| 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? Market Watch The JSE has significantly come off the boil in the last few weeks, and we are probably going to have to wait out the uncertainty of Trump 2.0 (and take advantage of offshore opportunities while we tread water).  This sort of volatility in markets underlines the need to be diversified – and that includes global diversification. Look at the Hang Seng for example:  There was a nice bump in stocks after the stimulus packages were announced, and this has since come off the boil, but perhaps taking a breath – like the rest of the world – to wait and see what the Trump circus will bring to town.  Trump picks We’re starting to find out what Season 2 of Trump is going to look like and it’s as deranged as you might expect. As a candidate, President-elect Donald Trump promised to let Robert F. Kennedy Jr. “go wild on health” last week, Trump said that he would nominate Kennedy to lead the Health and Human Services Department, which would give a vocal skeptic of vaccines significant influence over public health policy. Kennedy has no medical or public health degree. Interesting he has ‘worms that at half his brain’, the dead bear in central park that he took home, ditto with a dead whale head, 14-year heroin addiction – The list goes on.  Earlier, Republicans and Democrats had expressed dismay at Trump’s choice of former Representative Matt Gaetz to lead the Justice Department as attorney general. Lawmakers called on a congressional panel to release the results of its investigation into various allegations of misconduct by Gaetz (allegations of improper conduct with minor girls), who effectively ended that probe by resigning from Congress after Trump’s announcement. There is now a call to have those findings released and there is little chance for him to be approved by Congress. Trump could pull a “Recess Appointment’ but that would require Congress to recess for more than 10 days (which it hasn’t since 2016) and even then would only last a year, at the most. Trump said he would name Todd Blanche, who oversaw his legal defence against a number of indictments, to become the No. 2 official at the Justice Department. About a dozen cabinet or cabinet-level roles have yet to be announced. Kristi Noam is another pick. Famously, in her autobiography, she boasted of shooting an unruly puppy in her yard, in front of her kids, because he wouldn’t obey her. The clown car is coming to the Whitehouse and there are no guardrails this time. This week Trump named National Guard veteran and Fox News presenter Pete Hegseth for the role. Hegseth served as a prison guard at Guantánamo Bay detention camp, as well as in Iraq and Afghanistan, before becoming an outspoken rightwing critic of the military. He has called for a purge of generals for pursuing “woke” diversity policies. Pentagon officials were said to be stunned by the choice and the Army Times quoted an unnamed senior military officer as saying there are concerns that Hegseth – who has minimal managerial experience – will be able to manage a government department with a budget of more than $800bn. Another candidate is unlikely to be confirmed by Congress. You can read more HERE.  Rand/Dollar The rand is caught in a tug-of-war between optimists who expect the South Africa’s economic reforms to pay off in the longer term, and pessimists selling it off as Donald Trump’s policy proposals drive the dollar higher. Are the pessimists winning?  Since the US election on November 5, the rand has slumped 5.2% against the greenback, reaching its weakest level in three months and leading a broad decline in emerging-market currencies that’s wiped out most of its year-to-date gain, fuelled by signs the country’s coalition government in place since June will do what it takes to boost economic growth. It’s still one of only three emerging-market currencies to still show gains against the dollar this year, albeit at just 0.6%. Confidence in the so-called Government of National Unity is evident in bond markets: benchmark local-currency yields are still lower than before the US elections. And a Eurobond sale this week — the first in more than two years — attracted orders of almost three times the deal. None of that is helping the rand. With Republicans in the US securing a trifecta of the White House, the House of Representatives and the Senate, investors see a strong chance Trump will implement his policy agenda, including import tariffs and large tax cuts. That would likely fuel inflation, leading to higher interest rates and supporting the dollar. If the AGOA agreement doesn’t hold, it’ll be very bad news for RSA exporters.  UK Budget – update Chancellor of the Exchequer Rachel Reeves said the UK has been regulating for risk instead of growth and vowed to give authorities a new remit to reverse that approach in her deeply unpopular inaugural Mansion House speech. She added that the post-2008 crackdown on banks has gone too far. At the same event, Bank of England Governor Andrew Bailey said the UK must look out for opportunities to rebuild relations with the EU. And the BOE changed the way it manages its bond portfolio, freeing up £10 billion for the chancellor over the coming years. The graph below shows the GBPUSD and while the pound is well of its near parity in 2023, it slumped dramatically following Reeves’s speech and has since recovered a tad.   Government Employees Pension Fund (GEPF) Staying local – why should we care what the GEPF gets up to? Because if this falters then we taxpayers will have to bail them out! Unbelievably the GEPF claims its 4.9% return for 2024 is “satisfactory”. It’s not. The JSE returned 13,8% and even government bonds have averaged at 8.5%. With too much of its portfolio invested in South Africa, its members could be losing out.  