ARTICLES

Central Banks

The functions of a central bank are to maintain the stability of the country’s currency and to ensure growth. Unfortunately, these two objectives are mostly mutually exclusive because growth tends to cause rising inflation while controlling inflation means taking the wind out of the economy’s sails. When the central bank becomes concerned about inflation, which is often caused by excessive demand, it raises interest rates to curb spending – but, of course, this tends to reduce spending because everyone has to pay more interest on their bonds overdrafts and credit cards. Conversely, when the central bank reduces rates to stimulate growth the increased spending inevitably results in higher inflation sooner or later. So the Central bank’s monetary policy committee meets every two months (in normal circumstances) to either put their foot on the economy’s accelerator (by reducing rates) or the brakes (by increasing rates). They conduct a very delicate balancing act between economic stimulation and currency stability. In South Africa, that balancing act is considerably complicated by the strength or weakness of the rand against first world currencies. Changing the level of interest rates is not the Central bank’s only weapon. They can also engage in “open market operations” – which basically means either buying or selling government bonds on the open market. When the central bank buys bonds they are injecting cash into the economy and vice versa. Following the 2008 sub-prime crisis, the Federal Reserve Bank (“the Fed”), in their efforts to avoid an economic depression, engaged in excessive quantitative easing (printing money) and bought back an enormous number of US treasury bills from the public. Now that the depression has been averted, they are trying to reverse that position by once again selling bonds in large quantities. This is removing excess liquidity from the economy at a slightly alarming rate. Apparently, commercial bank deposits with the Fed have dropped from around $2,9 trillion in 2014 to levels around $1,3 trillion at present. This is beginning to impact on the availability of cash. We believe that much of the cash that was printed and injected into the economy actually found its way overseas. After all, China is actually America’s largest creditor. At the same time, the economic boom which is now taking place in America is increasing the demand for cash both from businesses and consumers. Clearly, the Fed cannot allow the money supply to become too tight because that would risk a deflationary crash (similar to what happened in 1929). So, they will almost certainly hold back on selling bonds and allow the money supply to continue to grow and that, in turn, means the continued rise in the stock market. Fortunately, the relatively low oil price (half of what it was in 2012) and the continued nervousness of consumers and businesses has meant that inflation remains subdued at less than 2%. Sooner or later the virtually full employment situation in the US must result in strong upward pressure on wages and hence inflation. To begin with inflation will be relatively benign, but it will gain momentum over time. The Fed is already raising rates, but those rates will become far more aggressive when the pandora’s box of inflation is opened fully. Rising interest rates are the force that will eventually result in the next stock market bear trend – but we still believe that that point is a considerable time away. The great bull market is set to continue and the charts confirm our opinion:

S&P500 Index Semi-Log Chart 2009 to 2019 - Chart by ShareFriend Pro

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PDSNET ARTICLES

Bubble

Last Friday the S&P500 reached another new all-time record high, closing at 6791 and reaching a new intra-day record high of 6807. This is obviously an exciting time for private investors, but with each new record high the systematic risk of a bear trend or crash increases. Consider the chart:

The PEG Ratio

Since the government of national unity (GNU) came into power in June 2024, there has been a definite improvement in the South African economy. Perhaps the improvement is not as dramatic as some people were expecting, but the progress cannot be denied.

Possibly the best indicator of that is the 28% rise in the JSE Banking index which, before the GNU had

Rare Earth Elements

Investors worldwide had been of the opinion that Trump’s ability to impact markets was on the decline. His erratic, on-again, off again tariff policies had either disappeared or had been mostly discounted into share prices. His attack on the second largest economy in the world, China, seemed to have been largely resolved, and a meeting with

US Shutdown

There has been much in the media recently about the US government shutdown and the fear among investors that it might begin to affect the stock market, depending on how long it lasts.

A shutdown occurs when the US government reaches its budget limit and requires a bill to be passed through both Houses to extend the government’s spending limits.

New Listings

Two new companies, ASP Isotopes and Greencoat Renewables, have recently come to the JSE. Both are developing companies that have recently made losses and have been funding those losses by raising capital and selling assets. They both have substantial “blue sky” potential but also carry substantial investment risk. This is probably truer of ASP

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments