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CIARAN RYAN: Donald Trump is poised to reclaim the White House in January of next year for his second term as US president. Will he jump right into his commitment to rejuvenate job growth in the US? What will be the consequences for South Africa, particularly with rising tariffs from key trade partners? As we move into the new year, many economic uncertainties are on the horizon.
Joining us is Adriaan Pask, chief investment officer at PSG Wealth, to discuss what the future holds as we conclude 2024 and enter the unpredictable year of 2025.
Hi Adriaan, great to have you back. Please share your thoughts on the US economy and the important outlook for 2025.
ADRIAAN PASK: Hi Ciaran, and greetings to everyone tuning in. This topic is particularly captivating, as we see a stark difference between the prevailing optimism and some of the data we’re currently evaluating.
Even with a generally positive outlook driven by economic growth, manageable inflation, and stable unemployment rates, many struggle to articulate reasons for pessimism.
This sentiment seems to resonate among global investors. While many emerging and developed markets face challenges, the US appears to be leading the pack.
However, when we delve into more data and dissect the statistics, there are warning signs that could begin to influence investor confidence in the incoming year.
For example, consumer debt levels continue to climb, along with the costs associated with that debt. Changes in mortgage rates within the real economy have been sluggish; this is primarily because mortgages reset only when properties change hands and new mortgages are taken out. Hence, interim interest rate hikes won’t have an immediate effect, as individuals remain tied to their original rates.
Ultimately, as people transition to new properties, they will encounter higher mortgage rates, though this transition is gradual since moving isn’t an often-occurring event. That said, other types of debt are escalating more rapidly. In fact, non-mortgage consumer debt is on track to eclipse the interest costs related to mortgages, which are around $600 billion combined.
This trend is largely driven by rising credit card debt, which has soared to about $1.5 trillion in the US—a striking 50% increase since 2021.
These credit card rates are connected to the Federal Reserve’s rates, and as they have risen, consumers’ interest payments have also increased to levels we’ve not seen in decades. This growing debt is becoming a significant burden.
At the same time, the consumer savings rate has plummeted, halving from its historical average of about 8% to roughly 4% currently. This suggests that consumers are feeling the squeeze and becoming more dependent on credit cards.
It’s also essential to keep in mind that mortgage rates will be a factor as well.
A critical question arises: why have interest rates had such a lagging impact on the US economy?
Interest rates began rising in late 2021, with notable increases in 2022, yet economic activity has continued to thrive, which contradicts traditional economic forecasts.
This delay, in my opinion, is largely due to the over $2 trillion in excess savings accumulated during the pandemic, which has helped mitigate the economic effects of increasing rates. However, that savings buffer is running low, and consumers are starting to feel the pressure.
Moreover, wage growth is now trailing behind the unemployment rate for the first time since COVID, adding another layer to the story.
These consumer metrics are crucial, as they represent roughly 70% of US GDP. If the consumer feels pressured or if any signs of distress appear, it’s an important element that cannot be overlooked.
In tandem, corporate trends indicate similar worries. Corporate bankruptcies have surged since 2022, with quarterly filings doubling from approximately 12,000 to around 24,000. Additionally, about 50% of corporate debt is set to mature in the next three years, requiring refinancing at rates 2.5% to 3.5% higher than just two years ago, which will affect profit margins in a manner similar to how rising funding costs impact consumers.
From a governmental perspective, it’s well-known that we’re experiencing twin deficits: a debt-to-GDP ratio exceeding 100%, and net interest expenses surpassing $1 trillion. This is beginning to strain government finances and its ability to make significant investments.
In South Africa, we often hear critiques regarding government spending on employees and related financing costs, which take up a large portion of revenues, leaving little for investment.
However, the situation in the US isn’t vastly different. Social security and Medicare account for nearly 50% of total revenues, while defense spending makes up another 14%. It’s vital to understand that the majority of tax revenue comes from consumers rather than corporations, which presents a more optimistic picture in some aspects, although corporate tax contributions still comprise only 8% of total revenue.
As we examine these metrics closely, it becomes clear that the situation might not align with the current prevailing narrative. Recognizing these factors will be critical as we approach the new year, and we could face some intriguing challenges ahead.
