| The podcast to the newsletter is available here. Market View The JSE continues to shine, with most sectors in the green. While Wall Street has recovered from the ‘Liberation Day” shock, and has become desensitised to TACO diplomacy, it still can’t seem to get back to the highs we saw in January.   RSA GDP South Africa’s latest GDP data is a sobering reminder of what economic stagnation looks like when politics gets in the way of progress. The economy grew by just 0.1% in the first quarter of 2025 – better than the 0.1% contraction predicted by Bloomberg, but not by much. In an interview for Fine Music Radio last week I spoke with Maarten Ackerman, Chief Economist at Citadel, about this news, just as it broke, and he pointed out that South Africa is firmly in a per-capita recession, meaning we’re all getting poorer by the day. In other words our GDP is not keeping up with our population growth. Only four of 10 sectors expanded in the quarter. Agriculture surged 15.8%, while transport rose 2.4% and finance and trade added modest gains, helped by retail, insurance, activity in the pension fund industry, auto sales, accommodation and food. Disappointingly, the GNU has yet to articulate a coherent strategy for growth and employment (and why on earth Cyril would sign the deeply unpopular AWC bill, after the elections, is anyone’s guess!) Gwede Mantashe, meanwhile, made sure to cling to his title as the world’s single biggest deterrent to mining investment with the release of the draft Mineral Resources Development Bill, just days before Ramaphosa’s trip to the White House. Let’s just add to that an ideologically charged push for National Health Insurance (NHI), law firms fighting it out with the government over irrational and impossibly unworkable BEE codes, a vague R100bn transformation fund, and close ties with geopolitical outliers like Russia and Iran. The most worrying number in the GDP data was the 1.7% drop in gross fixed capital formation, led by a 4.5% contraction in private sector investment. Companies aren’t buying into the idea of a South African turnaround. Despite Ramaphosa’s many reform pledges, very little has materialised. Promises to end bailouts and restructure state-owned enterprises remain just that. Mining, once the backbone of the economy, contracted 4.1% in the quarter. Gold prices tested record highs, but South African output crumbled; for copper, coal and nickel too. The country has, once again, missed the commodities boat. Manufacturing shrank 2%, and construction by 3.8%. The only thing we can bank on at this point is stronger consumer demand, helped by lower borrowing costs and pension withdrawals under the two-pot retirement system . If La Niña brings good weather and confidence improves, agriculture and retail sales could surprise to the upside. Still, the TACO Donald is a wild card, and geopolitical tensions are high. As we keep saying, the government lacks the political will to get out of the way, and until they do the economy is going nowhere. The private sector has the capital, capacity and urgency to rebuild energy, rail, ports and housing. What it lacks is a partner in government with the same resolve. Besides, the government has blown all the money.  Europe, can it fill the vacuum? Like RSA, Europe is also ‘front-running’ Fed decisions on interest rates. Central banking can involve excruciating dilemmas, but the European Central Bank was spared one for its meeting last Thursday. It was already thought virtually certain to cut its target rate, but any impediment has now been removed by surprisingly low euro-zone inflation in May:  That was achieved primarily through an unexpected sharp fall in services inflation, which, as in the US, had stayed obstinately high well after goods prices calmed down:  There are some reasons why they may not be quick to cut further: 1. Inflation risk has not gone away. 2. Trade policy w.r.t. the US is still up in the air 3. They don’t want to get into a deflationary mode until growth is well entrenched and run the risk of stagflation. Inflation remains above the 2% target, but many Western countries are having to face the prospect of this being the ‘new normal’. It is impossible for anyone (probably even the Donald himself) to predict what TACO Trump is going to do from one minute to the next. To this must be added domestic European politics. Across the continent, parties of the establishment are attempting to fend off populist challenges. In the Netherlands their parliament has been dissolved after Geert Wilder’s Freedom party withdrew from the ruling coalition. An election is now likely this autumn, in which Geert Wilders will hope to gain the premiership. Poland (outside the euro zone but crucial to the EU) is holding a vote of confidence in Donald Tusk’s centrist government after his ally lost to populist historian Karol Nawrocki at the weekend’s presidential election. In Germany, a knife-edge vote led to an astonishing reversal of fiscal policy which will see increased spending and investment, as the new chancellor, Friedrich Merz, threw caution to the wind. That sharply narrowed the gap between European and US rates. That was a logical reaction to a big and unexpected German stimulus, but the effect was more or less cancelled out by the “Liberation Day” tariffs and ensuing brouhaha. The latest US data continues to do little to support rate cuts there. Payrolls due on Friday (complete on Friday) will offer the key guide to the labour market.  |
