| The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. Market Watch The JSE has recovered somewhat after the GNU jitters settled down and hopefully, everyone in government gets on with the job we voted for them to do. The loss of Gauteng to a non-ANC/DA coalition is disappointing but it could be tempered by a strong opposition, not shy of shining a light on abject failures.   Politics, Elections and Markets Several weeks on from Biden’s disastrous debate, the calls for him to step down have not abated. On Thursday he gave one of his few solo speeches and made some serious gaffs including calling his VP Vice President Trump and instead of queuing President Zelensky to the stage, called Vladimir Putin. To be fair, he has made these sorts of gaffs now for decades, but he is now under the spotlight, and Trump is sitting back not having to say anything and hoping all this will implode in his favour. Once again the US Presidential elections are going to be Trump or Never-Trump. Tellingly, the NATO summit that’s underway in the US and they are spending most of their time ‘Trump-proofing’ the organization. Interestingly, one idea being floated is for Harris and Biden to swap roles. In France, the French who have always used their voices and ballot boxes to express their displeasure woke up to the spectre of the far-right ruling the country and handed them a resounding defeat in the second round of elections. Now the French are trying to cobble together a collation, and in a mirror image to our experience, the French bourse isn’t particularly happy.  CAC40 Let’s face it, The National Rally has spent recent years vigorously trying to sanitize its public image and take out the stain of anti-immigrant bigotry and Nazi nostalgia that has undermined its efforts to portray respectability. Its third-place finish in the elections, even as its number of seats increased by nearly 40, showed that it had not convinced enough voters that it had done so. You can put lipstick on a pig – but it’ll still be a pig. Kenyan President William Ruto has been forced to sack his entire cabinet as the fallout from the riots continues to ripple through Kenya. The austerity financial bill that triggered it all was abandoned a long time ago, but now he could have to call for new elections. Interestingly these have been dubbed the Gen Z riots. To alleviate Kenya’s high debt burden and generate government revenue, the National Treasury of Kenya proposed high tax levies on everyday items. Some of the most controversial elements of the finance bill include a tax on bread, an increased tax on menstrual health products, a motor vehicle tax, and taxes on mobile money transfers. The bill’s policies are in line with objectives laid out in an International Monetary Fund program aimed at increasing government revenue. What started out as a protest against taxes and government incompetence is now evolving into a show of public anger and frustration with what many Kenyans see as a corrupt leadership that does not adequately acknowledge their struggles. President Ruto’s campaign promise to build a “hustler nation” has not been forgotten by protestors, who mockingly call him “Zakayo,” (Swahili for the biblical figure Zacchaeus – a tax collector). During his election, Ruto positioned himself as the champion of everyday Kenyans—the hustlers. Without results, and as life has only become more expensive for the hustlers, his slogan has routinely left him susceptible to criticism.  US Deficit Cobie and I often talk about the US deficit, here and on our podcasts. This is one of the biggest potential threats to the US economy as we know it – and when the chickens come home to roost and there is an implosion, those reverberations are going to be felt right across the world. One of the first things that would happen would be the devaluation of the US dollar – and its massive implications on the entire commodity market that is quoted in US dollars. When Donald J. Trump ran for president in 2016, the official Republican platform called for imposing “firm caps on future debt” to “accelerate the repayment of the trillions we now owe.” (LOL). When Mr. Trump sought a second term in 2020, the party’s platform pummeled Democrats for refusing to help Republicans rein in spending and proposed a constitutional requirement that the federal budget be balanced. Interestingly those ambitions were cast aside in the platform that the Republican Party unveiled this week ahead of its convention. Nowhere in the 16-page document do the words “debt” or “deficit” as they relate to the nation’s grim fiscal situation appear. The platform included only a glancing reference to slashing “wasteful” spending, a perennial Republican talking point. To budget hawks who have spent years warning that the United States is spending more than it can afford, the omissions signalled the completion of a Republican transformation from a party that once espoused fiscal restraint to one that is beholden to the