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| Market View , The JSE This week, the Johannesburg Stock Exchange (JSE) continued its strong performance, with the All Share Index (ALSI) sustaining levels above 91,000 points, reflecting an advance of over 8% for the year to date, 21,8% y-o-y  Banking, retail, and property stocks were buoyed by investor optimism over an anticipated South African Reserve Bank (SARB) repo rate cut in the coming month (Thursday 31st July), on the back of lower-than-expected inflation (due out on 23rd July)—now at its lowest in nearly five years. Several major counters, including Vodacom, OUTsurance, and Momentum, reached new 52-week highs. However, the market has not been without volatility, with some shares, like Aspen Pharmacare, experiencing sharp corrections. The rally on the JSE this week comes amid subdued gold stocks, despite their strong run earlier in the year, while continued global economic factors, such as US trade policy and weaker oil prices, favoured local equities by helping to curb inflation. Is it all mag 7 again? Fewer stocks are setting new highs alongside the S&P 500 Index, an unwelcome sign for traders worried about the market’s increasing concentration in a cluster of those Mag 7 we talk about so often. Having said that, retail sales are having a ‘moment’ too:  As the equity benchmark bounced to fresh records in recent weeks, the number of companies traded on the New York Stock Exchange making new highs outpaced those making new lows by only 88. That’s been a harbinger of poor performance: since 1972, a difference of 100 or less while the S&P 500 broke out has resulted in subpar returns for the index, on average, over the next 12 months. It’s far from a certainty, but worth watching. The Magnificent Seven Index of megacap stocks is up 36% from its April (Liberation Day) lows, compared to the S&P 500’s 25% advance. Overall, the S&P 500 is up 6.16% for the year, but 219 member stocks are down. The rally is being carried by the Magnificent Seven, which foreign investors have not sold because these companies have no equivalent outside of the US. Whenever you get a share concentration like this, there is significant downside risk for the entire market if this cools, or, heaven forbid, comes off the rails (there is no indication that this is on the cards).  Will he, won’t he (Fire Powell)? Jerome Powell, as most of you are probably aware, is the Chairman of the Fed, a position appointed by the President of the USA. With our Reserve Bank, the FED is an independent body. Jerome Powell’s current term as Chairman of the Federal Reserve is set to end in May 2026. He was reappointed and sworn in for his second four-year term as chair in May 2022, which will conclude in May 2026. However, Powell remains a member of the Federal Reserve Board of Governors until January 31, 2028, so he could stay on the Board beyond his chairmanship if he chooses In my opinion, having an independent central bank is a good thing, but let’s just revisit the pros and cons: The independence of the Federal Reserve (the Fed) (and the SARB, too, frankly) is a deeply debated issue in economics and politics. (For those etymologists among our readers, it is called the Fed and not the FED because, unlike the SARB, it is not an acronym but a nickname.) Most experts and international evidence point to significant advantages of central bank independence, alongside some important criticisms and risks. * Focus on Long-Term Economic Health: Independence allows the Fed to make decisions that prioritise the long-term stability and health of the economy, rather than those that might provide short-term benefits to politicians or political parties, especially during election cycles. This is irritating Trump enormously. * Better Control of Inflation: Countries with independent central banks tend to experience lower and more stable rates of inflation. Free from political pressures to boost the economy in the short term, the Fed can implement policies that prevent runaway inflation. * Credibility and Market Confidence: An independent Fed is more likely to be viewed as credible by financial markets and the public, making its policies (like interest rate adjustments) more effective. * Even Trump has recognised that firing Powell, which he would dearly love to do, will cause market disruption. You can see this in the graphs below when Trump was (yet again) floating the idea of firing Powell. * Expert-Led Policy Decisions: Decisions are led by economists and specialists rather than by individuals influenced mainly by political considerations, resulting in data-driven policies aimed at economic stability. * Protection from Populist Pressures: Political leaders, motivated by electoral concerns, might push for expansionary monetary policies (such as low interest rates) that can temporarily reduce unemployment but lead to high inflation and economic instability later. Independence shields the Fed from such pressures. This is similar to the pressure we have seen from the ANC’s populist agenda from time to time.  