The GEPF, which looks after the retirement savings of about 1.28-million civil servants, justified its performance for the year through year March 2024 because of the “tough and volatile conditions in the face of slow economic growth, and high unemployment amid the global challenges of conflicts, high energy costs and inflation”. Huh? Investment professionals and fund members are sceptical, pointing out that global markets returned 23% over that period. The underperformance reflects a major diversification risk for the fund. Its performance is well below the inflation rate, which averaged 5.5% over the GEPF’s financial year. It’s not yet time to panic; the actuarial position of the fund is still positive, but clearly, red lights are flashing. In its annual report, the GEPF says its assets under management have increased to a record R2.38-trillion in its latest financial year, up 2.6% from the previous year. To put that amount in perspective – that is two years of TOTAL SARS tax receipts! The increase is in part due to an increase in the number of civil servants and increases in overall public sector wages. That added 10.88% in contributions to the fund, and though benefits paid out increased too, they did not increase at the same rate, which helped boost overall assets under management. This is of course just creating a problem further down the line. The GEPF, which outsources about three-quarters of its fund management to the Public Investment Corporation, is an enormous player in local markets, but it differs from most fund managers as government employees are obliged to invest 7.5% of their pensionable salary towards the fund, an amount matched by the state. Keeping it local I’m all for patriotism – but there is no room for it in investment IMHO. Judging solely on the basis of the 2024 results, it’s obvious that the GEPF’s lack of international diversity crimped its performance dramatically.  The fund’s international equity investment handily outperformed the MSCI world index, but since the fund has only a little over 8% of its investments in this asset class, it wasn’t enough to outweigh its investment underperformers. The fund is somewhat constrained by a general mandate to keep most of its investments in the local market for political reasons, but most investment funds in South Africa have for years sought to balance local and foreign portfolios. It’s small potatoes, given the huge size of the fund, but since it does have a broad mandate to support local businesses, it’s worrying how badly these investments have performed. Impairments overall increased from R6.2bn in the 2023 financial year to R6.5bn. One of the largest has been the decision to sink R4.3bn into technology firm Ayo. It has managed to claw back R619m as part of an out-of-court settlement reached last year, but its investment has deteriorated even further and is now valued at only R41m. This is far from the only disastrous unlisted investment. The fund has impaired its investments in Honsha Property, which part owns the Melrose Arch Precinct, Firefly Investments, which bought a stake in unsecured lender Bayport Finance Services, and South Point Management, a student accommodation property investor. All of this again underscores the urgent need to drive economic growth. The GEPF is a defined-benefit fund, which means the benefits the members receive are guaranteed. With its fortunes so closely tied to its home market, it’s time for the government of national unity to deliver. As the country’s largest pension fund, with the most members, the fund’s significance lies in the potential burden it could be on taxpayers if its returns continue to fall short of inflation and eventually erode its ability to meet its obligations.  Oil and Gas Remember the wild ride in Gas prices at the beginning of the Ukraine war? Well, the topic is back in the headlines. Countries are now preparing to turn off the gas taps with Russia. Austria’s state-owned energy company is enforcing a ruling against Gazprom in relation to a €230 million arbitration claim. Traders are nervous, with European gas prices rising 5% last week on the news that the end of Russian gas is nigh just as winter heating season begins. But Europe’s gas-market reaction is just one part of a broader global trend, where traditional supply and demand relationships are being upended. Oil demand globally is also slowing as more car drivers — especially in China — opt for electric vehicles. Global crude markets face a surplus of more than 1 million barrels a day next year, cushioning prices against turmoil in the Middle East and beyond. Ironically a drop in petrol prices (called gas of course by the US, but we English speakers know the difference) is not going to come from ‘Drill, baby, Drill” as Trump likes to parrot, but from declining demand. Staying with Europe they are making a last-ditch appeal to the outgoing Biden administration to boost American support for Ukraine in order to solidify Kyiv’s position as much as possible before the presidential term ends in January. Donald Trump, who takes office Jan. 20, has said he’d seek a quick deal between Kyiv and Moscow, raising concerns in Europe that such an accord would be disadvantageous to Ukraine. European leaders and officials have asked the US to provide Ukraine with more weapons and artillery, impose additional sanctions on key Russian revenue streams and target Moscow’s ability to acquire banned technologies. We’re probably seeing the beginning of the end of the Ukraine war – and not in a good way.  