That is why I regularly scour the Internet in search of data always expecting to find other funds doing better. But month after month, year after year, all I find are comparative under-performers.

Now my three overseas portfolios have just come of age inasmuch as they were started exactly five years ago, so now is a good time to review them alongside that of the South African portfolio which will be 14 years old come January.

Let us start with the local evidence provided in the table above courtesy of Investonline SA listing the best unit trusts available to South African investors, noting that among the ‘Aggressive’ funds which offer higher risk but boast the highest growth rates in South Africa, the best performer over the past five years to October 31 has been PSG’s Equity Fund Class A which, with all distributions reinvested, has achieved a compound annual average growth rate of 14.7 percent.

By way of contrast, my own SA Prospects portfolio, also with dividends reinvested, has achieved a compound annual average growth rate of 22.1 percent…….a whole 50 percent better*

Pictured in the graph above is the Prospects portfolio performance over its entire existence since I launched it in January 2011. During that 14-year period growth has averaged 18.7 percent taking an initial investment of R1-million to a current aggregate value of R8 002 060.

Australia

The best performance among the four Prospects portfolios is currently that of our Australian fund which, since inception in October 2019, has delivered a compound annual average growth rate of 32.56 percent. By comparison Australia’s InvestSmart organisation lists Global X Semiconductor ETF as achieving a compound annual average of 20.23 percent over the past three years.

Furthermore, the average growth rate of Australia’s top five fund performances is 18.95 percent over the past three years while the Prospects Australia fund has over the past three years achieved a return identical to its five year growth rate of 32.56 percent.

The following graph depicts our Australian performance:

One can accordingly conclude that my Australian Prospects fund was 72 percent better over the past three years than the top five average growth rate.

USA

In the USA, the four best performers as measured by Mackenzie Investments, achieved an average growth rate of compound of 17.823 percent. They are listed below:

By comparison our New York Prospects Portfolio achieved a compound annual average growth rate of 30.98 percent.

Work that out and you might conclude that the Prospects New York portfolio was 73.8 percent better than the US average top performers over the same five-year period. Here is the graph proving that achievement:

Britain

Morningstar, the global fund analysis organization, lists the five best British performers of the past five years below:

Britain’s best performer, the Artemis UK Select fund has, with dividends reinvested, delivered total growth of 91.28 percent since its inception on April 3 1998 and has, according to the company fact sheet, over the past five years delivered an average annual growth rate of 16.3 percent.

Though it is the worst performer of the four Prospects portfolios, my Prospects UK portfolio has delivered a compound annual average return of 19.47 annually as depicted in the graph below:

Comparatively then, my Prospects UK portfolio has outperformed Britain’s best by 19.5 percent.

Collectively one might thus conclude that ALL the four Prospects portfolio were better performers that the best domestic performers in each of the four countries which we analyse. Collectively they have on average performed 54.1 percent better than ALL the best funds they have competed with.

So the puzzle is why my funds have done so much better than the best in four countries? The only suggestion I can offer is that the Prospects portfolios do not have to carry management fees involved. However, since most regulatory authorities now oblige fund manages to disclose the sum of all built-in costs and that number seldom exceeds 1.5 to 2 percent, the mystery of the Prospects massive out-performance remains!

Dogs Catching Cars

By John Mauldin

My dad would repeatedly use the old joke about the dog catching the car: “Now that you’ve caught it, what are you going to do with it?”

Trump and the Republicans will soon own the same economic problems they talked about in the campaign. Our big challenges won’t magically disappear. US debt is now growing twice as fast as our strong GDP. As I say often, the debt problem is beyond the point of easy solutions. All the options are bad.

Every president for my 75-year lifespan has talked about fixing the debt. In fact, apart from Clinton and Gingrich, who actually did it, they didn’t seriously try. That’s why it keeps getting worse. (Who knew we would be nostalgic for the good old days of Bill and Newt?)

Inflation is not dead. The bond market has been volatile, but the 10-year Treasury yield is up 60+ basis points since September. Not exactly a vote of confidence from the market, nor what the Fed wants to see. The bond market has good economic reasons for concern.

Still, the Fed cut short-term rates and plans to do more. Lower rates might marginally help the government’s interest burden, but that has inflationary consequences. There are no free lunches. TANSTAAFL bites. Riffing on Keynes, we could call it the Paradox of Deficits. More on that below.

