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Comment                                                                                6 April 2017

The crest of a wave    

by Cees Bruggemans                 words 950

Serendipitously, SA finds itself on the crest of a wave, accompanied by many other vessels of similar vintage. Not quite Jan van Riebeek and his fleet sighting table mountain 365 years ago today, but the surfing analogy applies.

The entire emerging world is currently on the top of a wave, wallowing in their typical fashion, but way beyond their station when considering what happens once the wave breaks. And off Hawaii not knowing your wave crest from your trough is like not knowing one body part from another.

 

What wave, what crest?

Simply put, the world today is one capital market with its epicenter in New York. More risky emerging outliers pay more for their money and have weaker currencies on structural grounds than the big developed bruisers at the centre. If that is the normal state of play (a flat sea, as occasionally happens), what drives a trough and what drives a crest?

When hurricane winds favouring the epicenter create troughs for risky emerging outliers, it usually is because the epicenter is pumping up its growth and raising interest rates, increasing its attraction to global capital which then starts flowing with great force towards it, firming the Dollar while doing so. Just the very opposite happens in the risky emerging outliers where many end up under water among so much sucking violence under their keels.

That was the outlook not all that long ago. Trump gaining the US presidency unleashed a tsunami of bluster on the world, as long promised during his election campaign. Normally Sphinx-like eyes on Wall Street turned into Dollar signs as the next great gold rush came into view. Tax cuts, deregulation, much infrastructure spending, it got the juices going.

Interestingly, while this got US interest rates and Dollar going higher, it as yet did not sink the risky rusty outliers. Somehow the whole global capital market got a shot of Trump adrenaline in the arm. Gold in them far hills, everywhere.

That was Serendipity One, and it caught a few folk flat-footed in recent months, those who had in mind “buy Trump, sell the rest”.

But then Trump never was a really sure thing. The bigger the promises, the deeper the wonder about the US division of political labour, meaning presidency, the Congress with two houses, and the Supreme Court.

And sure enough, the good ship Trump has sprung a few leaks, in recent weeks licking its wounds about migration and Obamacare, and the market ardour this past month gradually subsiding. Were all those promises still for real, or was a rain check in order, with no sense of timing as to cashing in?

And so the great hot air of expectations (a sugar-rush, Larry Summers called it, by now long ago) that had pumped up the epicenter equities, bond yields and Dollar slowly began dissipating. And the wallowing risky hulks out there in the far emerging oceans remained attractive on their higher yields, keeping their currencies also well supported, and no evidence of sinking hurricanes on the distant horizon yet.

Indeed, the more the Trump fairytale gets thrashed by US politicians and judges, the more he has to eat humble pie, the longer this global standoff may last.

This is not to say that there will be no US tax cuts, deregulation, infrastructure spending. It may all still come back into focus eventually. But for now, market focus has lost its certainty. Only once it comes back, does the play resume.

Meanwhile the risky world is wallowing in Serendipity Two on top of a wave as the Trump deflation persists that has yet to break.

It doesn't mean it won't eventually. The real world isn't into suspended animation. Cresting waves do break. But apparently not just as yet.

At the height of all this happiness, when wise folk don't make hay but lay in buffers for when things become less happy, SA choose this moment to act like a bull in a China shop. The shaming recall from Gordhan from London, firing of a mere 20 ministers, inviting the S&P knee jerk to junk us, with the other two rating agencies likely not far behind. And who knows what still ahead in self-inflicted damage as new policies wait in the wings, unless politics were to surprise us with a reversal.

Presumably why the market reaction has been so muted was because we are still knee deep in Serendipity Two globally, and we just part of a flotilla of rusting hulks, the one worse than the others (and with us admittedly now with a few toes fewer, but who would notice in such company?).

However…….

Once that global wave stops cresting and breaks, and the trough beckons, with us in any case apparently still hell bend to change our Western furniture in favour of Mao and Stalin jackets, one kind of wonders what special treatment will await us.

For one, show me your toes?

We need to be realistic. The world will keep evolving, and some of the Trump promises come to fruition. Markets will change their tune along well known ways. And unless we succeed in politically insisting on a new course, it will likely go painfully. Those who care to remember the 1985 SA debt default should know better than those ignorant of those events.

As to timing, this is clearly full of surprises, which suggests heightened risk. I hope and wish you may for long have balmy weather, but do come prepared for hurricanes. They have a way of turning up when you least expect it.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website www.bruggemans.co.za

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