| 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. This newsletter will also be uploaded to our website on Monday mornings. 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 Markets in the US and here at home have been making a stream of new highs this year, bolstered over the last 10 days by the drop in interest rates as investments move out of the fixed-income environment into shares looking for higher yields and better returns.   Gold Unsurprisingly, as one of the globe’s top producers, there are still plenty of ‘gold bugs’ around in RSA Inc, and when gold occasionally comes out of hibernation, so do the pundits. Gold’s record-shattering run continues. It topped $2,660 an ounce last Thursday the highest price on record for a commodity that has been prized for millennia. While in nominal terms this is a new high, the real price has obviously been eroded over time by inflation. When compared to a stock exchange (like the S&P) it has had its ‘moments’.  GOLD PRICE RELATIVE TO THE S&P Bullion’s rally in the past week has coincided with the Fed’s half-point rate cut. It’s usual for the price of safe-haven assets like gold to appreciate as the Fed eases policy. As a hedge against economic downturns and uncertainties, there’s a justifiable cause to view the recent surge as a sharp disconnect with growth projections or outlook. But one has to remember that the West’s debt levels are rising devaluing currencies. This is bullish for Gold.  Apart from China, the global economic picture looks pretty decent, with recession forecasts no longer the base case for developed and emerging economies. Even China looks determined to turn their recent fortunes around (see Cobie’s focus piece below) The battle against post-pandemic inflation looks all but done, with central banks worldwide at various stages of easing cycles. Hopefully economic growth returns in a meaningful way to ensure that economies can grow their way out of a debt trap.  Gold’s strong physical demand has come from central banks. BofA estimates that between 2022 and the end of this year, they’ll have acquired over 3,000 tons, the fastest clip in history. The stockpiling has come mostly from outside the US, notably China. Bullion is a reasonable alternative to sovereign debt in terms of reserve holdings because it cannot be confiscated (unless during a war) or sanctioned.  Change is inevitable – 40 years on Apart from the COVID blip, the US hasn’t seen a full-scale recession since 2008, and we seem to have speculated endlessly about the end of the ‘everything bubble’ which just seems to keep gaining momentum. Everything comes to an end, it’s just a matter of ow long it takes. One of the things I love about markets, economics and finance is that they change daily – and often we subtly move our understanding of the status quo. So what’s changed in the 42 years since 1982? Why 1982? 1982 marked the end of the stagflationary 1970s and the start of the 40+-year bull market in stocks, real estate, and until recently, bonds.  What did the world look like 40 years ago? 1. China was just emerging from the Cultural Revolution, but after 40 years of astounding growth, it’s struggling. 2. Debt levels across all sectors–public, corporate and household–were low compared to the present. 3. The global Baby Boom was entering peak earnings, household formation, home buying, and starting enterprises. Now they’re retiring and entering the phase of selling assets to downsize and fund retirement. 4. Computer technology entered the mainstream economy and boosted productivity. Now we have AI but its long-term effect on global productivity is unproven. 5. Diminishing returns are manifesting across the global economy, as what worked so well in the boost phase no longer generates the same results. 6. Hopefully economic growth returns in a meaningful way to ensure that economies can grow their way out of a debt trap. Fast forward to now: Global debt has been rising on the shaky foundation of the Everything Bubble: as assets have bubbled higher, they expand the collateral available to borrow against. Once the bubble pops, then the collateral evaporates and the lender is under water: the assets is worth less than the loan amount. For this reason, the FED is acutely aware that a stable market is the bedrock of a smooth functioning debt market. What they are hoping to achieve is to activate economic growth again in order to repay the escalating debt levels. In reality they can continue to do this for as long as markets don’t revolt.  Demographics have changed. The massive global Baby Boom is exiting the workforce and starting to liquidate assets to fund retirement. Some in the younger generation will inherit this wealth as the boomers continue to reach their sell-by date. On the whole, though, younger generations lack the capital and income to buy assets and there is nothing on the horizon that could change that asymmetry. As for the hype that AI is going to save us: we are a very long way from that becoming a reality. Economists puzzled over the “productivity gap” in the 1980s as new technologies entered the mainstream economy: companies and households were buying the new technologies but productivity wasn’t responding as expected. Rosy projections are not causal; real productivity gains take time, and don’t always play out as projected. If AI eventually boosts productivity across the entire economy, is may take a decade to play out.  