| Poor old Freddy and Fanny Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises in the US (GSEs) that play a crucial role in the U.S. housing market. They buy mortgages from lenders, package them into mortgage-backed securities, and sell them to investors. This process helps ensure a steady flow of mortgage credit, making home loans more accessible and affordable. (Remember that it was just this sort of ‘product’ that was abused by the financial markets and brought about the 2008 financial crisis. Both entities were placed under government conservatorship in 2008 during the financial crisis due to concerns about their stability. Since then, they have remained under federal oversight, with ongoing discussions about their future, including potential privatisation. Recently, there has been talk of taking them public while maintaining government guarantees to stabilise mortgage rates, but it isn’t quite that easy. Fannie and Freddie have total assets of $7.8 trillion and liabilities of $7.6 trillion . This leaves them with total net worth (shareholders’ equity, assets minus liabilities) of a meagre $160.7 billion. The US government has a $348.4 billion senior preferred claim on that net worth. So, after paying out these claims, whatever’s left over goes to the common shareholders. After the US govt has taken its chunk of the pie, the biggest common shareholder is also the US government, which gets 79.9% of that; various regular shareholders, of whom Bill Ackman’s Pershing Square Capital Management is perhaps the best-known, get the other 20.1%. Right now, it does seem like something might change. The Trump administration is talking more and more about ending the government’s control and ownership of Fannie and Freddie. They could go out to market and try and raise capital but ths would be a massive IPO. The other end of the range would be for the government to say, “You know what, never mind, this $348.4 billion number is kind of fake, that claim is unfair, and we are going to write it down to zero.” If they do that, then Fannie and Freddie can just keep their existing shareholders’ equity ($160.7 billion). That is almost enough for them to be well capitalized, though they’d still have to do very large IPOs — perhaps $30 billion total — to get all the way to 2.5%. My bet is that is what the markets would like the government to do. To get a little technical (but the housing and mortgage market is such an important component of the US economy, it’s worth looking at), if you do that, then the existing shareholders will be in good shape. Ignoring a potential new equity raise, the existing shareholders would own 20.1% of the companies (the US government would own the other 79.9%), with a book value per share of around $14 or $15. The existing common shareholders would get something like $25 billion of book value in the companies, the preferred shareholders would get about $33 billion (the face amount of their preferred), and the US government would have a 79.9% equity stake with something like $100 billion of book value. Everyone wins a little. This is why this is a hot topic right now – perhaps they think they can get Trump to allow this move. This is the softer scenario — the one where the government gives up its $348 billion claim — seems more realistic, and would actually get the government $100 billion (or more) worth of stock. In recent social media posts, Donald Trump said he’s exploring the sale of new shares in the two companies, which play a key role in determining how much Americans pay for home loans — but he also made clear the government will keep a strong oversight role.  Fannie and Freddie are giant companies that generate a lot of money. Right now, the US government is entitled to essentially 100% of that money. To re-privatise them, it would have to give up some of that money. The expectation, which is not unreasonable, is that the government will give up some of that money to Bill Ackman. But that is not an absolute requirement of re-privatising them, and if the government is looking to keep as much money as possible, that might not be great for the shareholders. Watch this space.  EM Carry trade Before looking at this emerging trend – what is a cartry trade, and why should we care? A carry trade is a financial strategy where investors borrow money in a currency with a low interest rate and invest it in assets or currencies with higher yields. The goal is to profit from the difference in interest rates. I’m sure you remember the fuss around the ‘unwinding’ of the Japanese carry trade last year. Emerging market carry trades are taking off again, as currency volatility subsides amid signs that President Donald Trump’s aggressive tariffs may not get fully enacted. (I hope I haven’t jinxed that just by mentioning it.) An index of carry returns – for which a trader borrows in a low-yielding currency and then invests in another offering higher returns – hit a seven-year high in late May. For example, if Japan has low interest rates, an investor might borrow Japanese yen and invest in a currency like the Brazilian real, which offers higher returns. This strategy works well when markets are stable, but it carries risks, especially if exchange rates shift unexpectedly or if the high-yielding currency depreciates. Recently, carry trades have gained momentum in emerging markets as currency volatility has subsided. The strategy, which performs best in periods of low volatility, has been very popular since about 2020 with most trades