Strange shapes and sizes, Dynasty Asset Management

On Wednesday, the US released its inflation figure of 8.5% for the 12 months ending July, against the consensus expectation of 8.7%, this being the lowest year-on-year number in recent months and the first sign the Fed’s aggressive rate hiking policy may be moderating inflation.

On the back of this marginal decease in the inflation rate, it’s beginning to look like the Fed may be able to pull off a soft landing by taming inflation without plunging the economy into a recession.

Although GDP in the US has contracted for two consecutive quarters, the National Bureau of Economic Research has yet to officially declare a recession. This is because recessions come in all shapes and sizes.

According to Bloomberg News, “the reason why there is so much talk these days about whether the economy is in a recession is recency bias, with people remembering how damaging the last two (Covid 19 and the Global Financial Crisis) were and thinking the next one will be of the same magnitude”.

The article adds that the labour market is the biggest source of cognitive dissonance, with the unemployment rate currently a tenth of a percentage point above the half-century low of 3.5% set in 2019. At the same time, most companies comprising the S&P 500 have released Q2 earnings that have come in ahead of estimates.

In a more cautionary note, the New York Times also reported this week on a strange phenomenon: Americans with low incomes are scaling back on spending versus their richer counterparts who continue spending. This divergence poses a challenge for the Fed in that higher income households have been able to keep spending as costs climb, whereas lower income households are struggling more profoundly with inflation. Should richer families continue to spend, many prices may rise, causing the Fed to continue on a rate hiking path until inflation is under control. “In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs.”

The bifurcated economy and the policy decisions flowing from it will be key to market movements in the ensuing months, although our base case remains that global inflation will subside considerably over the next year, global growth will slow appreciably, but a significant recession will be avoided.

According to data compiled by the Leuthold Group, those buying the S&P 500 at major inflation peaks going back to 1940 have seen the index rally on average by 16% in the next 12 months. (The caveat being that the P/E has averaged 12.7X in prior instances, whereas the current forward P/E ratio is around 16X).

“When systems come to be far from points of equilibrium, they reach bifurcation points wherein multiple, as opposed to unique, solutions to instability become possible.”

– Immanuel Wallerstein, American sociologist and economic historian

Global News

Renting in the US is costing significantly more, with prices soaring at the fastest pace in more than three decades. Surpassing a median of $2 000 per month for the first time ever is pushing rent above pre-pandemic levels in most major cities.
In New Zealand, house prices have fallen for the first time in just over a decade. The Real Estate Institute’s price index slid 2.9% from a year earlier, the first fall since 2011. On a monthly basis, the gauge has dropped for the past five months straight.
In the midst of an electrical component shortage, caused by lasting Covid-19 shipments out of China, US president Joe Biden has signed a broad competition that includes about $52 billion to boost domestic semi-conductor research and development, calling it a “once-in-a-generation investment in America itself”.
In the UK, household energy debts as of July were more than double September 2021 levels, according to price comparison service Uswitch.com. Each year since 2018, when a UK price cap was introduced, household debts have gradually fallen during summer. This year, however, debt increased by 10% between April and July.
Five decades after president Nixon’s advisor raised alarm bells over climate change, Congress is on the cusp of finally responding to the problem. Senate Democrats have muscled through a $370 billion bill designed to move the country away from fossil fuels and toward solar, wind, and other renewable energy. This could be the country’s first major climate law as the world reaches an inflection point.
Russia will no longer supply oil to central Europe over payment issues, which means that Europe’s energy security has taken another hit. Continued sanctions have prevented payment of a transit fee.
However, good news is on the cards for consumers across the globe as crop futures have retreated to pre-war levels, and the UN’s monthly measure of food prices sank the most since 2008. Yet, the war in eastern Europe is putting more pressure on farmers from the US to India to replace crop losses and make up for the shortfall in supplies from Ukraine, usually a key shipper to poorer nations in the Middle East and Africa.
Former US president Donald Trump has released a campaign-style video that may be the strongest hint yet that he plans to run against Biden in 2024. This came hours after he denounced the FBI’s raid on his Florida home as political persecution. The bureau entered Trump’s home as part of an investigation into his removal of boxes of classified records from the White House when his term as president ended in 2021.
As Russia continues to invade Ukraine, Taipei has warned that China’s military drills may lead to an invasion as Beijing is determined to control the East and South China seas at either end of the Taiwan Strait. China used US House of Representatives speaker Nancy Pelosi’s visit to Taipei as a pretext to prepare for a possible invasion of Taiwan and expand its control throughout the region.
Warren Buffett’s Berkshire Hathaway was a net buyer of equities during this past quarter, reporting $3.8 billion in purchases. Despite the spending, the company’s cash pile stood at $105.4 billion at the end of June. The company was a net seller of equities in the second quarter of last year.
Tesla founder and multi-billionaire Elon Musk has sold $6.9 billion of his shares in the electric car maker – his biggest sale on record – saying he needed cash in case he is forced to go ahead with his aborted deal to buy Twitter.
At the time of writing, the S&P 500 was up 1.5% for the week based on Thursday’s close.

