Short Note 11 February 2016
by Cees Bruggemans words 750
From a country genuinely on edge, given everything that has been assaulting us, externally and internally, South Africans have reason to stare at the US where many seem to think they too are heading for recession, too. Mistaken identity?
While the forces pummeling the SA economy may still gather enough in strength to actually push us over the edge in to two or more quarters of falling output, amounting to a recession, it is difficult to pinpoint where America’s weakness is supposed to come from and be overwhelming enough to push output down long enough to qualify, too.
The banking system isn't putting undue strain on the US economy. Property keeps advancing, with new housing starts and property price gains perhaps no runaway boom, but also not faltering. The labour market keeps adding new jobs, with a “normal” mix of low, medium and high paying jobs, and well ahead of the minimal 75 000 monthly needed to absorb new labour force entrants, thus ensuring a steady dwindling of unemployed, discouraged and underemployed.
Nominal wage gains of 2.5% translate into steady real income gains, given an inflation rate nearer 1%. Together with the job gains, it provides a steady boost to household real incomes and spending power.
Where is the problem? The energy patch is being subjected to a vicious down-scaling, in fixed investment reduced and jobs cut, but countering that is the deep price falls of oil and gas prices favouring households, improving real purchasing power and such real disposable income being spend. There is a net benefit, not a negative, in that.
The strong Dollar through last year has apparently weighed on US industry, as trade competitiveness suffered. But exports are only 16% of GDP, half of it accounted for by Canada & Mexico (inside the tent, so to speak), with only half the trade exposure globally. That's minuscule compared to domestic economic forces which remain the prime movers in the US economy.
So what's eating them then?
Corporate profit growth has been dwindling. More important, global strains focused on China have been unnerving (stock market and Yuan liberalization giving rise to shock adjustments), oil prices have dramatically fallen (and gas following through now), suggesting weak global growth (rather than vicious supply shakeouts in progress) and key central banks like BOE, ECB and BoJ have nailed colours to the mast regarding softish growth, undershooting inflation and dovish policy signaling.
The US bond market has for long been very vocal, querying the Fed’s insistence on rate liftoff now, instead seeing no evidence in humdrum US growth, inflation undershooting or lingering safe haven flight globally to lift its game beyond 2% yields. A test of wills and evidence that the market seems to be winning, though the Fed will keep watching out for data confirming its deeper sense.
But with the US long bond yield at 1.75%, oil (and gas) prices deeply suppressed and Chinese data of all kinds suspect, with Europe and Japan struggling, and many Chinese country dependencies among commodity producers and EM industrialisers struggling deeply (in or out of recession), and this unease feeding through to European and American bank bond holders regarding the safety of their holdings, a worldwide sense of near doom has been slowly gathering. A sense of weakening performance sliding towards the precipice of recession, with central banks unable to resist with the tools at their disposal (negative rates, more bond buying).
The problem with capitalist market growth is that much of it is self-fulfilling prophesy. Have confidence, will travel. But erode the self-confidence, substitute a dollop of anxiety and carefulness in its stead, and defensive pullbacks become possible.
Equity markets worldwide have sold off heavily these past six weeks and are taken as evidence of something unhealthy getting a grip on things. Suggesting it is mostly imagination won't fly. Analytically explaining that most of the unease has its origin in overdue economic adjustments and reforms, to be welcomed rather than deplored, can miss the bigger point of sentiment contagion getting underway regarding negative mindsets reinforcing each other, worldwide.
I don't think an American recession is looming, but US equities have already discounted over 30% probability that one will hit this year. Do not suggest it is all in the mind. They don't like that. Far too rational and all that.
Bottom line for us is that it may intimidate the Fed for a while too, reinforce liftoff delay (interrupting the countdown, going on hold, just as with a NASA rocket launch) and for the duration taking the shine off the Dollar.
That may take the pressure off the Rand for a while, though a weak Wall Street will weigh on the JSE, too. Mixed blessings, all of that.
Bruggemans & Associates, Consulting Economists
Short Profile Dr CW Bruggemans
Chairman, Bruggemans & Associates Consulting Economists
Consulting Economist, Avior Capital Markets
Consulting Economist, Ince (Pty) Ltd
Consulting Economist, Hellmann Logistics (Pty) Ltd
Consulting Economist, Bureau for Economic Research (BER), Stellenbosch
Honorary Professor of Economics, University of Stellenbosch
Short Note 2 February 2016
Revisiting Shock & Awe
Military terminology has its uses. Shock & awe. You get in a flash where that is leading. Are we witnessing the equivalent in our economy, being a small EM commodity producer in a badly upended world, further raked by many internal forces completely at variance with her general welfare, instead more politically inclined, seeking change, if need be at any cost?
Recent months proved extremely shocking and damaging. What we are left with is aftermath, digesting their playout. But what if skimming the zero line when looking forward isn't good enough? Projecting slowdown to near zero growth but then skimming rather than breaking lower? If we live in an era of major upsets, coming from many adjustment processes, having the effect of serially pummeling the economy and rearranging especially her financial furniture (Rand, inflation, interest rates, equity and bond markets)? What is it that we need to plan for: skimming or being awed? Indeed, shocked out of our socks, like some people before us elsewhere? Into recession?
Short Note 29 January 2016
SARB’s deeper dilemmas
by Cees Bruggemans words 800
The SARB Governor likes to talk about his “policy dilemma”, the one about a weak (and weakening) economy and a high (and rising) inflation rate. What to do? Favour the weak economy with a dovish policy stance? Play the inflation nutter, resisting with a vengeance the rising inflation tide? Straddle the divide, doing neither, by trying to adopt a neutral stance (if that is at all possible in a situation like this where things are seriously getting unstuck on all sides?).
