The Investor June 2024

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Taxing us by stealth

By Richard Cluver

When governments over-borrow, they push up the whole pattern of borrowing rates which ordinary folk are forced to shoulder in order to service the monthly expense of the big-ticket items in their family budgets: like the mortgages on their homes and their hire-purchase debts.

Furthermore, because we live in a globalised world where all markets tend to take their cue from those of the biggest economies, even in the case of the few countries where governments have taken a responsible attitude to debt, the effect has been that everyone has been punished for the sins of the governments of the big powers and their central bank policies. Thus, because the irresponsible monetary policies of the world’s major governments during the first quarter of the 21st century had caused them to run up excessive debt, ordinary folk everywhere are being burdened with what effectively amounts to hidden taxes.

Even for the middle-income group in society which is traditionally taxed at ‘affordable rates’ – because most politicians well understand that to do otherwise is to court the probability that their party will probably lose power at the next election – the burden has soared. Thus, as the numbers of ‘Have-nots’ in society have grown steadily in most countries where social welfare budgets have stripped their economies of job-creating growth, this middle-income group has also had to shoulder the burden of taxation over the past half-century.

To illustrate the weight of this burden of both taxes and hidden taxes, I thought to start with the wealthiest nation on earth, the United States whose government keeps extremely good statistics about all manner of items.

To arrive at the following table I sought out ‘arithmetic mean’ examples of average family expenses which, simply explained, refer to the average costs faced by the largest single groupings in a society:

The table does not require much explaining except to note that the median price of a house in the USA in 2024 was $495 100 and so, in order to calculate the cost of servicing the interest on a mortgage at the 2024 median rate of 7.02 percent, I assumed that buyers had been required to put down a 20 percent deposit and thus had a mortgage amount of $396 080 to service. 

Back in 2020, before the US Federal Reserve was forced to raise rates in order to begin its war on inflation, the median mortgage rate in the US was 3.38 percent which meant that the annual interest rate charge rose from $13 388 in 2020 to the latest borrowing now costing $27 505 in 2024.

Meanwhile, ordinary taxation in its many forms has been rising steadily as a percentage of the earnings of ordinary folk – and very rapidly in respect of the wealthy who were in the past the entrepreneurs whose efforts ensured job-creation and rising wealth for everyone. Thus, while the median of American men and women have seen their earnings multiply over the past century, their tax rates have more than doubled from less than 10 percent to a current 22 percent.

The following graph illustrates the steadily-rising collective impact of taxation upon individual Americans over the past 50 years:

Now, referring back to my table of the median household expenses faced by the median of US citizens you can clearly see that against a combined income of $127 728 in 2020, US families were at that time facing a shortfall of $15 329 annually. It clearly explains why the median US family was at that stage no longer able to afford to pay for their children’s university costs, let alone live as pre-war families did when mum stayed home to mind the children.

However, had normal taxation remained at the same levels that prevailed before 1945, the annual shortfall in 2020 would have been a mere $1 841 which might have been managed by skimping on one of two discretionary expenses such as substituting a second-hand car for a new one, or by enduring less heating in winter.

However, since the war on inflation pushed mortgage rates up to 7.02 in 2024 percent for a 30-year mortgage compared with an average of 3.38 percent in 2020, the family budget was clearly broken. By 2024 the mean mortgage payment had risen from $13 388 to $27 505 and thus there is no way around that additional burden for new home buyers at the present time.

Of course, you need to appreciate that only a relatively small percentage of US families actually face this size payment because the majority bought their homes many years ago and so the US mean repayment of $2,883 for current buyers on a 30-year fixed mortgage is not entirely accurate for the average person today. But this reality is the only one that is logically preventing the entire American public falling into bankruptcy.

Nevertheless, according to the US Census Bureau, the current mean mortgage repayment for all homeowners is also an unsustainable $1,775 which highlights the plight of young US home owners trying to raise families in 2024 against an annual expenditure shortfall of $28 243.

It’s no wonder that so many young Americans are currently asking, “What happened to the Great American Dream?” Furthermore when one teams that reality with the de-industrialisation of vast swathes of the US as much of individual discretionary buying has moved in the past quarter century to Far East sourced items – creating at the same time a growing army of unemployed former factory workers – it becomes easy to understand why Donald Trump found such wide appeal among working class Americans with his “Make America Great” campaign slogan!

