The Investor March 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

From a low of $2012.40 on January 25, the gold price soared to $2 195.50 on March 11, a gain of nine percent ahead of the latest US inflation surprise increase and along with some surprisingly optimistic comments from the US Federal Reserve predicting faster than expected economic growth this year.

Gainsaying a major consensus among economists that hard times are likely to continue for at least the rest of 2024, the Federal Open Market Committee has been speaking of a rare combination of strong economic growth, low unemployment and falling inflation. However, the graph below tells a different story of sharply-rising market concern about the strength of the world’s monetary system:

Responding to the Fed comments, the Financial Times noted that, “A brisk start to 2024 means officials are now confident that the US economy will expand by 2.1 per cent this year, faster than most other advanced economies and above even their own forecasts three months ago.

While underlying inflation will come in slightly hotter, and the strong jobs market slightly stronger, Powell signalled this would not dissuade the committee from lowering borrowing costs from their current 23-year high of 5.25-5.5 per cent.

Now the reality is, unlike Europe where inflation has come down to 2.6 percent from January’s 2.8, the latest US Consumer Price Index climbed 3.2 percent last month from a year earlier, up from 3.1 percent in January. That’s down notably from a 9.1 percent high in 2022, but it is still quicker than the roughly 2 percent that was normal before the 2020 pandemic.

After stripping out volatile food and fuel costs for a better sense of the underlying trend, US inflation came in at 3.8 percent, slightly faster than economists had forecast. And on a monthly basis, US core-inflation climbed slightly more quickly than anticipated. Taken as a whole, the report was the latest sign that bringing inflation fully down is likely to take time and patience.

So why has the gold price soared and since then failed to retract? Has the US Fed, I wonder, been up to its old tricks of talking up the marketplace because it senses troubles ahead and hopes to change a pessimistic public mindset? The real problem, however, is that this is not just a domestic US issue. The whole world is captive to whatever happens in the US economy and, as long-time readers are well aware, one of my greatest concerns is the fact that the US has control of the whole world’s monetary system to do more or less what it pleases.

Custodianship of the global monetary system was 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. The signatory countries at Bretton Woods had after all agreed to, “… keep their currencies fixed but adjustable (within a 1 percent band) to the Dollar, and the Dollar was fixed to gold at $35 an ounce.”

Now it is clear that, had that 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 to today’s $2 171.30 implies that the consequence of the US failure to strictly adhere to its $35 undertaking is that throughout the intervening 80 years the US has effectively printed dollars at a compound annual average rate of 5.23 percent greater than its growth of gold reserves.

Surprise, surprise if you care to study the graph above, courtesy of the US Bureau of Labour Statistics, it illustrates that 5.23 percent was also more or less identical to the official average US inflation rate over that whole 80 year period. 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, the US was enjoying an annual inflation rate of 0.6 percent but, driven by a post-war boom, 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 below 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 inflation 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, 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.

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, criptocurrencies like Bitcoin and, potentially, Blue Chip shares, are soaring or about to go exponential. You be the judge!

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A Bull and a Super Bull

By John Mauldin

You may have noticed the stock market rising lately. Much of the gain isn’t so much “the market” as a handful of mega-cap stocks. Nonetheless, the bulls are clearly in charge. The question is how long they will stay there. History suggests longer than many market bears think.

I expect another bear market at some point. But the timing? My personal history suggests I’m not a very reliable market timer. We will know when it gets here. (By the way, I am not predicting a bear market. I am making an observation.)

In theory, a stock price represents the discounted current value of its estimated future earnings. You buy because you want a share of its future profits (as either dividends or a higher share price) and today’s price offers that opportunity. But that’s theory. In reality, many people buy simply because they think the share price will keep rising as other people buy. It’s a kind of “greater fool” method that can actually work. (Market timers and technicians argue they have ways to measure this. And some succeed, at least for a time.)

As with other assets, low interest rates magnify the profit opportunity. Cheap financing helps, whether you’re buying a home or a stock. Conversely, high interest rates reduce the potential gains. But the market is also forward-looking. It responds not just to current interest rates but also to where it thinks rates are going. On that basis, the last six months or so make sense. Rates seemed to have peaked. Analysts began projecting rate cuts. The already strong bull market accelerated further. But rates aren’t the only factor here. Profits—or expectations thereof—accelerated as well, making buyers more willing to pay higher share prices.