Is nuclear power making a comeback? Last week Constellation Energy (US) announced it was restarting a nuclear reactor at Three Mile Island under a power-purchase agreement with Microsoft Corp. and this was followed by last Monday’s announcement from 14 institutions to finance a tripling of nuclear energy capacity by 2050. Cobie and I have often talked about the sheer amount of power that is required by the AI data centres and where this is going to come from – nuclear is an obvious, if unpopular solution. It’s a matter of simple demand, particularly for data centres to support the growth of artificial intelligence. Getting nuclear up and running again is going to take some work — nuclear’s share of global power generation slumped to 10% in 2021 from 17% in 1990, and much of that dwindling share is powered through aging reactors. Accidents, waste disposal concerns and, perhaps most importantly, costs, have all hampered nuclear output. Construction times for new reactors also are an issue — a new reactor in Finland took 16 years to complete. But the sentiment is changing. “The conversation around nuclear energy has, in a relatively (very) short space of time, completely reversed. In China, where the government has given nuclear a push, nuclear’s “levelized” cost of electricity is almost on par with other technologies. Will RSA Inc start putting this back on the agenda? With the massive push toward solar and wind technology – and the abundance of that ‘free’ resource that can be quickly rolled out – it doesn’t really make sense. We have an energy infrastructure constraint – which would apply to any additional capacity. Recent attempts to reintroduce nuclear power have been severely tainted by vested interests, corruption and getting too pally with global ‘bad actors’.  France In the seven years that he has been France’s president, Emmanuel Macron has bet on tax cuts for the wealthy and for corporations as a recipe for stimulating the economy, but his new government is about to tear up that playbook. Faced with a rapid deterioration in the nation’s finances, Mr. Macron’s recently appointed prime minister, Michel Barnier, is opening the door to higher taxes on businesses and the rich, in a last-ditch bid to plug France’s widening budget deficit and reassure worried international investors about the government’s ability to tackle the problem. The government is facing an uphill battle to control a ballooning debt and deficit that have become among the highest in Europe. A couple of weeks back we talked about the Trump v Harris plan to raise or lower corporate tax- and this seems to be a more global trend – and part of France’s plan too. Since he was first elected in 2017, Mr. Macron has made it a hallmark of his presidency to burnish France’s reputation as a place to do business. He cut taxes on companies and curbed a national wealth tax, earning praise from investors — and the nickname “president of the rich” from his detractors. Mr. Macron’s tax policies included lowering the official corporate tax rate to 25 percent from 33 percent, and reducing taxes for manufacturers and industry from what were once among the highest levels in Europe. He turned a generous one-time employment tax break for companies into a permanent tax cut. And he introduced a flat tax of 30 percent on investment income. Mr. Macron stirred up controversy when he watered down a wealth tax on the very rich by replacing it with a tax on real estate assets valued at more than 1.3 million euros. The tax policies’ aim was to stimulate growth by getting wealthy individuals to invest more in the economy and encouraging businesses to hire. But critics say they have mostly widened economic inequality, while draining tax revenue from the national coffers. The combined measures are estimated to have cost the French Treasury nearly €15 billion in lost income. Mr. Barnier needs to find an €110 billion in savings over the next several years to bring France’s ballooning debt and deficit back in line with European Union rules. Much of that will be in the form of slashing government spending. Among the avenues being explored are increasing the flat tax to as much as 35 percent, a shift that French economists say could bring in up to €300 million in new revenue. Other countries around the world, also beset by a looming debt crisis will be watching this trend closely.  Economics and the US elections For decades Republicans have always been considered to be stronger when it comes to the US economy – some of it probably a halo effect from the famous “Reganomics” era. Recent public polls in the US show that Mr. Trump’s once-daunting lead is eroding on the critical question of whom voters trust most on the economy. A strong economy in the US always acts in favour of the incumbent, which is effectively Harris. With less than 40 days to the election, it would take a major event to shift some of those economic headwinds – at the same time the stock market hit record highs, gas prices dropped and the Federal Reserve have slashed interest rates for the first time in four years. Harris has a large war chest to spend in the next few weeks and a savvy media team behind her who are literally producing content on the fly, with ads and billboards in reaction to some of Trump’s stupidity – going up in