| 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. Many of our clients come from referrals from our existing clients, often through the forwarding of this newsletter – so if there is anyone you know who might like to be on our database please share this newsletter. If you’d like us to contact them directly – our details are below. Market Watch The JSE All Share closed the week with record highs at 82 824.44. This gain was mostly driven by the banking sector, especially with Standard Bank up and FirstRand up. Meanwhile, the rand gained for a ninth consecutive day on Friday, which is always welcome news.  The S&P 500 regained its losses from the previous week, closing the week at 5 554.25. Strong economic data this week helped to ease investors’ fears about a looming U.S. recession, while also boosting the likelihood of a 25-basis-point interest-rate cut by the Federal Reserve next month.   The Rebound By the end of last week the S&P had regained all of its losses from the carry-trade flash crash. As of Friday’s close, the S&P 500 was up 0.4% in August, while the tech-heavy Nasdaq Composite was only marginally lower on the month.  Strong economic data this week helped to rebut investors’ fears about a looming U.S. recession while also boosting the likelihood of a 25-basis-point interest-rate cut by the Federal Reserve next month. One thing to consider about the stock market sell-offs is to look and see where the spare cash flows. The selling off of the yen carry-trade, often from treasuries didn’t just lie dormant in bank accounts. The answer is probably into the Magnificent 7 – trying to eke out every last bit of growth in this bubble.  When you see a bubble in the market, you can be pretty sure there is a fair amount of leverage behind this. High-risk speculators feed off this sort of high-risk/high-return game. Remember that they are likely to be all over the trade on an hourly basis, with built-in ‘stop losses’ (the algo automatically sells if the stock falls below a certain point). These trades are not for the Average Jo – but they are usually the ones left scrambling after professional investors have long since left. For Nvidia Corp., still the most exciting stock of the moment, the swings brought its market cap down by an eye-watering $902 billion in six weeks, only to regain $589 billion over the next five trading days. Volatility (VIX, the rate of buying and selling of stocks) was at a level only usually seen in major market crises.  China We keep on talking about China because as the second biggest global economy, and a major consumer of commodities and raw materials, its economic health impacts the global economy and stock markets. Post Zero-Covid I think most of us were waiting for China to revert to normal quickly – after all, as a centrally controlled economy if they can’t do it, nobody can. If you remember, in December 2022 China suddenly threw the Zero-Covid policy out – after brutally enforcing it for 2 years. No phasing out, one day it was at level 10, and the next it was gone. Now, 18 months later, China’s economic malaise is spreading to new areas that had previously defied gravity. Beijing’s favoured manufacturing sectors, the bright spots amid broad weak growth, appear to be running out of steam. After solid growth in the first quarter inspired optimism that Beijing had returned to a positive path after reopening from Covid-Zero restrictions, a series of economic data prints have disappointed. The indication in the current quarter (Q3)shows a slowdown in industrial production. Infrastructure and manufacturing investment tumbled, while the money going into property continued to contract, largely due to poor domestic demand. This chart shows manufacturing relative to infrastructure and property:   US Inflation The US consumer price index, a broad-based measure of prices for goods and services, increased 0.2% for the month, putting the 12-month inflation rate at 2.9%, its lowest since March 2021. Excluding food and energy, core CPI came in at a 0.2% monthly rise and a 3.2% annual rate, meeting expectations. A 0.4% increase in shelter costs was responsible for 90% of the all-items inflation increase. Food prices climbed 0.2% while energy was flat. Inflation data showed price pressures have continued to ease, while the latest batch of reports released last week helped ameliorate concerns that a slowing labour market and fading U.S. consumer would lead the economy into a recession. Below you’ll see the ‘Heat Map’ of US inflation which gives some nice insight into that crucial US CPI number.  Shelter made the headlines for being sticky. This is directly linked to the interest rate which is at a decade high and has impacted the entire housing market. US renters are used to either no rent increases or increases down at 1 or 2%, suddenly getting 5%-7% has gone down like a lead balloon, but renters have very few options. The heatmap needs to look ‘more green’ before we can consider the US inflation beat, nevertheless, the data is trending in the right direction. Though food inflation was soft on the month, multiple categories saw sizeable increases, most notably eggs, which were up 5.5%. Cereals and bakery items declined 0.5% while dairy and related products fell 0.2%.  Inflation readings have been gradually drifting back to the central bank’s 2% target. (There are some that feel that 3% might be the new normal). A report Tuesday from the Labor Department showed that producer prices, a proxy for wholesale inflation, rose just 0.1% in July and were up 2.2% year-on-year. Fed officials have indicated a willingness to ease, though they’ve been careful not to commit to a specific timetable nor to speculate about the pace at which cuts might occur. Futures market pricing currently points to a slightly better chance of a quarter percentage point reduction at the Fed’s next scheduled meeting, Sept. 17-18, and at more moves by the end of 2024. The next FED meeting, and the last for 2024 after September is on the 7th of November – the US Elections are on the 5th. Since the last consumer price inflation numbers for the US came out just a month ago, the political landscape has turned on its head and global markets have endured their biggest scare since the pandemic. On its face, it suggests that consumers are suddenly very confident that inflation is coming down. The fact that the least-educated seem most optimistic is also, if this number isn’t a fluke, a very positive indicator for the Democrats in the November election. Shifting political probabilities might also change expectations on inflation and rates.  