The deeper question is whether today’s prices are right compared to what the future will actually bring. That’s our topic this week.

A Bull and a Super Bull

Stock valuation can be a difficult topic because it’s inherently subjective. What is the fair price today to buy what you think will be $100 in earnings a year from now? Or five years from now? The answers will always differ because everyone has their own preferences. Maybe you would pay more than I would. Neither of us can prove the other one wrong.

Sarah Hansen at Morningstar thinks the market is fairly valued. David Rosenberg, not so much. But let’s look at some of the other analysts Sarah quotes in support:

“While the S&P 500 may be ‘egregiously expensive’ versus its historical pricing, Bank of America strategists led by Savita Subramanian recently concluded that stocks are still poised to climb higher. ‘The S&P 500 is half as levered, is [of] higher quality, and has lower earnings volatility than [in] prior decades,’ she wrote last week. That means a historical look at valuations may not be the most helpful perspective for investors.

“Goldman Sachs strategist David Kostin has also concluded that today’s rally is different from history. Unlike in 2021, when extreme valuations were widespread in the market ahead of 2022′s bear-market losses, he finds that today’s elevated valuations are more concentrated among a handful of stocks. Paradoxically, that’s a good thing. ‘Investors are mostly paying high valuations for the largest growth stocks in the index. We believe the valuation of the Magnificent Seven is currently supported by their fundamentals,’ he wrote last week.”

But then we get to that timing thing. The market expected 6 rate cuts early this year. Now it is 4ish. Was the market disappointed? Evidently not. Earnings keep coming in reasonably well. Bonds sell off as stocks climb.

In late 2006, I was on The Larry Kudlow Show with Nouriel Roubini and John Rutherford. Larry and John were aggressively bullish, and Nouriel and I were arguing for a recession and hence a bear market. (My rationale was the inverted yield curve and a coming subprime collapse.)

Technically, I was right. A recession started in 2007 along with the collapsing market. But my timing was a tad off. That is, if by “a tad” you mean six months. Because over the next six months the market rocketed another 20% higher.

(Larry is bullish by nature. If he really wants to boost the stock market, he should get me and Nouriel on his show and tell us to be bearish.) The market today trades at a healthy 24X trailing earnings.

This is clearly in the historical top tier. But to be fair, I’ve been arguing that past historical data no longer applies in the era that we live in. Could the “normal” P/E ratio actually be higher than it was in the past? Possibly. The world has changed in many ways. For the record, I am not selling my stocks and I’m actually shifting a larger portion of my portfolio into equities, although not growth stocks.

That said, if history means anything, it shows periods when people pay enormous premiums for dubiously projected profits often didn’t end well. We are in such a period now.

My good friend David Bahnsen shared this illustration of today’s price/earnings ratios vs. the 1999 tech bubble year.

“The overall multiple of the S&P is expensive, and 1999 comparisons have been used for good reasons (in so much as much of the high valuation has been concentrated in a certain ‘cool tech’ portion of the market)… But is the problem even worse than imagined? On one hand, the high P/E companies today are legitimately better companies and more established in both revenue and earnings. On the other hand, the quantity of companies trading above 20x, 25x, 30x, 35x, and 40x earnings is significantly higher than it was in 1999. Then, you at least had 43% of the index trading at 15x or cheaper. Today, that number is just 25%.” David Bahnsen

The other side of David’s note is that 75% of the S&P 500 stocks are trading at 15X their earnings, or more. That means you are paying $15 to acquire $1 of profits—which makes sense only if you think someone else will pay even more. To be fair, that’s been a good bet lately. And a P/E of 15 is quite reasonable.

More important, though, this shows the current bull isn’t, as often thought, simply a function of the “Magnificent 7” stocks becoming brutally overvalued and dragging the index higher. They are indeed brutally overvalued, and they are dragging the index higher. But the rest of the market is hardly cheap.

