| 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 continues to make new highs and over a 5-year period is almost on par with Wall Street.  If you dive a little further into the JSE you can see that the financials have had a great run in the six months, having been flattish since early 2022.  Resources paint a different picture:  Earlier this year resources were down at early pandemic levels but might be trying to bounce back from those doldrums – its too early to say and unfortunately China might not sail to the rescue this time.  RSA CPI Last week the RSA inflation print came out and was lower than expected at 3.8% y-o-y, down from August’s 4,4%. Does this mean we can expect that interest rates are going to fall lower, faster or is the Reserve Bank going to use this as an opportunity to reduce the RSA inflation target – which the finance ministerhas been hinting about for a long time? We will probably find out in the medium-term budget. (I will be interviewing several prominent personalities on Fine Music Radio that afternoon so please tune in (or stream from their website fmr.co.za)). South African Reserve Bank Governor Lesetja Kganyago said in an interview with Bloomberg TV last week that the nation’s 3% to 6% inflation target was overdue for review and should be adjusted lower. He feels that the target is out of sync – which is another signal that we may see small decreases in the interest rate – say 25 bps at a time – and the cuts will be slow and for longer to try and keep inflation under control. This al all obviously highly dependant on what happens with global inflation. The SARB began formally pursuing an inflation target in 2000, making it an early adopter of this method, but the goal has never been revised. The central bank says this is why the country’s inflation rate has been higher on average than other emerging markets and is working with Treasury to review it. But surely inflation is measured based on the price change for a basket of goods rather than the target of the SARB? Also if our rates were lower in the past this would have spurred consumption which would have aggravated inflation further? It has been 24 years since we had the inflation target, and even the SARB has to ask questions about how optimal the current inflation target is. The SARB, whose independence is enshrined in the South African constitution, has faced longstanding criticism from labour unions and some lawmakers, who say it keeps rates too high in the pursuit of low inflation at the expense of jobs. Kganyago, who has consistently made the case for a lower inflation goal, rebutted the argument that it would be at the expense of economic growth. To quote Kganyango: “There is no virtue in high inflation,” he said. “The lesson from the great inflation surge in 2022 had been that the public actually hates inflation.”  MTB expectations Next Wednesday, the 30th of October is the Mid-term Budget Policy statement presented to parliament by Finance Minister Enoch Godongwana The expectation out there is that the Minister is going to ride the wave of GNU economic euphoria, better markets and improved exchange rate to introduce some of the reforms that are still needed in the problem areas. The GDP figures for the second quarter showed that consumption spending increased and several economic sectors improved. Overall, the improvement in electricity supply supported the economy. All of this is positive for tax collection and perhaps the minister will announce that tax revenue in the current fiscal year is ahead of budget. One of the most positive outcomes of the GNU is that there is an air of far better governance and less tolerance for corruption and ineptitude. There is a willingness to talk through policy differences rather than rail-roading the not-so-ruling-party preference. It is much easier to negotiate in an economy that is going better rather than scraping along the bottom. With enough money to go around and hopefully a fuller Treasury, the government can focus on some of the big problem areas: electricity supply and roads, rail, ports and water supply. In other words, the government may have some wriggle room to bring back some fiscal prudence (if not austerity), bring down our debt burden to get the economy going whilst attempting to pay lip service to quasi-populism. One area that we are already starting to see is the private-public partnerships, and we might see something from the minister unwind some of the red tape and bureaucracy that holds back these initiatives. The Government wants to see 3% GDP growth per annum, and it looks like this might at last be achievable… but it’s going to need the help of the private sector who hates populism. An update on how we’re progressing in removing RSA INC from the Greylist is overdue – hopefully, the Minister will at least give us an update on that progress. We were put on the FATF Greylist in Feb 2023 (20 months ago). Just a reminder – Mauritius was put on the Greylist in Feb 2020, and off on the 21st of October 2021. Public servants recently asked for a 12% pay increase, which the government countered with a 3% offer. This is obviously a thorny issue, especially with a cut in the overall budget for services which is already hampering some key areas. It’s a thorny issue – the revenue pot is only so big – do you give in to the above-inflation increase demands and retrench people – or keep the people and keep the increases