| Cobie and I like to keep this newsletter and our podcast evolving. We’d love to hear from you about what you like or dislike, what you’d like more or less of – both in the newsletter and podcasts. Do you have topics you’d like to hear a blog on? Do other people’s wealth journeys interest you? 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 Well, that was an interesting month! Markets, which looked like they were cooling at the end of last month, got a huge wake-up with the flash crash, but quickly recovered their poise, and seem to have forgotten that they were thinking of cooling down a tad. Nvidia ( which we speak about more later on) was a bit of an outlier. The JSE is still hitting new highs, and still up 12,4% for the year steadily climbing since the announcement of the GNU.  The equal-weighted version of the US S&P500 equity index (which evens out market cap heavy stocks) notched up a fresh record high on Thursday. In Europe Thursday with the pan-European STOXX600 equity index closing just a hair’s breadth beneath its all-time high that it hit back in May.   US GDP – Is the economy slowing? The US Gross Domestic Product (GDP) was released last week and pushed back further on recession fears that worried markets, in particular just a few weeks ago. The second estimate of US Q2 GDP was even more positive than the first estimate that was released late last month. The latest US GDP print for Q2 was revised up to a q-o-q annualised growth rate of +3.0% and recorded above the preliminary first reading for Q2 of +2.8%. You can see this in the graph below:  Looking at the data another way, the Q2 year-on-year print now stands at +3.1%. All in all, these numbers really do not support a near-term US recession outlook, especially when you consider that the US Federal Reserve’s so-called ‘longer-run’ GDP assumption for US annual GDP growth is at +1.8%. Compared to the first quarter, the acceleration in real GDP in the second quarter primarily reflected an upturn in private inventory investment and an acceleration in consumer spending. These movements were partly offset by a downturn in residential fixed investment. A drop in interest rates expected this month will put more money in the pockets of consumers, buoying these numbers even more. Anyone hoping for a meaningful thawing in the frosty relationship between China and the US could be in for a long wait. This past week has seen US National Security Adviser Jake Sullivan hold three days of talks in China, including a meeting with China’s President Xi Jinping. Of particular note, in his meeting with China’s Foreign Minister Wang Yi, Sullivan said the US would “continue to take necessary actions to prevent advanced US technologies from being used to undermine our national security”.  Oil A few weeks ago we looked at oil in-depth, and the potential impact of a blockage in the Straits of Hormuz on the price of oil. The US has been self-sufficient in domestic oil demand for years now – and the flexible element is fracking, or shale production. Trump is inclined to think he is the ‘oil czar’ and the solution to the higher prices of oil is to ‘pump baby, pump’. That of course is balderdash, but what is interesting is that it is getting quicker to build new oil wells. The turnaround time is down to 60 days!  Commercial stocks of oil have moved sideways rather than declined this summer, thanks in part to ongoing efficiency gains as well as slowing Chinese demand growth. Short of an escalation in the Middle East (of course, the probability of that is relatively high) prices might stay at current levels, despite the increased winter demand.  Nvidia last week, Nvidia, despite its stellar performance in the last 18 months or so, failed to meet the market’s (perhaps unrealistic) expectations and was punished as a result. It’s important to look at this stock as it is probably the ‘bell-weather’ stock for this AI exuberance (aka bubble). For the second year in a row, Nvidia has been the world’s most important company, rising more than 150% YTD to a staggering $3.1 trillion market cap, massively outperforming the Nasdaq, and putting it within spitting distance of becoming the world’s largest company (it is currently #2 behind Apple). And while the stock price gains have largely been driven by regular raises of the company’s forward earnings expectations…  Free cash flow, a very important metric when valuing a company, keeps on growing, that’s going to drive cash balances far in excess of operating needs, which may result in a bit of an anomaly — higher shareholder returns and a better credit profile. This is what has probably led to the buyback authorization. (When a company buys back its shares, they (perhaps artificially) keep the earnings per share high.)  While the Q2 earnings were impressive, beating both estimates and the even loftier whisper numbers across the board, there was just a touch of weakness in the company’s guidance: NVDA projected Q3 revenue will be $32.5 billion, +/- 2%. While this was above the average estimate of $31.9 billion, it was below the consensus whisper of $32.95BN and certainly below the most optimistic sell-side prediction of $37.9 billion. Perhaps anticipating the potential market revulsion to the modest guidance disappointment, NVDA tried to appease investors by announcing a massive new $50 billion buyback programme. The share had started to recover after the flash-crash, but its last high was on the 10th of June, and had already begun to slide before the flash crash showing how much exuberance has been built into the current price.  