The Investor April 2024

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ShareFinder’s prediction for Wall Street for the next 3 months(top) and the JSE (bottom).

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Gold is warning us!

By Richard Cluver

Is mankind entering yet another era of massive social and economic disruption which could threaten the wellbeing, wealth and comfort of millions worldwide? That is the scary question that is beginning to arise as investment hedge markets, which include gold bullion, cryptocurrencies and Blue Chip shares, have steered exponential price increases!

 The graphs below illustrate how, on the left, US 30-year long bonds have been rising in yield at a compound annual average rate of 44.6 percent and gold bullion on the bottom at compound 111 percent.

Could the world be nearing the close of the latest phase of a series of great economic and social experiments which began with the Reformation in the 16th Century, all of which have begun or ended with social misery, warfare and massive monetary upheaval and, if so, what might the immediate future look like and how might investors best insulate themselves from the pain of transition?

Already, social unrest brought on by mounting global debt pressure – which could presage the impending collapse of mankind’s third major social era of democratised capitalism – has arguably been a leading cause of the outbreak of warfare in no less than 45 nations. The Geneva Academy which monitors such things says that in addition to well-publicised hostilities in The Ukraine and Palestine, there are clashes in Cyprus, Egypt, Iraq, Israel, Libya, Morocco, Syria, Turkey, Yemen and Western Sahara. There are 35 in Africa, 21 in Asia, seven in Europe and six in Latin America.

So how did we get here? It’s been a long philosophic journey which probably started on Halloween night 1517 when, challenging the Roman Catholic church’s practice of selling pardons for sin, German cleric Martin Luther questioned the then long-held belief that the Church existed as an intermediary between mankind and God.

Thus initiating the ‘Reformation’ which ultimately ended the 1 500-year rigid rule of the Church – and setting in train the closing chapters of the Aristocracy which had co-existed with the church in a symbiotic relationship in Western world government – Luther believed ordinary people needed to make up their own minds about the dictates of the Bible rather than rely upon the arguably sectarian-biased views of the priesthood. Accordingly, wherever he established a new church he also established schools in order to end the profound illiteracy of the Roman Catholic era and, in so doing, Luther planted the seeds of education which in turn enabled the later Industrial Revolution which historians date to happening between 1760 and 1840. Wherever Luther planted his schools, these would later became the world centres of industrialisation!

Broadly speaking, the Industrial Revolution began with the development of the steam engine which enabled a transition from village-based ultra-small-scale cottage industry to centralised industrial cities. And interpreting these events was the “Father of Economics” Adam Smith (1723-1790) who – using the practical example of how ten men working as a team in a pin factory proved to be 4 800-times more productive than an individual working on his own – laid the foundations of modern ‘free-market’ economic theory. He was, additionally, the first to claim that true wealth was represented by the accumulation of labour productivity rather than by gold stored in one’s vaults!

This latter realisation set in train an infinitely more effective utilisation of both money and labour for, if the creation of wealth was facilitated by the efficient use of labour, then it followed that by educating labour and improving their working environment one not only created a happier workforce, but simultaneously increased both productivity and in turn profitability. Smith had accurately observed the phenomenon which modern economists have come to regard as a ‘virtuous cycle.’ In other words, being a good employer benefitted everyone. That is why 18th Century Britain began replacing smoke-begrimed tenements with model industrial towns and became, in the process, the wealthiest nation on earth!

That is also why, for example, economists today try to encourage governments to create enabling environments for commerce and industry by, amongst other efforts, educating young people to their maximum potential. Here, from the politician’s perspective, people working to their maximum potential logically earn top wages and, of course, also end up able to contribute far more taxes to the fiscus!

Now we have also come to understand that the availability of a skilled work force is one of the best means of attracting investors to bring new industries to a country. That is also why progressive governments, which dedicate much of their resources to the development of their human capital, logically end up with fulfilled, dare I say happy, citizens enjoying full-employment and able to generate far greater quantities of tax. So investing in education and fit-for purpose skills-training it is a win-win for citizens and government alike.

It is, demonstrably, the complete opposite of failing to adequately educate people, which leads in turn to de-industrialisation, unemployment, a collapsing fiscus and ultimately leaves government with no alternative but to implement unemployment grants in order to avoid social revolt. Where this latter approach is allowed to be set in train – it is usually found hand-in-hand with a shrinking fiscus and a rising debt spiral which inevitably means that failed-state status is never far behind.

But there is more. Smith spoke of the “Invisible hand” of Free Markets which, when allowed to operate without the restraint of governing authorities like the Church and the feudal restraints imposed by the aristocracy which had until then divided mankind into a working class of landless serfs and a land-owning class of aristocrats, has consistently proved to be the world’s most efficient wealth-maker. Unrestrained capitalism, Smith observed, encouraged wealth-creation but his ‘Free Market’ vision also showed how competition between businesses could effectively prevent the exploitation of consumers by ensuring fair prices and quality products. Competition, he argued, encouraged constant economic innovation while simultaneously satisfying consumer demand.

In short, Adam Smith recognised that competition keeps everyone honest: because customers treated unfairly by one business can instead always patronise another competitor. But the early stages of this transition to enhanced productivity understandably also led to massive job destruction and, stemming from the resultant labour surplus, the consequent evil that socialist politicians latterly tried to accommodate; namely large-scale unemployment.

So, while industrialisation and competition proved very effective in keeping prices down, it did not necessarily protect employees from exploitation. Indeed the Industrial Revolution was notorious for its ‘Sweat Shops.’ It thus fell to Karl Marx (1818-1883) to refine Smith’s theory for, from Marx’ perspective,
“….capitalists, in competition with each other for profits, squeeze as much work as possible out of the proletariat at the lowest possible price.”