funded in the ultra-low-yielding yen. Those positions were suddenly upended in August last year following a Bank of Japan interest-rate hike that triggered a surge in the currency. Sentiment toward carry trades though, has been boosted in recent weeks as global trade tensions have eased. A gauge of global currency volatility compiled by JPMorgan Chase & Co dropped to 8.7% on Friday from as high as 11% in early April. The carry trade has been generating an increasing number of headlines recently in Asia. The Taiwan dollar surged in early May as gains in the currency led to a rush to exit positions using it as a funding currency. The Hong Kong dollar slid to the weak end of its trading band in late May as falling local interest rates led traders to use the currency as a funding vehicle. Moderating inflation in many emerging-market economies (including here in RSA) means that real yields on their bonds are relatively attractive.  US Dollar weakness causing pain outside the US For decades, Asia’s export powerhouses had a simple financial strategy: Sell goods to the US, then invest the proceeds in American assets. That model is now facing its biggest threat since the 2008 global financial crisis as Donald Trump tries to remake global trade and the US economy, upending the logic behind $7.5 trillion of investments from Asia. Some of the world’s biggest money managers say an unwind is just getting started.  For those caught flat-footed by the shift, the pain has already been severe. A selloff in the dollar after Trump slapped tariffs on most of the world had Taiwanese insurers reporting a $620 million loss in April alone. Then, a surge of as much as 8.5% in the value of the Taiwan dollar over two days in early May raised the prospect of $18 billion in currency losses for their unhedged US investments. Even before Trump’s second presidency, capital flows from Asia to the US were off their historic peaks. There are now signs the trend will accelerate, with Japan’s largest life insurer looking for alternatives to US sovereign bonds, family offices cutting or freezing investments, and a $96 billion Australian pension fund declaring a peak in its allocation. The latest data show China shrank its Treasuries holdings in March. There is very little doubt that we are entering a new normal, irrespective of whether the tariffs stick or not. There are many reasons to look for alternatives to US-based assets: 1. There’s a growing budget deficit. 2. Widening political polarisation. 3. Worries about the country’s ageing infrastructure. 4. The usage of the dollar — the world’s reserve currency — in sanctions against Russia also raises concerns over the safety of currency assets held by Asia. 5. In addition, Trump’s push to cut taxes is elevating worries about fiscal profligacy, with the US getting stripped of its last top credit rating on May 16 after Moody’s Ratings joined peers in downgrading the nation. The switch from hoarding dollar assets to doubting US exceptionalism has the potential to send $2.5 trillion or more cascading through global markets. In that scenario emerging-market currencies will soar against the dollar, equities from Europe to Japan will benefit from inflows, while new capital swells debt markets in countries including Australia and Canada, asset managers and analysts said. Having said that, this is much more likely to be a gradual process, as the US would likely step in before things went too far. After all, it was the bond markets that started the Trump TACO about turn on Tariffs It won’t be plain sailing, though. For Asia, a rewiring of its ties will mark a reversal of a strategy conceived in the depths of the 1997 financial crisis. Back then, an excessive reliance on short-term borrowing without the backing of dollar assets triggered a debt crisis, followed by a sharp depreciation of currencies and a collapse in equities. That lesson led Asian nations to focus on earning dollars from exports to the US, building up surpluses that were redirected back into America. Collectively, the 11 biggest economies have bought $4.7 trillion of US equities and bonds since 1997, taking total investments to $7.5 trillion. The annual flows into the US peaked in 2004 at $354 billion as the ascendance of China, after joining the World Trade Organisation, started to reshape trade and investments in the region. In the early 2000s, almost every dollar earned by the largest Asian exporters to America was reinvested back into their equity and bond markets, given the high returns and growth seen in the world’s biggest economy. Over the last decade, sovereign wealth funds, family offices and institutional investors across Asia have gradually been rebalancing their portfolios to reduce overexposure to US assets. By 2024, Asia’s capital inflows into the country had dropped to $68 billion, making up just 11% of trade surpluses with the US that had continued to expand. Exports had ballooned in the past few years, aided by a strengthening dollar and a rebound in American consumption after Covid. Despite the slowing capital flows, Asia is still heavily reliant on a strong dollar for its growth and investment model. The risks were exposed last year when the Bank of Japan stepped up its interest-rate hikes after years of an ultra-easy monetary policy, and the nation intervened in the market to support the yen (see the piece on carry-trade above). The US president’s pledge to bring manufacturing back to the US, along with his frequent complaints about