 And if their problems are a living nightmare for young Americans today, how much worse is the plight of young families living in the Developing World? For my next example I thus turn to the situation of South Africa’s Top Ten Percent by income. The following chart, courtesy of Money 101 illustrates how wealth is so thinly spread in South Africa.

I deliberately chose this rarefied income group because the universal poverty that has overcome the rest of South Africans under the past 30 years of ANC Government administration makes it impossible to make a similar family budget comparison with the lot of US families. In South Africa the top 10% own 86% of aggregate wealth while the top 0.01 % of the distribution (3,500 individuals) concentrate 15% of household net worth: more than the bottom 90 % as a whole.

The top 20 percent of the population holds over 68 percent of income (compared to a median of 47 percent for similar emerging markets). The bottom 40 percent of the population holds 7 percent of income (compared to 16 percent for other emerging markets).

SA Revenue service figures suggested in 2024 that the ‘Top Ten Percent’ numbered just 3.54-million out of a total population of 61.26-million. That’s fewer than six out of every hundred South Africans and while popular perception was that these were the fortunate ones, the wealthy few who were driving around in fancy cars, living in suburban palaces and sending their children to posh private schools…. that was about as wrong as any other South African myth!

To get a handle on what South Africans are earning in 2024, let’s consider the following table generated by SA Revenue Services:

Adding credence, data from BankservAfrica showed that the median monthly take-home pay in South Africa was R15 489….or R185 868 a year. So, comparing that figure with the table above suggests that every South African with a half-way decent job slotted in just below the top ten percent…. as did pretty much everyone who owned a home in the suburbs of South Africa’s leading cities.

To try and put that income level of R783 750 into proper perspective, SA Bureau of Statistics figures suggest the average South African family was spending R8 796 a month on groceries alone. That’s R80 580 a year and it was growing at a frightening 13.6 percent annually because of South Africa’s high inflation rate.

Next, given that everyone wants to own their own home, there was the ever-increasing burden of municipal charges over which property-owners had practically no control. A study by The South African Cities Network created four categories of South African municipal ratepayers on a basis of their aggregate payment levels.

On average, low-income households (type A) were paying around R1,425 per month for services while high income households (type D) were paying over four times as much, at R6,119…..and usually a whole lot more in cities like Durban!

Furthermore. the authors of the SA Cities study divided household incomes into three main groups: Income bands 0–4 (households with incomes of less than R3,200 per month in 2011 Rands which accounted for around 53 percent of all city households. Income bands 5–8 (households with incomes of R3 200–R51 200 per month which accounted for 42 percent of all city households. Income bands 9–11 (households with incomes above R51 201 per month which accounted for just 5 percent of all city households. This latter group actually paid the bulk of municipal bills. However, the mean of South African income earners fell into category C and represented 47 percent of all ratepayers.

So, to the grocery total of R8 796, let’s add Group D’s R6 119 in municipal charges and levies to take our total expenditure to R15 915 which, as an aside, explained the scramble at that time by householders to install rooftop solar panels in order to escape both the imminent collapse of the national power grid and, simultaneously, the tyranny of municipalities which were on average doubling the power utility’s bulk electricity charge when billing their ratepayers.

Then there was the cost of providing a roof over one’s head. Ooba noted that the average bonded property in South Africa had climbed in value to around R1.43 million. With a 10 percent deposit, that thus amounted to a monthly mortgage repayment of R13 241 at an interest rate of 10.95 percent at that time.

However, the reality of leafy suburbs like Kloof where I live was that the average house price was R3 435 000. And that was very modest compared with sought-after suburbs like Constantia and BishopsCourt in the Cape where R14-million got an average home……demonstrably well beyond the reach of the top ten percent! Working thus on that (comparatively modest) R3 435 000 cost would take a monthly bond repayment over 20 years to R31 805 which would patently be beyond the budget of a SA top ten percenter. Even repaying over 30 years and a monthly installment of R29 324 would blow his budget.

But let’s continue, noting that in view of South Africa’s failed public transport system the average Top Ten Percent family could clearly NOT manage without at least one car, vehicle financing company Wesbank noted in 2024 that the average value of new cars it had financed was R352 208. Without a deposit, the estimated monthly repayment on that amount was R7 163 over a 72-month repayment term.

For this you can forget vehicles like the bottom-end Mercedes C class which started at R849 000 or the BMW I series which started at R655 000. Think instead VW Polo at R247 000 to R332 800.

All of this was, furthermore, before one had to fund education costs at anywhere between R30 000 a year for a government school to R200 000 for a private school. So let us choose the middle point of R85 000 or R7 083 a month for one child.

Adding all these things together took us to an average living cost before accounting for ‘luxuries’ like annual holidays, clothing and entertainment. Thus one might have concluded that a Top Ten Percent family needed an income of at least R58 485 just to meet the basic costs of living.

If you relate that to the income table on page 70 you will clearly conclude that if you wanted to enjoy such luxuries as an annual holiday, or a slightly better home than average suburbia offered, you needed to be at least in the top one percent of income-earners.

But now consider that if you were a Top Ten-Percenter earning R65 000 a month you would have had left just R47 764 a month after meeting your Income Tax bill with which to meet all your family’s basic needs, leaving absolutely nothing for luxuries……that’s a deficit of R10 721 if you had one child getting a half way decent education and R17 884 for a two-child family…..and I have still not costed in items like a medical aid plan and savings for retirement.

Given that monthly cost of living shortfall of R17 884, our ‘Top Ten Percenter’ could clearly not afford the luxury of a stay-at-home wife. And if she needed to go out to work to supplement family income, one might practically assume she would also need her own car in order to get around and that, we have already calculated, would cost a monthly average of R7 163.

Adding the cost of a second car to the family-income shortfall thus suggests she would need an after-tax income of at least R25 641 and, in order to take home that amount, she would thus need to gross around R32 000 which would incur income tax monthly of R5 583 and UIF of R177 or, an annual R69 120.

Thus we have our Top Ten Percenter couple breaking even with nothing to spare for savings, holidays and any luxuries on a gross annual income of R1 167 750 and paying total taxes of R17 236 (he monthly) and R5 760 (she monthly) making an annual total tax bill of R275 952 or 23.63 percent of their gross income.

But, as I have just noted, there were additional sums laid upon them as a result of interest rate increases they had recently faced on their mortgage and vehicle finance etc: a pimple on a mountain slope of interest rate increases which had been happening for years as a consequence of the ANC government’s ever-increasing debts.

Working on a home cost of R3 435 000 and assuming our couple afforded a twenty percent deposit and elected to repay a mortgage over 20 years then, noting that in October 2021 bank mortgage rates were 7% percent and in July 2024 11.75%, SA Home Loans calculated a monthly bond installment of R26 908 would be necessary in 2024. At the 2021 rate a repayment of R18 033 was suggested. The implied monthly (hidden tax) resulting from this differential is thus R11 967 or an annual R143 604.

The cost of financing a R352 000 car in July 2024 at an interest rate of 13% was R7 163 compared with R3 860 when interest rates were 7%. Thus the implied additional cost of financing two average cars as a consequence of the interest rate increase amounted to R79 272 a year.

Assuming that our couple had no additional financing costs, then we might argue that the war on monetary inflation was costing them a total of R222 876 a year in 2024 which, together with income tax of R275 952, was costing R498 828 a year out of a total annual income of R1 167 750: a total effective tax rate of 42.71 percent.

But then note that there was VAT at 15 percent on virtually all their spending and excise duty, road licenses, fuel levies and a plethora of municipal rates, to mention just a few. So let’s be conservative and ONLY calculate the VAT burden of 15 percent on their after-tax income or another R114 151. Municipal rates were, furthermore no longer insignificant and so we could not exclude them. On a home worth R3 435 000 in a city like Durban they would be paying R3 520 a month.

Effectively then, in the year 2024 a Top Ten Percent family was likely to be contributing to national and local government a total of some R655 219 or 56 percent of their collective gross income….and that was even before we started to calculate the amount that inflation striped from their savings annually.