Thus, in the early part of the 20th Century, disruptive change was under way and the wide-scale unemployment of the era was one of the fundamental reasons why Great War military commanders could afford to march battalions of ordinary soldiers up against their opponents’ machine guns. It could further be argued that a root cause of the indescribable carnage of the Great War was a massive surplus of manpower. Though the following graphic shows different numbers, historians claim that war accounted for 20-million deaths and 21-million wounded.

Perhaps it was also no surprise then that World War Two – coming soon after the Great Depression which created the greatest number of unemployed people in human history – was also the cause of the greatest death rate of all. Nobody to this day knows precisely how many died in the 1939 to 1944 war but historians put the figure as somewhere between 45 and 60-million people.

However, as always, social change requires some signal event to precipitate it. In this case it took the massive upheaval of the Great War and the subsequent impossibly-punitive reparations demanded by the victors, coupled with the disruption caused by the Great Flu epidemic and, finally, by the Great Depression, to collectively bring about the real end of the Industrial Revolution. These three seminal catastrophes resulted in three major social and economic outcomes. They:

  • Ushered in modern democracy and state-moderated capitalism
  • Sparked the rise of Hitler and Mussolini, Fascism and, ultimately, World War Two
  • Launched the Communist revolution throughout Eastern Europe

There was, however, a problem with Adam Smith’s then orthodox economic theory which had been the major driving force behind an era without war which has since become known as the ‘Entente Cordiale,’ a period of unparalleled prosperity when taxes were low and industry boomed across the West as railroads were driven across Europe, Africa, India and the USA in a period of unrestrained growth. The problem, however, was that Smith’s economic theories predominated during the closing phase of a monetary period that had dated all the way back to pre-Christian times: the ‘Gold Standard’ during which monetary inflation was demonstrably impossible. But gold’s scarcity was beginning to curb growth and a new monetary system was increasingly becoming necessary.

Thus, apart from a few which had with foresight run fiscal surpluses and accordingly accumulated crisis-contingency funds, governments of the time lacked the monetary flexibility to address periods of economic recession by unleashing social upliftment programmes such as the US Hover Dam project which, subsequent experience has taught us, is one of the most effective means of getting the unemployed masses back to work: indeed the means with which to jump-start a moribund economy. What the world needed was a new, more elastic, monetary policy solution which could allow governments to create instant cash in greater quantities than was possible when the amount of money in circulation was determined by the amount of gold governments had in their treasuries.

In short they needed to abandon the Gold Standard which was keeping the brakes on government policy in times like the aftermath of the 1929 Wall Street crash. Ironically, a prime cause of the ‘1929 Crash’ was the fact that the United States had already been experimenting with its monetary system in order to create such policy flexibility. Private banks, which until then had been required to maintain reserves of gold and silver in equal proportion to the loans they had extended to borrowers were – with the introduction of Woodrow Wilson’s Federal Reserve Act of 1913 which had established a central bank of last resort – thereafter allowed to instead hold government bonds as security against the loans they advanced.

Not only was the government thus able to inflate the money supply by issuing new bonds, the new legislating also altered the ratio of required bank reserves to their loan extension which further increased the money supply which in turn unleashed the period now known as ‘The Roaring 20s’ Prohibition, Jazz, Flappers and, above all, the massive share market speculation which represented an explosion of credit synonymous in magnitude with contemporary money-printing exercises of the Central Banks which have since created the world’s largest-ever debt mountain. That massive credit expansion then, as now, created a vast illusion of wealth that was totally divorced from reality. It clearly panicked the newly-minted Federal Reserve which, sensing the rise of uncontrollable inflation, acted too late to curb the money supply gains which precipitated panic among both borrowers and lenders and, inevitably, the ‘Black Thursday’ crash of October 24, 1929: the day of the largest sell-off of shares in U.S. history.

The lesson was clear, if a central government allows more money to be circulated than is created by the difference between productivity and consumption, something that was impossible under the Gold Standard, it artificially cheapens money. Interest rates accordingly fall and business models are distorted because entrepreneurs and ordinary individuals are tempted to borrow more than they can profitably sustain in the long term. Since interest rates and investment yields are inversely correlated, share market prices then become uncoordinated with their long-term average earnings growth rates which, in turn, invites short-term speculation and stock market bubbles….and inevitably a market crash when the party ends.

Since this phenomenon of monetary inflation inevitably also distorts the normal balance between demand and supply, because individuals, who perceive themselves to have become suddenly wealthier, start buying goods they would normally not afford. Supply bottlenecks usually result and the ‘cost of living’ inevitably rises. Thus it is easy to understand why governments need to act to restrain the money supply which, since the time of the US Federal Reserve Act and its mirror images throughout the capitalist west, essentially implies central banks applying the brakes by such activities as raising the interest rate structure of nations and buying back government bonds.

When, as a result, interest rates generally and sovereign bond yields rise in sympathy, the inverse relationship with share prices again comes into effect. Thus share prices need to fall in order that they be priced competitively in the marketplace with bond yields in order to attract buyers. Thus, when governments act to raise interest rates, share prices usually fall commensurately and, as investors scramble to protect their savings, they create an inevitable snowball effect: the classic market crash!

So, it’s time to return to Karl Marx who believed that capitalism fostered greed and exploitative behaviour which in turn leads to the impoverishment of workers and the effective instatement of a new class of aristocracy in the shape of wealthy Capitalists. To counter this threat Marx argued that only the State, employing centralised planning, could be trusted to optimise the use of the savings of private citizens in a collective effort to uplift the welfare of the majority. Only the state, he believed, could guarantee continued full employment and shield ordinary folk from the life-shattering consequences of the free market boom and bust phenomenon.

Though Marxist economics inspired the Communist revolution in Eastern Europe and ultimately a massive economic ‘Cold War’ contest between East and West, the comparative inefficiency of central command economics was finally demonstrated by the inability of Communist countries to collectively compete with the Capitalist West in the subsequent race to conquer space. The rising public dissatisfaction of Communist country residents at their relative impoverishment led inevitably to the fall of the Berlin Wall and in turn a scramble by most former Communist countries to return to Capitalism.

