Tag: Economy

The Confidential Report – December 2019


America

The strong upside break of the S&P500 index above its previous cyclical high at 3025 shows that the potential for a “triple top” formation is now behind us – together with October month. Consider the chart:

S&P500 Index January 2018 to December 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

There had been some concerns among investors that the rising triple top (with tops in Jan 2018, September 2018 and July 2019 shown above with the red circles) would predicate a new bear trend potentially from October 2019. October is traditionally a scary month for investors following the collapses of 1929 and 1987.

We never had that opinion. We always thought that the underlying power of the booming US economy would drive share prices higher in a continuation of the great bull market which began in March 2009. The S&P has powered ahead and is more than 4% above the last of the tops in a strong new upward trend. On average, the S&P has gained about 1,7% in December month. While markets tend to have lower volumes because of the holiday season, once October is past there is usually a relief rally through to January of the new year. Read More

The Moment of Truth


It is becoming very evident that South Africa is now facing a “moment of truth”. Following the mini-budget of end-October, it is clear that the fiscus has exhausted most of the normal and politically acceptable methods of dealing with its growing debt problem. Taxes are at an all-time high and borrowings are rising steadily to untenable levels.

Various highly-respected experts have pointed to the fact that we are now entering a national debt-trap and that radical action must be taken. CEO of Sibanye, Neal Froneman recently pleaded for the government to adopt investor-friendly policies to attract investment. He pointed out that many aspects of South Africa – mostly within the government’s control – have the effect of scaring investment away. These are things like the interference in visa regulations, the third mining charter, the uncertainty around land redistribution policy and the high crime rate. At the same time the recent paper by Michael Sachs, formerly of the Treasury, calls for immediate action to avoid further debt – mainly through the reduction of the civil service and privatisation of various state owned enterprises. But the government is unwilling or unable to take these measures because of their fear of a union backlash. Read More

The Confidential Report – November 2019


America

Whenever considering a chart of the S&P500, it is important to put it into its historical context. The situation that we are in now is the result of an extended history that actually goes back to 1929 and before. More recently, in the past ten years, the S&P has been in the process of the longest bull trend since its inception. Experts are confused by this unusually long bull trend because they have not studied the history of how the S&P arrived at this point. In the chart below you can see that the bull trend is marked by a clear upward channel going back to 2009:

S&P500 Index November 2008 to November 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

Read More

The Confidential Report – October 2019


United States

The Federal Reserve Bank of America (Fed) has cut rates again by a further 0,25% which indicates that the monetary policy committee (MPC) is still concerned about the possibility of the US economy sliding into recession.  At the same time Europe has resumed its quantitative easing program also because of fears of a recession. Some of this is certainly due to the trade war between America and China. Nobody is quite sure how that will play out in the world economy and the primary result has been a shift towards “risk-off”. This risk-off sentiment has had an impact on the S&P500 index and also on the South African rand. Consider the chart of the S&P500 since April 2019:

S&P500 Index April to October 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

This shows the previous cycle low at 2744 made on 3rd June followed by the rise to the all-time record high at 3025 on 26th July. After that, Trump managed to invoke the next correction with his China trade war taking the S&P down to support at around 2840. A period of sideways movement followed, generating a “flag formation” which we predicted on 4th September would break to the upside. That upside break has occurred, but a new record has not yet been set. The index is currently falling back towards the resistance line of the flag formation – which is at around 2932. That resistance has now become a support level.

In our view, we expect that the index will move upwards from current levels and break above the all-time record high – probably sometime in the next month. That will signal a resumption of the great bull market which has been in progress for over ten years since March 2009. Read More

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. Read More


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