Here’s a good illustration from Ed Yardeni. The red line is the normal S&P 500 index, which is weighted by market capitalization and thus becoming top heavy. The blue line is an index of the same 500 stocks, but equally weighted so each stock has the same influence.

 Here is Yardeni’s take on the difference.

“The S&P 500 market-weighted stock price index is up 43.2% since the current bull market started on October 12, 2022 (chart). The equal-weighted version of the index—with the 500 stocks assigned an equivalent weighting regardless of their market capitalization, allowing us to compare performance—is up 29.5% since it bottomed on September 30, 2022. This confirms our view that the bull market has been a broad one all along. The equal-weighted index certainly has been in a bull market, it just hasn’t been as awesome as the one for the market-cap-weighted index. The former just rose to a new record high, while the latter did so in mid-January.”

So within the S&P 500, we don’t see a Mag-7 bull market and a flat or bear market in the others. It’s better described as a bull and a super bull. The bullishness seems to diminish as you go down the size scale. Small cap benchmarks like the Russell 2000 are lagging behind. In Ed’s view, this sets up continued gains as the buying interest goes downscale. People who are afraid to buy Microsoft or Nvidia at today’s lofty valuations will look at less expensive (but still giant) companies, slowly broadening the bull market.

My experience over many decades shows markets can get far more overvalued than I thought possible. I hesitate to project when this one will end. But I’m sure it will. Another question is whether we are overlooking important changes in market structure.

A few decades ago, the typical growth company went public as soon as possible because that was the best way to acquire more capital and continue growing. IPOs were a big deal. Investors would sort through the thousands of small caps and invest in those they thought had potential.

We have a different pattern now. Public companies face a variety of new tax and regulatory headaches, making that status less envious. But more important, the venture capital and private equity industries are better developed. They can provide growing companies with all the capital they need.

For many companies, the rewards of going public no longer outweigh the hassles and expenses. IPOs are still necessary, but as more of an ending than a beginning. The IPO is the “liquidity event” offering insiders and early investors a chance to sell their shares at the highest possible price. In today’s market, companies stay private as long as possible, hoping for even bigger IPO payoffs. Or they bypass the IPO process and get acquired by a larger, already-public company.

But something interesting happened the last few years. Private equity groups own thousands of companies they would like to sell. Higher interest rates present the same problem homebuilders face: High financing costs reduce the pool of potential buyers, which reduces exit prices. This isn’t a small problem. Bain & Co.’s annual private equity report says globally there are about 28,000 unsold companies worth (or so the owners think) more than $3 trillion. Rather than cut prices, the PE industry seems to be waiting for better times. This may explain some of Wall Street’s rate cut demands. They want to have lower rates in the same way homebuilders want lower mortgage rates.

But the more immediate effect is that it creates a shortage of emerging growth stories to attract investor interest. The money that would once have gone into those companies has to go somewhere.

(28,000 companies in private equity hands? Most are too small to really matter. If a PE firm buys 200 funeral homes, who cares? Are you going to invest in your local funeral home? But 200 of them in one stock? That becomes interesting. PE companies have their place in the creation of opportunity.)

But there is no escaping the fact that the number, if not size, of public equities is dropping. Let’s look at two charts. The first shows US-listed stocks dropping from 8,090 in 1996 to 4,642 in 2022.

It’s even worse when viewed as the number of public companies per million people in the US:

The number of US public companies is down by more than half. This has happened as the number of listed stocks on a global basis has simply exploded:

This has happened when total money supply has also exploded:

Too much money chasing too few goods (listed US stocks)? We should expect the market to rise. A lot of it seems to be entering the large-cap and mega-cap stocks, raising their valuations in a kind of snowball effect. This attracts yet more investors at ever higher prices, sending valuations further into the stratosphere.

Big Kahuna

Observation: You can’t buy stocks with your good looks (which would mean I would be out of luck); you need money. It can be cash or borrowed but money is the fuel that makes the rocket move. Add more and it goes faster. What is this market’s cash source?

One contributor is the vast amount of COVID stimulus still working its way through the system. This let households repair their balance sheets and add to savings. Businesses, large and small, borrowed boatloads of cash at very low rates which then flowed to shareholders (as buybacks) and to managers, workers, and suppliers. Some of this cash found its way into stocks.

