflation is not accelerating. The  Japanese are huge foreign asset owners via Japan’s positive net international investment position. Yen weakness therefore leads to huge capital gains on foreign bonds and equities, most easily summarized in the observation that the government pension fund (GPIF) has roughly made more profits over the last two years than the last twenty years combined.

Graph: Dollar/Yen over time

There simply isn’t an inflation problem in Japan. Japan’s core CPI is around 2% and has been decelerating in recent months. Inflation may well accelerate again helped by FX weakness and high wage growth. But the starting point of inflation is entirely different to the post-COVID hiking cycles of the Fed and ECB. By extension, the inflation pain is far less and the urgency to hike far less too. 

Negative real rates are great. There is a huge attraction to running negative real rates for the consolidated government balance sheet. It creates fiscal space via a $20 trillion carry trade (borrowing in Yen and investing in Dollar denominated debt) while also generating asset gains for Japan’s wealthy voting base. This encourages the persistent domestic capital outflows we have been highlighting as a key driver of yen weakness over the last year and that have pushed Japan’s broad basic balance to one of the weakest in the world. It is not speculators that are weakening the yen but the Japanese themselves.

The bottom line is that for the JPY to turn stronger the Japanese need to unwind their carry trade. But for this to make sense the Bank of Japan needs to engineer an expedited hiking cycle similar to the post-COVID experiences of other central banks.

Time will tell if the BoJ is moving too slow and generating a policy mistake. Their last major attempt to manipulate the markets (real estate) didn’t end well. A shift in BoJ inflation forecasts to well above 2% over their forecast horizon would be the clearest signal of a shift in reaction function. But this isn’t happening now. The Japanese are enjoying the ride.

US Consumers

More than 70% of US GDP is tied to consumer expenditure, and they effectively control whether or not the US goes into recession. When markets appear to be topping out, it is helpful to look at indicators more closely.

According to the March retail sales data, consumer spending added “fuel” to economists’ exuberance about this year. Rising inflation in March didn’t deter consumers, who continued shopping at a more rapid pace than anticipated.

First, retail sales data was extraordinarily weak from October to January, the traditionally strongest shopping months of the year. That period included Halloween, Thanksgiving, Christmas, and New Year. So, to some degree, the strength of spending over the last two months is unsurprising as, eventually, consumers need to buy goods or services previously postponed.

Secondly, while the March retail sales data was strong, it was weaker than February. However, March contained two significant spending periods, Spring Break and Easter, which generally don’t occur.

Unsurprisingly, the price of oil has a significant impact on consumer spending – and we all know what the price of oil has been up to recently.

Economics is always a key focus during the presidential race in the US and so this is going to be important for the next 6 months. Just to make this water even more muddy, buoyant retail sales and a good GDP print have not been good indicators of recessions in the past.

It’s almost as if the recession blows out of nowhere. Often it takes an unexpected  shock to the system – and maybe there just haven’t been any of those around because a natural cycle of ups and downs just hasn’t been working. 


Wealth Tax/ Unrealised Gains Tax

A wealth tax is usually a flat tax on a person’s gross assets every year. Unrealised Gains Tax is getting a capital gains tax before an asset is sold (a Capital Gains Tax event) – and would presumably be counterbalanced by capital losses. (Guess which one the Governments prefer).

You’ve probably heard RSA ruling party pundits occasionally calling for a wealth tax  – and this is already a reality in parts of Europe and the Biden camp is talking about it. One of the major differences between The Republicans and Democrats in the US is around tax, with Trump supposedly cutting back on big government but in reality just giving the top bracket massive tax cuts during his Era, Democrats have a more socialist stance.

The wealth tax/unrealised seeks to tax any assets rather than waiting for them to be sold and then get Capital Gains Tax. In other words, the government want their bite of the cherry now, and not wait until later. This is typical of a government that is spending way beyond its tax receipts and getting further and further into debt. Of course, those material gains could never materialise… 

The tight hold that the IRS has over US citizens forever (if you hold a US passport you have to submit tax returns every year, no matter where you live) makes it difficult for Billionaires to just up and leave (as the wealthy did out of the UK decades ago). 


Confusing markets

The markets continue to look for direction globally as new economic data fails to lift the sentiment. Last week US GDP was released and the US grew at 1.6% for the quarter below estimates of 2.5%. It was volatile trade and inventories which led to the large swing and once these are excluded, the US grew at 2.8% as compared to 3.5% in the second half of 2023. So the economy is growing slower but if this is a trend only time will tell.  

It seems the FED continues to make policy errors as it takes them too long to deal with an outbreak of inflation and then creates confusion in the broader market and economy. Arguably outcomes have been improving over time, but this may be overshadowed presently by the debt refinancing process underway in the US. We are currently experiencing the end of the reverse repo program as the FED pulls back on its overall balance sheet. This is where they sold securities to market participants with an agreement to buy them back at a later stage. The reverse repo part of the FED’s balance sheet hit a high in early 2023. 

Markets are thus trying to evaluate their future prospects in line with new economic releases. Take PCE inflation data which was also released and this showed a 2.7% rise y-o-y from a previous 2.5%. This is not good news for the FED as they would want to see rates falling at some point in the year. They may have to concede that there is a new normal for inflation rather than the 2% target. 

With this as a backdrop, investors are nervous.

Take Meta’s earnings miss as an example (Dawn also discussed this above). This stock fell by over 10% trading at values last seen in early February. Or Alphabet (Google) who beat on expectations and traded 11% higher in the aftermarket creating an all-time high in this stock’s price. I am expecting the economic backdrop to continue being murky and the heavy lifting will now have to come from earnings. Owning not only the right ideas but also at the right prices seem to have become equally important. With the latest pullback in markets, the S&P500 is trading at 20x earnings and overall earnings expectations are for a 12% expansion. This is far ahead of the expectations for emerging markets which are expected to grow at 4% and MSCI EAFE (Europe, Australasia and Far East) to not grow at all. 

            Source:  Jurrien Timmer

Author- Cobie Legrange


The dollar was almost the same again last week at 106.09. 

The DXY Index:

The Rand/Dollar closed better at R18.80 (R19.09, 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 slightly better at R23.49 (R23.62, 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 better at R20.12 (R20.35, 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 at  $89.29 ($87.39, $90.87, $86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33).  

Bitcoin was up again at $69,992 ($64,135, $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: 
Why do I need a financial advisor ?  NEW
Costs Fees and Commissions 
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.