Currency Comment: The Donald, the Dow, Pfizer
21 Oct 2020
Remember that kid in school who somehow always had a soccer ball, or cricket kit, or any paraphernalia needed but, whenever he found himself on the losing team, he’d take his ball and cry foul? This is Donald Trump – the kid who simply cannot lose.
How deliciously ironic, then, that he calls a ‘major’ press conference in Philadelphia, hosted by Giuliani, and they land up booking the wrong venue. Not the swanky Four Seasons Hotel, but the slightly lesser known landmark (until Friday last week) of the Four Seasons landscaping business… in the car park.
And can you just imagine the man’s blood pressure yesterday when Pfizer announced their new vaccine is 90% effective… a few days after Biden’s win?
These two events - Biden’s win and Pfizer’s announcement - meant that riskier asset prices went stratospheric. The Dow is well above 29 000, the rand is stronger than pre-Covid and touched 15.22 on Monday, and even the Turkish lira put on a show, albeit for different reasons.
One thing I know for sure: positioning in EM is now heavily skewed to punters being short (lots of) USD. We have seen very good import demand over the last few sessions in the ZAR, and still it’s been a one-way ride from 16.0900.
Ironically, the Pfizer announcement may in fact be the catalyst that changes sentiment. Once the euphoria wears off, punters may start to realise that a world without Covid does not require the stimulus from central banks and governments that the market’s factored in. For sure there’s still some water to flow under this bridge, and it’s difficult to predict whether this vaccine (and others) are the panacea to the world’s health challenges.
The fact though is that, right now, we have a tremendous amount of good news built into asset prices. Positioning is very heavily skewed – perhaps it’s time for a little rebalancing. But the most rebalancing needed is by the man who currently occupies the Oval Office. The man is unhinged and can do some serious damage.
Comment and rates accurate as at 10 November 08h30.
About the author
Head of Foreign Exchange and Fixed Income Trading
David has more than 30 years of trading experience in South African financial markets. He heads up the FX and FI trading desk, trading in both asset classes, and makes markets to clients in products associated with these asset classes. David also manages the risk associated with this function.
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The rand, the U.S., Coronavirus…
21 October 2020
A few weeks ago, the rand was behaving like a two-and-a-half year old in the grocery store wanting a lollipop, a behaviour otherwise known as Trump syndrome. Now it has settled into a quiet, range-bound zone, like a 53 year old marriage, where everything is nice and comfortable, but both parties are silently wishing life was just a little bit more exciting.
- Tito Mboweni’s MTBPS
- The US election.
And then we have the quadrennial US election to look forward to in just a few days … in fact, in a lot of places it’s already started. Two geriatrics vying for the most powerful position in the world. These guys are so old (and no disrespect to senior citizens) that, in effect, US citizens are actually voting for the Vice President candidates.
It’s all so nasty: one guy can’t bring himself to show any respect or decorum, and lets the insults fly as they enter his empty head. His ego is unfettered, and the man forgets that he is President of the entire USA, not just the Republicans. The other chap has a few allegations levelled against him which, if they turn out to be true, will provide Trump all the ammunition he needs to prove that the ‘liberal’ media is against him. As a father, I fully accept that Biden is not responsible for the actions of his adult son’s reprobate behaviour. However, if he did sell his time at the behest of his son, then that is something else altogether.
Anyway, these are the two candidates that the US has to choose from: one who, in his manic state, may mistake his diet coke for the red button on his desk, and the other who in all likelihood will forget where the red button is located. It’s all too depressing for words.
And then of course we have the ongoing global battle with the coronavirus. From what I read, we have learned nothing new in the last nine months.
Vaccines are around the corner, don’t be silly they are far from completion
Strict lockdowns are necessary, no they are not, they simply cause economic harm without protecting anyone
Masks are mandatory, except when robbing a bank – oh wait I may have that the wrong way around.
And so this quiet, long marriage-like status probably won’t last much longer. There’s a good chance that soon the two-year-old is going to start throwing his/her toys again. Good luck.