Rising wages added to the cash flow. The demographic labour shortage has forced many employers to both raise pay and expand benefits like retirement plans. This is yet more fuel for the stock market—particularly since much of it is going to lower-wage service workers who, I must stress, are wonderful people but often not seasoned investors.

But the Big Kahuna, as always, is the central banks. Together they provide a lot of cash, as Louis Gave highlighted in a report last week.

“I never tire of quoting Beat Notz, who many decades ago told me ‘it’s an easy business: just figure out if there is more money than fools, in which case asset prices rise, or more fools than money, in which case asset prices struggle.’

“Looking at the world through this prism leads to an old Gavekal favorite: the ratio of market cap to local M2 broad money. As the chart below indicates, the ratios of fools to money in the US and Japan are starting to look stretched. China is the mirror image, with way more money than fools.

“But in a global world, is this still the right way to look at things? With capital able to move around ever more easily, perhaps we should add together the monetary aggregates of the Big 4—the US, the Eurozone, China and Japan—in our crude attempt to monitor the fools-to-money ratio?

“The chart above shows what Big 4 M2 looks like. Note the dip in 2022, a year in which bonds and equities both fell, and the apparent topping out.

“Using this aggregate as a proxy for ‘money,’ US equity market cap does not look excessive. This is testimony to a lack of equity issuance. A unique feature of the last decade’s bull market is that Wall Street has been busier arranging acquisitions or taking companies private than in arranging new listings.”

John here again. Louis makes an important point here. Total US stock market capitalization as a percentage of global money supply hasn’t changed much. Some of the price gains we see may just be the natural result of monetary expansion. Which even in the US hasn’t significantly reversed, despite rate hikes.

Now, add what Louis and I both observed about equity issuance. The same percentage of a stable or growing money supply going into a smaller number of stocks will, on average, mean more demand for each stock. Rising prices and valuations are the natural result.

Further, the nature of capitalization-weighted portfolios will concentrate most of the demand on the largest stocks. Which is exactly what we’re seeing.

This arithmetic says we shouldn’t be surprised to see rising stock valuations. The bigger surprise would be if they weren’t rising. But that doesn’t mean they will keep rising.

Look again at how M2 growth seems to be topping. The market’s fuel tank is beginning to run dry. It may get drier still if, as rumored, the Bank of Japan starts exiting from its negative rate policy and yield curve control next week.

The BOJ is kind of the last man standing from the old NIRP/ZIRP era. They haven’t needed to tighten because local inflation in Japan has been slow to increase. But it is finally picking so the BOJ has begun some modest tightening. The impact may spread far beyond Japan.

Why Capitalism has failed

By Jeff Thomas

Today, more than at any time previously, Westerners are justifying a move toward collectivist thinking with the phrase, “Capitalism has failed.” In response to this, conservative thinkers offer a knee-jerk reaction that collectivism has also had a dismal record of performance. Neither group tends to gain any ground with the other group, but over time, the West is moving inexorably in the collectivist direction.

As I see it, liberals are putting forward what appears on the surface to be a legitimate criticism, and conservatives are countering it with the apology that, yes, capitalism is failing, but collectivism is worse. Unfortunately, what we’re seeing here is not classical logic, as Aristotle would have endorsed, but emotionalism that ignores the principles of logic.

If we’re to follow the rules of logical discussion, we begin with the statement that capitalism has failed and, instead of treating it as a given, we examine whether the statement is correct. Only if it proves correct can we build further suppositions upon it.

Whenever I’m confronted with this now oft-stated comment, my first question to the person offering it is, “Have you ever lived in a capitalist country?” That is, “Have you ever lived in a country in which, during your lifetime, a free-market system dominated?”

Most people seem initially confused by this question, as they’re residents of either a European country or a North American country and operate under the assumption that the system in which they live is a capitalist one.

So, let’s examine that assumption.

A capitalist, or “free market,” system is one in which the prices of goods and services are determined by consumers and the open market, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Today, none of the major (larger) countries in what was once referred to as the “free world” bear any resemblance to this definition. Each of these countries is rife with laws, regulations, and a plethora of regulatory bodies whose very purpose is to restrict the freedom of voluntary commerce. Every year, more laws are passed to restrict free enterprise even more.

