| 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 While the JSE has cooled somewhat over the last 10 days or so, it is still up some 12.25% for the year (closer to the long-term average of 13%).  The wind in the sails of this nice stock market uplift has been the financial sector as you can see below:  In the above 10-year graph you can also see how volatile this sector of the market is. As interest rates drop, however, bank fixed deposits become less attractive and financial stock prices usually fall.  Like the South African markets, the US S&P has also dropped in the last few days… (to be continued)  Rate cuts – looking down the road The question around US rate cuts (and inevitably ours in RSA too) has turned from when (very likely on the 18th of September) to how much and how quickly thereafter. The graph below shows a very interesting survey to see what the expectations are ( it’s always interesting to look back on these forecasts for accuracy – spoiler alert the success rate is usually abysmal).  The consensus at the moment is that the rate will drop a full 300 basis points in the next year. (It is currently at 5.25%-5.5%. As slow as the FED was to react to the rising inflation, will they be that aggressive in the cutting cycle? Unless the economy looks like it’s tanking, I doubt it. This year the rate-cutting can has consistently been pushed out – at the end of last year the predictions were for the first cut to be in March, then June.  US Taxes – the two candidates have very different ideas. Gone are the days when the Republican and Democratic policies were quite similar – post-Trump they are on either end of the spectrum, especially when it comes to economics. Before we look at what Harris and Trump are proposing, remember that the House has tax-setting power, so neither candidate could do anything very radical if they faced gridlock. (Perhaps this is one of the reasons Kamala is diverting part of her substantial ‘new’ war chest to Democratic House elections down the ballot). If the Republicans get their way, however, the difference would be stark. From the current basic corporate tax rate of 21%, Republicans want to move to 15%, and Democrats to 28%.  You can see from the above graphic that the current rate is the lowest since the 1940s. The stock market will be one of the biggest winners in the case of a tax cut – it’s easy to see why. Dividends are paid after tax in the US so a lower tax rate should mean a larger pool from which dividends can be paid. A buoyant stock market shows the US economy is thriving – right? Not so fast… The stock market is not the economy, and while they often sing similar tunes they belong to wildly different genres. In the US economy, as measured by GDP for example, all the heavy lifting – 70% of it – is done by consumer consumption – all 333 million of them, 258m of whom are adults. The stock market is the playground of people who can afford to invest – estimated at around 50% of all individuals of all ages in the US. Superficially, those numbers look good, but the top 1% own 30% of the market cap in US markets. The average American will probably have a 401k (the equivalent to our pension products) and maybe a stock or ETF portfolio. The other half are living from paycheck to paycheck and hoping not to be bankrupted by a bad medical event. Make no mistake, I am hardly what you’d call a bleeding-heart liberal, but there does need to be some humanity. If American presidential elections were determined by the popular vote, there would not have been a Republican President since 2008. (Bush was the last Republican to win the popular vote).  Blue is Democrat, Red is Republican Unfortunately, the US have an antiquated system using the ‘electoral college’ dating back to 1797. The Electoral College originally was officially selected as the means of electing president towards the end of the Constitutional Convention due to pressure from slave states wanting to increase their voting power (since they could count slaves as 3/5 of a person when allocating electors) and by small states who increased their power due to the minimum of three electors per state. Over the decades (and centuries) this has led to a situation where a handful of states (and a very small proportion of votes) can swing an entire presidential election.  Broadly, the Red – Republican states are found down the middle of the country, and the blue states at the periphery. These are the swing states you need to look at when watching the elections in 2 months time. Unbelievably as few as 0.03% of the votes in the US could swing the Presidential race in either direction. (In an interesting aside, Pennsylvania, one of the swing states has a rule that mail-in ballots can only be counted after all the on-day votes have been counted. This leads to nail-biting finish because on-day votes are usually Republican, and mail-in are Democrat. Although Trump had won the state in 2016 by a narrow margin of 0.72%, Biden was able to reclaim the state, winning it by a similarly narrow 1.17% margin.)  US Trade deficit and dollar strength One of the most asked questions around the presidential race in the US is the ultimate effect it will have on the US currency and the trade deficit. Trump has put less emphasis (of late) on tariffs and his contest with China. (perhaps someone has finally told him that it is not China that pays those tariffs but the consumer?) There is an alternative that neither candidate seems to have talked about – encouraging trading partners to build facilities in the US. That would be great for US jobs. The problem is that the US dollar is still quite strong and would be likely to strengthen further if Trump’s economic policies went into effect. (Ironically, Trump personally is not pro a strong dollar – it is just the net effect of his proposed policies). Since Harris’s rise to the top of the Democratic ticket, the “Trump trades” have been steadily unwinding. His DJT stock (Truth Social) has been on a steady decline since ( and some of the founders are already bailing out).  