Who knows what Entropy knows

  • Welcome to 2024 and I wish all my readers a prosperous 11.5 months ahead.
  • At the beginning of a New Year its always interesting to try to predict the major themes that will play themselves out.
  •  And then at the end of the year no one seems too intent on pointing out just how wrong they were in their predictions and assumptions.
  • I will do the same today knowing that I will probably be eating copious amounts of humble pie at the end of the year.
  • And I have to say that in my opinion the year ahead certainly will be interesting.
  •  The world around us is changing rapidly. Often too rapidly to keep abreast of the issues.
  • We tend to forget that the natural state of the Universe is one of Entropy – order descending into disorder, and not to be too dramatic, but it does appear as if there is a tremendous amount of chaos around  us at the moment.
  • I wrote last year that it seemed to me as if the world was at some kind of cross road.
  • Six months later that appears to be even more evident, all of which has implications for the year ahead.
  • So let’s dive right in to this pool of uncertainty and entropy and see how close we can come to winning the gold medal (or the wooden spoon)  at the end of the year.
  • In the words of Donald Rumsfeld Let’s begin with the Known knowns (or better said the things we think we know
  • Inflation and interest rates
    • Global central banks have spent the last few years trying to tame the beast of post covid inflation, raising rates at a rapid pace. It finally appears as if the battle has been won, opening the door for rate cuts over the course of this year. In theory, this should be positive for emerging market currencies including the Rand – in theory!!Remember entropy reduces order into chaos. In isolation global rate cuts should provide a boost for high yielding assets. However the devil will be in the detail. Do rate cuts take place in an environment  of a soft landing for the global economy, or do we enter into a prolonged recession globally meaning for example,  reduced demand for commodities etc , which would be a negative factor for ZAR exports, and consequently the local currency?
  • Global politics
    • What a complete mess we are in on this front.
    • From the Middle East the Eastern Europe, to China and Taiwan to North Korea vs the West. From Religious ideology to Economic theory, from Wokeness to Conservatism. Climate change Vs. Denialism…..the middle ground has dissolved. Rationalism has disappeared. The noise has become overwhelmingly deafening.
    • Against this backdrop the US will hold an election later this year.  It can only get louder. On the one hand you have the printing press administration of Joe Biden and his democrats. On the other you have Donald Trump and his band of conservative Republicans. To say that the USA has not been this divided since the civil war of the late 1800’s is surely not an understatement.
    • And then of course we have a looming election here in our tiny part of the world. We have so many parties on the ballot paper, but of course it will come down to the “big 3” and the potential for coalitions that may need to be formed. This of course has major implications for our economic policy and growth trajectory.  Ex-President Zuma has also added additional entropy to the mix with his overt support of a new left wing RET party.
    • I am not in any way qualified to comment on events in the Middle East, and thus I have intentionally avoided speaking about the situation up there. I do wonder though about South Africa’s official positioning. We are increasingly positioning ourselves away from the West, which surely has to have future implications for our economic fortunes. One has to wonder for example about the status of AGOA should there be no resolution to the Israel , Hamas, Hezbollah conflict.
  • Debt
    • Yes I know I beat this drum often. That’s because we never ever see any improvement. U.S Government debt recently surpassed 34 Trillion USD – 15 trillion of which has materialized in the last 4 years. Little wonder then that the US economy is growing at 5% (for now). The interest rate bill alone is growing alarmingly. There is increasing concern about this situation. A full blown debt crisis is not beyond the realm of possibility.
    • And that’s just one Country – throw into the mix Japan, China, Europe and the UK and its not beyond the realm of reason that a real problem is bubbling under.
    • And of course our own situation is decidedly dire. So much so that the Government and the Reserve bank are entertaining discussions about unlocking the nation’s foreign Currency reserves.
  • Global growth
    • How do you like your landing? Soft or hard?, turbulent or smooth? This is another source of potential entropy. Do interest rates decrease because inflation is under control or because the global economy is under threat. Of course the hope is that we get a soft(ish) landing. But it could be that all of this uncertainty detailed above results in a harder type landing for the global economy. What of global equity evaluations which remain elevated?
  • I could go on and on ….but then you would get bored and disinterested.
  • Over the course of the year we will attempt to dissect these and other issues, but for now let’s leave this here.
  • Entropy – the opportunity for disruption and chaos.
  • At least Liverpool has introduced order into the system. Long may it last.
  • Where does the Rand trade at the end of 2024? If you ask that question you clearly have not been paying attention!!!
  • Again, here’s wishing everyone a prosperous New year. Beware the Entropy.