Equally as bad is the fact that, in these same countries, large corporations have become so powerful that, by contributing equally to the campaigns of each major political party, they’re able to demand rewards following the elections, that not only guarantee them funds from the public coffers, but protect them against any possible prosecution as a result of this form of bribery.

There’s a word for this form of governance, and it’s fascism.

Many people today, if asked to describe fascism, would refer to Mussolini, black boots, and tyranny. They would state with confidence that they, themselves, do not live under fascism. But, in fact, fascism is, by definition, a state in which joint rule by business and state exists. (Mussolini himself stated that fascism would better be called corporatism, for this reason.)

In recognizing the traditional definition of fascism, there can be no doubt that fascism is the driving force behind the economies of North America and Europe.

In addition, the concept of any government taking by force from some individuals the fruits of their labour and bestowing it upon others is by no means free-market. It is a socialist concept. And, in any country where roughly half of the population are the recipients of such largesse, that country has, unquestionably, settled deeply into a socialist condition.

However, this is by no means a new idea. As Socrates asked Adeimantus: Do not their leaders deprive the rich of their estates and distribute them among the people; at the same time taking care to preserve the larger part for themselves?

So, which is it? Are we saying here that these countries are socialist or fascist?

Well, in truth, socialism, fascism, and, indeed, communism are all forms of collectivism. They all come under the same umbrella.

So, what we’re witnessing is liberals, rightfully criticising the evils of fascism, but failing to understand it for what it is—a form of collectivism. Conservatives, on the other hand, do their best to continue to operate under their countries’ socialist laws, regulations, and regulatory bodies, whist continuing to imagine that a remnant of capitalism remains.

And so we return to the question, “Have you ever lived in a country in which, during your lifetime, a free-market system dominated?”

Such countries do exist. It should be pointed out, however, that even they tend to move slowly toward collectivism over time. (After all, it’s in collectivism that they gain their power.) However, some countries are “newer,” just as the US was in the early nineteenth century and, like the US, the governments have not yet had enough time to sufficiently degrade the economies that have been entrusted to them.

In addition, some citizenries are feistier than others and/or are less easy to convince that, by allowing themselves to be dominated by their governments, they’ll actually be better off.

Whatever the reasons, there are most certainly countries that are far more free-market than the countries discussed above.

But, what does this tell us of the future? What can be done to turn these great powers back to a more free-market system? Well, the bad news is that that’s unlikely in the extreme. To be sure, we, from time to time, have inspired orators, such as Nigel Farage or Ron Paul, who remind us what we “should” do to put these countries back on track, so that they serve the people of the country, rather than its leaders. But, historically, such orators have never succeeded in reversing the trend one iota.

History tells us that political leaders, in their pursuit of collectivism, never reverse the trend. They instead ride it all the way to the bottom, then bail out, if they can.

However, it is ever true that, in some locations in the world, there have always been free-market societies. Over time, they deteriorate under the hands of their leaders and, as they do, others spring up.

The choice of the reader is to look upon the world as his oyster—to assess whether he is more or less content with the country he’s in and confident that it will continue to be a good place in which to live, work, invest, and prosper, or, if not, to consider diversifying, or even moving entirely, to a more rewarding, more capitalist jurisdiction.

Editor’s Note: Economically, politically, and socially, the United States seems to be headed down a path that’s not only inconsistent with the founding principles of the country but accelerating quickly toward boundless decay.

It’s contributing to a growing wave of misguided socialist ideas.

The Budget promise – will it be fulfilled?


In my pre-Budget comments I had argued that SA could only hope to for SA to escape its debt and slow growth trap by ensuring that government spending and revenues grow no faster than the real economy.

I asked whether the SA government would be able to grasp this nettle? Given its long term trend of rising real levels of government spending and taxing – with taxes playing a growth suffocating catch up with spending – and government debt ever increasing as a ratio to GDP and spending of interest rising to over 20% of all spending the danger is that SA will resort to its central bank for funding and the inflation, to inevitably follow, will push up interest rates that will reduce the value of long-term RSA bonds outstanding and weaken the rand.