What if Trump policies actually got implemented? The spike in global inflation from 2021-2023 was caused by an unlikely mix of events – specifically the Pandemic which upended global logistics, causing bottlenecks and demand issues globally, and then the Ukraine war with its effect on commodities – and very meaningfully on gas prices (which are causing a concern again – see above). In the US (and parts of Europe) this was exacerbated by the stimulus cheques which were sent out by the government to stop the economy from imploding. The FED has played a large role in bringing inflation under control with interest rates, but to be honest, many of those inflationary causes were already working themselves out of the system. It is the stickiness that stubbornly remains. Bottom line, the only long-term way to make sure the inflation beast doesn’t rear its ugly head again is to tackle the debt – a deeply unpopular move that more often than not unseats ruling parties. Remember the midterm elections in the US in Nov 2026 and the Republicans don’t want to lose their trifecta. . If Trump wants to make a meaningful change the end of debt creation is essential. Easier said than done! Every time Congress authorizes more spending than is in the bank, the Treasury has to float debt to make it happen. That is the statutory obligation. What that means is that Congress needs to pass a balanced budget, ideally, right away (and we’ve seen what happens when that is delayed). Enter the DOGE department headed up by Trump’s new BBF, (this week anyway), Elon Musk. His solution is to fire 4 out of every 5 government workers in a Twitter-style putsch. (Let’s ignore for a moment the 75% drop in value in X-Twitter as a result). That’s not enough though, there would also have to be a sweeping elimination of agencies, each of which can save tens of billions and possibly a trillion or more in total. (Trump’s going to need that Trillion to deport millions of migrants). This can happen through executive order or through legislation. Trump is not famous for being a budget cutter. He cared nothing for the topic in his first term. To say that this would be deeply unpopular is an understatement! Government workers are often predominately Republican (but Trump doesn’t care – this is his last Presidential Term). Of course, unemployment would spike immediately – and while the US economy is at ultra-low unemployment levels, the private sector cannot mop up millions of out-of-work government workers (with their skill set which is not necessarily in demand in the private sector). The Treasury would need to go into Quantitative Tightening in a big way. It’s not just not rolling over debt it already has, but actively buying back Treasuries. This is also likely to trigger a recession if done too aggressively. The Tariffs could bring in some much-needed cash to the Treasury – but the immediate result would be inflation. Cobie goes into tariffs below, but from a layperson’s perspective: I’m sure most of our readers understand how tariffs work (unlike the MAGA crowd) but let me put it very simply. Say you import T-shirts from China for $10 a piece and sell them for $20. Now Trump puts a 100% tariff on the shirt. The retailer orders the shirts from China, still costing him $10 a piece, and the Chinese manufacturer is paid (there may be terms, it may be FOB (Free On Board – when it moves out of China) but the bottom line, they’ve been paid!) When it arrives in the USA, customs now impose the tariff – on the IMPORTER, say $10 per shirt. That shirt is now $20 at wholesale. If the retailer wants to make the same profit, he has to sell it for $30. At best, it makes those imports less competitive boosting local production. If a local manufacturer can produce the goods for $15, he is in with a chance – but the price is still going to go up to $25. There is a good chance that the machines used in the production are also Chinese. You can see from the graph below, what percentage of goods in the various sectors trade between the US and China. The largest component by far is machinery – and that will impact every single other sector in the country. Do you think that China won’t retaliate? 20% of the US’s exports to China are in agriculture for example. For years China has been diversifying their agriculture reliance from the US, and Brazil is now the biggest trading partner for agricultural products. Australia is also a large import/export partner, but that relationship has been fraught for a while.  In 2023, China imported $494.16 million worth of edible fruits, nuts, citrus peels, and melons from South Africa. Other agricultural products imported from South Africa to China in 2023 include • Pulp of wood, fibrous cellulosic material, and waste: $322.60 million • Mineral fuels, oils, and distillation products: $258.59 million • Wool, animal hair, horsehair yarn, and fabric: $202.42 million Could Trump go full Argentina through dramatic, sweeping, historic levels of regulation torching plus the shock and awe of full agency elimination? It’s going to be an interesting 2025!  Interest Rate cuts (USA) In our previous newsletters and podcasts, we have talked extensively about US interest rates – apart from anything else, our SARB is likely to follow suit. On Thursday Producer prices increased 0.2% in October, specifically Portfolio management, airline fares lift services costs. Core producer prices rise 0.3%; up 3.5% year-on-year. Weekly jobless claims fall 4,000 to 217,000 and continuing claims decline 11,000 to 1.873 million. On the positive side Food prices dropped 0.2%, with the cost of eggs plummeting 22.0%. Gasoline prices decreased 0.9%.  