DJT stock price A consensus position among investors appears to be that the currency market will counteract Trump’s attempts to restrict trade. However, there are ways a Trump administration could try to weaken the dollar: Imposing capital controls: This brings the dollar down, but an attempt is unlikely as it would also discourage inflows of capital when the government needs foreign buyers for its debt and S&P 500 companies gain much international investment. Changing the Federal Reserve’s independence or appointing new governors who would cut rates. Such a move would weaken the dollar; the risk is that it would be far too much. Fiddling with the Fed is highly unlikely before Jerome Powell’s term ends in 2026. It would be very dangerous at any time, so is unlikely. A “Mar-A-Lago” Accord in which Trump tries to initiate a coordinated move to weaken the dollar, much like the Plaza Accord did in 1985. This would be difficult to achieve and based on Trump’s recent negotiating ‘prowess’ highly unlikely. The bottom line is that the dollar would likely strengthen under Trump. Chinese and Mexican assets would be unlikely to benefit. With a bit of luck this is just useless speculation.  GNU and Eskom in the News It’s interesting to watch how the “GNU” is faring now that it’s having to function and deal with the reality of economics – and massive egos. Twane is a case in point. Alex Hogg did a very interesting interview with The Major, Cilliers Brink . Basically, not quite a year and a half into recovery, the Tshwane Metro is again on the brink of descending into chaos. In this interview, Tshwane’s executive mayor, Cilliers Brink, unpacks why this is happening. He says the national leaders of Action SA, specifically its founder/president Herman Mashaba, are imposing their will on the party’s members in the capital city. Action SA, with 19 seats, is currently in coalition with the DA (69), Freedom Front Plus (17) and a few smaller parties in the group governing the 214-member council. Taken to its logical conclusion, Mashaba’s decision to withdraw Action SA from a functional alliance will re-introduce an ANC/EFF “doomsday coalition”. Why Action SA would want this is anyone’s guess – Petty revenge? Eskom This graph (Ave. Weekly Electricity Demand) below provides one of the compelling reasons why there is no load shedding.  Besides improved maintenance, less sabotage & past broken units returned to service, the actual demand for Eskom’s power has reduced significantly, because… well, their past years of poor performance has chased their customers away. Over 6000 MW of electricity generation now sits on the rooftops of homes and businesses. This will also explain why Eskom needs massive price increases to survive. The poorer sectors of society will bear the brunt of this Government-inflicted (poor leadership) disaster. Eskom is considering increases of 43.55% in 2026; 3.36% in 2027 and 11.07% in 2028, with the first increase set to be implemented on 1 July 2025. These price hikes would see the utility collecting revenue above R400 billion for each year. It also reported that there is a request to Nersa for an increase of 36.15% in the standard tariff that it charges non-municipal customers during the financial year 2026, 11.81% in 2027, and 9.10% in 2028. This year Nersa approved a 12.74% tariff increase which kicked in from April. Eskom and Nersa regularly disagree on tariff hikes with Eskom generally receiving less than the requested tariff hike. This was often the case in the past few years. The power utility has constantly argued that revenue sales in electricity are not enough to cover its debt. The plan to open up the electricity market as part of the Electricity Regulation Bill which has recently passed through the National Council of Provinces means it will struggle to make up revenue as electricity will not be monopolised by Eskom. The price of electricity has increased by almost 400% in the past 10 years. South Africa has one of the highest rates of electricity. It is higher than countries such as Brazil, China, India and the United States andmore expensive than in most African countries, according to GlobalPetrolPrices. For a country with such high unemployment rates, these prices have to become more affordable. But aside from saying innovative solutions are needed, nothing else is being done to lower these prices. Financially, Eskom has battled a growing municipal debt leaving it requiring bailouts from the treasury. This means that electricity consumers face a serious burden paying for electricity. In previous years when load-shedding was rife, diesel was used to run open-cycle gas turbines at great costs, often in the billions. This would undoubtedly affect the price of electricity. But this year, load-shedding has come down significantly, with more than 150 days of no power cuts. That means the use of diesel has significantly gone down. Yet, the alleged tariff hike remains. The alleged tariff hike has reached some important ears. The Democratic Alliance (DA) has written to parliament to debate the hike which was approved by National Assembly speaker Thoko Didiza. It has also written to Nersa to protest such a hike. The party believes the hike is exorbitant and will severely affect the average South African. Nersa’s head of electricity regulation Nhlanhla Gumede has recently been in the news as well. He recently said the regulator made a crucial mistake in the past regarding the approval of tariff increases. He said the prices were regulated according to Eskom’s revenue instead of the cost of the supply. The regulation of these tariffs has also been questioned by Ramokgopa who has called for the methodology to be reviewed. This cannot happen soon enough..  