On the other side of the equation, one can make the following counterarguments: * Reduced Democratic Accountability: The Fed’s leaders are not directly elected by the public, yet their decisions deeply impact jobs, the cost of living, and borrowing. Critics argue that this lack of direct accountability is problematic, especially if decisions benefit certain groups over others. Remember that Powell was appointed by Trump (something that he seems to forget of late). * Risk of Detachment: Fed policymakers, often professional economists, may lack a connection to the lived realities of ordinary Americans, potentially focusing narrowly on inflation or employment data at the expense of broader social or regional issues. This is the argument that Trump is focused on because it plays into his populist rhetoric. * Coordination Challenges: During economic crises, optimal results can sometimes require tight coordination between monetary policy (Fed) and fiscal policy (government). Independence can make collaboration more challenging in urgent situations, although past crises like 2008 have shown that successful coordination is possible. * Potential Overreach: Some worry the Fed’s independence could allow it to take on broader powers without sufficient external checks, especially following financial crises when its role expands. What about the potential fallout if Trump were to fire Powell? * It would not guarantee lower policy rates, as monetary policy decisions require a majority vote of the FOMC (and no, Trump cannot fire them all). * Government financing costs could actually increase, as bond yields rise as a result of higher long-run inflation expectations and a greater risk premium related to inflation and Fed independence. * Larger-than-appropriate cuts would likely feed through to higher inflation. * And Powell’s removal could lead to volatility in equity markets (as witnessed very briefly last week). Who would benefit from lower interest rates? There’s always room for argument over how low rates should be, although it’s hard to find any justification for Trump’s preferred rate of 1%. If there’s one group that can make a good case for lower rates, it’s consumers, particularly those paying off mortgages. Mortgage rates have retreated from multi-decade highs. But it’s getting hard to remember that it’s less than five years since the average 30-year mortgage rate was below 3%:  US 30-year mortgage rates  Is the US economy really in good shape? Despite the (nanosecond) market wobble of Trump’s remarks on Powell, there are still strong signs that the world’s largest economy is holding up, lifting stocks almost immediately thereafter. There have been some strong signals coming out of the US stats, and investors are still piling into the markets. The dollar climbed. Short-dated bonds fell. The crypto industry got a major win after Congress passed the stablecoin bill. Economically sensitive shares outperformed after solid retail sales and a drop in jobless claims, with the S&P 500 briefly topping 6,300 and closing at an all-time high. The Russell 2000 gauge of small firms rose 1.2%. Tech gained as a bullish outlook from Taiwan Semiconductor Manufacturing Co. bolstered confidence in artificial-intelligence spending. Netflix Inc. reported strong earnings and raised its forecast (their restriction on password sharing paid off, only because they have such a strong product offering. Customers are inclined to switch streaming services (Apple TV, Disney, Prime, Hulu, etc) on and off, but Netflix stays as the staple. The dollar halted its steady decline and resumed its advance for July, which is set to be its best month in 2025.  Treasury two-year yields rose while those on 30-year bonds were little changed. Money markets continued to price fewer than two Fed rate cuts this year. US retail sales saw a broad advance in June, tempering concerns about a retrenchment in consumer spending. Meanwhile, applications for US unemployment benefits declined for a fifth straight week to the lowest since mid-April, showing a resilient job market. The consumer came back to life in June, so is the pressure on the consumer over? Can the rates stay higher for longer? Should the FED continue to wait and see what actually happens to the tariffs? If tariffs start to weigh on consumer spending in the months ahead, that could present risks in the second half of the year, but for now, consumers are still spending, and stocks can continue to rally, particularly if earnings reflect continued underlying strength in America’s largest engine: the consumer.  |
| Inflation in the US – not just sticky, maybe baked in? In an inconvenient coincidence for Trump (or perhaps because he knows what it means), US inflation is back on the rise (latest data 15/7). Underlying US inflation rose by less than expected for a fifth month in June, even as the details signalled companies are beginning to more meaningfully pass some tariff-related costs to consumers.  US CPI y-o-y he consumer price index, excluding the often volatile food and energy categories, increased 0.2% from May, according to the US Bureau of Labour Statistics. While a decline in car prices helped keep a lid on the figure, goods categories exposed to President Donald Trump’s levies, including toys and appliances, rose at the fastest pace in years.  