Default through inflation becomes more likely and so lenders demand compensation in the form of higher initial yields and risk spreads. That make borrowing more expensive and a debt trap ever more likely. The earlier pre budget comment is available here.

An emphatic response Spending growing at a slower rate than GDP

The short post-Budget answer is that the government has delivered a Budget that would take fiscal policy on a very different and very necessary path. For all the good reasons made very clear in the Budget Review’ almost to the point that the Treasury presents itself as an alternative and highly critical government agency, it is a top-down plan that deserves full support and for which the governments to come should be held fully accountable.

Between 2024/5 and 27/28, GDP in current prices is predicted to grow by 25% – or at an average rate of 5.9% p.a. All government spending is planned to increase by 21%, by 27/28 or an average 5% p.a. while taxes will grow faster by 24% or an average 5.2% a year over the same period. Government spending, excluding interest payments is more heavily constrained to grow at well below the growth in GDP, at a very demanding mere 4.2% a year. The payroll for the 216000 government officials employed by the central government, at an average R470000 a year, is expected to increase at 4.2% a year until 1927/28 with minimal increases in the numbers employed, and well below inflation expected.

Government Expenditure and Revenue 2023/4 =100

All this genuine austerity would mean reducing the real burden of government spending (exp/GDP) and to a lesser degree the real burden on taxpayers (Rev/GDP) and allow the debt to GDP ratios to stabilise and decline. Especially should these very different long-term trends impress investors in SA enough to have them supply extra capital to reduce the risk premium and the interest they demand of the RSA and to factor in less persistent weakness of the rand Vs the major currencies. As is very much the Treasury intention.

The thoughts that have moved the Treasury are well illustrated by the extract on the right from the Budget Review. They are enough to warm the cockles of a heart sympathetic to a market led economy. Even more warming were the intention and practice to pass the incentives to add and maintain the infrastructure to the private sector.

Are the plans credible? The market remains unconvinced

One could perhaps argue and judge that these austere budget plans are too ambitious and hence not credible. The Budget proposals have however not received any positive reactions in the currency or bond markets. Long term interest rates have not declined nor has the risk spreads between RSA and US Treasury Bond Yields declined. They remain at highly elevated levels. So far not so good for the SA economy.

Interest rate spreads before and after the Budget. February- March 2024 (Daily Data)

Interest rate spreads- a long run view 2005-2024 with SA specific risks identified. (Daily Data)Interest rate Spreads over the longer run – 2010-2024.Daily Data The rand has weakened marginally against the EM currency basket since the Budget. A minor degree of extra SA specific risk rather than the strong dollar is to be held responsible. (see below)

The ZAR Vs the US and Aussie Dollar and the EM Basket February-March 2024 (Daily Data) The ZAR Vs the US and Aussie Dollar and the EM Basket over the longer run ; 2010-2024 (Daily Data)

Taking of reducing the inflation targets has not been well received- for good reasons.

Perhaps the post budget suggestion by the Treasury that they would welcome a reduction in the inflation target has muddied the waters. How would lower inflation be realised without a stronger rand? A rand that could, with a more favourable view of fiscal policy, be expected to depreciate at less than the current 5.5% p.a. rate – which clearly adds to prices charged and inflation expected. Absent a stronger rand, a lower target for inflation would imply even more restrictive and growth and tax revenue defeating than current monetary policy settings. It is not something to be welcomed by investors.

The Treasury would be well advised to wait for the approval of their policy intentions as and when registered in the bond and money markets, in the form of lower interest rates and a stronger rand – before they explicitly aim at lower inflation. The Treasury may well be getting ahead of itself.

• Kantor is head of the research institute at Investec Wealth & Investment,

2024 – Elections

By JP Landman

The election date has been announced for 29 May and the Budget speech delivered. Now it is off to the races!

The lie of the land

In the last national elections, in 2019, 14 political parties were elected to parliament. However, only 3 of them, the African National (ANC), the Democratic (DA), and the Economic Freedom Fighters (EFF), garnered 89% of the vote. The remaining 11 parties shared the remaining 11%.