Comment and rates accurate as at 20 October 08h30.
What is going on?
3 June 2020
Equity markets the world over have been super buoyant. The DOW for example has climbed back from its low point of about 18 000 to currently trading close to 26 000 - a rise of close to 45%.
Exuberance (noun): the quality of being full of energy, excitement, and cheerfulness; ebullience.
I have not written a ‘normal’ comment for some time now. This is partly due to lack of motivation! Corona blues is a real thing (I’m going to write a song), and partly because to the fact that I have been battling to understand what is going on. Let me try and give you a few examples of what I mean:
- Equity markets the world over have been super buoyant. The DOW for example has climbed back from its low point of about 18 000 to currently trading close to 26 000 - a rise of close to 45%. Does this make any sense in a country where +-30 million people have recently lost their jobs? Now I know that Trump is doing everything to re-open the economy as soon as possible, but does it make any sense that the DOW is only some 3 000 points off its record highs set earlier this year?
- Of course one has to factor in the glorious amounts of monetary and fiscal stimulus that have taken place but, even so, this smacks of what former FED chief Alan Greenspan used to call irrational exuberance [with apologies to Greenspan].
- Even as the civil rights riots have gripped large parts of the U.S., markets have continued to power ahead!
- Even as China/U.S. relations continue to deteriorate, markets continue to power ahead!
- Even as companies enter bankruptcies on an unprecedented scale, markets continue to power ahead!
- Another example is EM currencies – it’s not that long ago that these currencies were being smashed to record lows but, in this return to risk markets, these high yielding currencies have made back an impressive amount of lost ground.
- The rand, for example, has recovered more than 200 cents from its weakest point at circa 19.2500 post Moody’s downgrade during the first stages of lockdown. This all while the lockdown has continued for another 60 odd days, adding immeasurably to SA’s economic woes.
And so on and on it goes…
All of this liquidity and monetary stimulus is finding its way into high yielding riskier assets, because earning zero or negative interest in your home country is not a compelling investment scenario.
To be sure, as demonstrated post the 2007/2008 crisis, the party can continue for some time. However, at some point the debt collectors are going to come calling. As every movie about gangsterism has ever depicted, they may arrive in a friendly and polite manner, but eventually they start breaking knee caps and heads.
In SA we owe a lot of money, and we keep approaching new lenders to help us. At some point we will have to have a chat with the debt collectors. It may be true that, while these lenders can’t generate returns elsewhere in the developed world, they may be happy soaking up positive returns in riskier markets. That is only until your ability to repay comes into question.
Therefore do not be surprised that we are hearing more and more about ‘Modern Monetary theory’ (google is your friend) in a country as debt strapped as ours. As the SARB pointed out recently, this is definitely NOT a good idea for South Africa.
We can enjoy the exuberance while it lasts, but we cannot lose sight of the rising risks – debt collectors are mean and demanding.
I have not forgotten that I still owe episode 3 of ‘purchasing power’. Perhaps when Liverpool lifts the trophy my enthusiasm (or exuberance) will return.
Comment and rates accurate as at 3 June 08h30.
2 cents versus R500 billion
21 February 2020
10 years ago, R500 billion would have been worth about USD70 billion, now it’s only about USD26 billion – that’s what 10 years of mismanagement, graft, corruption and daft policy, does to one’s wealth.
To illustrate, 10 years ago, it would have been worth about USD70 billion, now it’s only about USD26 billion – that’s what 10 years of mismanagement, graft, corruption and daft policy, does to one’s wealth.
Anyway, R500 billion is still a substantial amount of money, and on one level I do applaud government’s efforts to support and provide assistance to the vulnerable. On another level, I want to scream in anger. If there had not been so much squandering and theft during the previous Presidency, then we would not find ourselves in such a dire economic position. But I guess it is what it is and here we are.
Of the R500 billion, an amount of R130 billion would be reprioritised from the current budget. The remainder is to be sourced from sources such as the Unemployment Insurance Fund, as well as international finance institutions such as the World Bank and International Monetary Fund.
