Newsletter – Week 18 2024 – Higher for much longer?

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Market watch:
The graphs below, over a 3-month period, are a cautionary tale of cherry-picking intervals to distort your perception of statistics.  Over the last 3 months the JSE has significantly outperformed Wallstreet (thanks to a mini-commodity boom). 

The cautionary note is to be fully diversified – not just by asset class but also globally. 


Stagflation still a concern

Hard data is what every economist and asset manager looks at to decipher trends and try and predict future movement of shares, markets and economies. What about soft data – how people feel about the economy? This is probably more important than you think. People, whether they are retail investors or professional investors always bring emotion to their decisions – and even the more sophisticated algorithms, increasingly powered by AI are taking ‘sentiment’ into consideration. This so-called soft data (Hope, is another soft metric) has been measured for a long time. 

Source: Bloomberg

You can see from the graph above that hard data has been improving, but sentiment has not. Last week we looked at the trend of negative news having a far bigger impact on a share than positive at the moment, the low sentiment is playing into that. 

S&P Global’s US Manufacturing PMI (survey) fell from 51.9 in March to 50.0 in April.  ISM’s Manufacturing survey also missed, dropping from 50.3 to 49.2 (contraction). Input costs increased sharply, with the rate of inflation quickening for the second consecutive month. Higher prices for oil and metals were the biggest contributors.

To quote Jerome Powell : “I was around for stagflation, and it was 10% unemployment, it was high-single-digit inflation,”, noting, “Right now we have 3% growth, which is pretty solid growth, I would, say by any measure, and we have inflation running under 3%.” Only time will tell.

There is no doubt that inflation is still top of mind for consumers, as shown in the graph below

Stagflation is inflation in a stagnating economy. 



The Federal Reserve and US Treasury are being forced to confront the reality that inflation is persistent, which has led to an increase in yields, recently reaching 4.7% on the 10 year, the highest since November.

We have been looking very closely at offshore bonds for months now – and the US investors are now starting to understand that this is perhaps the new normal and that they can get decent, safe returns from bonds without the volatility of shares.

When bond yields started to climb, there was more investor concern over the loss of value of the bonds.. Investors were used to bonds being a safe haven for capital preservation. Remember, as bond yields rise (in the open market) then the capital value of that bond has to decrease to accommodate that higher yield. While we are inclined to equate bonds with money market – and SARS treats the two yields the same – they are quite different. The Capital value and the yield of that bond, say $1m, doesn’t change, you have to hold it to maturity to get that – 20 or 30 years in the future of whatever the term of the bond is when you bought it at issuance. If you want a higher return profile, this requires buying the bond during its tenure when market conditions allow for the purchase below issuance.

The FED is stuck between a rock and a hard place. It needs to raise rates to combat inflation.. in essence providing a cash yield which compensates for inflation. But higher rates would exacerbate the already burdensome debt servicing costs and threaten industries reliant on borrowing. While a further hike in rates would be deeply unpopular in the election season, we may not see a cut in the near future – perhaps not even this year.   



Starbucks, one of the relatively new global corporations, is an interesting case study.

Last week Starbucks reported a 4% drop in same-store sales in the second quarter compared with the same period last year, while analysts tracked by Bloomberg were expecting growth. In China, same-store sales plunged 11%. The company’s top geographic segments are showing a pullback in consumer spending. Is Starbucks a global economic bellweather stock? 

Starbucks stock (5 yr)

You can see in the above graph that Starbucks stock had a moment during the pandemic, and recovered before inflation took hold in the US, but has been on a steady decline since. 
Last week, a similar story occurred at McDonald’s when the burger chain reported lower-than-expected quarterly sales growth. 

Menu prices for hot or iced espresso shots used in lattes and macchiatos are higher than fast food chains. A 12-ounce brewed coffee at Starbucks costs between $2-$3 on average compared to $2-$2.50 at chains like Dunkin’ Donuts. Specialty Frappuccinos and blended beverages range from $3.25-$6, about $1-$2 higher than shops like Peet’s Coffee. In other words, they are priced as a premium brand in a middle-class market and it’s no surprise that they suffer when times are tight. 

Cocoa – again

A few weeks back we talked about the high price of cocoa – and guess what – Cocoa prices turned lower at the end of last week extending a weekly decline that is slated to be the largest on record due to the evaporation of liquidity from large traders. 

Futures in New York plunged as much as 9.3% to the lowest level since mid-March and have tumbled 37.5% from the peak of a little more than $12,000 a ton in mid-April. 

The wild ride in this commodity is a case-study on bubbles. They have to be constantly fed to be sustained, and the actual commodity buyers – the end users – were running out of liquidity, and decided to postpone their orders until the new season – this isn’t a highly perishable commodity  


The rich get richer

They say the rich get richer, and nowhere is that more true than for the most-valuable firms in the US. We have looked at the magnificent 7 for months now. Large-cap indexes in the US have never been so concentrated, with the Magnificent Seven accounting for 27% of the S&P 500’s market cap. (In other words if you’re buying an ETF based on the Market cap – you’re going to have not just embedded share concentration but sector concentration too).