In 2021, two and a half years later, we had local government elections. In comparing 2021’s numbers to those of 2019, 2twopoints are striking. Firstly, the ANC took quite a beating. Their support went from 57,5% to 45,6%. Secondly, the ANC’s former support did not go to the other two big parties, the DA and the EFF. It went to smaller parties. The Inkatha Freedom Party (IFP) increased their vote to 5,65% (from 3,3%) and newcomer ActionSA received 7,4%. (Yes, yes, I know … one cannot really compare national and local elections, but they help us establish the lie of the land.)

How can all this change?

Just a cautionary word about polls: They don’t predict election results. They are a measure of the opinion of voters on the day they were polled. Voters can and do change their minds by the time they cast their votes. But it is the best that we have, and we work with that which we have.

We averaged the 11 opinion polls conducted in South Africa (SA) over the last 2 years and then excluded the highest and lowest scores for each party. The results are as follows:



Average with lowest and highest scores excluded
















One recent opinion poll affords the uMkhonto weSizwe (MK) Party some 24% of the vote in KwaZulu-Natal. In recent by-elections in that province the party also performed well. It took votes from the 3 main parties (ANC, IFP and EFF), but seems to have taken most of its votes from the EFF. The other parties do not really feature in the polls.

A whole host of new parties will also participate in the election. Top in the media headlines are RISE Mzansi (Songezo Zibi); Build One South Africa (Mmusi Maimane); Change Starts Now (Roger Jardine); Patriotic Alliance (Gayton Mckenzie); African Congress for Transformation (Ace Magashule); and of course, the MK Party (Jacob Zuma). This is by no means an exhaustive list. In addition, there will also be several independent candidates running.

Each voter is going to get 3 ballot papers – 1 for the national government, 1 for the provincial government, and 1 for independent candidates. Be strong as you wade through them all!

What can we take from these polls?

Firstly, the Multi-Party Charter (MPC) is unlikely to get 40% of the vote at national level. The narrative in some circles that we will see ‘a new government’ (ie a replacement of the ANC at national government level) is simply misleading. The MPC may be more successful in Gauteng and KZN.

The idea that all the opposition parties can come together to form a government (DA, EFF, IFP, FF+, etc) does not strike me as Realpolitik. It will also be a frightfully unstable coalition.

Secondly, we will see more fragmentation of parties. The smaller parties are going to nibble at the bigger parties. I suspect that we will again end up with 3 bigger parties in the National Assembly, although not as big as they used to be (particularly the ANC) and a host of smaller parties. 


If the ANC does not get to 50%, it will team up with a smaller party to form a government. South Africa will then have a coalition government at national level, but certainly not ‘a new government‘.

At provincial government level, the 2 provinces to watch are Gauteng and KZN. The ANC may very well lose its majority in those 2 provinces, and both are likely to end up with coalition governments.

As our politics stand now, I believe a national coalition between the EFF and the ANC is most unlikely, all the more so while Mr Ramaphosa is around. It may be different in Gauteng and KZN, as there are ANC leaders in both provinces who would be willing to deal with the EFF. But there is nothing as devastating for a politician as to not get the votes. So should the ANC lose those provinces, the local leadership will be cut down and they may not be able to conclude coalitions with the EFF.

Pre-condition for successful coalitions

After the 2021 local government elections, coalitions took the reins in several municipalities and metros. It did not work out well. Why not? Because the focus was on WHO, not on HOW. Who will get the job? Who will be the mayor? Who will be the speaker? The focus was definitely not on HOW the coalition was going to govern.

We can learn from examples in Europe, where coalitions are an accepted part of the political landscape. Coalition agreements form the basis of those governments. For example, the current German coalition government was elected in September, but only took power in December. For almost 3 months, the parties that would constitute the coalition negotiated how they would govern – not who, but how. The English translation of the German coalition agreement is 127 pages. In the Netherlands the agreement ran to 57 pages.

