| 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 managed to hang onto those post-election gains and is taking a breather.  The Nasdaq has retreated off its recent highs – but it is too early to predict any kind of slowing.   Inflation, interest rates and Banks Stubborn inflation is taking a toll on the US’s largest banks. On Friday, Citi, JPMorgan Chase and Wells Fargo released earnings that were stuttered with indications that despite recent signs of cooling inflation the economy continues to be a drag. JPMorgan and Wells Fargo reported that their overall deposits fell and they had to hike the average interest rates on checking and savings accounts — good news for borrowers but not for the banks themselves. Major banks, like other investors, have had to contend this year with high interest rates. While higher rates help lenders by allowing wider potential profit on loans, they also deter customers from taking on new debt, a big source of revenue for banks. On the other hand, the financial sector was one of the biggest beneficiaries of the GNU change here in RSA. (On a side note, Sasfin has decided to delist).   Trump 2025 the dollar and the FED One of the hot debates on Wall Street this election cycle is how Donald Trump would deal with the FED if he is re-elected and, in particular, if he would fire or demote Jay Powell as chair. In an interview conducted before last weekend’s assassination attempt, Trump said that he did not plan to fire Powell, allowing him to serve out his term. But he also added some drama by making the statement conditional, saying that he would keep Powell on “especially if I thought he was doing the right thing.” That said, it’s not clear that Trump could legally fire Powell even if he wanted to, but Trump’s phrasing seemed to imply that he believed he had a choice. Trump appointed Powell but turned on him over interest rate policy. The former president was displeased when the central banker refused to cut rates to bolster economic growth. President Biden reappointed Powell to a new four-year term that started in 2022. There have been questions about whether Trump would fire Powell. Rates are much higher now than when Trump was in office. Given his history of criticizing Powell’s policies, investors and economists have been wondering if Trump might actually try to fire the Fed chair if he were to win in November. Trump still wants low rates, eventually. Asked to describe his philosophy for the economy, Trump talked about “low interest rates and taxes.” But there’s a hitch: The Fed sets rates independently of the White House. Some conservatives have suggested that Trump could try to wrestle Fed policy under White House control, but Trump did not talk about that in this interview. Instead, he spoke about bringing down inflation, which would in turn allow the Fed to cut borrowing costs. Trump does not want the Fed to move on interest rates until after the election. Even if Trump wants lower borrowing costs, he called rate cuts before the election “something that they know they shouldn’t be doing.” (I wonder why) That’s at odds with market expectations: Futures traders this morning were pricing in a 98 percent chance of a rate cut in September, with a second to come on Nov. 7, two days after the election. Those expectations have helped fuel a market rally, with the S&P 500 up 10 of the past 11 sessions, and notching 38 highs this year. (When interest rates come down, funds needing to be invested generally find a home in equities). Trump faces another conundrum with the dollar. The Republican candidate and his running mate, Senator J.D. Vance of Ohio, have both railed against a strong dollar as a threat to corporate America’s global trading prowess and to jobs, especially in manufacturing. Yet that position appears to be at odds with the Republican Party’s official platform of preserving the greenback as the world’s reserve currency. The DXY,a good measure of dollar strength has been trading in a fairly tight band of late, as you can see from the graph below.  The DXY was significantly lower during Trump’s first term, staying below 100, having said this, during Obama’s term it was lower still. Is this really a partisan issue?   |
Penny stocks – a different way to invest, and different investor Maybe saying that for most of the past 10 years, you could get 10 Russell 2000’s for every one S&P 500 – and now it is 16 is silly? But everyone loves a sale! The Russel 2000 is the hunting ground for day and penny stock traders, where small movements in the price can translate into big percentage returns.  The combination of underperformance, low liquidity, especially in the US summer, and underinvestment could be a powerful combination for small cap outperformance! (as of this weekend’s report, the smallest 250 companies in the S&P 500 had an average year-to-date return of 0%!) Maybe these small caps have just missed out?  Interest rate drops, FED Rather like here in RSA, the FED (their equivalent to our Reserve Bank) is theoretically separate from the government and has the responsibility of managing the monetary policy (interest rates). Whereas the government is responsible for the fiscal policy (taxes) – the FED chair is nominated by the US president and serves 4 years. (We have gone into that above). The FED is trying to engineer a ‘soft landing’, and over the last decade has actually been fairly effective at using QE to moderate the volatility in the economy and to all intents and purposes (apart from the Covid black-swan event) has managed just that. Can they do so indefinitely? -The Fed has never actually managed to pull off an engineered soft landing- at least not at any time in the last 45 years. In actual experience, this is what happens: The Fed denies there is a recession approaching well until after the recession has begun (just like they did with inflation). Then, the Fed cuts interest rates after unemployment has already begun to march upward. Another problem with the narrative is that the Fed is not motivated simply by concerns over the state of employment and the economy. Yes, the Fed would have us believe that it cares only about an unbiased reading of economic data and that Fed policy is guided by this alone. When the Fed claims to be “data-driven” this is what it means. In reality, the Fed is deeply concerned with something else entirely: keeping interest rates low so that the federal government can continue to borrow enormous amounts of money at low yields. The more the federal government adds to its enormous debt, the more pressure there will be on the central bank to keep rates low and send them lower or even higher. Note, for example, that over the past 30-plus years, Fed rate cuts did not cap off a “soft landing,” but actually preceded the most vigorous period of job losses. As can be seen in the graph, cuts to the federal funds rate come several months before sizable increases in the unemployment rate. Sharp rate cuts began in 1990, for example, and the 1991 recession soon followed. Similarly, the Fed began to cut rates in late 2000, and then the unemployment rate soon accelerated upward. This again happened in 2007 when unemployment began to mount shortly after Fed rate cuts. One could almost argue that they caused the recessions by keeping the rate too high for too long.  