The outperformance really began to take off in the pandemic. Expanding to the largest 50 stocks in the S&P, we can see these began to significantly outpace the index’s smallest 250 members after 2020. What lies behind this dominance? 

There are at least five reasons: Massive loosening of monetary policy in the pandemic The US running its largest ever pro-cyclical deficit. Tech firms benefiting from mass working-from-home during Covid. Companies taking advantage of the pandemic disruptions to raise margins by almost more than they ever have before – with the largest firms taking advantage of monopolies to raise prices the most. The AI boom kickstarted by ChatGPT

These advantages are allowing the largest firms to move into an advantageous position. Generally speaking, for a bull market to be sustained, a rally in a section of the market needs to be replicated across the whole market. We saw inklings of this at the beginning of the year when the rise in stock prices started being replicated across more stocks.

Market concentration can also be seen in earnings, with the largest 50 firms accounting for 35% of the S&P’s total Ebitda. (EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortisation is one of the most useful metrics used by asset managers to rate and compare companies). An acceleration in earnings at the largest firms since the pandemic is fortifying that effect. The top 50’s Ebitda has risen over 3.5x since 2020, while it has only doubled for the smallest 250 companies in the S&P.

Something that we spoke about in the podcast last week is the sheer volume of Capex these huge companies can pour into their companies – further entrenching their lead and making it more difficult for small companies to compete. 

If all that is not enough to make the largest companies’ shares more attractive, they are also diverting more of their accelerating earnings to buying back their own stock, mechanically helping to boost their price by reducing the share count. Smaller companies have not had the wherewithal to match them, even though in the years before the pandemic total buybacks were similar for small and large firms alike.  



Non-farm payrolls are one of the most watch indices in the US, and while these numbers are usually re-rated downward, for the first time in months there was a substantial decline. If you dive down into the numbers – the reason for the decline is that the government has taken it’s foot off the employment throttle. This metric is highly politically sensitive, and all presidents love to crow about their increases.

In the graph above you can see the sudden decline in government hiring (peach)

You can see from the graph below that unemployment is highest among African-Americans, but that demographic saw the biggest improvement last month. 


Economists and cage fighters

I usually spend my time writing about serious matters but last week I came across a news story which had me thinking. Renato Moicano is a UFC fighter. Now for those of you who do not know, UFC fighting is on a different level. Gone are the hard and serious rules of boxing and these are replaced by a loose set of do’s and don’ts as two opponents get to show the world what they’ve got. Punching, kicking and continuous fighting even if your opponent is on the floor is at the order of the day. The sport naturally attracts hardened opponents who found boxing a little too boring.

Mr. Moicano on the 13th of April when he won a lightweight bout, decided to grab the mic to shout out his favourite economist.   “I love private property and let me tell you something, if you care about your country, read Ludwig von Mises and the six lessons of the Austrian economic school,” Moicano, his cheekbone bloodied, roared, along with a pair of profanities, reported CNN. 

I have never put the disciplines of UFC fighting and understanding an economy together, but here bizarrely, Mr. Moicano has been able to do so.

There is clearly a feeling of disappointment with South American economies which is driving this. After living for years under the joke of their own brand of leftist socialism, Brazil now has a movement: Less Marx More Mises which is swelling as it finds popularity especially amongst the working class. Less taxes please ……. More freedom. This may seem like a pipe dream but at the heart of this lies a dissatisfaction with current politics and their ineffectiveness in running a country. Jair Bolsonaro, the former Brazilian president (and friend of Donald Trump) embraced libertarian freedoms.   

Ludwig von Mises was an economist who championed laissez-faire free markets finally ending up in the US after fleeing the Nazi onslaught in Austria where he was an economic advisor. During his time, his theories didn’t find the home they are finding today, but nevertheless the whole notion of free markets free from socialistic handcuffs was his founding theory. One can never experience true economic freedom but given the constraints of nature and interdependence of humans and organisations, the consumer should ultimately be the axis around which decisions are made. In other words …. The customer is always right!… not the government.
South America has been devoid of free markets for a long time. Take Argentina’s Javier Milei who has been mentioned many times before in this newsletter. He is a von Mises adherent. After reading von Mises for the first time he felt “superlative conceptual clarity” So change is underway in South America. The challenge is that change takes time. Do South Americans have the patience to see this through? Perhaps there is a role for Mr. Moicano as a free markets enforcer! I wont oppose a UFC fighter… will you?

Author- Cobie Legrange


The dollar was a little weaker again last week at 105.07 

The DXY Index:


The Rand/Dollar closed considerably stronger at R18.51 (R19.09, R18.68, R18.99, R18.76, R18.72, R19.15, R19.30, R18.97, R19.03, R18.80,  R18.78, R19.03). This is probably due to the Dollar strengthening again over the week.  

The Rand/Pound is stronger at R23.22  (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 R19.92 – the first time we have seen it below R20 for a while (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 down at  $82.82 ($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 down a touch at $63,154 ($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.