Intel Inside If you’re old enough you would probably remember buying a computer which proudly displayed a sticker saying “Intel Inside”. This was the heyday for Intel. It was the 90’s and the partnership between Intel and Microsoft .. often called Wintel really shaped the PC market as you know it today. Microsoft’s software needed a chip to run it, and Intel was the company which developed and manufactured the chips. The company was founded by Andrew “Andy” Grove, Robert Noyce and Gordon Moore (from Moore’s Law fame). Here were three brainy individuals in the late 60’s who happened to take a liking to semiconductors. They quickly found themselves at the right place at the right time. Fast forward to today and things have dramatically shifted for this company. They still dominate in the design and manufacture of certain chips. Take the X86 chip family for instance. It’s what PC’s and laptops run on and has been in continuous development since the 80’s. These are different to what smartphones and tablets would use. In this market they dominate but the product has become a commodity. Revenue for Intel is under pressure:  Lip-Bu Tan, a board member from 2022 has resigned amidst mounting losses. To be clear, Mr Tan is the executive Chairman of super success story, Cadence Design which amongst other things makes software and hardware for designing products such as integrated circuits and printed circuit boards. Intel is considering halting factory projects and splitting its foundry business from the company. This business reaches back to 2013 when Intel took on a contract to sub-manufacture chips for competitors. It was closed in 2018 but reopened in 2021 to do the same thing but with a different product mix. All of this costs a lot of money and two years ago they were hoping to start setting up a new manufacturing facility in Ohio Columbus. The cost was a cool $20 billion and it did not stop there as there were similar plants planned for Germany. To help fund this expansion, Intel came to an agreement with Brookfield Asset Management to co-own and split revenues. This isn’t ordinarily something one would want to do if enough spare cash was available for the expansion. The problem is that the company has lost money 50% of the time over the last 4 years whilst gross and operating margins continue to decline. Revenue has been on a trajectory lower whilst the company continues to issue new debt. For this reason, they now need Brookfield Asset Management. What is most telling is their Return on Invested Capital as compared to major competitors. There are more competitors to add to the list but the three below gives a good indication of long-term trends in the semi-conductor industry. One can see the meteoric rise in the Nvidia ROIC showing the returns they have been able to generate with their own free cash. Intel certainly was a major success story through the 1990’s, being able to generate 20% ROIC’s through the decade and even extending this into the 2000’s. Amazing business. But a lack of innovation has now lead to a downfall in their ROIC profile. Look at how volatile AMC’s ROIC profile is. They are a worthwhile competitor but fail to generate the annuity ROIC that Intel was for most of it’s life. Will Intel be able to reclaim this space? The other two competitors show how difficult the semiconductor business can be. Its volatile and working on the correct future product mix is crucial to survival  The risk today in purchasing Intel hinges on if they are capable of reclaiming their glory years. I would argue that our interaction with technology will continue making for a ready market in semiconductors, but that the competitive landscape has changed. There are more competitors in the market and the democratization of ideas and technology has eaten away at margins. This will make the replication of their glory years difficult. That being said, Governments see semiconductors as a critical industry, and they may decide to protect the likes of Intel giving it a new lease of life. Other than that, they may just approximate what the other two competitors are facing …. Volatility whilst living or dying by a future product mix. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.85 (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 R23.44 (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 R19.79 ( 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 $71.47 ( $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) Early data from the Central Energy Fund is pointing to a fifth consecutive cut in petrol and diesel prices for October. Data for the end of the first week in September shows a significant over-recovery in prices, exceeding R1 per litre for both petrol and diesel. Petrol is showing an over-recovery of between R1.31 and R1.39 per litre, while diesel’s over-recovery is between R1.12 and R1.125 per litre. These are the early indicators: • Petrol 93: over-recovery of 131 cents per litre • Petrol 95: over-recovery of 139 cents per litre • Diesel 0.05% (wholesale): over-recovery of 112 cents per litre • Diesel 0.005% (wholesale): over-recovery of 125 cents per litre • Illuminating paraffin: over-recovery of 118 cents per litre  Bitcoin closed at $54,548 ($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: Two Pot pension system demystified NEW Keeping your legacy shining bright NEW 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 |