Demonstrably, where socialist thinking begins with the view that all men are born equal and thus deserve a level economic playing field in which the State guarantees equal pay, adequate housing, health care and education, Capitalism instead offers a carrot and stick system which encourages people to individually compete to their own maximum potential and accordingly rewards productivity with wealth.

Now while wealth-creation is the result of individuals effectively investing the difference between the fruits of their labour and their chosen costs of living, if the State elects to strip such surpluses into a central fund to be used to provide both the living and old-age retirement needs of the individual, it follows that the State needs to ensure the optimal investment of such funds. Unfortunately the lived experience of most people trapped in socialist states is that the politicians in control of them fail to understand this latter responsibility. Thus, giant statues of glorious leaders seem to take precedence over investment-planning in most socialist countries as, inevitably, does the provision of fancy cars, big houses, personal bodyguards, blue light car cavalcades and the like.

Conversely, in free market Capitalist countries where few social safety nets appear necessary, every individual becomes personally preoccupied with maximizing both his earnings through entrepreneurial striving as well as the return he is able to achieve for his invested savings….and this in turn collectively creates winning nations.

In theory, by extension of this thinking, if a socialist state created a massive bread factory in every city, you would imagine that resulting economies of scale would provide good quality bread cheaply and in abundance for all its citizens. Yet one of the core observations of the Soviet Union was it’s complete inability to ever eliminate bread queues. That bread queues never happened in Western nations was entirely due to the fact that capitalism is built upon the concept of individual entrepreneurship which, in the bread-production example, means facilitating the concept of the privately-owned ‘corner bakery’ where scores of tradespeople compete against one another to attract customers and thus maximize their own profits by offering the best quality products at the most competitive price.

Demonstrably the corner bakery example will always be more effective than the vast socialist-run bread factory where dispirited employees are the norm because they inevitably become mere numbers in a vast sea of identically-paid co-workers who seldom see any reward for working harder or more productively than their fellow workers.

But back to British economist John Maynard Keynes who, in the wake of the Great Depression, refined the ideas of Smith and Marx to usher in the modern era of economic thinking. He overturned the then-prevailing idea that free markets would automatically provide full employment — that is, that everyone who wanted a job would always have one as long as workers were flexible in their wage demands.

Central to the Keynesian theory is the idea that Adam Smith’s ‘Invisible Hand” was actually represented by the aggregate demand of four components:  Consumption, Investment, Government Purchases, and Net Exports (the difference between what a country sells to and buys from foreign countries) which collectively represent Gross Domestic Product. Any increase in demand has to come from one of these four components.

Keynes noted that during recessions, when public spending diminished, this caused businesses to similarly reduce spending as firms responded to weakened demand for their products. Accordingly, he argued that in such times the task of increasing output needed to instead fall on the shoulders of the government. According to Keynesian economics, “….at such times state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle.”

Keynesians, in a nutshell, thus believe that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists thus justify government intervention through public policies aimed at achieving full employment and price stability. However, here is the next flaw because Keynes did not spell out how, other than by running up debt, the State could afford to intervene at such times.

That is why it was only once nations individually abandoned the gold standard that they were each able to emerge from the Great Depression. In essence Keynesian economics enabled central governments to effectively print more money that normally existed when the issuance of bank notes was directly related to the quantity of gold in central bank vaults. But the unfortunate outcome of the Keynsian approach is that once economic activity is restored, this excess capital has to be mopped up….but governments and their central banks have never been very successful in doing that.

Furthermore, since the inflationary result of excess money-creation is a weakening of one’s currency, there is a beguiling temptation to keep on running excesses because the result of progressively devaluing one’s currency is to render one’s domestic industry more competitive in international markets. It can consequently result in increasing one’s exports and reducing imports which is obviously good for national wealth and job-creation. Accordingly, the politician who is able to put a good spin on the matter can emerge as a national hero because he would accordingly be able to claim that he and his political party not only helped industrialise his country and make it prosperous, but simultaneously created thousands of jobs.

Even more tempting is the fact that governments obviously prefer to raise debt within their own monetary system: because it is there that they can have the greatest influence by effectively flattening out economic cycles. But, noting that sovereign debt (a fancy word for government loan stock) is universally regarded as the safest of all investments and thus many nations have legislation requiring their domestic pension and annuity investment schemes to include a substantial proportion of sovereigns within their investment portfolios, the potential thus exists for this to create a ‘Hidden Tax’ system which most of the electorate does not see as money coming out of their own pockets.

Now, government debt is normally raised with a fixed redemption date which might be as far away as 30 years so such loans are likely to be eroded in value over very long periods of time with the result that the effect might not be recognised by the voting public as a contributory cause of their relative impoverishment as well as being a primary cause of the long-term inflation rate of each country which issues such bonds. Effectively the borrower government is thus let off much of the repayment burden because, when the time comes for repayment it will be made in inflation-debased currency: effectively it is a hidden tax upon one of the most vulnerable classes in society, the pensioner.

A classic example is that of the loss of value of the US Dollar since 1944 when, following the Bretton Woods Agreement, the US agreed to take on the role of custodian of the world’s monetary system and promised to peg the US Dollar to a parity of $35 to an ounce of gold. Now the truth of the matter is that despite its massive accumulation of wealth as the prime munitions provider to the Western Allies during World War Two, the US was neither wealthy enough nor economically strong enough to play banker to the whole world and so, while maintaining the fiction that the Dollar was anchored to gold at a fixed price of $35 per fine ounce, global monetary inflation actually continued insidiously.