Of course, loans have to be repaid at some point, even if the interest rates are low. And the R500 billion (+ interest) repayment will have to be generated from future economic growth once Covid-19 has been dealt with.
This is where my concerns become evident. If we have more than tripled our budget deficit over the last 15 years, because we could not generate the growth required to reduce our funding requirements, how are we going to be able to repay the additional funding required when it becomes due?
This is where it becomes a little scary for me, because I do note that some economic lunatics are advocating that the money simply be printed.
We already have a central bank that’s buying government bonds (not unlike other places in the world), but from there it’s not a massive stretch to simply fire up the printing presses and monetise that debt.
And so once again I am left with one conclusion: Over the longer term all of this can only be ZAR negative. Yes, the rand has already weakened substantially over the last few weeks, and corrections and pullbacks can be very severe. However, in the longer term we have just added 10% of GDP to our national liability pile, and right now, even before Corona, there is no GDP growth to make even a small dent.
To be sure – this is not a criticism of the package announced by Mr Ramaphosa. Millions of people are vulnerable and starving. Perhaps as many as a million others are set to lose their jobs in the next few months. It is a crisis of monumental proportions and required serious government interventions.
It is however a criticism of the previous 10 years. Were it not for that debacle things could have been very different.
Comment and rates accurate as at 22 April 08h00.
Where to from here?
21 February 2020
SONA has come and gone and, as expected, it was a bit of a circus. However, two things of interest were mentioned by the President.
- The establishment of a state-owned bank
- The establishment of a sovereign wealth fund.
I guess it’s possible, but my only question is where the deposits will magically materialise from. As for a sovereign wealth fund – a cursory glance at ‘Investopedia’ has the following:
- A sovereign wealth fund is a state-owned pool of money that is invested in various financial assets. The money typically comes from a nation's budgetary surplus. When a nation has excess money, it uses a sovereign wealth fund as a way to funnel it into investments rather than simply keeping it in the central bank or channelling it back into the economy.
The focus now moves toward the upcoming budget and Moody’s response a few weeks later. Yesterday Moody’s had this to say:
- Moody’s Investors Service could cut its rating for South Africa if the nation can’t rein in spending, boost growth and improve tax compliance to stabilise its debt ratios, said Lucie Villa, the firm’s lead sovereign analyst for South Africa.
- Would probably downgrade if the nation’s fiscal and economic strength erodes further, she wrote in an emailed response to questions
- A downgrade would mean it is less likely that growth will be enough to “preserve current income levels for the majority and halt the rise in government debt over the medium term”
- Moody’s would probably change outlook to stable from negative if conditions are met to stabilise debt ratios
- More sluggish growth in South Africa worsens debt dynamics, which will be important to the future of its rating
- “Everything else equal, a downward revision of 0.1pp in nominal growth in 2020 means that debt/GDP will be 0.07 pp of GDP higher in 2020.”
It’s becoming clear that the focus is going to be on the spending side of the balance sheet because the revenue side isn’t improving (for reasons I’ve written about in the past). And so the only way to balance the books is on the spending side (remember we have a sovereign wealth fund to work on).
- This is the key part of the budget that will reveal our fate. I’m not sure how material spending cuts can be achieved, but I guess we will have to wait and see.
- Should taxes go up, it would be another negative drain on the economy.
- This may make unions unhappy – are they ever anything else?
- And ordinary South Africans may be unhappy – they would have reason to be.
- But, will Moody’s be unhappy, or will they grant us another reprieve?
- There is no money left in the cupboards
- The economy is going nowhere
- SOEs continue to drain money from the fiscus like a runaway Hoover machine
Comment and rates accurate as at 19 February 09h00.
05 February 2020
It’s an endless litany of disappointment from our global ‘leaders'.
- If the black box always survives an airplane crash, why don’t they build the entire thing out of the same material?
- If you’re not allowed to drink and drive, why do pubs and bars have car parks?