The so-called “mandatory” spending, like Social Security and Medicare, increases every year, both as more boomers reach retirement age and because of inflation.The situation is serious, but not hopeless.

The presidency isn’t a prize; it is a responsibility. I have always, whether my party won or not, wished new presidents “good luck” in leading the country (and the world) forward. I truly do the same this time. But I fear the luck Trump needs will not be there. He is going to have to make his own luck. The good news is he has a track record of doing that.

Like the proverbial dog who chased a car and then caught it, now he has to figure out what to do.

Stop Digging

Last time I wrote we are on a One-Way Road to Crisis. Turning around on a one-way road is difficult, at best. So, it is with the federal debt, which is now so huge that interest alone is a bigger line item than defence. And it’s rising. The latest CBO estimates show an FY 2025 deficit of about $1.9 trillion. It’s actually well over $2 trillion because some spending is off-budget but is never talked about in the press.

To actually reduce the debt, we must first stop digging the hole deeper. That means increased revenue and/or spending cuts of around $2 trillion per year. How?

Trump says he will appoint Elon Musk to streamline the government and make it more efficient. I truly applaud that. But non-defence discretionary spending—basically the entire executive branch except the Pentagon—will be only $928 billion this year. I actually believe we could cut $200 billion a year, with a lot of weeping and wailing and gnashing of teeth. But that’s just 10% of the deficit. Even if we took it down to zero, we’re only halfway there. We should have been doing this slowly over time. Meanwhile entitlement spending grows 3% plus every year, just from inflation.

But that doesn’t mean we shouldn’t deal with the “small stuff.” Cutting $200 billion is a great first step on what will be a long and uphill journey.

Trump has said he won’t touch entitlements. But if he doesn’t, the debt will keep growing. Here’s the CBO outlook, which is actually conservative due to a number of rosy assumptions. For one, this is “debt held by the public,” which excludes the Social Security and Medicare trust funds. Note that those funds will disappear in the early 2030s. Not counting that debt is extraordinarily misleading. It will have to be funded. If any public company used the same accounting principles as the government, they would be shut down, and there would be prison time. The SEC would justifiably call it criminally misleading. 

Source: CBO

On the current course, the federal debt will exceed 120% of GDP in the next few years. If you account for all debt, it is already at 122%. That is roughly the level Greece found unsustainable during its last sovereign debt crisis. The answer there was extreme austerity. But that happened only because other EU countries more or less forced it. It is unclear who would impose such austerity on Americans. Are the bond vigilantes waiting off stage?

Small Dents

The Trump campaign is not without ideas. Last time I mentioned Trump and Harris debt estimates made by the Committee for a Responsible Federal Budget. Since we now know the outcome, here’s a deeper look at the Trump proposals.

Trigger warning: this is going to at a minimum annoy and more likely anger Trump partisans. Let me state up front that I don’t think this is a realistic assessment of what will happen. The CRFB was simply trying to analyse campaign promises. Everyone knows reality will be different. It was a different type of ugly for their Harris analysis.

Source: CRFB

Based on statements during the campaign, Trump would cut taxes and increase spending by a central estimate of $10.4 trillion over 10 years, reduce spending and add new revenue of $3.7 trillion, on net increasing the debt by $7.5 trillion in 2026–2035—an average of $775 billion per year.

With the real exception of extending the 2017 Trump tax cuts, I think most of those campaign spending and tax cut promises are dead on arrival. And while I take great exception to tariffs, the revenue estimates are in the ballpark. That means in the real world, total debt additions will be somewhat more than a $1 trillion increase, or $100 billion+ a year. Plus inflation. (Sidebar: CFRB assumes that securing the border and deporting illegal immigrants would cost $350 billion. I think a proper analysis would show a net savings after the first year or two.

On that, let me suggest you read this letter by my friend Joe Lonsdale, one of the truly great venture capitalists in this country. Now living in Austin, he is the cofounder of Palantir and scores of other companies. He founded and helps fund a the Cicero Institute to promote real-world solutions on state-level policy problems around the country. You’ve seen him on CNBC and elsewhere, but the depth goes way beyond markets. Yes, a friend of Elon and highly likely to be on that government efficiency board, whatever it becomes. He does a must-listen weekly podcast, typically with some tech or national policy guru that really makes me think.)