Local News

South Africa’s embattled government, which is trying to rein in public spending, had until today to put a new wage offer on the table for 1.3 million public servants, failing which the unions have threatened to declare a dispute that could lead to a debilitating national strike if unresolved.
Organised crime – of which illegal mining is an integral part – is an existential threat inflicting a devastating toll on the political, economic, and social fabric of South Africa, from central government to rural municipalities, and from the JSE to the spaza shop. Read more here.
National Assembly speaker Nosiviwe Mapisa-Nqakula has said that a motion by the African Transformation Movement, calling for the impeachment of president Cyril Ramaphosa over the Phala Phala scandal, will be referred to an independent panel to assess whether the available evidence supports a finding that the president is guilty of a serious violation of the constitution or the law, or of serious misconduct.
The hearing into Busisiwe Mkhwebane’s fitness to hold office must rank as the political showdown of the century. Her advocate, Dali Mpofu, has risen to the occasion as a courtroom conjurer. Click here for the full story.
Meanwhile, US secretary of state Antony Blinken, has ended a three-day visit to South Africa, which will be the launchpad for the United States’ new Africa strategy in an effort to reset relations between the two countries.
Local mining and manufacturing data came in worse than expected. Statistics South Africa figures showed June mining output fell 8% year-on-year, worse than the 5% drop predicted. June manufacturing shrank 3.5% in annual terms versus a forecast 2.9% decline.
Households in South Africa could see a decline in food and fuel (excluding gas) prices over the next few months, according to the Bureau for Economic Research. The organisation has noted a downward move in global oil prices, which – if the trend persists – will lead to a sizeable fuel price cut at the end of the month, with the one-month ahead Brent crude oil price declining by 13.7% despite fears of a recession subsiding.
At the same time, a Sasol gas price hike will see the price of gas almost double, harming the poor the most as they will battle to afford energy and food. The price increase will influence upstream and downstream contracts that are in force across all supply chains.
However, local farmers are embroiled in disputes with key export markets in the EU and China that risk crippling a sector that has been one of the economy’s few bright spots in recent years. Citrus and wool exports have been hit by the imposition of phytosanitary restrictions, which South African exporters argue are unwarranted and discriminatory, and will likely lead to pressure on the government to intervene on their behalf.
Peter Bruce has written that government’s Window 5 for its Renewable Energy Independent Power Producer Procurement Programme, for which 25 winners have been announced, is in big trouble and may need rescuing. This is because the bids have not reached financial closure.
Turkish Karpowership, which wants to supply more than 1 200 megawatts of power to South Africa, has seen its appeal to overturn an environmental ruling against its plans fail in another blow to the country’s attempts to resolve an electricity crisis. It will be allowed to correct “perceived gaps” in its application and resubmit.
Nedbank, which reported growth in its earnings and dividends back to pre-pandemic levels, said the prospect of SA being grey listed by the Financial Action Task Force when it decides on the matter in early 2023 is “too close to call”, though it believes the effect of such an action has probably already been priced in by markets.
Meanwhile, the Air Services Licensing Council has suspended licences that give Mango the right to fly – the budget airline has been grounded for more than 12 months. Without licences, investors that have lined up to rescue state-owned Mango may walk away, hastening the operation’s demise.
Standard Bank has parted ways with Edelman, the US-headquartered PR firm that provides it with corporate reputation management advisory services, apparently over a dispute over the bank financing a fossil fuel project amid a pushback from shareholders for financiers to go green. Read more here.
At the time of writing, the JSE All Share was up 2.1% for the week, while the rand was 3% stronger against a weaker US dollar.