Sorry if we keep on focusing on the US debt – but when those chickens come home to roost the entire globe is going to feel it. Interest costs over the past few years have been kept somewhat under control by the fact that federal debt does not mature all at once. In 2024, however, nearly 9 trillion dollars worth of federal debt will mature. That will need to be replaced with new debt which will need to be paid off at higher interest rates (i.e., at higher yields) than the maturing debt. Combined with the $2 trillion or so in new debt that will be added in 2024, the Federal government will need somebody to buy more than 10 trillion dollars worth of federal debt. That is a whole lot of debt and the Fed will be expected to help the federal government somehow keep interest rates from rising further. This will require the Fed to enter the marketplace and buy up large amounts of debt in order to push down yields. This is not a problem I would wish upon any US President (except one). Eventually, the can can’t be kicked any further down the road and the problem has to be dealt with, but if the problem implodes in the next 5 years we might be entertained with more novel solutions like injecting yourself with bleach.  Online Retail Wars Many South Africans will be familiar with Shein and Temu, huge Chinese online retail companies that have managed to get around the South African logistics hurdle, and often have your goods to your door quicker than Takealot and way quicker than Loot (who are so far behind the curve they are probably ripe to be taken over). Even with customs duty, goods from Shein and Temu are often 25% to 50% cheaper than the equivalent from Takealot. Amazon SA is still in soft launch – and really just in a price war with Takealot. It is so-called Prime Week this week (but Amazon is notorious fro rising prices before the sale so everyone thinks they are getting a deal on the day. Takealot is known to have done this in the run-up to Black Friday. You can see in the graph below how these retailers have caught up with Amazon. According to this data, Pinduoduo (which is B2B and owns Temu) will only be 13 per cent behind Amazon in terms of gross merchandise volume in 2024. To put this in perspective: in 2019, Amazon’s gross merchandise volume was more than twice as large as that of Pinduoduo. The Temu app went online in the U.S. in autumn 2022, where it went straight to number one in the download charts. While Temu’s global goods volume of around $30 billion is still quite small compared to the $389 billion of amazon.com, sales forecasts are pointing upwards. Shortly after the release of the shopping app Temu in autumn 2022, Pinduoduo renamed itself PDD Holdings and has since served as the holding company for both platforms. In 2023, PDD Holdings recorded record sales of $34.9 billion. Compared to the previous year, this corresponds to sales growth of almost 90 percent, which, according to the company, is due to an increase in revenue from online marketing services and transaction services.   To tech or not to tech Last week saw an interesting change in markets after large tech names sold down in favour of small caps and non tech names. Below are the price movements of the QQQ Trust (Blue) which tracks the movement of technology companies relative to the S&P500 small cap Index (Purple) and the equally weighted S&P500 (orange) (S&P500 in green). The other indices are experiencing net inflows whereas tech has experienced an outflow. Will the price jump in AI last? No one knows but I do point out the price movement in the QQQ over the last 3 years. Without the AI narrative, tech underperformed the other markets until the beginning of 2023. This gives an indication as to how volatile this sector can be, and that downside volatility can happen despite the current narrative.  The QQQ is the largest ETF available at $300 billion as investors use this as a proxy for the AI revolution. The companies that need to buy this AI and then use it in interfaces to better their companies or create more efficiency are represented by the other bubbles below:  Look at the size of the QQQ relative to the other sector ETFs. Somehow there is a disconnect between the users of technology and the ones that are manufacturing it. This is obvious, unless the demand for technology continues to ramp up, but at some point the chip manufacturers will run out of runway. This is perhaps what markets are becoming concerned about. There is added uncertainty of a change in political landscape in the US and its implication for technology companies. Donald Trump has reservations in aiding Taiwanese defence (home to TSMC) whereas the Biden administration wants further restrictions on ASML as it continues to do business with China. This stock was down 11% at some point in the week. So the short answer is that technology and the AI play isn’t just a buy and forget strategy. There is a lot that can change the fortunes in this space and it can happen quickly. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar is still volatile now at R18.35 (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 also closed down at R23.70 (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 R19.96 (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 slightly again at $85.13 ($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.)  Bitcoin was up at $64,031 ($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 |