- If there’s always an applicable speed limit, why do car manufacturers build cars that can exceed this limit?
- Where does navel lint come from, and why is it always a dark colour?
- Why are politicians so infuriating?
The reason for this abundance of time at an ungodly hour is… load shedding! Eskom decided, as it does, to turn off my power at around 03h00 this morning. Ordinarily this would have gone unnoticed but, because I have a back-up generator that kicks in after a few minutes, every electronic device in my home decided to announce their resurrection with a selection of whirs, clicks and beeps. And then, for the next few hours, I lay listening to the glorious deep baritone-like BRRRRR of my generator’s monotonous D-major, doing its work.
As time slowly moved forward, that last question occupied my mind, as I became increasingly angrier at the ineptitude of our politicians and civil servants. What I should have done was to put my headphones on and found something to watch/listen to. But, alas, I was so overcome with fury that any rational thought escaped my mind altogether.
I mean, think about it…
We elect people into office who ordinarily do not have the skills to find decent jobs on their own, then we pay them a salary, and then they use that lack of skills to come up with harebrained schemes to ‘govern’ our lives. And don’t think I’m only talking about South Africa here, although much of my wrath was directed at our own lot. All over the world the situation is the same:
- Boris Johnson is banning some journalists from No 10
- Donald Trump can’t find Kansas City on a map (both stories true – google it)
- Our own President is continuously shocked – although I’m not sure how - Eskom can’t generate enough power to shock anyone.
It’s an endless litany of disappointment from our global ‘leaders'. And then just as I could not take it anymore – and decided to get up and do my morning exercises earlier than normal (you know, preparing for our Christmas day soccer rematch) - the lights came back on. Now, I fully realise that my problems may well be trite compared with what’s going on out there – what with poverty, Coronavirus, etc, but allow me the space to vent.
Which leads me neatly to the outlook for our currency/country. GDP in SA will continue to go nowhere for the next few years – Eskom simply cannot generate enough power. Slowly we will see the power mix in SA change as more and more corporates and individuals move to generate their own energy (don’t use a generator). But this will take a long time.
This means that our national balance sheet will remain bloated and vulnerable. It also means that unemployment will grow – which means that social grants will continue to consume more and more of the national budget. It also means that confidence will remain constrained, and South Africans will continue to look for opportunities elsewhere.
This is even before we have attempted to implement expropriation without compensation – another confidence constraint, and long before we have even had a go at NHI. As you can tell – my morning hours were spent thinking about, and reinforcing, my bearish outlook.
Thank goodness then that I managed to find some great old music that I haven’t listened to in a long time, while I roamed the streets of my neighbourhood. It certainly lifted my mood. Just imagine how Dr Doom would have sounded without it. Oh – and just remember, 22 points people – that also lifts my mood.
Comment and rates accurate as at 4 February 08h30.
The benefit of hindsight
21 January 2020
The rand has been very difficult to call recently. Toward the end of last year, it came out fighting and actually outperformed.
But more recently the rand has lost some of its lustre as some political risk is again materialising. It seems evident that the ruling party has some major rifts inside it (nothing new), however as we approach budget season these risks will make market participants a little nervous.
Speaking of the budget – that now becomes an immediate event risk. The Finance minister painted a realistically gloomy picture with last year’s MTBPS release. I hear a lot of people saying that he was that pessimistic because he wanted to leave some room for positive surprises in this year’s budget. I’m not sure I agree with that sentiment. In my opinion he was honest and forthright, SA Inc. has serious and numerous challenges.
Let’s start with GDP… we require growth of 4% plus to begin to address our many social challenges. The fact is that we cannot even get 1.5%, simply because Eskom cannot produce enough power. Then we need to cut expenditure by +- R150 billion over the next three years. We cannot do this by simply being more efficient.
We need to address the public wage bill, roughly 40% of all revenue generated. I note that there are ongoing discussions with the unions about this, and we will wait to see what transpires on this front. Again, in my opinion, I can’t see this happening.
