| 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 Last week was all about interest rates – much more about that below. As expected, the cut in rates was good for all bourses concerned and yr-on-yr the JSE is up a comfortable 15.39%.  With only 6 weeks to the US elections, make hay while the sun shines. The results are going to be highly contested and don’t think that DJT is not going to try and overturn the election if it doesn’t look like it’s going his way, again. DJT has already set up teams of lawyers and officials to do what he failed to do last time – make sure the election is not ‘certified’ and thereby invoke amendment 12 of the US Constitution where the leader of the (Republican-led) senate becomes the president because seats are being held in limbo by small states who refuse to certify. The bottom line? it could be messy and delayed.  Is the interest rate cut going to play into the US elections? Only time will tell whether this much-anticipated interest rate cut is going to have any impact on the US elections – there are so many moving parts, is it even possible to put it down to a single event? Sometimes when we look back on it, a single event can change the path of elections – in the 2016 US elections, FBI Director James B. Comey on the Investigation of Secretary Hillary Clinton’s Use of a Personal E-Mail System that was announced on the 5th of July is now seen as the final nail in the coffin of her campaign and led to the 4 year Trump era. By mid-2019 when she had been officially cleared of all wrongdoing it was obviously far too late. Historically, a good economy and stock market often bode well for the incumbent president. Is the DJT stock a barometer of Trump’s fortunes in this campaign – he’s how it is trading after the Friday stock-cut off for the founders expired:  More investors have been shorting Trump Media & Technology Group Corp.’s stock in the past 30 days, in a sign of negative sentiment ahead of the lifting of a ban on insider stock sales on Friday. The increase in short interest in the stock — which gauges the amount of open short positions that have yet to be covered or closed out by a sale — has grown by 40%, or $66 million, to $231 million in the past four weeks, according to research firm S3 Partners. At this point, about 17.5% of the total number of shares outstanding in the company.  Interest rates cut at last – but is there a new normal? The much-anticipated FED interest rate cut finally happened last week – and it was on the higher end of expectations at 50 bps. After a brief contemplation, investors have taken stock markets to fresh records. The S&P 500 closed Thursday at its first all-time high in two months; the “summer swoon” is firmly in the past.  S&P Index Here in South Africa we are much more familiar with the distinction between the real and nominal rate of interest – in other words interest rates once inflation has been stripped out. Because our inflation rate, for decades, has been well above that of first world countries, you’re probably familiar with investments that track as “CPI+”. Over long periods of time, income usually returns about CPI plus one and Equities at CPI plus 3% or 4%. This benchmark was turned on it’s head during Covid, and especially once inflation started to peak in the West – thanks in the main to liberal consumer stimulation and supply chain bottlenecks. Interest rates are the primary instrument used in ‘Monetary Policy’ to stimulate or constrict consumer growth (Fiscal Policy is mostly taxes). Because CPI is always backward looking, this real rate is never accurate in real time – and central banks are not known for making quick monetary decisions. The FED’s glacial response to the inflation rate rise in the US is a case in point. It was first thought that the rise in rates would be “transitory” in nature, but this theory quickly evaporated as rates continued to rise to multi decade highs. Even though rates will now fall, there very possibly will emerge a “new normal” where rates are going to be higher than the FED’s target rate of 2%. Meanwhile, central bankers in emerging markets can be forgiven for feeling relief after the Fed’s jumbo cut. Developing countries have already reaped the benefits from proactively dealing with the post-pandemic inflation breakout, but subsequent easing has been constrained by high rates elsewhere. Aggressive cuts that aren’t on the same wavelength with developed central banks are imprudent for emerging markets that have to deal with weak and potentially volatile currencies. The Fed has just lightened their burden and made it easier for them to countenance monetary easing. Right on cue, South Africa has cut its lending rates by 25 basis points — its first since the pandemic. The Rainbow Nation’s easing cycle wasn’t driven solely by developments elsewhere. Inflation had cooled off notably, with August’s 4.4% print marking the first time since the surge began that price rises have slipped below the midpoint of the central bank’s 3% to 6% target. The magnitude of the US cut erases any lingering apprehensions for emerging banks, and helps to explain how — in another post-pandemic first — the South African decision was unanimous:  Brazil’s central bank took rates in the opposite direction. The decision to hike its Selic rate by 25 basis points to 10.75% was unanimous. The pace of price increases was drifting from the Central Bank of Brasil’s comfort zone and policymakers had to do something. Perhaps there is a desire to regain credibility on its inflation-targeting mandate that may force the central bank to stray from an optimal monetary policy. Put differently, international investors still don’t give economies like Brazil the benefit of the doubt, and that can compel uncomfortable policy decisions. The relative strength of the dollar has also been at play in some of the decisions outside of the USA. Overall, the Fed’s easing cycle risks piling pressure on the dollar, which has been on a downward trend for the last two years. A weak dollar is invariably good news for emerging markets, as shown in this comparison with a basket of emerging market currencies:   Recession We’re always on the lookout for the dreaded R word – is there a looming recession? can there be a soft landing? I came across this interesting take on Recession – called the Perkins rule.  