Here is not the place to digress into a discussion of why as a consequence it became increasingly difficult to mine gold in the aftermath of the Bretton Woods Agreement and, eventually, only a South Africa blessed with an abundant source of cheap labour could keep on producing the metal. Much of the wage repression that marked the Apartheid era clearly had its roots in that 1944 agreement. But that is a discussion for another day when we consider who really profited from the agreement.

Custodianship of the global monetary system was thus handed to the US in the closing stages of World War 2 when most Western nations were war-torn and totally cash-strapped. The US by contrast, because of its late entry into the war and massive industrial capacity, had profited mightily from the war and the greenback Dollar was consequently overwhelmingly strong. But even that strength was insufficient to bring stability to the post-war economy and this latter fact was worsened by the recent reality that the US has since used its dominance to shape the world economy in a way that is not always in the best interests of the world as a whole.

That Bretton Woods Agreement custodianship made the dollar the world’s reserve currency, and until the mid-1970s the US Federal Reserve did, at least verbally, try to preserve the fiction that the Dollar was backed by gold in Fort Knox. However, it is important to note that the U.S. economy was still recovering from the Great Depression when the United States entered World War II in December 1941 and interest rates were already at low levels when the Fed agreed to prevent them from rising during the war. In fact, throughout the war the Fed kept the yield on long-term U.S. government bonds from rising above 2.5 percent and pegged those on short-term term Treasury securities at lower levels, thereby ensuring that the Treasury could borrow at low rates to finance the war effort… exercise replicated recently by the era of “Quantative Easing” which has arguably considerably worsened the crisis we now face!

Quantitative easing (QE) is a process in which a central bank buys securities from the open market to reduce interest rates and increase the money supply. Quantitative easing thus creates new bank reserves, providing banks with more liquidity and encouraging lending and investment. 

Thus, at the end of the war, large US government deficits together with the Fed’s policy of preventing the yields on government securities from rising, caused US money supply to increase sharply. And while wartime spending and armed forces mobilization brought full employment and rising household incomes, this, alongside highly expansionary fiscal and monetary policies, put upward pressure on prices. To keep inflation in check, controls were thus put on wages and prices as well as on the growth of private credit.

When these wage and price controls were removed in summer of 1946, it unleashed the suppressed inflation and, though Fed officials pressed for higher interest rates to contain inflation, the US Treasury argued for holding the line on rates to keep down the government’s borrowing costs. Ultimately, however, the situation became untenable. Inflation began rising rapidly in 1950 because of the Fed’s efforts to keep interest rates from rising by pumping more money into the economy. Ultimately the Fed and the US Treasury reached an agreement in March 1951, known as the Accord, which ended interest rate controls and freed the Fed to use its monetary tools to control inflation. But the damage had already been done, particularly in post-war Europe where French President Charles De Gaulle eventually refused to accept any more greenback Dollars in return for his country’s exports. He had correctly identified that the Dollar was massively overvalued in terms of gold.

Now, it is clear that had the Bretton Woods agreement held true to the letter until today, the explosion of world trade which bought us to the current ‘global village’ situation, with its massively-profitable trade flows, would probably have been impossible. Nevertheless, if you care to calculate it out, the gold price increase from $35 on Sunday August 15 1971 – when then President Richard Nixon was forced as a result of the De Gaulle initiative to decouple the Dollar from gold bullion – to its recent peak of $2 418.20, measurement of that gain means the metal has grown in value at an annual average of 8.13 percent since then. That is, noting the US Federal Reserve graph on the right, significantly greater than the official 50-year average US inflation figure of only 3.5 percent. The difference highlights the consequence of the US failure to strictly adhere to its $35 undertaking.

That’s why gold remains the ultimate store of wealth and why, furthermore, governments probably cannot be individually trusted to manage monetary systems.

Here let us pause for a brief history lesson, noting that, when the agreement was signed, wartime price controls ensured that the US was enjoying an annual inflation rate of just 0.6 percent but, driven by the post-war boom and the events I have just described, it then soared by March 1947 to a peak of 19.7 percent. In the subsequent harshly-enforced recession, inflation then fell all the way back to negative 2.9 percent by August 1949. Then the ‘stimulation’ began again in earnest and, with more dollars spewing out of the Fed, inflation quickly took hold again and it soared to another peak of 14.4 percent in May 1980 by which time ordinary folk in countries like South Africa were fighting inflation rates which here peaked at 20.7 percent in January 1986 and mortgage rates which peaked at 25.5 percent in August 1998.

Tamed by another dose of harsh Federal Reserve action in the 1980s – an event which became known as the Volcker Shock – inflation was brought under control again and a severely chastised US Federal Reserve remained quite responsible over the next 30 years during which time, as the graph on the right illustrates, inflation gradually trickled down to an August 2009 rate of negative 1.5 percent.

Briefly, in between, the irresponsible events of the great ‘Sub-Prime’ financial crisis – which to be fair was barely understood even by Nobel Prize-winning economists – so perhaps the Fed’s liability was not so serious this time. Nevertheless that sub-prime explosion of credit that was largely created by the private banks, culminated in August 2008 with an “official inflation rate” spike up to 5.4 percent. But that was a separate story which, taken together with the recent and obviously necessary Covid stimulation, was undoubtedly to prove to be a fore-runner of current events!

So we cannot only blame the Fed. However, the important lesson to take away from this history is that at 3.2 percent – if you trust the controversial methodology of the US Bureau of Labour Statistics – the current US inflation rate is actually at an historically quite low level from which, once interest rates are officially lowered, the stage should be set for a very strong global economic recovery if, for a moment, we overlook the small problem of global debt. But these are not ordinary times! Consider that if the gold price has in the past provided us with a fairly accurate picture of the true rate of monetary inflation over the long term, why is it suddenly soaring when it should be receding?