Please note, I am not saying we should do nothing about spending and taxes. We should do whatever we can. My point is that it is very unlikely to be enough.

I explored potential debt reduction measures in depth last year (see Debt Catharsis). It was a palpably frustrating experience. If I were a member of Congress facing donors and voters? Dig into the specifics, and it’s easy to see why they haven’t acted.

Let’s take a graphic look at the problem. A simplistic way is to ask yourself, as many do, was the government spending too little money in 2019? The total budget was under $5 trillion. Of course, COVID came along and we properly threw stimulus at the economy. But it never came back to trend.

Source: FRED

We are now spending $3 trillion a year more than we did five years ago, literally a 75% increase. Inflation in that same period totaled 23%.

Let’s look at the CBO’s 2023 budget breakdown, the latest data we have.

Fast forwarding to 2025, mandatory spending will be up a minimum of 6% due to more people simply getting older and inflation. That’s almost $250 billion.

The problem isn’t on the revenue side. Federal tax revenues are up $1.1 trillion, over 30% since the 2017 tax cuts. And yes, extending them will make the deficit worse. Biden/Harris have a point when they said the economy is strong. That’s why revenue is up so much. The problem for their campaign was that a stronger economy didn’t translate into a strong personal situation for the large majority of citizens. Inflation is insidious and visible. While 3% GDP growth is great, it’s not visible in your pocketbook.

The point is there is some room to cut spending. Just as only Nixon could go to China, maybe only Trump can corral the herd of cats in Congress and get them move toward a balanced budget. Simply getting us on a 5-to-7-year path will calm the bond market and get us out of the coming crisis.

As much as I hate tariffs, it is a halfway point to a full value added tax (VAT). It would be a net trade positive for the US as the VAT would disappear for our exports. There would be no threat of a Smoot-Hawley type tariff retaliation, because every other country already has a VAT.

You could actually reduce income taxes across the board, especially and significantly for the bottom 50%. You could go to a flat tax at each bracket. Substitute a portion of the VAT for Social Security, and you can eliminate FICA withholding on the first $50,000 of income. There are literally a ton of ways to make a VAT more palatable.

Yes, I know it is the camel’s nose under the tent. But as I’ve demonstrated in previous letters, you simply can’t raise income taxes enough to make up a $2 trillion difference. You would literally need to tax 100% of incomes on the top 50%. And it still doesn’t get there.

Which is why I say that the situation is desperately serious, but not hopeless. There are different ways to accomplish a balanced budget without a VAT, just not as easily. I have repeatedly said that it will take a crisis to force us to deal with the issue.

The Paradox of Deficits

In 2002, Ben Bernanke gave a now famous speech called “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” It became known as the helicopter speech. He laid out the principle that deflation wasn’t a problem because we can always print money and bring back inflation.

The problem today is we’re printing money via deficit spending. Deflation is obviously not the problem. Deficit spending, especially at the level we are doing it, is by definition inflationary. It is also eventually going to hinder growth, as deficit spending is negative savings in the macroeconomic sense. The negative savings of the US government is now big enough to offset private savings and investment, and that will hinder future growth. It won’t show up for years, but it’s real.

Further, the bond market senses it. It is why forward measures are signaling higher inflation, and they’re not buying the concept that the Fed has inflation under control.

Powell can cut rates a little more, as he will be chairman through 2025, and he made it clear this week he is not leaving before the end of his term. They can take short-term rates down, but if long-term rates don’t follow, it is not going to help home buyers or businesses or commercial real estate or (pick an industry). The lower short-term rates will actually hurt retirees and savers.

I have been saying that I don’t think the real crisis happens until later this decade. That’s just the way the cycle structure seems to work out. But what if I am wrong? (Always a real possibility.)

Is the recent rise in long-term rates a signal that bond vigilantes may not be dead? Could it be that they are waking up and are at least on the sidewalk outside of the cemetery?

Let’s clearly understand. Tariffs are inflationary. (So is a VAT, and it would have to be layered in over time.) Deficit spending is inflationary. The Fed will only have so much room to cut in an inflationary environment. Trump’s natural instinct to want lower rates is going to meet the reality of the inflation that he also hates.

Which gives me a somewhat irrational hope that Trump could go to China, i.e., put us on a path to a sustainable budget. There are things the Fed could do to help. Serious, but not hopeless.

The importance of addressing supply-side weaknesses

By BRIAN KANTOR

By paying more attention to growth, monetary policy can also help promote rand strength and lower inflation.

 Looking back at the economy over the last few years reminds us how tough it has been for households and businesses. Since those pre-Covid days, the economy has hardly grown at all. Compared to first quarter 2019 GDP, the economy gained a mere 5% over the five and a half years to June this year  (growth of less than 1% a year).  Households are spending only 6% more than they did then and capital formation is down by about 14% in real terms. How could such a deterioration be allowed to take place?

Figure 1: Vital SA economic statistics (2019 = 100)

Source: SA Reserve Bank and Investec Wealth and Investment, 24/10/2024

The supply side of the economy has performed poorly – led by the well-documented, confidence-sapping failures of the state-owned enterprises and government generally, including those of the provinces and municipalities. But demand management by the Reserve Bank can also be held responsible for at least some of the weaknesses. Much of the period since 2021 has been accompanied by higher interest rates both absolutely and relative to inflation. That is despite the grave weakness in demand for goods, services and labour.

The Reserve Bank’s Monetary Policy Committee provides a full explanation regularly for these interest rate settings. It has been fighting the inflation that arose after 2021 as the rand weakened. The idea of a dual mandate of the US Fed kind – low inflation and employment growth – has been anathema to our determined inflation fighters.

Shocks to the price level caused by exchange rate weakness – unrelated to immediate monetary policy settings and inflation trends – are not ignored when interest rates are set. Yet such shocks (not of the Reserve Bank’s doing) lead inevitably to more inflation followed by higher interest rates and in turn still weaker demand, already under pressure from higher prices. Higher prices have their complex causes, but they also have rationing effects on the willingness to spend more, given the minimal growth in incomes.

The problem for the Reserve Bank has been that the rand weakened decidedly after 2021, against not only the US dollar but also other emerging market and commodity currencies. This was South African-specific in nature, linked to the failures of government and the failure of the economy to grow.

The rand – against the US dollar, the Australian dollar and most emerging market currencies – had recovered well from the Covid-linked risk aversion that had put pressure on the rand and the market in SA Bonds. It may be recalled that the rand had recovered to R14 against the US dollar in early 2021. But then t he sense of South Africa’s failures to realise economic growth took over the currency and bond markets. And the weaker rand inevitably forced prices higher at a faster rate.

The connection between the foreign and domestic exchange value of the rand, and the outlook for the SA economy has never been clearer. The government of national unity has raised the prospects for growth, and the rand, bond and equity markets have responded accordingly. Inflation is therefore on the way down. Over the past three months, it has averaged a year-on-year rate of 2.4%. Interest rates at the short end of the market have come down and will come down further, provided the rand holds up – perhaps not so much vs the US dollar, which may be getting a Trump boost, but against the other currencies similarly affected by a firmer US dollar.

We should not expect the Reserve Bank to change its pro-cyclical approach. We should however insist and hope that the supply-side weaknesses of the economy are well addressed. Raising the GDP growth rates to a modest 3% will not only promote economic and political stability, but it will also bring with it lower interest rates and less inflation.

Will ‘The King of Debt’ Fix America’s Debt Crisis—or Push It Over the Edge?

by Nick Giambrunon

In 1990, Donald Trump proclaimed his Taj Mahal casino venture the “eighth wonder of the world.” Itwas the world’s largest and most extravagant casino-hotel at the time.

Situated in Atlantic City, New Jersey, the project needed a $1 billion investment to get off the ground. To finance this massive project, Trump had no choice but to issue $675 million in 14% high-interest “junk bond” debt.

That meant the Taj Mahal needed to generate roughly $94.5 million annually just to meet its interest obligations. This staggering debt burden and the accompanying interest costs doomed the project from the very beginning. The Taj missed its first interest payment only eight months after its grand opening.

“We could have foreclosed [on the Trump Taj Mahal], and he [Trump] would have been gone,” stated Wilbur Ross, the chief adviser for Rothschild & Co., which represented the Taj’s creditors at the time.

Had Ross chosen to foreclose on the Taj, it would have severely damaged Trump’s reputation and could have shattered his prospects of running for president. However, during negotiations, something shifted Ross’s perspective. While visiting Trump, Ross observed crowds flocked to “The Donald” wherever he went. People adored him. Ross recognized Trump’s star power.