And then there is revenue generation. Given the serious pace of layoffs in the private sector, and factoring in emigration, slowing GDP etc, it’s clear to see that Revenue remains constrained. And this is long before we get to the continuously gluttonous SOEs, and the biggest glutton of them all … Eskom.
In my opinion, and it’s only an opinion, Eskom is unsolvable. I don’t think that the utility will exist in 10 years’ time (if that). The major reasons for my thinking are thus :
- Eskom cannot generate enough revenue to even start paying off some of its debt. Its business model is flawed and outdated. Its staff complement is far too bloated and expensive, and so, even as they raise tariffs year after year at multiples of inflation, all they succeed in doing is forcing those consumers who can afford it off the national grid.
- The consumer’s relationship with Esksom is an abusive one. Eskom is like a dominant abusive partner who keeps beating the consumer up. In the morning when we wake up our partner apologises and buys us flowers, promising it will never happen again. However in reality the abuse keeps getting worse, and now the abusive partner is saying that we have collective responsibility. Even the most dependent, defenceless partner is eventually going to see the light and pack their bags. This is where we now are.
- I expect this issue to become a major legal bunfight going forward – as the Government will attempt to legislate to keep us in this abusive relationship, but my sense is that consumers are making a plan.
And so, as we head into the 2020 parliamentary season and the budget, some of these realities will again begin to eat into sentiment.
However the macro environment remains supportive and our yield differential remains attractive, perhaps to an ever decreasing pool of risk takers.
This is what makes the currency a difficult one to call. However I suspect the rand’s recent poor performance is justified, and last year’s fourth quarter rally was a technical aberration.
Comment and rates accurate as at 20 January 10h00.
Leadership, vision and strategy
15 January 2020
I have a vision, if we can change our midfield...
Therefore, if you see a rather rotund middle-aged (cough, cough) chap waddling through the streets of Sandton early on weekday mornings, don’t make fun, rather encourage me, knowing I am preparing for the rematch on Christmas day 2020. This time gap also allows us time to find a new midfield trio. We have already offered our goalie a contract extension so the opposing team doesn’t poach him.
My football heroics got me thinking
- Why do some teams struggle perennially and while others consistently outperform?
- What separates the Liverpools from the Scunthorpes and the Man Uniteds?
- Can these lessons be applied to winning companies/countries and losing counterparts?
For the first time in 30 odd years, I can point to my club’s strategy and try to see what it is they have done and achieved over the last few years as an example of creating a winning mindset and culture. Late in 2015, Liverpool appointed a new manager who has become a scouse hero. He has taken Liverpool to the top of the pile in England, Europe and the world. How did he do it?
As is customary in European football – many clubs throw money at the problem, spending copious amounts on the elite players in what has become an obscene game of my wallet is bigger than yours. Sometimes this strategy pays dividends, but the results tend to be rather short term in nature simply because there is always another team with more money willing to outbid yours in this never-ending game.
And while Liverpool certainly did spend money on key players, their net spend ratios (players bought – players sold) is the envy of many rivals.
So what did Klopp do differently that has set Liverpool apart?
The answer, in my opinion, is ‘vision’, and then a clear implementing strategy. If you listen to Klopp speak about vision and strategy it becomes rather revealing.
- He has said unequivocally that he does not have all the answers – but that he tries to employ experts in the fields where he has no expertise. But what he then does is make sure that every expert buys into the same vision and that all work towards the same goal. He has said that even the hotdog salespeople are part of this strategy.
- By way of example, two years ago, he employed a throw-in coach. How quaint! He employed someone to teach professional footballers earning hundreds of thousands of pounds a month how to throw a ball to a team mate from the touch line. People giggled and laughed at this at the time. Surely it was a ludicrous waste of money and time. Today the statistics tell a different story – Liverpool win 80-90% of their own throw-ins and about 40-50% of their opponents’ throw-ins. Now think of the downstream impact of all this possession and domination.
- There are numerous examples of what he has done and the results are plain to see.