There’s always room for argument over how low inflation should be; is it still the targeted 2%? With new, higher tariffs now in force for three months, there was one question that the June consumer price index numbers needed to answer: Are tariffs at last beginning to push up inflation? The answer is an unsatisfying “probably.” Much remains unclear, and there is plenty to argue about, but the data taken in the large make it impossible for the Federal Reserve to cut rates without a clear improvement. As has been the case for a while, inflation is dominated by the services sector. Food inflation is also returning, although in a much smaller way than during the spike of 2021 and 2022. This, of course, could change quickly if food tariffs from Mexico and Canada are imposed. Falling energy prices have been keeping the headline numbers down. Tariffs would raise their ugly head most obviously in core goods, excluding food and energy. Core goods inflation had been negative for many years before the post-pandemic spike. Its current rate is the highest in more than a decade, outside of that spike.  Coffee and Brazil We don’t often talk about commodities, but coffee is a particularly interesting one at the moment. For coffee lovers in the States, Trump couldn’t have picked a worse time to impose tariffs on Brazil.  Brazil is the world’s largest coffee producer—accounting for roughly one-third of global output, for the 2025–26 cycle, production is projected around 62–65 million 60 kg bags, with arabica declining ~6–13% (to ~38–41 million bags) and robusta growing ~7%, reaching ~24–25 million bags.  You’ve probably heard of these two types of Coffee, arabica and robusta, perhaps also understanding that arabica is the ‘better’ type, and more expensive, so indulge the botanist in me while I give you some background: Arabica (Coffea arabica): The fancy one. Grows at high altitudes. Represents about 60–70% of global production. Robusta (Coffea canephora): The tough, bitter cousin. Grows at lower altitudes, is more disease-resistant. Makes up about 30–40% of the world’s coffee. Unfortunately, there has been a severe drought across Brazil—which is worse than any since the 50s, and has hit agriculture hard, including coffee. Irrigation has become essential to maintain harvests, particularly in arid regions. Climate-change effects are pushing farmers to adopt advanced techniques: agroforestry, drought-resistant varieties (robusta), and higher-altitude plantations. Tariff Turbulence: A looming 50% U.S. tariff on Brazilian coffee (planned from August 1) is causing exporters and traders to rush shipments to beat the deadline, reroute vessels, and shift coffee destined for Canada/Mexico into the U.S. market. Despite weather-based shortages, coffee prices dipped recently on forecasts of rising supply, but U.S. futures have rebounded sharply with the tariff news Brazil is piloting drought-resistant arabica lines, deeper tree integration, and research into new varieties like Coffea stenophylla ( a rare species from West Africa), better suited to warming climates.  Arabica futures doubled from around $1.50/lb in early 2023 to peaks of ~$4.24 in Feb 2025. Robusta also spiked ~25% in 2025. Major producers like Brazil, Vietnam, Colombia, and Ethiopia have faced climate-related hiccups, drought, heat, even logistical/piracy issues, and tightening supply. Brazil’s 2025–26 Arabica crop deficit is projected at ~–8.5 million bags. You’ll notice that Kenya, the land of my birth, is not on the list at a meagre 0,5% of production, but what it loses in terms of quantity it makes up in superior quality, commanding significantly higher prices and much sought after in speciality markets. (You might remember in the movie ‘Out of Africa’, Karen Blixen lived on a coffee farm.) President Trump proposed a 50% tariff on Brazilian coffee, triggering immediate spikes (~1–1.8% in futures) and threatening to push retail prices even higher. The tariff takes effect vendor-to-vendor around Aug 1, 2025, and could drive U.S. roasters toward more expensive origins. Consumers are seeing 12 oz bags exceed $20, café prices climbing, and a shift to brewing at home or cheaper blends (blending with robusta for example). World Bank forecasts Arabica prices up ~50% year on year in 2025, easing about 15% in 2026 as production rebounds – potentially just leaving the US with much higher prices.  Deflation and Stagflation We’re all way too familiar with inflation and its effects on global economies, but why is deflation a problem? Reduced Consumer Spending: As prices fall, people expect goods and services to become even cheaper in the future and may delay purchases. This leads to less spending, which reduces overall demand in the economy.Business Challenges and Rising Unemployment: Lower demand means businesses earn less revenue. To compensate, companies often cut costs by reducing wages or laying off employees, leading to higher unemployment and weaker economic growth.Debt Burden Increases: Deflation increases the real value of debt. Because debt amounts stay the same while wages and prices fall, it becomes more difficult for households and businesses to repay loans. This can result in more bankruptcies and financial instability.Debt-Deflation Spiral: Falling prices and weak incomes cause more defaults, which further erode confidence and decrease demand. This can spiral into a cycle of deeper recession and more deflation.Discourages Investment: The expectation of lower prices and profits discourages businesses from investing in new projects or expanding operations, which slows down innovation and productivity. This is the scenario facing China at the moment. What Is Stagflation? Stagflation is an economic condition that combines three major problems at the same time: • High inflation (rapidly rising prices) • Stagnant or slow economic growth • High unemployment This scenario is unusual because, under traditional economic theory, high unemployment and high inflation do not usually occur together; typically, when one rises, the other falls. It is a scenario that has been at the back of our minds since the post-pandemic inflation spike. Key Characteristics: • Prices of goods and services increase persistently (inflation). • The economy shows little to no growth, sometimes even shrinking. • Many people are out of work or find it harder to get jobs Why Is Stagflation a Concern? Policymakers face a dilemma: Actions to control inflation (like raising interest rates) can further hurt growth and employment, while measures to boost jobs and growth (like increasing government spending) can worsen inflation. Stagflation reduces purchasing power and living standards. It complicates economic recovery and can persist for years if not addressed properly. Stagflation became widely known during the 1970s oil crisis, when supply shocks from rising oil prices caused economic growth to slow and unemployment to rise, even as prices kept going up. We haven’t really seen much of it since, but symptoms surfaced elsewhere, such as Japan in the early 1990s, and to a lesser extent during short periods in the European Union and some emerging economies in response to oil price or commodity shocks. However, none matched the scale and intensity of the 1970s crisis in the US and UK.  How is China and the economy reacting to the tariff war? Beijing’s economic growth story is showing a fragile resilience in the face of growing US and global efforts to “de-risk” from China. The US has woken up to China using other Asian countries as transit hubs, and those products are being tariffed as if they came out of China. Second-quarter gross domestic product growth in China was modestly lower than its previous advance, but it remains on course to meet an ambitious year-end growth target of 5%. (Numbers coming out of China should always be treated with some scepticism, to be honest.) Despite tariffs, exports continue to be the main driver. In light of the tariff risk, that underscores the fragility of this expansion, especially as the property sector’s problems drag on. As we have mentioned before, China’s trade balance with the country peaked in 2022. That suggests that the trade realignment is already underway. Price discounting is eroding China’s terms of trade and intensifying disinflationary pressures. That has now turned into outright deflation. The GDP deflator, which tracks average price changes over time, fell 1.2% year-over-year in its ninth consecutive quarterly drop. That’s the longest streak since records began in 1993, and the sharpest since the Global Financial Crisis year of 2009:  Turning this around will take more than exports. Further, US importers are building stockpiles while the US-China trade truce lasts. That could weigh on exports later this year, a risk that policymakers can’t afford as Washington pushes on with tariffs. Attempts to boost domestic consumption have largely failed to deliver, with retail sales now slowing down. As Gavekal Research’s Wei He observes, softening domestic demand will force the question of whether incremental stimulus is justified. What are policymakers in China doing to try and turn this around? For the first time in nearly a decade, reinforced speculation that imminent help for the property sector may not amount to much. The meeting communique called to “steadily promote the renovation of urban villages and dilapidated housing,” but said that China is shifting to “a stage in which the focus is on raising the quality and efficiency of the existing stock”, comments that do not imply a major stimulus in the offing. As with all communication from the CCP, you have to read between the lines and obfuscation. Given the structural and demographic headwinds, expect any property easing in the second half to be measured rather than aggressive, given that there is no fundamental or demographic basis for stimulating a housing demand upswing in China.  What Is Gerrymandering? In summary, Gerrymandering is the manipulation of electoral district boundaries for political gain, leading to distorted representation and challenges to democratic fairness. Trump opened the conversation last week with this off-the-cuff comment. The Democrats, specifically California, clapped back with “Anything you can do, we can do better”. Its primary purpose is to maximise the effectiveness of supporters’ votes and minimise that of opponents’, influencing which party or group wins more seats in a legislature, even if they don’t win the majority of votes across the state or country overall.  The term originated in the early 19th century when Massachusetts Governor Elbridge Gerry signed a redistricting bill that created a strangely shaped district. Critics said the shape resembled a salamander, and the combination of “Gerry” and “salamander” formed the word “gerrymander”.  How Gerrymandering Works There are several main tactics used in gerrymandering: * Cracking: Spreading voters of one type (e.g., opposing party) across many districts so they are never a majority in any, diluting their power. * Packing: Concentrating voters of one type into as few districts as possible, limiting their influence elsewhere while conceding those districts to the opposition. * Hijacking: Forcing two incumbents to compete by merging their districts. * Kidnapping: Moving an incumbent’s home into a different district, making re-election harder.  