Let’s consider the ShareFinder graph below which highlights that in recent years the gold price has been accelerating at an ever-increasing rate. The green trend-line from 1999 to the present – that is from the time when the US began printing dollars in order to rescue the Far East from monetary collapse – indicates a dramatically accelerated rate from the 80-year long-term 5.23 percent average to a new compound 9.1 percent.

 And the acceleration has continued. Note the steeper angle of my red trend line which underscores the fact that from July 2018 the gold price trend had accelerated to 11.6% compound and then finally, note the mauve trend line which since October 2022 indicates that gold has since then been rising at compound 24.1 percent.

And recently that gold price trend has begun to rise exponentially which suggests it is trying to tell
us something important! Thus, note the yellow trend line drawn from last October shows that it then accelerated to compound 49.7 percent. February provided some modest weakness until the 14th. But since then gold has been rising once more at, note my last brown trend line, rising at a compound annualised rate of 235 percent……..that’s a nearly vertical climb which in mathematical terms means the gold price has gone exponential which symbolises monetary panic.

So, if inflation in the US has been abating – note my next graph tracking the US monthly inflation rates since last February for visual proof of that fact – why is gold going exponential? Well one might argue that the world is afraid that the Russian/Ukraine war followed by the Israel/Palestine crisis, and now the extraordinary fact that Donald Trump could again be headed for the White House, might be raising public anxiety. But is that enough for exponential gold? Might the global community be fearing some sort of imminent catastrophe? Moreover it’s not just gold. Investors are rushing for security in speculative areas like cryptocurrencies, fine art and the futures markets in soaring commodities prices.

Thus, my concern is that the event I have long been writing about could perhaps be imminent. I refer of course to the nub issue I raised in my 2019 book ‘The Crash of 2020’ – of a massive global debt default – which might now be perilously close; the fact is that the global debt of governments has begun rising exponentially and it might tip the entire monetary system into chaos. The table on the right, courtesy of the International Monetary Fund, details the ratio of government debt of the world’s six biggest nations relative to their respective GDP ratios.

Excluded is China whose figure is officially unknown: but one of the more authoritative sources, the National Institution for Finance and Development, notes that the macro leverage ratio which measures China’s total outstanding non-financial debt as a share of nominal gross domestic product, rose to 287.8% in 2023; that’s 13.5 percentage points higher than a year ago. The same institution claims the debt ratio held by households rose 1.3 percentage points to 63.5% while that of non-financial corporates increased 6.9 percentage points to 168.4%. None of those numbers are sustainable, even in the short-term!

China’s central-planned economy might well be imploding in the wake of its dramatically failed ‘Ghost Cities’ stimulus policy of recent years. Avalanches begin slowly but then…………….!

A recent Wall Street Journal report noted that Cities and Provinces across China have accumulated “.a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures.”


The stultifying impact of these numbers upon individual economies is well understood by South Africans in particular where servicing our debt to GDP figure – actually, compared with the debt of most leading nations, it is a comparatively low figure of just 74 percent as at last September – nevertheless it is now gobbling up a fifth of all tax revenue!

Arguably however, that 74 percent is a leading reason for our pathetically low GDP growth rate. Thus the question investors need to consider is how much more stultifying is it in other leading nations where the “cost of living” is the big reason why voters everywhere are demanding changes of government in this globally most significant election year?

Contrast our relative resultant discomfort with that of the US where, according to the Heritage Foundation which has historically been ranked among its most influential public policy organisations, “Interest on the federal debt is now so immense that it is consuming 40% of all personal income taxes.” It further notes that, “The largest source of revenue for the federal government is increasingly being devoted to just servicing the debt, not even paying it down.”

Now, unlike companies and private individuals who can be declared bankrupt when they are unable to either service or repay their debts, government debt is “Sovereign.” In other words it is guaranteed by governments on behalf of all of their tax-paying citizens. That is why government bonds have always been regarded as the safest investment of all……until now. So what happens if a government cannot service its debt? Usually its currency is devalued which effectively inflates the costs of all of its imports, speading the burden across every citizen and decimating the buying power of folk on fixed incomes – read pensioners.

That is why the Rand has collapsed. The graph below tracks how many rands have been required to buy a US Dollar on a daily basis during the 30 years of ANC government; it discloses an annual compound average decline of 5.8 percent!

Of course, if the US is forced to devalue then, because of its reserve currency status, it is likely to take the whole world with it. And, if China is then obliged to default, the global ring a ring of roses might get a little more complex. Arguably, that is why currency hedges like gold, commodities like cocoa, cryptocurrencies like Bitcoin and, potentially, Blue Chip shares, are soaring or about to go exponential.

Is dramatic change coming? Certainly the world cannot keep on piling up debt and ordinary folk cannot afford a higher effective tax burden. So governments need to change the way they spend money and that has huge implications for items like public healthcare, social grants and, indeed, socialism itself. And current debt levels mean they need to take such decisions very soon before the whole system implodes!

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Crisis cycle investing

By John Mauldin

Last year I wrote a series of letters reviewing different ideas of repeatable cycles in history. All four authors I reviewed, and your humble analyst, all foresee a major crisis/upheaval coming around the end of this decade.

However, we don’t know what the crisis will actually look like. Most of the theories I reviewed see war as a possibility. Not to mention the brewing government debt crisis that will create its own dynamics. We really don’t know how this will turn out. Who is going to be in charge politically? What compromises will have to be made in the midst of crisis and how will they affect our lives and portfolios?

A critical question is how do we get as much buying power as possible from the beginning of the crisis through to the other side? Part of the answer is Warren Buffett’s admonition to never bet against America. Better to do as he does, investing in specific parts of America.

I said earlier this year I was transferring my portfolio management and partnership to an independent investment advisor firm called The Bahnsen Group founded by David Bahnsen. David runs a blend of dividend growth stocks, alternatives, and special situations. Today David and I will start a series of letters on portfolio construction using dividend growth stocks coupled with alternatives. This isn’t the only way to navigate the crisis I see coming, but it is the way I am going to utilize.