Here in summary is a comparison between what our Top Ten couple was having to pay to get by in 2020 and, given the higher War on Inflation costs of borrowing money in 2024:

Clearly even South Africa’s Top 10 percent had back-breaking financial burdens by 2020 and by 2024 their situation had become complete untenable. So it is no wonder that the SA property market had ground to a complete standstill. But, as our US example showed, emigration would not necessarily have solved their problems.

What is clear from my two examples is that the sum of direct and hidden taxes has become unfairly excessive in both First and Third World countries.

I could go on to offer nation after nation where the imbalance remains the same. Everywhere, and unlike their parents’ case where mother ceased working after the birth of the first child and their grandparents’ era when mother never worked outside the home, modern families demonstrably could not get by without both partners working.

Furthermore, educating the current generation of youth had by 2024 became a burden far beyond the means of most couples. Student loans had thus become the norm in most western nations….which explained why young couples could not afford their first home until they were well into their 30s: until they had paid off their student loans…. and why, for many, children had become an unaffordable luxury….because couples could not afford to stop working in an era when child care costs were equal to the average wife’s take-home pay.

Ordinary citizens were not only feeling powerless over events that were shaping their history, but they were acutely aware that ‘Big Government’ was swallowing an inordinate part of their earnings.

So it was no wonder that ordinary folk everywhere were clamoring for change and that political systems were being challenged on a scale like never before. The birth of the Internet and the subsequent development of ‘Chat Groups’ facilitated by software like ‘Facebook’ meant that ordinary people could talk across the planet and shape opinions radically different to those they were enduring at the hands of the current crop of politicians.

Putting these facts together makes it abundantly clear why throughout the world, ordinary folk were feeling they were overburdened by taxes and dissatisfied with the failure of governments to adequately represent their individual hopes and aspirations….that change in the form of a tax revolution was inevitably on the way!

Furthermore, it was not just ordinary people who were feeling the pinch. When governments drain too much money out of the economy, corporate profits decline as well and staff retrenchments begin, so it should not surprise anyone that as taxation in its many forms has risen, business activity has declined steadily over the past half-century.

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Geopolitical Breakdown

By John Mauldin

Commenting on recent remarks from Jamie Dimon and Ray Dalio about Hamas attacks spreading into a larger conflict, retired General David Petraeus, who was also CIA director under President Obama has some very interesting thoughts on why geopolitical risk is so

Hard to escape.

“If you think of that metaphorically, we’re the guy in the circus who, together with our allies and partners, have to keep a whole bunch of plates spinning. The biggest of those plates, clearly bigger than all the others, is the plate that represents the US and Western relationship with China.

“But there’s also a plate for Russia, needless to say. The challenges that it poses beyond Ukraine, but also very much in Ukraine. There’s the North Korea plate. Needless to say, there’s an Iran plate and a plate for Iran’s proxies, which of course include Hamas, Hezbollah, the Houthis in Yemen, and then Shia militia in Iraq and a variety of other places in the Gulf. And they actually have other discrete plates as well. Their nuclear program, their missile program, and so on.

“There are plates that represent still the Islamist extremist organizations around the world that we’ve learned the hard way. We have to keep an eye and pressure on because if you don’t, as with the case of the Islamic State after we pulled our final combat troops out of Iraq in late 2011 and after the Prime Minister undid so much of what we’d achieved together during the surge in the subsequent three years, if you take your eye off the Islamic State they can reconstitute.

“By the way, there are some lessons there for the situation with respect to Hamas and Gaza that we can get to later as well. Then there are plates that represent various nation-state and non-state actors, including Islamist extremists and criminals in cyberspace, all of the different challenges that we face there.

“There are issues with domestic populism in a number of countries, including in some of our NATO allies. And of course, we have some of those issues here at home when you look at the hyper-partisanship that characterizes much of what goes on in Capitol Hill. So the number of challenges that is out there is really enormous.

“And I should add to that really the manifestations of global warming, the much greater frequency of and severity of weather events, hurricanes, flooding, wildfires, and so forth that we have seen as well. So when you look at that, and probably as a result of that also, that latter category is substantial human migration. We are obviously challenged by that very considerably as you look at what goes on largely across our southern border but through other means as well. But so are our European allies with the challenges that they face across the Mediterranean, from the east of Europe, and so on.

