| 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. Market Watch The JSE softened a little last week, but all the US bourses continued on motoring up, with Wall street making new highs.   Thinking from the FED After CPI came in a touch hotter than expected, expectations of another rate cut on Nov 7th have cooled. The Fed decision is made by committee, and it’s often interesting to see what the range of comments are: Lorie Logan, Dallas “Following last month’s half-percentage-point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here” — Oct. 9 Susan Collins, Boston “A careful, data-based approach to policy normalization will be appropriate as we balance two-sided risks and remain highly attentive to both parts of our Congressional mandate” — Oct. 8 John Williams, New York “Looking ahead, based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time” — Oct. 10 Alberto Musalem, St. Louis “I believe that further gradual reductions in the policy rate will likely be appropriate over time” — Oct. 7 Neel Kashkari, Minneapolis “As we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially” — Sept. 23 Thomas Barkin, Richmond “I didn’t have a lot of heartburn about whether you got there in three steps or four steps or two and then one” — Oct. 10 Raphael Bostic, Atlanta “I am totally comfortable with skipping a meeting if the data suggests that’s appropriate” — Oct. 10 The bottom line is that the FED looks like it is going to slow down the cuts, and if there is a cut at all next month, it is likely to be small – not more than 25 bps.  Boeing’s fall from grace In all fairness, Boeing just can’t catch a break, hard on the heels of the pandemic were the 737 max liner crashes, and then a substantial union strike which just about put a nail in the coffin of the company (and here I thought that a Union’s job was to preserve jobs – 171,000 of them).  Boeing could become the biggest US corporate borrower in history to be stripped of its investment-grade ratings and cut to junk, a so-called fallen angel. In turn, it would flood the high-yield credit market with a record volume of new debt to absorb. And the group, contending with a crippling strike which has now been running for four full weeks, has hardened its tone with union representatives, filing unfair labour practice charges and saying negotiations had been held in bad faith.  Inflation – has it lost its power to move markets? For the first time in a few years, Thursday’s announcement of September inflation made no discernible impact on markets. The S&P 500 dropped 0.2% for the day, while the 10-year Treasury yield shed one basis point (bonds though have been in retreat since Mid-September). These changes are minute compared to the convulsions that inflation reports have often caused over the last three years. That’s in large part because it had minimal impact on expectations for the Fed. This is the implicit rate predicted by the fed funds futures market since last Friday, when unemployment figures were announced. We’ve looked at the breakdown of the US inflation (Core versus everything else) over the last 18 months and the graph below shows just what a huge shock the rise in inflation was to the US economy – and the fact that it might be finding a new, higher, normal.  Simplifying that chart above, this is how core services’ contribution to overall inflation compares to all of the index’s other components:  The great spike in price rises that came the year after the pandemic was almost comprehensive, and it has run its course. What remains is grinding down the services inflation that followed the rest, and tends to be driven by wages. Unlike something like groceries or commodities, when salaries go up they very rarely, if ever, come down. The only time they come down is when people are laid off and then the whole wage bill comes down – but the US is almost at full employment, and in some sectors, there are still more openings than people to fill them – so core inflation is going to need at least another year to work it’s way out of the system – assuming that there is no further pressure on wages (which there could be if scarcity in skills prevails). You can see below where core inflation is tracked against ‘everything else, that everything else is back to normal – the core is still very sticky. Digging down into the ‘core inflation’ and removing rent, the ‘super core’ is even more sticky at 4%  The “supercore” measure of inflation, of services excluding shelter prices, has some bad news. It’s ticking up again, and the annual rate remains above 4%. That would make continued jumbo interest rate cuts difficult.  Unemployment claims and Hurricanes This has suddenly spiked in the last week or two – increasing the speculation that there will be no more rate cuts this year – but if you dig down into the numbers this is likely to be the ‘Hurricane effect” (Helene and Milton). They saw this in the US after Katrina:  In other words, the spike in unemployment claims (which the FED looks at very closely) is likely to be just a blip.  