how other countries weakened their currencies to gain a competitive edge, was directly in opposition to the Asian export-growth model. His announcements of unexpectedly high tariffs, especially on Asian exporters, spurred a rush by Japan and South Korea to the negotiation table. Traders started wondering if foreign exchange would be part of trade talks, given that China, Japan, Taiwan, South Korea, Vietnam and Singapore are on a currency monitoring list by the US Treasury. The department makes an assessment twice a year on whether America’s major trading partners are manipulating their currencies against the dollar for competitive advantage. China had already been cutting back on its investments given a worsening relationship with the US. Data from the US Treasury shows that the Asian nation sold a net $172 billion worth of American equities and bonds last year, adding to the $64 billion in 2023. The data may be incomplete, with some analysts pointing out that Chinese funds could have masked purchases of those securities through proxies in other countries. In an ideal future, there would be an orderly unwinding of dollar dominance and a return of capital back into Asia and underperforming currencies will appreciate. Author: Dawn Ridler  A glimpse into the future Writing for the Financial Mail, BlackRock Chairman and CEO Larry Fink, argues that it’s time for a second draft of globalisation. In the article published on 3 June, Mr Fink says that the globalisation we know has created pockets of wealth globally, but that the broad working class has failed to benefit from this wealth creation. Global GDP grew more since the fall of the Berlin Wall in 1989 than in all recorded history before it. This led to the S&P500 seeing a return of more than 3800%. If you were in a position to be invested, you benefited from this, but this did not benefit workers in the Rustbelt, according to Mr Fink. What he is suggesting is that governments can steer capital to specific markets which are held more broadly by a population through retirement funds. He cites both Japan and the US which have implemented tax-incentivised ways to invest for retirement. US lawmakers, according to him are weighing up creating an investment account for every American at birth where capital can grow for retirement, adding to the current 401k plans. So yes, capital is unequally spread amongst a population, but I would argue that this is the byproduct of ingenuity, product creation or even good luck. Most of the winners are entrepreneurs and through their effort drive an economy forward in the hope of making a return on their capital. What governments are facing in the future is a refinancing crisis where over three-quarters of new bond issuances are servicing prior debts. Perhaps governments in the West require dedicated investment accounts held by the population, which can buy the government bonds which was previously bought by other countries? As deglobalisation now takes hold, competing governments are going to be reluctant to spend their reserves on holding other governments’ bonds. There is an urgent need to drive bond yields lower in the US. Lower yields will kickstart the mortgage market, which, with GDP growth, is really important to stave off stagflation. This is a tightrope for not only the US but probably for the West as a whole. And then there is the threat of AI as it drives both productivity and unemployment higher. The winners in this race will be those who can use and adapt to the new AI tools becoming part of the productivity race rather than an unemployment statistic. I would argue that the ‘Rustbelt’ worker who failed to benefit from globalisation is about to be left in the cold again unless they can reskill themselves despite a newfound retirement account. Education is critical. The way students are taught is going to have to fundamentally change. Rather than asking students to not enlist the help of AI to create head knowledge, teachers need to embrace AI as a tool which can house knowledge to push the boundaries of understanding. This will start happening across multiple fields. Governments need to think about how they will enable this, thus offering the opportunity for Rustbelt workers to change their fortunes. If they don’t, competing countries may start attracting those that embrace AI, offering incentives, thus making skill rather than politics the new divider. Is democracy still going to be the best way to express the will of citizens in this type of world? Will people with fewer opportunities be forced to be more radical? Does this become especially true for those countries which are incapable or slow to embrace AI? These are pressing questions for governments worldwide and attempting to control the flow of capital may be a natural response but fails to deal with the real issue at hand. Author: Cobie Le Grange EXCHANGE RATES:The Dollar remains weak, and we can expect the dollar to be soft for the foreseeable future.  The Rand/Dollar closed at R17.77 (R17.95, R17.88, 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 R24.05 (R24.18, R24.14, 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 R20.24 (R20,37, R20.27, 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 $66.56 ($62.61, $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 $105,643, ($104,049, $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 PlanNEW 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 Bingo 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 |