Dario Perkins, managing director for global macro at TS Lombard. To quote him on the most recent 50 bps cut : “It is important to remember that the monetary settings we have today were administered in the face of a macro environment that was very different from what we have currently – inflation was at 50-year highs, the labour market was massively unbalanced , and central banks were fearful of repeating the experience of the 1970s. Given the complete reversal of all those trends, it was clear that Fed officials would be able to justify a 50bps reduction without unsettling markets or creating an undue sense of panic, the U.S. no longer needs “emergency levels of monetary squeeze” should be bullish for risky assets” The Perkins rule is based on how soon after a negative labour report (as we saw last week) one should sell equities, based on history. He postulates that it’s a contraction in employment rather than a gradual drift higher in the unemployment rate that is the signal of a recession.  How is the GNU faring? The first big test for the GNU – the BELA bill. The Basic Education Laws Amendment Bill (BELA) remains the subject of major debate. Until now, School Governing Bodies have had the leeway to develop their schools’ admission and language policies but the BELA Bill requires that they submit these policies to provincial departments for approval. Despite opposition, this was signed by Cyril – but the GNU did not fall apart. From his side, the president didn’t force through the two most contentious parts of the bill (the language of instruction and admissions control), giving three months to find a compromise. And if that fails? The Constitutional Court will sort it out. Bear in mind in 2021, RSA ranked last out of 57 countries assessed in the Progress in International Reading Literacy Study, which tested the reading ability of 400,000 students around the world. (What is needed, as with the NHI, is a way to bring the government standards up, not haul down the standards of education that ARE working). Earlier on, the president signed important legislation on electricity reform. Here too, he did not enact the most controversial clauses (affecting municipalities’ role in electricity distribution) to allow time for finding a compromise. On NHI, he has already signalled a similar approach – talk to all parties and find a compromise that works (don’t be fooled into thinking that the NHI is the introduction of universal health care – we already have that. Put bluntly the NHI is a revenue-seeking exercise). This is how democracy should work. Constitutional lawyers are going to be working full-time. There are also signs elsewhere that compromise and negotiation is finally taking place. Firstly on the land issue, The new minister of Land Affairs, PAC leader Mzwanele Nyhontso, ( the party for whom the restoration of land was a “red line”), took a pragmatic turn. He is now looking toward solutions – a much more realistic approach especially based on the abject failure of the program to date. There is obviously some serious issues to be resolved at the metro level – as we discussed last week with the Tswane metro standing on the brink of a reversion to the chaos we saw for years. Critics say the GNU is too costly, with 10 more executive members than before. But look at what it brings: 21 newcomers contributing diversity, fresh energy, and voices from across the spectrum – DA, IFP, PAC, GOOD, and more. It’s not just more people; it’s a broader, more inclusive government. Is that too high a price for a country desperate for social cohesion? Ultimately, the GNU’s success hinges on real change – jobs, poverty, inequality. The roadmap is there: implement the Vulindlela reforms https://www.stateofthenation.gov.za/operation-vulindlela (energy, transport, water, visas), and we could see 3,5% economic growth, according to the Bureau for Economic Research. Since their report was published after the election, the 3,5% growth possibility has been confirmed by the governor of the South African Reserve Bank and the deputy minister of finance (himself a leader of the SACP – one of those unique South African paradoxes). At 3,5%, economic growth will be more than twice the population growth of 1,6% (or 1,5% if we accept the criticism that there are one million fewer people in SA than the Stats SA census showed). A manufacturing survey by the BER released this week found that the political constraint has declined to the lowest level since 2012! This is a remarkable survey result. Unsurprisingly, the BER finds that fixed investment in manufacturing has already increased substantially. Manufacturers are buying into what is happening. (Unfortunately, this report is behind a paywall so I can’t link it here, just give you the top-line results) The manufacturing survey shows that in the GNU government, SA has a very real chance to break the decade of economic growth lower than population growth. It will turn the tide on unemployment and poverty, even if 3,5% does not eradicate them.  Are tax havens still a thing? Obviously, the world has come a long way from the heyday of tax havens and secret bank accounts and we now live in a world of globally shared financial information and technology, and for the most of us Joe Averages the best we can do is hope that we don’t get caught up in double-tax land. Essentially a tax haven offers foreign businesses and individuals minimal or no tax liability, along with a politically and economically stable environment. Entities may legally use tax havens to store money earned abroad while avoiding higher taxes in the U.S. and other countries. For this purpose, companies often establish a shell corporation – a corporation without active business operations or significant assets in the country where it is located. Here’s a nice graphic showing the most popular tax havens:  Hong Kong is likely to decline as a popular destination with the increased control from the mainland. Ironically the country with the tightest control on a citizen’s global assets is the US.  