To market, to market to buy a fat pig. Markets are mixed at the open here, the late rally in the US overnight has been countered with some caution ahead of the nonfarm payrolls today, we discuss that in what I guess we could call detail. There were some comments from the local reserve bank governor of the state of the pitch, I mean economy and the words that she had were pretty stern, I am not entirely sure whether they will fall on deaf ears or not. Well, at least she said that there would be no rate cut any time soon, and warned about the ratings agencies adjusting their view on South Africa sooner rather than later if some structural reforms were not on the cards. The reserve bank governor was speaking at the BER conference, I presume down in the windy and wet Cape (at least at this time of the year).
There was a presentation on the BER website that I downloaded and perused (you can't read a presentation), and there were some good points made. For instance the tapering by the Fed, the suggestion is that we would see more outflows from the local bond market. Gee, I am not 100 percent that is all true, obviously the Transnet bond issuance and "flop" suggests maybe that Mr. Market is not quite receptive to parastatal debt. I eventually found the speech that governor Marcus gave, and found that in fact it was Sandton, and not the wet and windy Cape. At this time of the year. At this time of the year we are having the most incredible weather. We really are. You can download it here: Conference Papers, titled "The implications of the global financial crisis for monetary policy".
I had a read through the speech you will see where the risks were identified by Gill Marcus:
- "South Africa has to contend with these issues at a time of heightened vulnerability. The current account deficit has to be financed, particularly at a time of uncertainty with respect to global capital flows. This is compounded by a real threat of downgrades from the ratings agencies while non-residents already hold a sizeable proportion of both domestic government bond (around 38 per cent) and domestic equities (around 42 per cent). The country also has a relatively low level of foreign exchange reserves. Household debt ratios remain high, while the fiscal deficit leaves limited fiscal room to respond to a further deterioration in the economy. Electricity supply constraints have also emerged as a risk to the growth outlook."
But then the juicy parts, at least the ones that have been unpicked by the media where the governor refers to "weak competitiveness, a poor skills profile and an educational system that, in parts, is dysfunctional, low domestic savings, low investment, uncompetitive product and labour markets and spatial distortions." I guess we did know that already, but this was presented whilst wearing her governor hat. The stinging part comes at the end: "There is clear recognition that South Africa faces significant challenges; what is required is decisive leadership that consistently demonstrates a coordinated plan of action to address them." And then of course, how would this help? Well, in the governors mind: "This will go a long way to restoring confidence, credibility and trust."
I guess that the president is well aware of these issues. Whether or not there is the political will or ideology change that will see us away from this particular path, seemingly a bad one. Elections are next year. I am not suggesting that an economic slump could displace the ruling party, but stranger things have most definitely happened. Right now politics has descended to toilet levels again, and I mean that figuratively. But, I do not want to offend anyone, and as they say in the classics, keep politics and religion out of any good gathering and we will almost always get along.
Jobs day. Jobs Friday. This is undoubtedly the most important day for equities markets, until ........ ummmm ..... the next jobs number. I often say that at the time, on the day, people remember the minute details of the jobs report versus consensus (important), but ask them the same number from six months ago, nope, can't remember. The health of the US consumer is directly linked to the health of the global economy. Roughly 70 percent of US GDP is linked to consumption, and that includes consuming financial and healthcare services. Both of those sectors have risen sharply over the last three decades. And those sectors should continue to contribute more and more over time, as people live longer and have to manage their finances better.
So the nature of the jobs change, not quickly, but rather slowly and at a pace that is barely noticeable. For instance, according to Wikipedia, there are 2.2 million registered farms in the USA. Which produce millions of tons of corn, soybeans and are "home" to tens of millions of cattle, hogs and hundreds of millions of chickens. As you can imagine mechanisation and better farming techniques have improved yields and because of industrialisation more and more people live in urban areas, that trend globally still continues. I am getting to my point. Why the report is called the non-farm payrolls is probably for historic reasons, when there were more migrant seasonal workers on the land. From nearly 3 in 4 people living and surviving by agricultural means 140 odd years ago in the USA to around two percent of the entire workforce, the change is mind blowing. Absolutely mind blowing. Plus, more importantly for the US economy, the pay is poor in rural areas.
I remember and found an oldish article that was republished by a favourite of mine, Mark Perry, an article titled The "Decline or Demise" of U.S. Farming?. One of the paragraphs struck me again:
"From a high of almost 9% of GDP in 1948, the agriculture sector's share of total output has declined steadily and fell below 1% by 2002. And yet we produce more food today than at any time in history and it's cheaper as a share of disposable income than ever before. Thanks to productivity gains, farm employment today represents only about 2.5% of total employment compared to more than 12% of America's workforce in 1950."
So even since our grandparents time, the world has changed dramatically. I guess that is why everyone is so keen for the Chinese to move from an agricultural based economy to a consumption based one. According to Wikipedia, there are still 300 million Chinese farmers, that is nearly equal to the entire US population. Technological improvements have also seen runaway larger crops to feed a growing urban population. But if the Chinese are to reach the same levels of employment on farms with greater mechanisation and at the same levels of the Americans, then by my crude maths that means 280 million odd folks will have to make their ways to the cities. Gasp.