But perhaps the SARB Governor doesn't allow enough that his true dilemma goes perhaps a lot deeper than discussed or acknowledged? I can think of at least two dimensions: the wide spread of views inside the Monetary Policy Committee; and also a few deeper questions about SA growth and inflation forecasts.
Short Note 27 January 2016
Social Pact Chimera
A social pact is an agreement, to act in the best interests of all concerned, each perhaps doing some water in the wine, but overall achieving a practical “peace”, allowing society to achieve better outcomes rather than remaining in endless disagreement, about ends and means, and instead of demanding all to come into line with one dominant view, to opt for pragmatic compromise. Not quite the theoretical definition, which suggests the consent of some to surrender certain of their freedoms in return of having remaining rights protected. Either way, you get the drift.
If that is an everyday workable definition of social pact, are we seeing such a thing being born today in SA? Or is it another stillborn effort leading nowhere? Politically, there is the suggestion of something being crafted, but reality is on the side of skepticism. What do such efforts do for us, besides making those making the effort look good politically (we tried!!!but alas!!!).
Short Note 21 January 2016
Getting our bearings
Events in recent weeks have been dominated mainly by political and financial news. The shock reaction to the Nene firing, the Rand reaching 18:$ before only partially correcting, the jump in long bond yields to nearly 10% (whereas America’s is below 2% and Germany’s 0.5%), the JSE stock market giving way (to fall below 47 000 from a 55 000 peak last year), Chinese stock market and currency turmoil, global markets selling off heavily, and oil reaching $27.
Throughout this period summer reined, not peacefully, as drought bit hard, giving a major downward twist to SA growth prospects in 2016, which belated interior rains are unlikely to undo. But the economy is more than just financial markets & farming.
Short Note 15 January 2016
Revealing Start to 2016
by Cees Bruggemans words 850
It isn't only the prez that should be in focus but also the Board, that handful of individuals running the larger political show, and not for ceremony either it would seem, considering finance minister recalls. A closing 2015 Etv interview with Tito Mboweni lifted the hem on a pair of interesting looking ankles.
There was the suggestion that SA has been turning to China because it will be the biggest economy, if it isn't that already. Eh, what about quality? Since when is big and ugly everything?
Short Note 12 January 2016
Rand sinks away 2001-style
The last time the Dollar more than doubled in value against the Rand was in 2000-2001, when it went from 6:$ to 13.85:$. This time it took five years to crack the same barrier, from 7:$ in 2010 through 14:$ in 2015. These past four weeks we added over 40% to that originally 2010 base, the Rand trading near 17:$ late last night. That was after a very volatile day, starting with a few stop-loss margin calls driving a flash-crash, highly illiquid market in Japan reached 17.90:$ which subsequently corrected to 16.50:$ as our Rand market opened. Things are going very fast now, as they did in the closing months of 2001, when all brakes had been removed and the one-way trend was the short-seller’s friend.
Events are of course different today, even if the momentum is the same. Even so, at least some of the elements doing the Rand driving have a similar origin, this aside of once-off exceptional Japanese margin calls. And the only question is: have these main forces exhausted themselves, and is the Rand rout nearing an end? Or are these forces still in full bloom with (much) more to come?
by Cees Bruggemans words 1100
The dirtiness of American politics is legendary, and the Trump-Clinton kiss-and-tell promises to plump new depths shortly. But take a closer look at Europe, and not only Britain, France, Greece, Spain or Italy. It is Germany of late that makes me wonder.
It is focused on Keulen, and what happened there on New Years Eve. As it did in many other cities, apparently (Hamburg) but also outside Germany (Zurich).
Short Note 4 January 2016
Taking the SA Pulse: fireworks 4/1
by Cees Bruggemans words 600
Anecdotal impressions may not be representative and not allow generalization to larger populations. Then again, impressions often assist in rounding out a general picture. So, too, perhaps fireworks, though the disclaimer is noted.
How poor, or how well are we doing, all of us, but also differentiating? We know the middle class is getting severely squeezed from above and below. We know about deep hardship among the poor. But sometimes there are moments that perhaps shed extra light. Fireworks on the 2015/2016 crossover did so?
Short Note 31 December 2015
An Interesting Year
It was an interesting year. Many also say it was a horrible year, and it certainly was for some, indeed momentous in some respects. But the JSE didn't lose 80% of its value as in 1969, we didn't have massacres like Sharpeville 1960, Soweto 1976, Bisho or Boipatong 1992 or Marikana 2012, we didn't do recession like 2008, 1998, 1984 or 1976, we didn't do strikes like platinum 2014 or public sector 2011, we didn't do debt default standstills like 1985. Indeed, there were lots of things we didn't do, which would have made this year truly horrible if they had.
Instead, we had a chuckling president steadily losing the plot (not edifying, but also not Shakespearean), we had much parliamentary slapstick with its darker but also lighter moments (those hats, those overalls, those…), there were banana peels (Nene’s firing, parliamentary manhandling reminding of Eastern Europe). We had the power of social media suddenly unleashed on us via the hashtag revolution, starting with Rhodes, and with that effort successful, redirecting its fury on other irritants, such as university fees, language policies and Zuma. And of course the Rand lost another 40%, but that protected a lot of mining and industry on the brink of extinction and also boosted not a few farmers. And the foreign rating agencies got antsy (they would, with so many banana peels flying).