“So it is accurate, again, for Jamie to describe the world the way it is, for Ray Dalio to describe that as it is. And I think it highlights the reason why geopolitical risk assessment has become an increasingly important component of the investment process.”

Whew. When you step through it that way, the scale of these challenges is staggering. But there’s more, much more.

“A Hot War in Cold Places”

At SIC we were thrilled to hear from Pippa Malmgren, analyst and futurist whose bio is almost beyond comparison. She was a special assistant to President George W. Bush, a strategist for UBS, and more.

Ed D’Agostino interviewed Pippa at SIC. He began by asking about her provocative 2021 statement that World War III was already underway.

“I also argued in that Substack piece that World War III would be very, very different from World War I and World War II because immediately when you say that, people have visions of tank to tank and naval vessel to naval vessel and a lot of loss of human life, but this is a much more technological war. This confrontation is happening, I’ve described it as ‘We’re in a hot war in cold places,’ by which I mean space, the high seas, we’re now in naval conflicts… This is a huge change from all the land conflicts that we’re accustomed to, and it’s often in locations that we don’t think of, like the Arctic and the high north, Scandinavia. And so these are all places where there are no journalists, by the way. There are no journalists in space, there are no journalists on the high seas, and there are no photo ops.

“So they can’t show you the story. It’s much easier to just report Ukraine and now, of course, the situation with Israel and Gaza because it provides a place for journalists and photo ops, but that doesn’t make this ‘invisible war,’ as I call it, any less real. And we’re also in a cold war in hot places, which means the conflict that’s between the US and its NATO allies and a combination of Russia and China and their allies across all of Africa and in the Middle East, which is very much part of the Israel-Gaza story, in my view. We make this mistake of thinking these are all localized conflicts, by the way, Ukraine and Israel. I don’t think they are. They’re symptoms of this much larger conflagration.

“And just to finish on this, what Russia-China, in alliance with Iran, North Korea, and a few others, are trying to do is basically force the United States to come to the table to agree on a deal on specifically Ukraine. And in my judgment, the White House position is, they want a deal on Ukraine, but they don’t want to announce it until right before the presidential election, for obvious reasons. Because Americans will forget. If you announce it now, they won’t remember and give the president any credit for it by November.

“So President Putin’s view is, ‘Fine. I will make your life hell between now and then.’ And this is what we see. And this is one reason we’ve just seen the head of the FBI come straight out and say, ‘There’s a real risk now of cyberattacks on the United States,’ and I could go deeper, but here’s the fundamental question we need to ask ourselves.

“I’ll just say this, instead of arguing about whether the US could win a nose-to-nose conflict with either Russia or China or both, think of it this way. This is jujitsu; this is not wrestling. Jujitsu is where China and Russia do things that suddenly force us to deploy our military and have them on high alert. So now we are deploying the Navy and aircraft carrier groups to deal with Houthis with missiles on their shoulder, which an aircraft carrier can’t really do very much about.

“But how much does it cost to deploy those vessels? The answer is nobody knows, but it’s eye-wateringly expensive. And at some point, the Navy’s going to have to tell the Congress what that number is, and we’re all going to choke. And the purpose of the exercise is to drain the US dry of funds. It’s not to fight in a traditional military strategic sense. It’s a bleed-you-dry strategy.”

Let me stop there and note how we in the US are doing a fine job bleeding ourselves dry. Defense spending worsens the debt, but it would be far too high anyway. 

Pippa went on about how this affects the economy.

“I think we’re in a massive race between inflation and innovation, and part of the reason the Fed did the zero interest rate and the free-money policy, their view was if we throw enough cash at it, the innovators will get going and they will build the next Apple and the next Microsoft, and that will begin to pull the economy into the future. And I remember being very skeptical about that at the time because I’m a little bit more hardcore on inflation. But I am now looking at it, and I’m not sure it was wrong. And we have had such extraordinary innovation.

“Interestingly, once you start getting into strategic-security conflict, then the defense community becomes a provider of dollars. And I’ve gone so far as to say that defense spending is the new quantitative easing because you can spend an unlimited amount of money. Nobody ever asks any questions. If you tried to do it through the Fed, everyone would be having a heart attack. But if it comes through this strategic-security fiscal angle, nobody can complain, especially because the risk of conflict is real and it’s a clear and present danger.