Types of Gerrymandering Partisan Gerrymandering: Designed to give one political party an advantage over others. Racial Gerrymandering: Manipulates boundaries to weaken or concentrate the voting strength of racial or ethnic minorities. Incumbent Gerrymandering: Keeps current officeholders in power by carefully crafting district lines. Why Gerrymandering Matters * Skewing election results, allowing a party to win more seats than justified by its vote share. * Making many districts uncompetitive (“safe seats”), reducing accountability. * Diluting the voting power of certain communities, sometimes undermining civil rights. A historical example is depicted in the famous “Gerry-Mander Map” from the early 1800s, which visually illustrates the bizarre shapes gerrymandered districts might take. Author: Dawn Ridler  Super AI 2 I thought it might be a good idea to do a second piece on AI, given that events are unfolding quickly. Last week, Meta announced that their intention is to build the most elite and talent-dense super intelligence team in the industry. They have the money to do this, but time is running out. In this race, they are hoping to bring online a 1GB+ supercluster called Prometheus and it will be live in 2026. These clusters, and yes, there will be more than one, are nothing more than a supercomputer which allows for high-level computing to handle large language models, AI systems and queries. (The 1GW refers to the power required to run the supercomputer, which spans a massive complex.) In essence, you will access one of Meta’s applications on a device and depending on your inputs, either the device will provide a low-level answer or send the query to the Supercluster at Meta. This will then allow your device to provide information-rich options, which will allow you to cut through information clutter quickly to ascertain applicability. If 1GW+ computing power isn’t enough .. don’t worry Meta is already working on a 5GW version which will roll out over the next few years. As I said in last week’s note, all of this costs a lot of money, and if you don’t have deep pockets, you cannot even hope to join this race. In another development, Open AI’s deal to purchase Windsurf fell flat after tensions arose because Microsoft would have access to Windsurf’s intellectual property. Remember that there is a partnership between OpenAI and Microsoft, and it is this that made them uncomfortable. This, though, led to Google spending $2.4billion hiring Windsurf’s CEO Varun Mohan and co-founder Douglas Chen amongst a range of other top researchers. Again, I say that one needs deep pockets to be in this race. The rest of the Windsurf people will now end up at Cognition, the company which founded the coding agent Devin. Cognition hopes to integrate Windsurf’s development environment with its autonomous coding agent Devin, creating a more powerful tool for developers. The good news for Cognition is that they also acquired some Revenue and 350 enterprise customers in the process. You can see how different players are positioning themselves to exploit a specific area in AI. Already, teams have been split into user interface specialists, developer tool applications or large learning modules which span most areas of life. And this is where some disagreement emerges. The whole notion around OpenAI is that because it is open, the best development ideas can be put into collaboration, which will help achieve outcomes the quickest. But this flies in the face of creating intellectual property, the very thing that makes a company valuable. Certainly, when it comes to areas such as large language models, I can see why collaboration is important. The New York Times reported last week that Meta is looking to abandon their open-source AI Model, Behemoth, in favour of a closed model. If they are going to spend the money, surely they want to maximise their chances of profiting from it. And this flies directly in the face of what the original architects of AI wanted to achieve. My bet is that AI increasingly follows a closed model. This isn’t a bad thing, but it will create distinct winners and losers in this race. This is what all large-scale revolutions have had to effect in the past. Why would it be any different this time around? Author – Cobie Le Grange EXCHANGE RATES:  The Rand/Dollar closed at R17.72 (R17.90, R17.58, R17.89, R17.99, R17.92, 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,)  The Rand/Pound closed at R23.76 (R24.22, R24.08, R24.49, R24.22, R24.35, 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, )  The Rand/Euro closed the week at R20.61 ( R20.93, R 20.70, R20.91, R20.74, R20.68, 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, ,)  Brent Crude: Closed the week $69.21 ($70.58, $68.27, $67.39, $77.27, $74.38, $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).  Bitcoin closed at $118,214 ($117,871, $108,056, $107,461, $103,455, $105,017, $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, ). Articles and Blogs: Difficult Financial Conversations NEW Kick Start your own Retirement Plan NEW You matter more than your kids – in retirement 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 |