In SA we do not have such a culture (of negotiating agreements), but that may well be changing. The DA and the IFP have negotiated and signed a 9-page agreement on cooperation in local government in KZN. Currently they run 13 councils, and it looks as if it’s going reasonably well. Those 9 pages are very, very important. It sets out the common values of the parties, their ideals, and objectives, what they want to achieve in the current term, and the practical steps they will implement. For example, one of the stipulations is that municipalities run by the DA and the IFP will spend 8% of their budget on maintenance. The agreement is an important breakthrough in our politics.

The problem we have in SA, however, is that our Constitution does not allow much time for negotiating coalition agreements. The Constitution stipulates that within 14 days after the election result has been certified, parliament must meet to elect a new president. Fourteen days is not a long time. (Of course, if a single party gets 50% the point is moot.)

The normal practice in a coalition is that the parties share positions in the executive in proportion to their votes ie. Ministers are appointed in proportion to party’s votes. That cabinet must then govern in line with the coalition agreement, and not according to the individual parties’ policies.

An interesting arrangement regarding coalitions that we may see is where 1 party takes the executive, ie appoints the cabinet, and another party takes the legislature, ie chooses the speaker, the chairpersons of committees and so on.

Policy uncertainty

With every election it is the same story. The chattering classes go into overdrive about ‘policy uncertainty’. This year it was fuelled more than usual by the possibility of coalitions. Another hardy perennial is that the Budget in an election year is ‘populist’ and a ‘splurge in spending’ will occur. Look back and we see that policy shifts and spending splurges happened BETWEEN elections, and not when they were looming.

This year’s Budget for 2024 knocked on the head the narratives of ‘policy uncertainty’ and ‘populist splurges’.

For the first time since 2008/9, in this current financial year (which ends on 31 March) a primary surplus will be recorded. A primary surplus is income minus expenditure before interest. Government still runs a deficit after interest, but the primary surplus is essential to start reducing the deficit and stabilise finances. It is an important tipping point. The minister budgeted for it last February, he repeated the promise in November and now it is in sight at the end of March – 2 months before the election. (The primary surplus did not occur on the back of a transfer from the reserves – that is an erroneous statement.)

Secondly, the Budget reiterated what the President said in the State of the Nation Address (SONA): Structural reform will continue in electricity, railways, ports and water provision. Structural reform simply means that these ‘network industries’ allow private sector operators and capital into the networks to improve performance and infrastructure. The minister showed some teeth in this regard. Eskom is losing R2 billion a year in bailout from the Treasury for every year the utility has not yet sold off a non-core business; and Transnet was told that they can draw on a R47 billion guarantee only if they allow third parties into the railway network.

He expects private operators to enter the railways on 1 May 2024 and that by end July 2024 a tender will be released for private capital to invest in electricity transmission lines.

The genie of private sector involvement in electricity and logistics is out of the bottle. It is not going back in. Over the next year we will see similar developments with water. The political decisions have been taken. Even if we see a coalition government, it is unlikely to scupper them.

It will take time for these changes to work through to the growth numbers, but the trend is clear. The Budget is prudent to assume 3 years. Over the years that I have tracked government policies, implementation has been consistently slow. It never happens as fast as government itself wants it. (They miss self-imposed deadlines all the time.) Even so, eventually it does happen.

Since the NHI got a lot of airtime recently, it is noteworthy that only R1,4 billion is budgeted over 3 years to implement it. Compare that to the health budget of R272 billion for one year. The minister outlined a number of preliminary steps that must first be taken. It is safe to say that NHI will be established over a long period and at a moderate pace as the country can afford it.

So what?

  • A host of new and smaller parties will eat away at the support of the existing big parties. All 3 of them are vulnerable.
  • There is likely to be more fragmentation, with 3 bigger parties and a host of smaller parties returning to parliament.
  • Expectations that we will have ‘a new national government’ are unrealistic. The ANC will still be the largest party and will invite other parties to join them (if a coalition government needs to be formed).
  • We won’t see much change in economic policies. The issue is speed of implementation, rather than policy uncertainty.
  • For the last 30 years, SA has been a 1-party-dominant state. That started to change in the 2021 local government elections. Will we see more change, ie. coalition governments that may need to be formed at provincial and perhaps national level? That is the major question this election poses.

I wish you all happy voting.

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