UK and Inflation UK annual all-items CPI came in at +2.2%, which is a touch better than the +2.3% expected. As for the core (excluding energy and food) CPI, the annual print here was also a touch lighter at +3.3% vs +3.4% expected. As a reminder of the context, the rise in the annual all-items CPI inflation rate from June’s 2.0% owes largely to past favourable base effects in the UK’s energy price cap dropping out of the annual reading (in effect a smaller decline in annual energy prices in July vs June). More constructively, as regards the UK annual core CPI, this is the lowest level in getting on for almost three years, since September 2021. Annual wage growth continued to slow, with regular pay (excluding bonuses) running at +5.4%, the lowest rate in almost two years, since August 2022. (Wage growth is a notoriously sticky component of inflation – once increased a person’s wages do not come down, and the only way that this comes down is with job cuts). Against this, there was also a surprise fall in the unemployment rate, down to 4.2%. While that might give mixed signals about possible labour inflationary pressures ahead, there is still a lot of uncertainty when it comes to UK labour market survey data. (Bear in mind however that the UK’s data has been dodged with problems of a low response rate and is considered unreliable.)  US Elections, Oil and the economy “The economy, stupid” is a phrase that was coined by Jim Carville in 1992. It is often quoted from a televised quip by Carville as “It’s the economy, stupid.” Carville was a strategist in Bill Clinton’s successful 1992 U.S. presidential election against incumbent George H. W. Bush His phrase was directed at the campaign’s workers and intended as one of three messages for them to focus on. The others were “Change vs. more of the same” and “Don’t forget health care.” This adage must be one that both the Harris and Trump campaigns must be thinking about a lot right now. I should think that both teams ran the full range of emotions from glee to despair during the flash-crash at the beginning of the month. Clinton’s campaign advantageously used the then-prevailing recession in the United States as one of the campaign’s means to successfully unseat George H. W. Bush. The US elections have taken on a new energy with Biden stepping down and Harris becoming the de facto nominee for the Democrats. Harris is steadily climbing in the polls, but that could change if there is a shock to the economy or markets closer to election day. July’s political shocks (Biden stepping down) happened too early in the cycle to determine the election results. For that, you need a surprise in September or October, like the bankruptcy of Lehman Brothers on Sept. 15, 2008. A week earlier, John McCain had overtaken Barack Obama in the polls; by week’s end, he was behind again, never to catch up. The financial crisis had convinced the voters that they didn’t want the Republicans back. The price of ‘gas’ is a sensitive topic for most Americans and a topic that Trump pounces on at every opportunity. As you and I know, but perhaps Trump supporters don’t, is that the price of oil is dictated by the global market and as a capitalist society where oil is pumped by private enterprise, that oil is going to be sold at market rates. No amount of pumping more oil ( which is trump’s mantra) is going to bring down the price of oil for just the US – at worst it can lead to an oversupply and that might bring prices down (but OPEC would just counter with production cuts).  The price of oil is much more sensitive to global conflicts. With an increase in tensions in Ukraine (who have now invaded Russia and taken territory) and the Middle East Crisis still unresolved there is a greater chance of the price of oil rising. Iran could, for example, block the Strait of Hormuz. This would have a devastating impact on the flow of oil out of the Persian Gulf and prices would immediately sky-rocket. The US is self-sufficient in oil, so they would still have their gas – but the prices would rise – and the incumbent President would be ‘blamed’  .  Built to last This past month allowed me to look at how our Rexsolom funds perform during a market downturn. We follow an investment process rather than attempting to invest in an index. This has been tough as market indices have done very well relative to stock pickers like us, due to the mega-cap phenomenon that has been playing out on the S&P500. But when the volatility set in earlier this month it gave us the opportunity to stress test portfolios and to measure their volatility against what the market was offering up. For example, our Worldwide Flexible Fund lost -0.6% between the end of June and the 7th of August in Dollar terms relative to the S&P500 which saw a loss of -4.8%. This firstly shows that the fund is different from the index. Its returns will be different and so will its long-term volatility characteristics. I mentioned that we are process-driven. We attempt to value companies that first have quality characteristics. This means that we score a company for its ability to defend its market share, without political interference, using its own capital with a long-term-minded management team amongst other factors. The score of each company allows us to assess various businesses on a continuum. The quality score allows us to put a specific business’s cash flow, ROIC and profits into perspective. This view of each company we assess allows us to delve deeper into qualitative data where it is required, but it also provides a view of each company and how it fits into its economic environment. The only other question we have to ask is what we are prepared to pay for the inherent characteristics of a business. We know firsthand that paying too much for a company leads to a lacklustre return so this component of the valuation is important. The management of the investment process is relentless. We for example have two formal investment team sessions each week where the data releases are discussed, models are updated and we consider the weighting of individual counters in a portfolio. No small task as the weighting for each share needs to reflect its own quality and volatility characteristics.  Jurrien Timmer, an analyst at Fidelity produced the above chart last week. It shows the market performance of the S&P500 during various soft-landing periods in history. A soft landing is where central banks, most notably the FED, have engineered from a monetary perspective the avoidance of a recession. It’s not always possible, but the inflation crisis which started two years ago could have had a recession to bear. So far so good. But history also shows (apart from 1994) that soft-landing bull markets tend to be short as is evident in all the other periods. Will this time be different? No one knows and for this reason, volatility could become more elevated as both bulls and bears attempt to find the correct level of a market. Happily, our volatility scores show that we can weather this storm. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.85 (R18.32, R18.26, R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09).  The Rand/Pound closed at R23.13 (R23.39, R23.28, R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62)  The Rand/Euro closed the week at R19.70 (R20.01, R19.94, R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35)  Brent Crude: closed the week down at $79.09 ($79.43, $77.56, $85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39)  Bitcoin closed at $59,152 ($60,847, $61,903, $59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135). Articles and Blogs: Weathering the storm NEW 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 |