at inflation? (Frankly, IMHO, both are needed, especially in some of the bloated areas like SOEs). . We have seen a mini-gold boom in the last year, with the price Gold up 38%  On top of this, R100 billion worth of gold and foreign exchange reserves came into the monetary system, because of the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, which took away some of Treasury’s funding pressures. This windfall will not last much longer. This is pretty much a once-off and the only meaningful way for the Treasury to move forward is through austerity – or the economy doing significantly better so there is more in the tax pot. Let’s not forget the 5Bn tax windfall from withdrawals from the two-pot system, which has given SARS a bonanza. There is no doubt that the GNU has given the government a chance to rebuild public trust. It’s early days and this perception is not going to change overnight but it is essential to boost both domestic and international investment.  RSA Budget deficit In the Feb 2024, the minister set out a trajectory to stabilise the debt to GDP ratio. Here is a clip out of the budget summary so we can mark his homework:  Despite the euphoria around the GNU, this may not be showing up in the tax receipts yet – current tax revenue trends suggest a potential shortfall of between R10 billion and R20 billion, while expenditure is likely to remain close to or slightly below Treasury’s February 2024 forecasts. Budget cuts, especially in the public sector wage bill is already resulting in a decline in public sector delivery in healthcare and education (most visibly in the Cape) – and no doubt putting more people onto the already burgeoning grant system. The last time we saw a budget surplus was in 2006-2007 see below.   Ports and China I think we have all been watching China’s growing influence in Africa with growing concern – but is that warranted? China has developed significant global influence through the use of development financing, spending $1 trillion since 2013, including $160 billion in Africa. It appears that Beijing’s overarching strategy on the African continent seeks to court foreign policy influence in order to sanction-proof supply chains and develop dual-use ports, despite the doubtful resilience of such a strategy outside of peacetime conditions. A core component of this strategy is China’s use of financing for ‘resource-led diplomacy’ to facilitate access to raw materials and minerals for electronics, renewable energy and hi-tech industries. Trade between China and Africa saw a 1,900% increase from 2000, the year of the first Forum on China–Africa Cooperation summit.  Securing raw materials in Zambia led China to enhance strategic supply routes to port sites in Lobito, Luanda and Mombasa. The use of financing to secure access to raw materials in Angola, the Democratic Republic of the Congo (DRC) and Zambia accounted for 60% of all trade between China and Africa. There is very little doubt that the need to secure a stable supply of copper was behind the China–Zambia financing deal. Despite some alarm bells from pundits fearing that the West would be cut off from the supply of copper, Zambia only produces 4% of the world’s copper – with the DRC and Chile being orders of magnitude higher. However, it is important to look at the bigger picture – the wider network being created by China which includes a corridor (the Tazra Railway) for many of those ‘rare earth’ minerals used in today’s technology – lithium, cobalt etc. Interestingly Beijing views Zambia as ‘land-linked’ rather than ‘land-locked’. China is securing the ability to move things directly from Zambia and the surrounding region out to Mombasa and the African coast to China. In Kenya, China secures strategic supply routes by using it as the maritime gateway for raw materials from the hinterland. The state-owned China State Railway Group which was responsible for the Mombasa–Nairobi Standard Gauge Railway (SGR) and the Nairobi-Thika Highway Project purportedly worked in collaboration with mining SOEs in neighbouring countries to improve China’s raw material supply routes. Mombasa’s deepwater port made it the best strategic location and a hub of the large region of East and Central Africa. China has been involved in the construction of 51 of the 61 African ports. There is increasing concern that China could want to have military bases in some of these ports that they have been intimately involved with. China’s own 2019 defence white paper stated that the PLA was developing ‘overseas logistical facilities’ to ‘address deficiencies in overseas operations’, calling for a shift from ‘near coast active defence’ to ‘far seas manoeuvring operations’. It claimed that China must establish its ‘perceived status as a Great Power’ by advancing ‘China’s escalating global interests, particularly those associated with the BRI, including infrastructure, assets, personnel and control over sea lanes’. Moreover, China’s capstone doctrinal text, the Science of Military Strategy (2020 edition), highlights the ‘two Oceans’ approach in the Pacific and Indian Oceans and the PLAN’s desire to ‘establish ourselves’ in both by constructing ‘maritime strategic support points’. Without buying into a huge conspiracy theory, this bears watching. Closer to home, Transnet’s ability to invest in expansion is hampered by limited cash flow, rising debt servicing costs on an R130 billion debt pile and a