hours. Kamala Harris and her allies are pouring tens of millions of dollars into advertising that seeks to define her economic approach as focused on the middle class. The ads promote a list of poll-tested Harris policy proposals, including stopping price gouging on groceries, lowering housing costs and cutting taxes. The goal, advisers said, is to make her seem attuned to the concerns of working-class voters who are likely to swing the election. The Republican VP nominee, JD Vance, stopped by a supermarket in Reading, Pennsylvania, last weekend to illustrate how grocery prices have been impacted by Harris’s policies- when he claimed a dozen eggs cost $4. The problem? When footage of the visit emerged, Vance was quickly called out by viewers who spotted the price tag of a dozen eggs behind him was actually $2.99.  To quote Harris “For Donald Trump, our economy works best if it works for those who own the big skyscrapers,” she said. “Not those who actually build them, not those who wire them, not those who mop the floors.” Make no mistake, if Trump loses he is not going to go quietly into the good night. Results are going to be endlessly recounted, some officials are going to try not to certify results, and lawsuits are going to be endless. There is some concern over rule changes in Georgia and Trump using the electoral college in this State to force Amendment 12 of the constitution. Effectively if there is a ‘draw’ in the presidential race then the presidency defaults to the Senate – controlled by Republicans (say, because Georgia refuses to certify its electoral college candidates.) Harris’s team is working overtime to make sure that the final results don’t come down to a single swing state – especially not Georgia. The biggest potential upset is Texas – if that could turn blue and Cancun Cruz be booted out it would be game over for Trump.  Chinese Stocks The Chinese economy this year has now created no returns relative to its US counterpart, the S&P500, which is up by 33% so far. Only last week, the Chinese market was looking like it would close the year lower as it grapples with growth concerns. As per the below chart, the GDP deflator has not been this negative in length of time since 1999. This is a concern for policymakers who grapple with the overall well-being of the middle class.  The PBOC cut key short term interest rates and announced that banks need to hold less currency in reserve thus freeing up liquidity. Interest rates were cut by 0.50 bps and could be cut by a further 0.25 to 0.50 bps before year end. Medium term lending (MLF) was cut by 0.30% to 2% and the 7-day reverse repo rate was cut by 0.20%. All of this makes the cost of the Chinese financial plumbing less expensive and has a direct bearing on liquidity. Mortgage rates will no doubt also fall hopefully spurring property prices again. Apart from the above, the authority also supported the Stock market with 500 billion which caused stock prices too rise sharply. The reality is that in the US, more ordinary citizens own shares of companies, by some estimates its as high as 70% relative to China where the minority of Chinese own stocks. So, the impact of a lower stock market may have an impact on pension values, but it has no real bearing on the average Chinese whose wealth is tied up in property and commercial enterprises. The global perception though of an advancing stock market is important as investors since COVID has gone cold on Chinese stocks. The economic miracle has been replaced by a middle-class slog for global Chinese relevance in a world which is busy deglobalizing. The CCP has their work cut out for them and the West is done with doing them favours. The liquidity boost last week saw stocks rise sharply. But it’s probably too little to cause ongoing momentum in stock prices. And then there is the bigger juggernaut of Chinese economic growth which needs to create the underpinnings of lasting growth. The Chinese are hoping that the liquidity boost will create the much-needed fuel for this and have indicated that more firepower is underway. I expect that the Chinese will continue their liquidity drive for some time. Apart from the fact that China is centrally planned, its lack of growth is a classical economic phenomenon. It’s an economy which is lacking new growth drivers as it has matured. The West on the other hand is dealing with an economic phenomenon which has not been seen for many years. It’s the refinancing of current debt levels to hold bond market mayhem at bay until reasonable economic growth can return. China can pull the debt lever to hopefully create future growth whereas the West is merely trying to pay the interest bill on their debt outstanding. This is why new ideas in an economy is so critical. They are the breeding ground for future economic growth. Countries with liberal economic policies generally are better breeding grounds and perhaps this is where China falls down long term. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.12 (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 R22.90 ( 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 R19.12 (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 down at $71.96 ($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 $65,596 ($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). 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 |