China carry-trade with the US China’s trade balance to the end of July stood at $84.65 Billion and is down from the previous reading in June at $99.05 Billion. The trade surplus is an indication of the strength of Chinese exports: Chinese Balance of Trade:  The excess Dollars held by the Chinese seem to be held for longer periods in Forex accounts as the interest earned on Dollars is higher than Renminbi. This could change quickly in the coming quarters as the US interest rate policy cycle turns. Exports rose 7% y-o-y, softer than the forecast of 9.7% and slowing from 8.6% in June. The Fed is contemplating initiating rate cuts for the first time this cycle, the interest rate differential will tip back towards Chinese assets—changing the conversion calculus for exporters. The relative strength of the dollar is important in the carry-trade considerations. The dollar has continued to weaken over the last year and the DXY is now at 101, 100 is the dividing line between a strong and weak dollar – it seems to be reverting back to the below 100 levels that we saw during the Trump Era (before the pandemic anomaly)… could this be a Shanghai accord number 2?  In an interesting side-note, the former President, a prime example of why we need warning labels, seems to think that the tariffs that he is so keen on imposing on China, are paid by the Chinese– aka a ‘fine’. Of course, that is nonsense, the consumer pays. There are multiple reasons why, even if the Dollar declines substantially, the impact on goods traders’ FX sales this time around could be more muted than has historically been the case. Chinese authorities might, for example, push back against aggressive renminbi purchases by goods traders. One reason is that the contribution of net exports is likely viewed as more essential than five years ago when domestic consumption was growing more quickly. Authorities might therefore push back against declines in international competitiveness. Authorities might therefore, perhaps, prefer that exporters convert their Dollars into other FX assets and gold rather than into renminbi. This would, of course, lead to indirect downward pressure on USD/CNY through sales of Dollars and purchases of other currencies. But the impact would perhaps be smaller than via outright conversion of Dollars into renminbi – hence not having the impact we saw in the Japanese carry-trade flash crash.  The end of the ‘Everything Bubble’ – looking back at the Dot Com bubble. The problem with soft landings is that they assume that everything just calmly floats down to earth and the bubbles just shrink, but not pop leaving a soapy mess for everyone underneath. In the “soft landing” scenarios, mind-boggling bubbles remain at “permanently high plateaus” as gamblers rotate out of one soaring sector into another soaring sector, in an endless rotation that keeps the entire speculative bubble fully inflated forever–or close to forever, which in today’s world is a few years. The last 13 years or so of constant bull market with the odd blip (Covid) and correction has reinforced this myth that cycles are broken. In the fairy tale, the economy is “strong” for all the right reasons: people are investing in new companies, spending lots of money, hiring more employees, and so on. In this fairy tale version of economics, the occasional spot of bother– a “weakening economy”–is deftly resolved by the central bank lowering interest rates, which magically encourages everyone to return to their happy speculative, consumerist ways. Is this AI froth just enthusiasm for new technologies with limitless potential to reap billions in new profits? It’s not a bubble, we’re assured, it’s simply strong fundamentals: sales are soaring, profit margins are fattening, and there’s no end in sight. Let’s look back at the dot com era. In March, 2002, two years after the dot-com bubble had topped out, Scott McNealy, co-founder and CEO of dot-com darling Sun Microsystems, wrote a now-famous encapsulation of the difference between strong fundamentals and a bubble: “At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes which is very hard. And that assumes you pay no taxes on your dividends which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?” This should stand as a stark warning to anyone heavily invested in this new AI frenzy. By all means partake in the euphoria, but ringfence your long-term assets from any fall out. In other words, use funds you can afford to lose. The chart of the dot-com bubble’s euphoric ascent and eventual collapse is instructive: note how strong fundamentals eventually returned to the pre-La-La-Land level, wiping out all the wealth created by the bubble.  (Here is the CNBC Mag 7 index -still on the upward trajectory, but looking a lot like the dot com bubble – watch this space: )  In response to the “weakening economy,” a.k.a. the bubble popping in 2002, the Federal Reserve duly slashed rates, and talked up the “soft landing” fairy tale. Nothing stopped the bubble popping, something the leadership in China is discovering the hard way as their decades-long real estate bubble is popping despite a slew of subsidies, incentives, rate cuts and other forms of stimulus: even a Command Economy can’t stop a bubble from deflating. Which leads to this question: if the “soft landing” fairy tale is, well, a fairy tale, then what happens to the current Everything Bubble? If history is any guide, this chart of bubble symmetry will play out in the years ahead: strong fundamentals eventually return to the pre-fairy tale level, wiping out all the wealth created by the bubble.  Jackson Hole The market was consumed by soft vs hard landing narratives since 2022. This is as inflation peaked at 9.1% in the US. I remember vividly how market commentators were arguing about the direction of the economy. The amount that was published around the subject was vast and it split investment audiences. There certainly was room for concern seeing that inflation had peaked at multi-decade highs. Now think back to where you were and what your attitude to investing was then. Most people wanted to wait things out on the sidelines. After all, the economic storm clouds were looking as if they would gather sending markets lower. Make no mistake, a combination of equities and bonds would have left you poorer during this period as both these traditionally uncorrelated asset classes became correlated leaving little room to hide. The question was how much lower could they possibly go? Now fast forward to today. The FED annual Jackson Hole get-together where policy is discussed and where after 3 days the economic framework is set has just occurred. The theme was “Reassessing the Effectiveness and Transmission of Monetary Policy” They were, in essence, trying to ascertain how effective monetary policy was during the COVID pandemic and the heightened levels of inflation felt thereafter. The meeting is a bit of a feedback loop to the effectiveness of economics. It’s no surprise that the field of economics is called the dismal science as the rules that underpin the field tend to shift rather than stay constant, as is the case in other scientific areas. The agendas for the meetings that occurred between 1978 and 1980 had a distinct leaning towards agriculture. It is the Federal Reserve Bank of Kansas who hosts the meeting after all! But as time continued, and the audience grew, so did the topics take on a more global flavour. In 2002 they were “Rethinking Stabilization Policy” and in 2012 they were reviewing “the Changing Policy Landscape” to give one an idea. Riveting stuff if you are of an economic mind but probably quite boring to the average man in the street. “The time has come for policy to adjust” were the words at the closing of the 2024 Jackson Hole meeting as Jerome Powell gave his speech. The FED chair said “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” In essence, they have now seen that inflation is cooling and that the trajectory of it could take inflation back to their target level of 2%. Holding out on rate cuts now means that they may incur unintended consequences such as weakening the labour market so that it becomes a drag on the economy. There have been recent signs of a weaker labour market and they obviously don’t want to aggravate this further. So now that the concerns around the market has disappeared, where do you find yourself? Have you perhaps decided to allocate capital again to growth asset classes? When did you decide to start doing this again? I find economics a fascinating study. It’s the financial story of countries and it intertwines with actual history which is driven by societies and their goals. Studying economics is studying humanity. There are in the history of any country a handful of defining moments and the economic response to these teaches us something about what our future responses should be so that the mistakes of the past is not repeated. But as enlightening as economic study can be, it’s not a strong predictor of stock market returns. Economics teaches generally trajectory, and this often plays out over long periods whereas markets are attempting to price in the short to medium-term future. If there is unfavourable news surrounding a stock, expect it to sell down. Such a time would have been during 2022 when inflation was escalating. The time of maximum pessimism would have been the right time to allocate capital because the short to medium-term seemed bleak despite economic naysayers predicting a global recession and long-term elevated inflation came to naught. It pays to be an optimist. And the best optimists I know have an investment framework which highlights where the best ideas lie. This allows for emotion to be stripped away and reduces investment choices to fundamentals rather than what one learns from the newswires. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.82 (R17.71, 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 R23.41 (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 R19.72 (R19.80, 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 $76.99 ( $79.05, $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 $57,947 ( $63,936, $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: Financial well-being when dealing with Dementia and Alzheimers NEW 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 |