AI- what’s next? We’ve often talked about the road ahead for AI. The production of those super-chips, dominated by Nvidia is reaching maturity so where is the next trade? Maybe it’s in energy and now, both BlackRock and Microsoft are making it known that they understand this, too. Last week it was reported that the two industry giants are prepping the launch of a $30 billion AI investment fund that’ll see Microsoft build data centres and energy projects to meet the demands of AI. BlackRock’s new infrastructure investment unit, Global Infrastructure Partners, is launching a major investment fund with Microsoft and Abu Dhabi’s MGX as general partners. Nvidia will provide advisory on factory design and integration. The partnership aims to tackle the massive power and infrastructure needs of AI development, which is expected to strain current energy systems. AI’s computing demands far exceed past technologies. The International Energy Agency predicts global electricity consumption by data centres could exceed 1,000 terawatt-hours by 2026, more than double the 2022 level. In the U.S., which houses a third of the world’s data centres, electricity demand is surging for the first time in 20 years. A report from Grid Strategies shows that five-year electricity demand projections in the U.S. have nearly doubled, from 2.6% to 4.7%  Efficient(less) Markets Clifford Asness co-founder of AQR Capital Management recently wrote a paper called “The Less-Efficient Market Hypothesis”. Mind you Mr Asness is a pioneer in quantitative asset management having started his career at Goldman Sachs before starting ultra-successful hedge fund manager AQR Capital Management. In the paper, Mr Asness argues that markets have become less efficient over time. Now for those who are unfamiliar with the topic, Eugene Fama a professor at Chicago Booth School of Business where he still teaches today, wrote a paper in 1970 where he argued that asset prices always reflect all publicly available information. It’s called the efficient market hypothesis (EMH). You and I, according to EMH cannot derive a benefit greater than the index can offer by favouring one investment over another over long periods of time. The cost of ownership also needs to be considered. If you decide to buy and sell an asset multiple times to get a performance upper hand, this invariably eats away at your return as well. EMH was a large boost in the arm for indexing. Obviously, this was vehemently rejected by those in the market who were daily attempting to create higher returns (alpha) than what the index could achieve… they are called active asset managers. It’s important to note that the effectiveness of EMH is both evident during certain market cycles and less so during others. Active managers have battled to beat indices for years and many investors have simply turned to indexing as a long-term strategy to create returns. As with everything, success begets success and the early wins by indexing have attracted large swaths of capital over time. Indexing has in essence become the market, driving the phenomena of super-sized companies. Apple for instance makes up 6.77% of the S&P500. As an index investor, you would get the 6.77% allocation to this stock if you liked the company or not. As an active asset manager, a choice would need to be made. If you liked the stock, more than 6.77% would need to be allocated to the company. For an active asset manager this would constitute a very large position… most would resist this large weighting. If you didn’t like the company, owning nothing would deviate far from where the benchmark resides. This is the dilemma of active asset management. The phenomena of indexing can drive the price of Apple higher over long periods of time, leaving those who don’t own the stock, with less returns if another idea isn’t sourced. When we cross section a company’s ROIC and share price performance or when we derive a fair price post a market event it is interesting to note that there is evidence for EMH. Stock prices tend to price in information quickly reflecting a fair value. So EMH exists .. the question is merely how strong it is. If Apple turned out to be a terrible company it obviously wont last long as the largest component of the S&P500. Probably due to indexing it could be more “sticky” than if no indexing existed but ultimately it would sell down to its rightful place in the index… it may just take longer. I have to conclude with Mr Asness that indexing cannot be the only reason why some stocks continue to be expensive at the expense of others. Mr Asness argues further that there are possibly two other factors to consider. Gamification and democratization of data. Gamification refers to, much like online gambling, the ability to “play” the markets with tools which only a short period of time ago was the purview of institutional investors. Hedging, leveraging and futures are but a small cross section of tools which the ordinary man in the street can load up on whilst sitting in the comfort of their homes. Too many the markets have become a game to play which is in stark contrast to long term investing. It’s on the menu alongside other high intensity online games. It’s a culture which has developed and it wont change any time soon especially as data costs continue to decrease. The second phenomena is the democratization of data .. or more simply put the availability of information to all. I remember when I started my career, much of the information we used came from sell side analysts or data vendors, both which needed to be paid for. Today much of that information is delivered through the internet and in many cases information is free.. especially historic data. This attracts a larger number of individuals all attempting to buy and sell market related assets including ETF’s based on indices. This can explain to some degree why certain stocks continue to rise in price at the expense of lesser expensive alternatives. Spare a thought for those companies which attract the public’s eye causing large price spikes. Gamification fuelled by social media creates exuberance on another level. But the flipside to all of this is that valuation-based investment managers will be able to steer their portfolios through the noise but it will require an iron will. Not only will this be important but so will the ability to ignore the index given how much it lends itself to outside influence today. Mr Asness argues that the period of underperformance by active managers may very well increase if this has not already been seen. The index may very well appear to be the superior choice for longer periods of time. The question is will investor clients understand the difference between a gamified option versus a long term investing solution. I think the opportunities in this paradigm could be vast. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.42 (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 R23.20 (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 R19.47 (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 up at $74.68 ($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). This is likely due to increased tension in the Middle East.  Bitcoin closed at $62,603 ($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). While this asset has been very volatile, you’ll note that each of the highs is lower than the last, showing an overall downward trend since March of this year. Articles and Blogs: Wealth traps waiting for unsuspecting entrepreneurs NEW 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 |