steep debt maturity schedule, leaving most of its spending focused on maintenance rather than expansion. Without solving this crucial infrastructure issue our imports and exports are going to continue to be hampered. (Failure to maintain and expand infrastructure is a common theme right across Africa, and only once that is addressed can the country stop digging the hole they’re in.) Hopefully, the government learned the hard way from the dodgy Chinese locomotive dealings. In Jan 2023 Transnet ripped up an agreement with a Chinese locomotive supplier after the firm – CRRC E-Loco Supply – refused to have its financial affairs vetted by the South African Reserve Bank and the South African Revenue Service (SARS). They subsequently came to an agreement in order to get spares. You can read more about the background to this story and HERE and HERE.  Dollar strength Dollar strength is often measured by the DXY index, and in the last few weeks, it has reversed the downward trend – coming close to 100 at one point and is now back up at 104. To put this in perspective this is the same range we saw in the early 2000s. This strength in the dollar is probably behind the ‘weakening’ of the Rand.  A stronger dollar makes imports into the US cheaper but exports more expensive. Cheaper imports reduce inflation (but not really in the core ‘sticky’ inflation areas that the FED is still concerned with – services and wages). Unfortunately, a strong dollar often starts to depress global trade growth, as it is the invoicing currency of the world and holds the most purchasing power. This means that when the dollar appreciates, other currencies essentially depreciate, making the world poorer and less able to engage in trade. It also makes countries that have dollar-denominated debt less creditworthy, as it makes it harder for them to purchase the U.S. currency to manage their debts. Furthermore, it is likely less favourable for the second-largest economy, China. This can lead to an obstructive knock-on effect for emerging market countries due to their linked supply chains and commodities demand from China. Finally, the stronger dollar is also more likely to cause inflationary upward pressures for emerging markets because they typically purchase their raw materials in U.S. dollars.  US Debt and Yields Jurrien Trimmer, an analyst at Fidelity published this very interesting chart last week:  It shows the overall FED balance sheet and how this has been influenced by both the Reverse Repo program (RRP) and Treasury General Account (TGA) account. The RRP program is now down to $260billion whereas the TGA has been replenished to $829 billion. The RRP programme was a tool used by the FED during the COVID crisis where eligible financial institutions such as banks and money market funds, could park their overnight cash at a guaranteed rate. This provided stability to the financial system when it needed it most. Today there is less need for this and at the same time the TGA account can be replenished. Think of the TGA account almost like a country’s checking account where deposits and withdrawals are made by the government to ensure the smooth functioning of itself. The $100 million payment (federal lawsuit) due to the collapse of the Francis Scott Key bridge when a container ship crashed into the bridge will most likely end up in the TGA account, as an example. Having cash in this account is crucial and by default can be tapped in a time of crisis as well. So, the US government has options when it comes to providing liquidity but ultimately this will all come at a cost. Rates have to come down but US bond yields are telling us that the government’s interest bill due every year is unsustainable. Below is a chart of the US 10 year yield (purple) relative to the US Federal Funds rate Blue). US inflation is recorded at 2.4% y-o-y at the moment and the FED should approximate this number by dropping rates. But the US 10-year yield is showing something quite different. Here yields have started ticking up again which is quite abnormal.  Whilst Equities try and price in the future, bonds are a lot smarter as they live in the future. This is because a bond’s terminal payment is set, and the price of the bond and its interest are payoff profiles for economic conditions during the life of the bond. When it comes to government bonds these are replaced by similar tenure at maturity so you could almost see them as perpetual future gazers. The bond market is telling us that the future may hold more inflation than what the current inflation rate is suggesting. This is because ultimately to moderate the US interest bill, taxes would need to go up. One can attempt to grow the economy at a higher rate than the interest payments due, but this is going to be very hard for a mature economy like the US. So taxes would need to go up. When and how this happens is what I am now most interested in. This is political suicide if just implemented, but if it coincides with a crisis, politicians may be able to spin it as “saving the US economy”. Watch the space! Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.66 (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 R22.89 (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 R19.07 (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 at $75.57 ($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 $66,989 ($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 |