Markets countdown to the US election The US elections are neck-in-neck, and with some of the Harris euphoria having calmed down, nobody is willing to call it for either side. Goldman Sachs has paired baskets of stocks for Democrats (long beneficiaries of a Democratic win and short the losers), and for Republicans, based on likely policies. Over the year, their performance has told much the same story about the election campaign as the prediction markets, with Republicans ahead until Kamala Harris replaced Joe Biden as the Democrats’ candidate in August. The Democratic basket got a great boost from the Trump-Harris debate a month ago — and in the last week had a dramatic reversal. The performance for the two baskets is now identical, with momentum behind the GOP:   Tesla Elon has been in the news a lot over the last few weeks, as he has put his heart, soul and considerable funds behind Donald Trump. This week Elon launched another vanity project of his – The Robotaxi, and the markets rewarded him with a 4% drop in the price (last week we looked at X’s fall from grace). Tesla share price Musk revealed Tesla’s Cybercab concept vehicle — a low, silver two-seater, has no steering wheels or pedals — on Thursday night, at the company’s “We, Robot” event, where it unveiled ambitions to create a fleet of autonomous vehicles and robots.  The plan is for the car to be capable of driving itself autonomously at launch. Musk said the company hopes to be producing the Cybercab before 2027, but offered no details on where the cars will be manufactured. He said consumers would be able to buy a Tesla Cybercab for a price tag under $30,000. He also said he expects Tesla to have “unsupervised FSD” up and running in Texas and California next year in the company’s Model 3 and Model Y electric vehicles. FSD, which stands for Full Self-Driving, is Tesla’s premium driver assistance system, available today in a “supervised” version for Tesla electric vehicles. The technology still requires a human driver at the wheel, ready to steer or brake at any time. In reaction to the Thursday event, the revelations had failed to highlight any near-term opportunities for Tesla, instead prioritizing Musk’s vision for a fully autonomous driving future. As expected, like prior Tesla product unveils, the event was light on the details and instead emphasized the vision underpinning Tesla’s growth endeavours in AI/AV [autonomous vehicles). In short, the launch was underwhelming and the markets punished the stock accordingly  SABC I’m sure you’ve read in the media that in order to raise funds, the SABC also plans to abolish the TV licences and introduce a host of new levies as per new legislation. It was estimated that over 9 million South Africans owe the SABC R44 billion in unpaid TV licence fees. The South African Broadcasting Corporation Bill was introduced to Parliament in October 2023 and revived in July of this year, following the seventh administration’s swearing-in and the Government of National Unity (GNU). Notably, there are no funding models in the Bill (just as we saw with the NHI), which states that the minister of communications and digital technologies will have to develop a model for funding the SABC in three years. The SABC suggested introducing a device-independent levy, essentially a household levy based on the ability to access the SABC’s services without having a TV. The SABC also suggested being the dominant subscription broadcaster levy, where a dominant subscription broadcaster, such as MultiChoice, can assist the SABC. In this levy, the dominant subscription broadcaster can deny customers a service unless they pay their licences. The SABC also suggested that it access the Universal Service Fund (USAF), which is run by the Independent Communications Authority of South Africa. The USAF received funds from broadcasters and telcos who pay a fee based on their annual turnover for universal services of electronic communications network services. All of this to finance its underfinanced public service mandate.  Medium Term Budget It’s that time of the year that we can look forward to the MTB. Usually, it is a damp squib but from time to time some serious policy changes are announced. One of the things we might see is Finance Minister Enoch Godongwana potentially lowering the inflation target. Despite this though, the actual inflation that is borne by the main in the street could then become even more detached from reality. The policy could very well allow the Central Bank to lower interest rates further but the policy will cause issues with the interest rate differential between SA bonds and their global counterparts. The 25-year rand/dollar exchange rate is shown below which could surely also be affected.  Rand/Dollar exchange rate On October 30th, Godongwana will deliver the Medium-Term Budget Policy Statement (MTBPS), revenue collections are meaningfully higher than a year ago to August . This is good news. The drop in global commodities prices and South Africa’s freight crisis (thank you Portnet) saw revenue collections drop to 37.5% of the budget estimate by August 2023, with expenditure at 43.1%, widening the budget deficit. The government, however, used the profits of the Gold and Foreign Exchange Contingency Reserves Account (GFECRA) to counteract the shortfall in revenue and limit borrowings. South Africa’s current deficit is R151 billion, far below the R237 billion seen last year.  