The Power of Dividend Portfolios (by David Bahnsen)

The easy part in analyzing the current state of affairs is acknowledging the risks. The “trifecta” of concerns I most focus on is not mysterious, it is not opaque, and it is not even new. Each of the categories of concern involve multiple nuances and layers of sub-categories, and each has manifested itself differently in the last several years. More important, the way all of these will play out in the years to come will be different from how they feel and look now. What I want to do in this piece is lay out what that “trifecta” of concern is from my vantage point as an asset allocator and portfolio manager and make the case for dividend growth equity investing as a significant weapon in fighting against these risks and concerns.

The major categories I incorporate into this trifecta are:

  • Excessive government indebtedness
  • Distortive monetary policy
  • Geopolitical uncertainties

All three categories have new dimensions to them. Government debt was $1 trillion when I was in high school 35 years ago; it is $34 trillion now. Public debt-to-GDP was 62% as we entered the financial crisis in 2008; it is 120% now. The balance sheet of the Federal Reserve was $600 billion before the financial crisis; it is $7.5 trillion now. We spent much of the 1960s and 1970s in a Cold War with the Soviet Union (with grave nuclear concerns); we are now looking at Russian adventurism in Ukraine and an uncertain outcome for Israel in its war with Hamas. But you will note—all of these “new” developments have an element of “old” to them, too. Then and now, we had excessive government debt, an interventionist central bank, and a dangerous world geopolitically. The new manifestations of these old categories have created a new paradigm.

Attempts to predict specific outcomes around these three categories have not gone well for the forecasting class. All at once, fiscal and monetary stability have worsened for years and years (with much more to go), yet corporate profits have grown, GDP has grown, and risk assets have produced attractive returns. It can lull someone into complacency if not careful, partially because we have grown used to the can being kicked down the road by policymakers and central bankers, and partially because too many doomsayers have burned people with inaccurate forecasts with wailing and gnashing of teeth. Investors are real people with financial goals, cash flow needs, a timeline, beneficiaries, and particular elements of their own lives and situation that require tailored solutions. A generic belief that “bad things are brewing” does not lead to a specific portfolio that generates specific outcomes. Just as much as Keynes was right that “in the long run we’re all dead,” David Bahnsen (I made this up) is right that “until then, we’re all alive, and have wives and kids.” In other words, ignoring the short and intermediate term while we wait for long-term inevitabilities to play out ignores pragmatic reality.

My view is that these three categories of risk, taken together and separately, put a burden on investors that disqualifies much of what has passed for traditional investing over the last couple decades, and redirects investors to a time-tested practice that ought to serve as a fundamental bedrock for those pursuing investment solutions that meet real-life financial goals. In the paradigm we find ourselves in, dividend growth equity investing represents a solid, dependable, and time-tested way to play offense and defence in a contest that requires both.

This week I will focus on the defensive components of dividend growth investing and how they are uniquely situated to protect during periods that require protection. Next we will focus on offense—how dividend growth generates excess returns both for withdrawers and accumulators of capital. What I will not advocate is the silliness or naiveté that says, “nothing can go wrong here!” Dividend growth equity is a long equity strategy, and equities go up and down in price. If they produced no downside volatility the risk premium would be so low, it would be a completely unattractive investment proposition! Dividend growth equity is still equity, and therefore subject to the standard price fluctuations that any asset class will have when:

  • It is owned by the highly emotional public,
  • Has a P/E ratio embedded in price that moves around sentiment and comparative economic barometers, and
  • Is highly liquid, marketable, and tradeable.

I argue that the reality of price volatility, liquidity, and public temperament in the stock market is an argument for dividend equity, not against. For it is the equity investors who have removed themselves from cash flow 

considerations who have the most to lose from price volatility. At the heart of this point is, well, math. If one is aiming for a 10% annualized return (to use a purely illustrative hypothetical), and the plan is to get 5% of it in dividend income and 5% in price growth, versus another aiming for 10% but with 1% in dividend income and 9% in price growth, the impact of downside volatility is not equally felt even if the 10% return ends up being averaged over time. A 5% dividend yield does not become -10% at times and +15% at others.

The yield is what it is, and properly managed does not go down at all, but certainly never goes below 0%. You never have to pay the dividend to the company; it only pays it to you. But price appreciation, on the other hand, only comes from “up and down” volatility.

A stock portfolio or index that averages 10% per year rarely is actually up +10%. Rather, it may be down -20% in some years but up +30% in others (and plenty of other variances in between). The portion of a return coming from price appreciation is by definition subject to more price volatility than a portion of the return that cannot mathematically go below 0%. Therefore, the volatility of two strategies pursuing 10% where one seeks to get half of the return via dividends, and one is content for just a 1‒2% dividend yield are categorically different.

But no matter what you have been taught, risk and volatility are not the same thing. The variance of a return around its mean is emotionally real, and in the context of a real-life withdrawal strategy, mathematically real (more below). But up and down price movements are not the same thing as the permanent erosion of capital. However, if one’s portfolio strategy requires a compounding annual growth rate that proves to be far above reality because of valuations or because prices drop and never recover, those are not volatility concerns—they are risk concerns. Real risk. Existential risk. And it is that risk that dividend growth seeks to eliminate.

First of all, valuation concerns… The market’s price-to-earnings ratio is high right now—very high. Any number of fiscal, monetary, or geopolitical developments could collapse that P/E substantially. The market has not priced in the very real possibility that:

  • The structural growth rate of the economy has been altered by excessive government spending, and
  • The monetary medicine in the next decade will be less efficacious than the last decade.

I do not view either of those contentions as even remotely debatable. The 2010‒2020 decade saw significant earnings recovery post-GFC, but also monetary policy facilitating reflation that boosted multiples (and then some).