“One reason you see the private equity firms aligning with the defense community is because that’s where the dollars are, and it is where the innovation occurs. War and conflict spur innovation. No question about it.

“So the question is, can we get through this period without actually having the war, or can we remain in the invisible war that’s very real? Can we get to a resolution without the public really registering what the real dangers are? And I think the chances are yes, because everybody does want to cut a deal on Ukraine, which implies also a deal over Gaza, Israel, because Russia and China and Iran would back off supporting Hamas and the Houthis if there was an agreement on Ukraine—or rather, China and Russia would stop giving them so much support if there’s an agreement on Ukraine…

“And if we get that—and here’s maybe my key takeaway from today, because I’ve given you a lot of dark stuff about the realities of geopolitics, so it makes everybody nervous and scared. But here’s the thing: A peace dividend is rare and valuable. How many of us missed the fall of the Berlin Wall and the end of the Soviet Union, and the extraordinary peace dividend that ensued? I would say most people did not anticipate that that was going to happen.

“This is another shot at that, and I would say in addition to whatever time you spend worrying about the downside, I want you to really think about, what is your strategy for the day that we get the headline in the Washington Post, ‘There’s a deal on Ukraine?’

“Because that is the day the peace dividend will begin again, and markets will go up and all this innovation will go crazy, and suddenly inflation will be an issue again. And there’ll be a question about how to solve that. But I would bet that in the race between inflation and innovation, in a peace dividend, innovation wins. So I just want to leave you with, I think there’s a real upside that most of the market isn’t even thinking possible.”

That was a curveball I didn’t expect, but an important one. We are often quick to assume the worst, but good outcomes are possible. The Cold War had one. While the various smaller conflicts brought tremendous pain and suffering, we avoided nuclear war.

It’s hard to imagine all today’s conflicts working out so peacefully. Yet it’s possible, and Pippa is right to say we should consider that scenario in our investment planning.

Intelligence Failures

Finally, we’ll turn to old friend Dr. George Friedman of Geopolitical Futures. I asked him to share his outlook for the Ukraine and Israel wars.

“The Russian situation is a disaster for the Russians. After two years, they have not succeeded in defeating a miserable little country like Ukraine. They’ve had a coup d’état, tried to overthrow the government. And a whole lot of people dodging a draft. So, when you take a look at the Russian position, they’ve advanced somewhat, but they are unable to surge forward. When they take a city militarily, they should hit hard with everything they have to punch through to the end. And they don’t do it. They don’t do it because their military is not formed properly and because they got into this war with an intelligence failure of enormous proportions.

“They failed to understand how the Ukrainians would fight. They failed to understand that Germans were not more interested in oil than the United States. And they failed to understand that the United States had a way to fight a war that didn’t lead to casualties so that we wouldn’t have what’s called a ‘Dover problem’ of corpses coming back. So I look at Russia and I say, ‘You may win, but boy, you should have won long before this.’

“Ukraine can’t win. Russia is not winning. We have to have a negotiation. The problem is that Putin cannot admit that he didn’t take Ukraine. He expected to; he didn’t believe he couldn’t. So he wants to have some victory of some kind walking away from it. The United States is negotiating this, and the United States is not inclined to give him that, but in the end, we’re going to have to give him a little flag saying, ‘Oh, you’re a great guy’ or something. But the problem is he failed to take Ukraine, and the United States is in a position that it wants to get out of the war. It’s had enough. So we’ll have a negotiation.”

This is, again, hard to imagine right now. But George says negotiation is the best possible outcome for both sides, so that’s where it will go.

As for Israel and Hamas…

“There’s two things to remember about this. No Arab country came to the support of Hamas in battle. So whereas Hamas, I think, expected at least Hezbollah to come in, they haven’t, which means the Iranians haven’t. For the Israelis, this is a second massive intelligence failure. Previous one was 1973 where they missed an attack by the Egyptians and the Syrians supported by the Russians. In this one, they failed to see—in a ditch sitting next to you—that something may have been going on. So you have internal crises in both countries, in both groups. The Arabs simply cannot figure out how to deal with the Israelis.

