Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We managed to stay in the green, closing at the lows of the day, 34222 on the Jozi all share index. The most heavily hit parts of the overall market were the retailers, who sunk over two percent. Remember that the Reserve Bank meet this week, the expectations from the economist community is for rates to remain on hold. No change. I guess that makes sense, if the last inflation read was inside of the range there could have been scope to do something.
But, the best thing to do for Gill Marcus and the rest of the team will be nothing. And so I am going to side with the expectations here, I suspect that notwithstanding the early signs of the business cycle turning, the next move in rates should be up. When, well, asking that same question to the Fed was answered at one stage with the end of 2011. Now that has moved out a couple of years hence. Not to mean that the rate cycle wouldn't turn in the US soon, if the economic data gets stronger, who knows? The other push and pull talk around at the moment is bonds versus equities. And where to next for the bond markets. This is good news for us, as we are long equities.
I laughed when I saw this commentary given to the current wrestle in capital allocations, the whole debate around bonds versus equities. And when to sell the safety flight from back then, then rates should start to increase, but as I said to Byron on Friday, the fixed income pool is far bigger than the equities pool. And seems very crowded at the moment. The US accounts for around 45 percent of the entire bond market, which is somewhere in the region of 100 trillion dollars. Corporate and Mortgage backed bonds account for half of all the bonds outstanding in the US. Total issuances in 2011 were 17.8 percent lower than in 2010, where a record 6.5743 trillion Dollars was raised. Mortgage related issuances at 1,9755 trillion Dollars in 2010 and 1,6602 trillion Dollars in 2011 (figures from Sifma.org) are comfortably below the go-go days of 2005, where mortgage issuances topped 40 percent of the overall total. In 2003 that number of 46 percent and above 3.179 trillion Dollars. In fact 2003 just eclipses 2009 as the biggest ever year of overall debt issuances. Amazingly complex. For me anyhow, but for every seller of a bond, of course there has to be a buyer.
So whilst it was a great time to be issuing debt instruments back in 2010, when there was the flight to safety, the same cannot be said now. The line that I was particularly interested in from the article titled: Fed's Inflation Gauge Reveals 2008 High a Distant Threat was the quote: "Instead of being the risk-free rate, they're return-free risk right now." So return free indicates you aint going to get much right now for your investment, but you are taking on more risk at this juncture. Because the environment has gone from a time where everyone was hiding in bunkers to an environment where folks have emerged to see the smoke lifting. We are in equities and do not have this headache to deal with. And now you might have picked up that the English want to sell perpetual gilts or ones with 100 year terms. WHAT? Almost everyone I see writing about them suggests that the buyers will be scarce. That tells me that the other side of the equation, the issuers are aware that these low issuance rates are perhaps a thing of the past. Which in itself presents a new dynamic.
There is a complete lack of company news today, so people are becoming experts on Spanish politics, this as the country grapples with their internal accounts. Not good. The Eurozone remember are demanding that the Spanish "do more". Whatever that means, you know what it means, they must try harder. Strategically the budget was delayed until this Friday (instead of last week), after the Andalusian regional elections, where the incumbents party made progress, but did not win a majority. Imagine if we did that here, how the peanut gallery would shout from the rafters, delaying the budget, what is that all about? We have a lot to be thankful from a fiscal discipline point of view. But the same cannot be said for the Europeans, a delayed budget means that they are on European time. Which of course is the best thing about today, the fact that we get an extra trading hour in our day. That started of course today. Which means when it is 9 in Joburg, it is 9 in Paris and 8 in London. We all start trading at that time. Spare a thought for the London guys, they have to be at work at least an hour earlier than their continental European colleagues.
Byron's beats is away in Cape Town for a couple of days, he is around the mother city. Mother city? Did you notice something strange this weekend at the Stormers match versus the Lions at Coca-Cola Park (yes Robbie Johns of 702, I mean John Robbie) which is no longer called Ellis Park? There were lots of refugees from Cape Town up at the rugby game. Or perhaps they all flew up for the weekend. Either way, I think I know what Premier Zille was trying to say, perhaps she should have said, economic or service delivery refugees. Anyone who can afford a ticket to a super rugby match perhaps is better to do than the folks flocking to the Western Cape from the Eastern Cape, looking for more than two days of teachers a week. Education my friends (in my opinion) is the path to success. We need to do more in that regard. 30 percent is very far from a pass in my book.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Closing in the green, after starting way down. I see that the helium voiced Bill Gross said via the PIMCO twitter feed that Fed are likely to hint at QE3 (another round of quantitative easing) at their April meeting. Charles Plosser (Philly Fed bank president) came out and said that he did not see the need for any new stimulus from the central bank. Well there you go. PIMCO and their new normal, remember that talk, of what the new normal was and is likely to be? Anyhow, the term was coined in March of 2009 by Bill Gross. There was this idea from PIMCO that the new normal meant that bonds would return lower rates than before and in fact that prompted them to start an equity arm to their trillion Dollar bond holdings. Meaning that they expected back then, 2009 at the bottom of the equities market that in the future (many years), equities would have a better return than bonds. And equities were not better, but we were just in the "new normal" landscape a better investment. And hence the search for yield across the globe, that in part had lifted our equities markets. All tied into the first part of this newsletter today.
Currencies and commodities corner. Dr. Copper is last at 384 US cents per pound, the platinum price is catching a bid and is higher, at 1629 Dollars per fine ounce. The gold price is off a touch, last at 1660 Dollars per fine ounce. The oil price is last at 106.23 Dollars per barrel. The Rand is last at 7.64 to the US Dollar, 10.17 to the Euro and 12.14 to the Pound Sterling. After having been a whole lot worse to begin with, we are better now.
Sasha Naryshkine and Byron Lotter
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