The budget deficit for 2024/25 is likely to be reduced from the projected 4.5% of GDP to 4.3%. On a separate note – The Credit ratings Agency Moody’s said last month that for South Africa to get a credit rating upgrade it would need to see a significant lowering of its government debt profile and signs of rehabilitation of its network (freight) infrastructure for robust growth. South Africa’s inflation target range is between 3% and 6%, with 4.5% as the target midpoint. This relatively high inflation target affects South Africa’s competitiveness and means that businesses must adjust wages, prices, and investments to avoid losing buying power. A lowering of the inflation target, likely from an annual average of 4.5% to 4.0%, would be a change that the National Treasury would make, as it is responsible for setting the inflation target, while the Reserve Bank is responsible for achieving it. When the current inflation target was introduced in 2000, it was supposed to be gradually lowered, going from 3% to 5% and 2% to 4%.In 2023, South Africa had the fourth-highest level of inflation among the G20 countries, only beaten by Argentina, Türkiye, and Russia, which experienced either hyperinflation or war. However, inflation is reducing, with SARB Governor Lesetja Kganyago saying that inflation could fall below 4% in the coming months. “We expect the next two or three prints that they could have a three handle on them, and that provides policy space for us,” said Kganyago. “The headline disinflation is mainly supported by petering global supply shocks.” The SARB’s forecasts see inflation at 3.6% in the last quarter of this year and averaging 4% in 2025. The improved inflation outlook will likely see further interest rate cuts in South Africa after the SARB cut rates by 25 basis points in November  US CPI and China US CPI last week was recorded at 2.4% y-o-y after rising by 0.2% m-o-m. Core inflation which excludes food and energy also stalled and was recorded at 0.3% m-o-m. Even though the 2.4% number isn’t bad, it’s the direction of inflation which is worrisome for market observers. Will inflation stick around these current levels or will it attain the long term FED target of 2%? If the average American voter uses the level of inflation as a gauge for who to vote for then surely wanting more tariffs (Republicans) is a bad thing for the economy. The two items in the inflation pot which remains elevated is Services (4.7% y-o-y) and Transport (8.5%)… both mainstays of the US economy. But preceding the inflation print, US bonds have been selling down. On the 1st of October US 10-year yields were trading at 3.73% to end the 11th of October above 4%. What is it that the bond market knows? We know that the US is refinancing their debt and this without economic growth will lead to trouble. But this information is mostly known but perhaps not fully taken into consideration by market participants yet. I still think that the next US President will have to prioritise a bond market revolt at some point in their term, but this remains to be seen. The ensuing inflation print accompanied by the stronger-than-expected jobs report certainly has something to do with it. Perhaps there is something to be said about what is happening in China at present. Remember they have historically held US treasuries but have started stimulating their economy through a range of means. Rates have been lowered making the cost of capital cheaper which sent Chinese markets higher. They promised much more. What is at play now is the issuance of new long-term bonds and for these there needs to be a ready market which I can only imagine starts with Chinese investors. Stimulating markets is one thing but what is probably really required in China is a Fiscal package which is aimed at the man in the street. I picked up the below graph from Alfonso Peccatiello, a macro analyst.  Look at how invested the average Chinese is in the property market relative to other countries. This is why measures directed at the public is needed to kickstart the Chinese market. One probably finds that as the property market starts yielding results again, Chinese are happy to relinquish some of their cash into equities, but only if it is performing. In the US 36% of household assets are invested in equities and equity-like products and this is only 11% in China. The measures taken in China now mimics in act but not in size what we saw in the West during the pandemic. Their overall debt burden is far below what the US is dealing with, so they possess the headroom for stimulus. Lets see how this all plays out in the coming weeks. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R 17.41 (R17.48, 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 R22.75 (R22.93, 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 R19.05 (R19.19, 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 up at $ 78.67( $77.95, $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 $62,876 ($62,267, $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 creation is a balancing act over time NEW Wealth traps waiting for unsuspecting entrepreneurs 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 |