So the US consumer still rules the roost, and the larger the number of people in formal employment in the USA, the better for the rest of the globe. Until the spending and consumption patterns of the collective Chinese are more important, the more people in employment in the US, the more the financial world will focus on what the late Mark Haines used to refer to as the financial capital of the universe. Wall Street, stocks and their reaction to the jobs number. Perhaps in a decade or two we can all get excited about statistics China (which once had a chequered past, remember?) releasing the monthly employment number outside the democratic (hopefully) labour department headquarters in Beijing. I presume Beijing will still be the capital.
And I suspect on this chart that the world will be more awash with red: Current Worldwide Annual Meat Consumption per capita. Another interesting overnight piece to read: A rare meat success in Africa. Zambeef, just cast your minds back a few months or so where Rainbow Chickens bought a stake in the Zambeef operation Zamchick, half of that actually. But that is another story, for another time.
For the scoreboard watchers the expectations are as follows, the headline number around 165 thousand to 170 thousand new jobs added for the month of May. The unemployment rate is set to stay exactly the same at 7.5 percent. There is even a hashtag on Twitter: #nfpguesses, where even you can put your best foot forward relative to the rest of the guesses and estimates out there. Personally I get excited about the report like everyone else and share their excitement and disappointment with the number, for a about an hour or so. But also, getting sucked into a number that huge and making it your everything, that is a mistake too. Bring on 14:30 our time!
Mario Draghi. He has to be the most suave central banker on the planet. Well, of the ones that I see on my screens often. Sanusi Lamido Sanusi, the Nigerian Reserve Bank governor is also very smooth, but I get the sense that ECB president Mario Draghi is wickedly funny. I get that sense with Ben Bernanke too, I suppose that they are sharp because they are wildly smart and have accepted jobs with huge responsibilities out of their obligations to society. And the way that I quantify that is to often show folks that Ben Bernanke earns less in his current job as the Federal Reserve chairman than as an academic at Princeton. Yes, you heard that right, less now than before. But yet....... when offered a job of such responsibility and an urge to serve, Bernanke took it, because it is an honour to serve. BUT!! Before you jump down my throat and point out that he makes an absolute bomb on textbook royalties. And I guess people want his textbooks more because he is the Fed chairman.
Anyhow, we are getting off the subject/topic of Mario Draghi and the ECB rate meeting and subsequent press announcement. Marketwatch was updating from the event: Live blog of news conference by ECB President Mario Draghi. So because he did not offer anything new, the market reacted a little negatively. And I think that there is some time for him to bask in the sun and appreciate what it is exactly that he has achieved. Good things. Because just remind me, how many countries have left the single currency bloc ....... Oh, none!
In fact, as we pointed out a couple of days ago, Latvia, a cold country with less than 2.1 million people is about to adopt the Euro. And by about to, I mean adoption of the common currency is set for the 1st of January 2014. In fact since the financial crisis Estonia and now Latvia have joined the Euro. Now in the region is probably the weirdest and strangest thing, there is a Russian territory called the Kaliningrad Oblast, where nearly one million people live and operate in mostly an economic free zone. The place used to belong to Germany, but since the end of World War II, the Russians have it as their own. I suspect that territory will stick out as not part of the Euro.
So, Mario Draghi might well be remembered as the guy that saved the Euro, or rephrase, led the recovery with that speech that galvanised the bureaucrats into action and not just speaking about it. Perhaps everyone was tired of looking for Merkel and Sarkozy (at the time) to solve their problems, Draghi himself was fed up and took the lead. And the rest, as they say, is history. Be disappointed yesterday that maybe you heard nothing new, but be very grateful that the same guy was the man who glued it all together again.
Byron beats the streets
- Household net worth in the US has reached $70.3 trillion. That is astounding and it is the highest point reached since 2007. A point which we already know was artificially inflated by unsustainable demand in the housing market. The reason for the growth in wealth is clear, we have seen good growth in the market and in housing. At the moment the combined market cap of the S&P 500 is $15 trillion. That index has grown 27% in the last year. A year ago the S&P market cap was $11.8 trillion. So in just a year, $3.2 trillion of wealth was created on the market. That is equivalent to the economic output of Germany in a year.
If you include home prices net wealth increased $3 trillion from January through to March this year alone according to the Fed in an announcement yesterday. This has helped stem the impact of increasing taxes. Remember the fiscal cliff everyone was talking about last year. Who would have known that the increase in taxes would have been forgotten because home prices increased so nicely? Sometimes good things happen at just the right time.
When the US consumer is feeling wealthy, the rest of the world benefits because they consume in a big way. And this is why of course more money is flowing into that market and away from emerging markets. It is a natural balancing act. I wouldn't be too concerned. As the flow continues towards the developed world, asset prices will increase and yields will go down. Anyone searching for yield will then look to the developing markets again. That is just short term flows in money. The long term picture of a strong US consumer is very positive for big exporting nations such as China, Germany and Japan.
The long term picture for developing nations has not changed either. Huge populations entering the middle class and becoming consumers, striving to replicate a standard of living that citizens of the US can afford. I can assure you that even though money flows have been leaving the developing world, businesses have not. The big multi-national companies are not that short sited. Plus moving money around is a lot easier than moving businesses. Visa, Nike, L'Oreal, GE and the like still have their eye on the ball. Same with the local businesses here. And that is who we prefer to align ourselves with.
Home again, home again, jiggety-jog. Markets are in wait and see mode. We are running on the treadmill here and someone is cranking up the steepness, that is where I think we are right now. That number might not be too important to me in the longer term, but for the short termers, this is a make or break. At least for the next few hours. Pity about that fielding and running between the wickets yesterday.
Sasha Naryshkine and Byron Lotter
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