ideology of Mr Trump, who once billed himself the “king of debt.” The U.S. national debt is approaching $35 trillion and is on pace to top $56 trillion over the next decade, according to the Congressional Budget Office. At that point, the United States would be spending about as much on interest payments to its lenders — $1.7 trillion — as it does on Medicare. Interestingly, South Africa External Debt reached USD 158.1 bn in Dec 2023, compared with USD 156.1 bn in the previous quarter (circa R2.2Tn). The data reached an all-time high of USD185.4 bn in Dec 2019 and a record low of USD 21.2 bn in Dec 1988. Our annual debt repayments are circa R200bn per annum. (Not having to pay that interest would go much of the way to funding the NHI – just saying). The combination of jittery inflation expectations and higher interest rates could make many of the ideas Mr. Trump talks about on the campaign trail either riskier or more costly than before, especially at a moment when the economy is running at full speed and unemployment is very low. Mr. Trump is suggesting tax cuts that could speed up the economy and add to the deficit, potentially boosting inflation and adding to the national debt at a time when it costs a lot for the government to borrow. He has talked about mass deportations at a moment when economists warn that losing a lot of would-be workers could cause labour shortages and push up prices. He promises to ramp up tariffs across the board — and drastically on China — in a move that might sharply increase import prices. And he has implied that interest rates would be much lower on his watch. That would be difficult for him to bring about because the Fed sets interest rates on its own and is insulated from the White House. But if Mr. Trump tried and found a way to successfully infringe upon the Fed’s independence and push down borrowing costs, it would risk reigniting growth and price increases. The policies Mr Trump is floating are escalations of things he has tried before. Tax cuts that swelled the nation’s debt pile, tariffs, immigration controls, and verbal attacks on the Fed haranguing it to lower interest rates were all cornerstones of his first term. Yet the economy’s evolution since makes it a potentially dangerous moment to repeat those policies in a more drastic fashion. It’s one thing when you run expansionary fiscal policy in a world with suboptimal inflation and an unemployment rate below full employment, but we’re now in very different times (but Trump’s base frankly doesn’t know better or doesn’t care).  FED and inflation watch With the SARB looking closely at the US when it comes to interest rate cuts, we have to keep monitoring when the FED will drop their rates – so that our beleaguered consumers can get some relief. Whether or not they should follow the FED is debatable – Europe has broken rank (and is, collectively, a far bigger trading partner than the US). Signs of lower rates in the near future, which would make it cheaper for consumers and companies to borrow, have typically been accompanied by market rallies. Stock indexes tracking larger companies have been buoyant in recent weeks. The S&P 500 has repeatedly set fresh records and is up more than 16 per cent this year. However, the Russell 2000 index, which tracks the smaller companies more sensitive to the fluctuations of the economy, has largely flatlined. US inflation fell faster than forecast to 3 percent in June, leading investors to increase bets on interest rate cuts and pushing yields on Treasuries lower. As the Federal Reserve debates how quickly to cut rates from their 23-year high, the year-on-year rise in consumer prices came in below May’s rate of 3.3 per cent. The increase was also lower than economists’ expectations. The dollar fell 0.6 per cent against a basket of currencies after the Bureau of Labor Statistics figures were published.  DXY INDEX The likelihood of a September cut rose to 100 per cent in the aftermath of the CPI data, compared with 72 per cent beforehand.Fed chair Jay Powell said last week that the central bank needed “more good data” before it could confidently lower interest rates. The Fed has so far kept its benchmark rate at a range of 5.25-5.5 per cent, the highest since 2001. After Thursday’s figures were published, yields on two-year US Treasuries, which track interest rate expectations and move inversely to prices, fell to a four-month low. The data also showed that consumer prices fell by 0.1 per cent on a monthly basis, compared with economists’ expectations of a 0.1 per cent increase. It was the first time since 2020 that monthly consumer prices had fallen. Petrol prices fell 3.8 per cent during the month, while the rise in housing-related costs slowed. Both factors contributed to the overall fall in inflation. It could be argued that housing costs had turned a corner. Core CPI, which strips out volatile food and energy prices, rose 3.3 per cent on an annual basis, less than the expected 3.4 per cent. The latest data reinforces Powell’s message to US lawmakers this week that the US economy is no longer “overheated”, with the labour market showing more signs of cooling. Powell stressed that officials would seek to avoid squeezing the economy too much by keeping interest rates too high for too long.  