I believe holding a high multiple will be impossible in the aftermath of what the economy faces. Going from $1 trillion to $20 trillion of debt happened without much structural impediment and with significant monetary facilitation. Getting to $30 trillion fed a lot of mal-investment, created excessive leverage, and further entrenched the economy’s dependence on something fundamentally unsustainable—namely a stimulative effect on monetary policy whose stimulative effects can only diminish over time.

Though the analogy is crude and uncomfortable, the high a drug addict gets from the initial stage of their addiction becomes less enjoyable over time. And worse, it requires more and more intake to get less and less of a high. The fiscal and monetary treatments we have used and will, no doubt, continue trying to use are in the “diminishing return” phase. Multiples may hold at a historical level (this would be an optimistic base case), but they are at a big premium to historical levels already, and require significant expansion, still, to achieve that aforementioned historical return.

Dividend growth equities, on the other hand, require less speculation than “growth stocks,” feature less frothy valuations, and offer return strategies far more connected to fundamentally knowable and repeatable phenomena than simple valuation growth. Where free cash flow is growing, and a company has a past, present, and future inclination to liberally share that free cash flow at an ever-growing rate with its owners, the impact of valuation volatility is muted. A company trading at 17X earnings is less exposed to a reversion to 16X than a company trading at 22X. And better still, a company paying 4‒5% in yield has less price appreciation need to get to an 8‒10% return than a company paying 0‒2%.

All of this is self-evidently true. Less self-evident is the inherent truth about the maturity of a company that can pay an attractive dividend and grow it from 6‒9% per year for year after year and decade after decade. These companies may be past a hockey-stick level of growth that requires very fortunate entry timing and even more fortunate exit timing, but they have achieved a scale, brand, balance sheet, and marketplace position (it can often be called a moat) that makes them superior companies. In other words, the capacity for such a dividend and such repeatable dividend growth is not merely the strength of an investment, but it is evidence of the strength of the company. It both presents and reflects a superior investment proposition at the same time.

What are the characteristics of a company that can grow its cash flow this reliably, and achieve the balance sheet strength, competitive positioning, and operating consistency necessary to be a perpetual dividend grower? Well, for one thing, it had better offer goods and/or services that are consistently needed. In other words, an apparel company making a hot line of clothing for 16-year-old girls is wise to hang tight on dividend payments, knowing that next year 16-year-olds might possibly change their minds (just a hunch). But a consumer staples company that makes toilet paper or diapers or dish soap or soda pop or bottled water (or, maybe, all of the above!) might just have a more defensive business model. In a given part of the cycle, that 16-year-old girls’ clothing might print money compared to the consumer staple, but one leads to decades of dividend growth with good and sober management; the other might lead to Chapter 11 once the new school year starts.

There are many examples of companies that traffic in goods and services which are less subject to disruption or changing fads and preferences. Utilities, Health Care, Energy, financial advice, basic technology hardware and infrastructure, Real Estate, and many other sectors in commercial society offer opportunities for market leadership, profit generation, and consistency of results (with ongoing innovation) that lends itself to dependable cash flows.

And that is the story of the defence of a good dividend growth strategy—that it represents the best and finest exposure to the components of commercial society not prone to being blown over by the winds of cyclicality. Fiscal and monetary and geopolitical risk will still exist, and they will play out how they are going to play out. A remnant of companies will continue to generate profits (capitalism works), and they will continue to share those profits with us.

Another segment of companies will only monetize for investors if they time their entry well, time their exit well, and survive the vulnerabilities of policy error, policy distortion, and other macro events. They are exposed to hope, not strategy, unless that strategy is mere multiple expansion. It is an economic risk but also basic mathematical risk that exceeds logic and prudence.

The environment in which we find ourselves is screaming for reasonable valuation, a buffer of safety, a consistency of operating results, and a management team aligned with shareholders enough to share profits with them. In this environment the path to returns that can be “eaten”—truly received and made efficacious—is in dividend growth.

Wealth may matter more than income


The resilience of the US economy in the face of higher interest rates has surprised many. Members of the US Federal Reserve’s federal open market committee, having pencilled in several cuts to interest rates to come in 2024, have seemingly reversed course.

Their pivot was precipitate. The still highly satisfactory state of the US economy must take the credit or the blame, depending on whether you a borrower or lender be, including in SA. US GDP or total output grew 3% year on year in the first quarter of 2024 and by a 1.6% annualised rate in the quarter.  Retail sales, an all-important measure of the state of demand in the US, had a lively February and March. Yet sales fell steadily for many months before, and retail sales deflated by the CPI are still 2% below that of January 2023.

This revived willingness of US households to spend more came despite minimal growth in real personal disposable incomes. In February, incomes were only 2% higher than they were in early 2023, despite very full employment. Tell that to the White House.

The good news about spending propensities, with their implications for high interest rates for longer, had a mixed reception in the financial markets. Given the new uncertainty about Fed action to come, stocks and bonds have fallen back in April.

This minor pullback has come after investors had enjoyed a full recovery from the significant declines in the valuations of stocks and bonds in 2022, when interest rates rose dramatically to deal with the inflation that had taken central banks and the markets by surprise.

Yet it has all worked out rather well in the financial and housing markets. History tells us that it takes a financial crisis to cause a recession, and the global financial system avoided one this time round.

The place to look for an explanation of US economic resilience is the behaviour of the US financial markets. US wealth, consisting mostly of financial assets, stocks, bonds and equity in homes, net of household debt, has been increasing dramatically since the global financial crisis of 2010. And it received a huge injection from the Covid-19 relief payments and the strength of the financial markets in 2023.

US household wealth, net of debts, is now of the order of $156-trillion. That is about seven times personal disposable incomes. It was but $110-trillion in early 2020.  Now it is up by about $40-trillion since the Covid-19 lockdowns. Personal incomes after taxation grew a mere $45-bn since then. 