This realization led Ross to convince the other bondholders to negotiate a deal with Trump that would preserve his reputation. Trump and the Taj had narrowly escaped disaster, but it only delayed the inevitable for several months. The Taj declared bankruptcy in November 1991, only 19 months after its lavish launch.

This bankruptcy was the first of several financial restructurings the Taj would undergo in the ensuing years.

In 1996, Trump’s publicly traded company, Trump Hotels & Casino Resorts, acquired the Taj. However, Trump Hotels had the same problem that plagued the Taj—a crushing debt burden. At the time, the company’s debt had ballooned to more than four times its equity.

In 1997, Trump Hotels posted a $42 million net loss. The $205 million interest expense far surpassed its operating earnings of $143 million. As time passed, the interest expense rose while operating earnings dwindled. Even if the underlying businesses performed well, Trump Hotels wouldn’t have made any meaningful profits because of the interest expense.

Like the Taj, the interest burden from the massive debt pile doomed Trump Hotels from the beginning. Trump Hotels never made enough cash to pay down the debt principal. The company went through two separate bankruptcies in 2004 and 2009.

Here’s why I’m highlighting this story today: it illustrates Trump’s propensity for accumulating reckless amounts of debt and the inevitable disasters that follow. Trump openly admits his love for debt, describing himself as “The King of Debt.”

In a few months, Trump will again oversee the US government. An urgent, existential problem will fall directly on his lap. The US federal government has the biggest debt in the history of the world. And it’s continuing to grow at a rapid, unstoppable pace. The only way to solve the debt problem is to address government spending.

However, efforts to reduce spending will be meaningless unless it becomes politically acceptable to make chainsaw-like cuts to entitlements, national defines, and welfare while reducing the national debt to lower the interest cost. In other words, the US would need a leader who—at a minimum—returns the federal government to a limited Constitutional Republic, closes the 128 military bases abroad, ends entitlements, kills the welfare state, and repays a large portion of the national debt.

Short of that happening—which is an unrealistic fantasy—the federal debt and accompanying interest expense are only going to grow until it reaches a crisis, which is probably not far off. The situation is truly urgent as it has reached a crucial tipping point.

That’s because the federal debt’s annualized interest cost exceeded the defence budget for the first time earlier this year. It’s on track to exceed Social Security and become the BIGGEST item in the federal budget.

Due to the soaring interest costs, the US government will soon have to choose to:

1. Cut defense spending amid the most chaotic geopolitical period since WW2.

2. Default on its promises regarding Social Security, Medicare, Veterans’ Benefits, and welfare generally.

That’s why I think there is an excellent chance the debt crisis will explode on Trump’s watch—though it is not all his fault. It’s a well-established trend that has been building for decades. At this point, I think it’s impossible to change its trajectory. It would be like trying to reverse an avalanche once it has already built unstoppable momentum.

If we zoom out and look at the chart below, we can see that no matter which party is in office, they are all headed in the same direction.

The truth is, no matter what happens, the federal debt’s growth rate will not even slow down. It will increase exponentially until it reaches a crisis, which I believe is not far off. It’s like being on a runaway train with no brakes.

The financial position of the US government has been gradually deteriorating for decades, so it’s not surprising that many people are complacent. They’ve long heard about the debt problem, and nothing has happened… yet. That’s because the US government is the most powerful country in the history of the world, leader of the current world order, and issuer of the world’s premier reserve currency.

While the US government can extend the charade of solvency longer than any other entity on the planet, not even the most powerful empires in human history can do so forever, particularly when they start to struggle to pay the interest costs. A moment of reckoning will come, and I believe soon. It will have massive geopolitical and financial implications.

When private businesses go bankrupt, shareholders get wiped out. When governments go bankrupt, those who hold its fiat currency get wiped out. One thing I think we can be sure of is that the US government will try to service its debt costs with currency debasement, just like many empires that collapsed before it.

That’s terrible news for the US dollar. The worst of it could go down soon… and it won’t be pretty. It will result in an enormous wealth transfer from savers and regular people to the parasitic class—politicians, central bankers, and those connected to them.

Countless millions throughout history were wiped out financially—or worse—because they failed to see the correct Big Picture as their governments went bankrupt.

Don’t be one of them.