- Of course this does not mean that Liverpool FC will keep dominating, but for now it appears as if LFC has the best vision, the best strategy and the best leadership in European football – even if they don’t necessarily have the best players or the biggest stadia or the most money. And they keep winning
- 1 calendar year unbeaten in the league
- 38 unbeaten games
- Close to 60 games unbeaten at Anfield
- The list of victories keeps rising
- Never mind Trump’s MAGA - Klopp has MLFCGA.
Leadership, vision and clear strategy are what create winning organisations and countries. Which brings me neatly to South Africa and what lies ahead.
There can be little doubt that in the first part of South Africa’s democratic journey, we had all three ingredients in bucket loads.
- Leadership – and vision – and strategy were evident for all to see, and we were winning.
But the last 10 years have been the complete opposite. Lately we have resorted to throwing money at the problem – Eskom, SAA, SABC etc have all enjoyed massive capital injections, but no results have been forthcoming. Government debt has exploded from +-20% of GDP about 15 years ago, and soon, if we don’t start strategising properly, debt to GDP will reach over 70%.
The list of failures is long – and despite all the money throwing, it’s getting longer. I am not going to pontificate further than this – I have expressed my views many times in the past. I am simply going to say – I don’t expect South Africa to win any time soon, because we seriously lack three key ingredients that can make us a winning nation. And don’t for one moment think I’m throwing shade at the ruling party only – vision and leadership are a national problem.
Don’t let the recent rand strength lull us into a false sense of comfort – the reasons are technical in nature and I will expand on them in the next comment.
Welcome to 2020 and bring on Christmas day – I have a vision, if we can change our midfield.
Comment and rates accurate as at 13 January 10h00.
Mischief, movies, memory lane… and an unsuspecting superhero
12 December 2019
Current superhero | The South African Rand
Thus was born my attraction and support for the underdog. Later in life came ‘Macgyver’ - a superhero who would often win, armed only with a blunt pencil and paper clip. A gang of baddies equipped with AK47s, rocket launchers, tanks and plutonium bombs stood no chance against this man who came to the fight with an old potato and some staples.
James Bond – I love him. Lasers, automatic weapons, evil warlords – who cares? 007 would take them all on while drinking a Martini and charming his way into a lady’s bedroom all while a fire was burning down the building.
Why, you may ask, are we going down memory lane?
It’s simple. It’s December and we have a new superhero! His name? The South African Rand! Nothing can beat him:
- Potential downgrade? – pfff, who cares?
- Bad GDP – please, that can’t scare the rand.
- A strong US economy? – bring it on!
- Load shedding stage 2 – what a wuss!
- Load shedding stage 6 – not good enough.
- Fiscal cliff – try harder!
It’s amazing – the rand is bullet proof, its only weapon is yield, and it’s beating all its attackers back time and time again. It’s like Bruce Lee surrounded by 100 knife-wielding lunatics intent on world domination. One by one they succumb to the speed and guile of the master.
The thing is, though, that in the movies the good guy always wins, gets the girl and manages to drive off into the sunset assured of victory over evil. I’m not so sure that our currency will enjoy the same long-term status. These ‘enemies’ are real and they’re not going away anytime soon. The other thing that worries me is that it’s not obvious where all this rand strength is going. It’s not flowing into bonds, or equities.
Which leads me to believe that it’s all sitting in cash waiting to be reversed should the February budget lead to an eventual downgrade. But that’s next year’s problem.
For now, Mr Rand is enjoying his Martini in one hand, with his other arm wrapped around a beauty. And nothing can phase him (for now).
We end the year as Rugby World Cup champs, Dubai 7’s champions, a South African Miss Universe (for the record, I’m not a fan of beauty pageants, but will take the win), and Liverpool is flying high.
On top of all this winning, I get to spend time with my family who happen to be spread all over the world. I wonder which movies we’ll watch?
Mr Rand, you’ll have to do some more fighting in 2020 – your enemies are gathering resources.
I wish you all a peaceful festive period with you and yours.
Comment and rates accurate as at 11 December 12h00.
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