“The Israelis have a strategy of pounding the enemy until he gives in. They don’t have to give in. So the Israelis have a problem. They see themselves as a superpower. I see them as a nice little superpower, very good. You are a small country. You can’t take major casualties, and you can’t manoeuvre widely. So try something else. And they won’t; they keep coming back to the same strategy…

“So two incompetent forces have met together and have no idea what to do now.”

That’s harsh but also hard to dispute. Neither side can achieve victory, but the situation also isn’t amenable to negotiated compromise. That makes me think it could drag on for a long time, extending the pain and raising the odds it spreads elsewhere.

Remember, too, how this war came out of nowhere, sparked by a brutal surprise attack on civilians. What other geopolitical surprises are brewing right now, and where?

Choosing the right partner has never been more important


That the Government of National Unity would include the Liberal DA and exclude the EFF (extreme left or is it extreme right?) has been well received by investors.

That this would be the new shape of government in SA was only known late on Friday 14th June after the markets were closed and that were only to reopen on Tuesday 17th June.

The run up to the election had seen SA listed shares and bonds and the ZAR well up from their mid-April lows. On the presumption that the ANC would be able to do business as usual with the assistance, if necessary, of one or two minor parties. A sense of better the devil you know seemed to characterise market sentiment.

That the ANC collected a surprisingly low 40% share of the votes cast, rather than 45-47 per cent expected, raised more uncertainty about the future course of economic policy. The markets in SA assets reacted typically to the new dangers by falling back from pre-election valuations.

Early days surely yet the share and bond markets are now ahead of their immediate pre-election highs and have both gained about 7% in USD’s from the post-election aftermath. The ZAR has gained ground against the stronger USD and against the other EM currencies, the true measure of rand strength for South African, rather than US reasons.

Of further encouragement is that the risks foreign investors attach to their SA assets have also narrowed. These sovereign or country risks are best measured by the spread between the yields on a RSA dollar denominated bond and those offered by a US Treasury Bond of the same duration. The spread between a five-year RSA Yankee bond had narrowed to 2.3% p.a. from 2.7% in the run up to the election. Then post-election the risk spread had widened to 2.6% p.a. and is now helpfully lower at about 2.2%. A good first impression but much more is called for the move the markets higher (see the charts below)

South African Stocks and Bonds in 2024. Daily Data to June 18th (January 2024=100)

Source; Bloomberg. Investec Wealth&Investment

The ZAR in 2024. Daily Data to June 18th January =100

Source; Bloomberg. Investec Wealth &Investment

Interest Rates – Dollar denominated Five Year RSA’s (Yankees) and US Treasury Bonds and the Risk Spread. Daily Data; April to June 18th 2024.

Source; Bloomberg. Investec Wealth &Investment

The DA will now carry a heavy responsibility for realising faster growth. Will the party and its leaders and followers be up to the task? Will they be able to manage change in an environment where the support of senior officials may not be fit for purpose? And when time spent in parliamentary debate and on the hustings may not have been the best possible preparation for expertly and vigorously executing the tasks at hand?

What specific government departments will be allocated to the DA members of the cabinet remains to be revealed? The DA should not be at all shy in coming forward to serve and be accorded a heavy responsibility for executing economic policy. There is apparently agreement on the initial economic policy reforms to be pursued, not surprisingly, given the weaknesses of government departments obvious to those who have sat for so long on the opposition benches and in parliamentary committees.

The Treasury and its Budget is in safe hands and can be supported by the DA in cabinet. It is the other economically vital Ministries that offer great scope for much improved governance and in executing policy and delivering value for the sacrifices taxpayers make to fund their government.  The management role to be played by the Ministers to be held responsible for Mining, Industry, Energy, Transport Water and Municipal Services, in and out of Parliament, will be all important promoting economic development. That is the essential growth stuff to truly add value to SA capital from which all South Africans will benefit, those in and out of work.

Will the new appointments be up to the task?  Businesses in South Africa can surely be a source of managerial talent. And a source of technical and financial advice to help fashion public-private partnerships to attract the necessary and available capital to revive the infrastructure.  The best and brightest will be needed and will not be found wanting. A government that regards SA business as a partner in progress rather than a threat to its power and privileges will be a huge asset value and growth promoter.

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