CIARAN RYAN: Very interesting. What about the US political scene and its broader effects on the world with Trump’s return to the White House? He took a very assertive stance regarding foreign policy and trade. What practical actions do you foresee with his re-assumption of power?
ADRIAAN PASK: I believe we can draw valuable lessons from his previous term in 2016. I don’t think he has changed substantially.
We can expect significant turmoil along with provocative and sometimes controversial remarks, which will create unrest.
It’s evident there is an awareness of the pressures facing the US fiscal situation; efforts will likely concentrate on alleviating consumer challenges and addressing financial concerns in the US.
China has notably expanded its influence over US interests from multiple angles. As a result, I expect increased pressure on China, which could develop into a tense situation, possibly resulting in unexpected shifts in our assessments.
While it’s debatable that intensified pressure on China may have negative consequences, it might also compel China to stimulate its own economy, a choice potentially beyond their control, which could, in turn, benefit emerging markets—a somewhat unconventional perspective, yet one we consider in our strategies.
Nonetheless, we should anticipate active trade negotiations aimed at fortifying the US position.
This forthcoming president is a negotiator who will likely leverage his position to achieve goals aligned with our expectations.
Concerning tariffs, the implications on inflation are noteworthy. While inflation seems to be stabilizing, these dynamic economic factors can rapidly alter expectations.
Some of these policies could boost inflation, as pushing for onshoring to reduce reliance on external sources means focusing locally rather than pursuing the lowest-cost options. This transition will inevitably lead to inflationary pressures from current pricing levels.
Tax policy discussions have also been widespread. It seems Trump has ambitions in this area that were left unfulfilled during his first term, and although he may not have much leeway to reduce income taxes given US fiscal hurdles, I suspect he will proceed nonetheless, potentially leading to dire long-term implications if it fails to spark growth.
Deregulation is another factor to consider. I typically view it as a positive element for business adaptability and growth, although it carries inherent risks. While some regulations may stifle overly regulated industries, others are vital for ensuring responsible behavior among market participants.
Finding the right balance between beneficial and harmful regulations will be essential, and it remains to be seen how the new administration interprets this dilemma.
Lastly, immigration will be a major focus, with voter expectations at the forefront and numerous promises made. However, I’m concerned that Trump’s past presidency experienced upheaval that culminated in unexpected events on Capitol Hill, which surprised many global investors, showcasing the potential for unrest in a nation once seen as a paragon of civility among developed countries. The current political atmosphere appears ill-prepared for such occurrences.
We should be vigilant about social unrest, as it could aggravate existing challenges.
CIARAN RYAN: Finally, Adriaan, how will all this impact the markets? We have already seen some anticipatory reactions, with markets responding positively to Trump’s anticipated return as a sign of potential profitability. Will this trend continue?
ADRIAAN PASK: We have observed some intriguing trends; for example, Bitcoin has demonstrated remarkable performance. Companies linked to Trump, including his media organization and Tesla, have also seen positive momentum. However, the rapidity of these changes raises questions about their justification given the scarce evidence supporting such shifts.
Such market behaviors likely reflect broader speculation prevalent within US markets.
The best reference point might still be 2016, a year rife with extreme volatility spurred by provocative statements across the political spectrum—leading to significant fluctuations. It was indeed a challenging time for analysts trying to interpret Trump’s often counterproductive assertions.
Regarding China, as I mentioned earlier, there could be a paradoxically positive shift, despite the underlying tensions.
The key consideration now is that nearly nine years later, valuations have increased considerably since 2016. When valuations stretch too thin, they become vulnerable to potential challenges.
As a result, I anticipate heightened volatility. Should adverse news regarding the economy surface, the markets may react sharply.
Our recommendation is that this is an opportune moment to explore investments beyond US borders. There are excellent global companies offering valuable opportunities, making diversification away from the US a prudent strategy. Although it might take time, the fundamentals and data support our perspective.
CIARAN RYAN: Let’s conclude here. Thank you, Adriaan Pask, chief investment officer at PSG Wealth, for your valuable insights.
ADRIAAN PASK: Thank you, Ciaran. I appreciate the opportunity.
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