Wholesale goods prices rebounded 0.1% after falling 0.2% in September. Clearly, the inflation genie is not back in the bottle, and while we will probably see a 25bps cut next month, we fully expect the rate to slow significantly next year, the FED (and everyone else) will wait and see what policies Trump actually does implement. He doesn’t have a good track record of keeping his word. Author: Dawn Ridler  US CPI A while ago, I suggested that inflation in the US may stay structurally higher than the FED target rate of 2%. The latest CPI release, out last week, showed that inflation had risen by 2.6% y-o-y from its previous reading of 2.4%. Core inflation stayed unchanged at 3.3%. Energy costs had generally fallen but food items, shelter and transportation added to the basket sending the inflation numbers higher. I continue to believe that the new normal for the US will be inflation at the 3% level. The factors that contribute to this are a trend towards deglobalization, an emphasis on fiscal spending and the upswing in trade tariffs which President Trump has promised will continue unabated. The issue around trade tariffs is a prickly one as it increases the price of goods sold in the US but protects those industries which compete with imports directly …. at least that is how the theory goes. Take appliances as an example. These are assembled in the East outside of China which attracts more favourable rates than if they were shipped out of China. But many components, including the hotly contested area of semiconductors, may very well come from China. So, the tariffs in place don’t really take a direct aim at China, its real intention. This should leave an appetite for the US Government to modify tariffs to become more component-sensitive. But that’s a massive job and can only prohibit the flow of appliances, sending prices higher and making for a more bureaucratic government. Here is but one example of why US inflation is set to stay higher rather than lower. The US yield curve seems to agree. I have been writing about the march higher for US yields and this continues with the US 10 year now touching 4.5%. So if inflation runs at 3% going forward, this not only means that interest rates could only fall to this level and no more, but it also means that the cost of capital for companies would have risen as well as sending the debt funding costs for the US government higher. Companies will adapt in time, but the government will need to ensure that they grow the economy in excess of their debt funding rate to ensure the longevity of the economy. This should be the crux for the Trump administration coming in. How do they grow the economy more than their debt funding level rather than immigration and abortion rights. The latter two subjects are important, but an underfunded government tends to let priorities lapse leading ultimately to a failure of the whole system which is not capable of dealing with any issues any longer. The US will become more isolated during the next 4 years. Their priorities will be enforced either through legislation or by might. The question other countries have to ask themselves is where do they see themselves in relation to the US. There is a political answer but the real answer is about money. Countries should think of their current trade with the US. In SA, AGOA is worth about $25 billion per year. But this is the tip of the iceberg. Strategically, countries should ask themselves what the US could possibly offer them that they won’t be able to get elsewhere? The US leads in technology. Yes, China is a rising power in this field but they continue to buy semi-conductors from US companies because they cannot manufacture the high end ones. This is the case with some of Nvidia’s chips which are intentionally dumbed-down for the Chinese market and which they happily buy. The US government wants to maintain this lead and therefore it shouldn’t come as a surprise that they will push capital into technology companies to maintain and enhance their lead. If the future is a technologically enhanced one, why wouldn’t countries align themselves with the US? At the same time, the US is an advanced economy. They have gone from being an agri-focused economy, to a manufacturing powerhouse and then to a services economy. To think that they will somehow regress back into becoming a manufacturer powerhouse is wrong. But where they could make a lead is in robotic manufacturing. Citizens of first-world countries tend to shy away from manufacturing jobs as these tend to be repetitive and precision-driven whilst earning wages which tend to be higher in the services economy. Where do other countries see themselves in context of this? As President Trump sets the legislative framework in place for a more isolated US, the time is now for other countries to think how they want to strategically position themselves … The question I ask is how many of them are doing so? Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R18.21 ( R17.58, R17.60, 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)  The Rand/Pound closed at R22.99 (R22.73, R22.72, 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, )  The Rand/Euro closed the week at R19.19 (R18.85, R19.09, 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,)  Brent Crude: Closed the week at $70.87 ($73.86, $73.99, $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).  Bitcoin closed at $90,679.47 ( $79,318, $68,277, $66,989, $62,876 , $62,267, $65,596, $62,603, $54,548, $57,947, $63,936, $59,152, $60,847, $61,903, $59,760,). 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 |