Changes in wealth are as much a source of additional spending and borrowing power as any other source of income. In aggregate, unrealised wealth gains dominate changes in other sources of income. Changes in wealth, even if capital gains can reverse, can significantly influence spending now.

 Predicting the wealth effect on aggregate spending requires predicting wealth itself, which is even more difficult than predicting the disposable income effect on spending. Success in predicting financial markets would be modern alchemy. Yet it is essential if economic forecasting is to have any scientific validity.

Household wealth in SA is about 4.5 times higher than household incomes after taxation. This ratio increased markedly during the growth boom of 2002-2008 and has largely stabilised since.

But the wealth of SA households is about to be challenged by a new dispensation: that is, the right to easily draw down a third of their accumulated wealth held in pension funds and retirement annuities, the impending two-pot system.

The effect on spending, interest rates and on the financial and real estate markets in SA will be significant. Forecasters in and out of the Reserve Bank will be fully engaged in predicting the outcomes.

Waiting to see what happens may be the only sensible option.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.

Debt and loadshedding

By JP Landman

It is now official: more than 50 parties will contest the national elections in May, compared to the 48 in 2019.

The new kid on the block

The party with most media coverage is, of course, Mr Zuma’s uMkhonto weSizwe (MK) Party. Mr Zuma was the number 1 candidate on that party’s list, but the constitution bars him from standing and he was duly disqualified by the Independent Electoral Commission. Predictably he appealed the decision. He will no doubt still campaign for the MK Party and may even be the face on the party’s posters. The ANC has also asked and failed to get the High Court to ban the MK Party from using the name uMkhonto we Sizwe as that is ANC property.

While these two legal processes wind their way through the court we can consider the possible impact the MK Party may have.

The table below compares the average results of polls before and after the MK Party was formed.

Before the MK Party was formed (average of 10 polls)

After the MK Party was formed (average of 3 polls)

African National Congress (ANC)



Democratic Alliance (DA)



Economic Freedom Fighters (EFF)



uMkhonto weSizwe Party (MK)



Inkatha Freedom Party (IFP)




The MK Party has taken support from the ANC, EFF and IFP. It also looks as if MK has put a lid on EFF support. Both observations are confirmed in by-election results in KwaZulu-Natal (KZN) and Mpumalanga. The party has done quite well in the by-elections, largely at the expense of the other 3 parties. The strongest support for MK is in KZN, where polls give it an average in the high 20s, currently more than any other party.

The MK Party probably benefited from a bounce in the polls and the by-elections with all the hype and novelty around its formation. But novelty wears off. Whether MK can sustain the bounce as the election campaign unfolds, remains to be seen. Also, an opinion poll average does not make an election result.

The day after the election

The election result is uncertain, and uncertainty is likely to be compounded the day after the election. If the ANC drops below 50% with whom will it form a coalition; which coalitions will be formed in in the provinces likely to see no majority party; are KZN and Gauteng the only provinces where there is uncertainty about the majority party?

I remain of the opinion that an ANC/EFF coalition at national level is unlikely. Ditto an ANC/MK coalition. If the ANC misses the 50% threshold by a small margin, it will probably team up with the IFP. If it drops to less than 45% of the vote, the ANC will have to look at a bigger party. That points to the DA. It is interesting that in the past week the leaders of both the IFP and the DA expressed themselves in favour of working with the ANC under certain circumstances.

The procedure if nobody gets over 50%

A reader has asked how the president will be elected if no party gets to 50%.

The constitution sets out the process. Parliament must meet for its first session within 14 days of the election results having been declared. The election is on Wednesday, 29 May, so the final results should be declared by the evening of Saturday, 2 June. This means Parliament must then meet by Sunday, 16 June, at the latest. The Chief Justice presides at that first meeting.

At that meeting, a president must be elected from one of the 400 members of the National Assembly. If no candidate receives a majority (i.e. 201 votes), the candidate with the least number of votes will be eliminated and voting will take place again. This procedure will be repeated until one candidate gets the required votes.

In the unlikely event that the last 2 candidates both get the same number of votes, Parliament must reconvene within 7 days and vote again. (That obviously leaves time for horse-trading and making deals). If a new president is not elected within 30 days, Parliament must be dissolved and a new election called. The president and cabinet will remain in their positions in an acting capacity until a new president and cabinet are sworn in.

I don’t think anybody in the country has the stomach for another election within 3 months. So, the pressure on the parties to agree on a candidate to become president would be enormous.

3 ballot papers

This year, each voter will receive 3 ballot papers, compared to the 2 we used to get. The reason is the inclusion of independent candidates.

  • The 1st ballot paper consists of political parties only, and voters will choose 1 as their favourite. This vote is for the first 200 members in the National Assembly.
  • The 2nd ballot paper consists of the same list of parties, but now independent candidates are added to the list. Voters can choose a party or an independent candidate. From this ballot, another 200 members of the National Assembly will be elected. The National Assembly consists of 400 people. There are only 6 independent candidates standing for the National Assembly, 1 in the Western Cape, 2 in Gauteng and 3 in Limpopo Province. In the 6 provinces where no independents have made themselves available, voters will not have the option of voting for an independent.
  • The 3rd ballot paper is for the provincial parliament or legislature. It will be a combination of political parties and independents running in that province and voters must choose 1. There are 63 parties and 6 independents contesting the 9 provincial elections.

(After all the hullabaloo of changing the electoral system so that independents can run, it is really a very meagre harvest.)

So what?

  • If the MK Party can hold on to the support claimed in various polls, its main impact would be to undercut the ANC and, paradoxically, put a lid on EFF support.
  • The MPC coalition polls at about 33%, which is very far away from the 50% needed to replace the ANC government.
  • Some of the MPC parties may well join a coalition government with the ANC – nationally and/or in some of the provinces.
  • But let’s first wait for the election results.

Happy voting!

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