The snack index Sometimes it’s useful to look for signs of consumer behaviour, beyond boring old stats. PepsiCo reported weaker-than-expected revenue growth in the second quarter on Thursday as consumers dialled back snack spending. The junk food giant tempered its full-year outlook on a more challenged consumer. This reflects a broader consumer slowdown trend, particularly impacting working-poor households amid elevated inflation and high interest rates. Consumers appear to be ‘trading down’ to store-brands. It is suggested that the cumulative impact of several years of price hike has pushed consumers over the edge.  Market Dynamics It’s interesting to look over time at how markets develop. Markets are barometers for economic areas. In many cases, indices represent countries, but countries tend to start representing specific industries over time which tend to have specific drivers – which tie back to economics. South Africa for example is a commodity exporter. One can have a great quality company but in a poor economic area. Such companies either diversify globally or end up suffering due to bad economic policies. Here are US and European equity returns as an example:  The S&P500 and the Euro Stoxx 50 (50 largest corporates in Europe) have shown a strong correlation between 1990 and 2010 but much of that correlation has broken down since then. It shows that the past doesn’t necessarily repeat itself and relying on correlations can lead to errors of judgement. It’s no secret that the heady returns on the S&P500 has been underpinned by the AI phenomena but is that all that is causing this? Below is the performance of the S&P500 (green) and the equally weighted S&P500 (blue) since 2010:  Whereas the EuroStoxx 50 doubled in this period, the equally weighted S&P500 achieved a return of over 300%… an amazing achievement for US stocks relative to their European counterparts. The AI phenomenon has played a part but this is only part of the story. In an effort to jumpstart the US economy, the FED introduced Operation Twist in 2011. This is where they were selling short-dated bonds and attempted to buy long-dated bonds. The effect would be that long-dated yields would fall and this ushered in a FED bond-buying program of $ 1.7 trillion. Here you can see the effect of this manipulation on the bond market:  In Jan 2010, the yield on the US 30-year bond was at 4.5% whereas at the end of 2012 this yield had compressed to 2.8%. The net effect was a run-up in equities and a release of capital into the US economy or so they had hoped. The focus for corporates though was to rebuild their balance sheets so the trickle-down effect wasn’t felt in the real economy. As the FED balance sheet expanded, so did the value of the market. Corporates became wealthier harnessing the power of low taxes and easy money and this resulted in large-scale buybacks of stocks. To this day, the FED continues to stand at the ready with its Quantitative Easing tool whilst the inequality gap in the West continues to grow. This is why the EuroStox 50 and the S&P500 equally weighted index look so different. So what does the future look like? The treadmill the FED has created for itself has to continue but it stands the risk that it would need to do so at higher rates as the sovereignty of US bonds is questioned. The great monetization is going to come with certain conditions. Europe on the other hand is fighting to keep their economies growing. The NATO axis and its emphasis on self-reliance may prove to be good for GDP long term but this one can only wait to see. There really is no way of knowing how this will pan out and for this reason, diversification across ideas and economic blocks is never a bad idea. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed a little better at R17.95 (R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, 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).  The Rand/Pound closed at R23.32 (R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, 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 at R19.58 (R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, 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 again at $85.03 ($83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39, $90.87, $86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33.) The rising oil price and the R/$ exchange rate indicate we might get a small rise at the pumps next month.  Bitcoin was up at $59,760 ($56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $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: Should you change your investments with changing politics? NEW 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 |