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Day 28 of lockdown.
Overnight WTI Oil (West Texas Intermediate) traded at a negative $40. Yip -$40, traders were paying you to take their oil off their hands.
Totally wild and now everybody wants to be an oil trader.
But some caution before you jump in.
1/— Simon Brown (@SimonPB) April 21, 2020
R500billion announced by the president on Tuesday evening. We await details from the finance minister, but some highlights.
10% of GDP and some 25% of the February budget total spend.
But it not all real money, some of it is soft loans, others tax relief in delayed payments.
The biggie is the increase of social grants, child grants ultimately an extra R500 a month and all others +R250 while a new unemployed grant at R350. This is to run till end October, in theory - but we'll still be in the midst of a COVID-19 pandemic then, so it will have to be extended.
Basically we have implemented a basic income grant (BIG) and it will be impossible to take that away any time. How do you say to poor hungry people, no more? Even when the pandemic has passed? Simple you can't and you don't.
For those who think a BIG is communist or evil, go check the research. There is lots starting from the 1970s in the USA and Canada, they work and they are cost effective. How do you help a poor person? Give them money. How do you help a homeless person? Give them a home. Surely there is nothing anti-capitalist about caring about the deeply less fortunate and having a little less of our luxurious lifestyles to help them? And the concerns that they will 'waste or drink' the money is simple not true. Every research shows the incidence of waste is actually lower in groups receiving state aid. As for the theory that women get pregnant in order to receive the child grant, again research has disproved that every single time. There is zero evidence to support that theory.
Lastly on social grants, we have a world class system that is also one of the largest in the world and it works. Further theft is pretty much impossible as the recipient knows what they due and if it not there, hell to pay. Now sure as we saw with Cash Paymaster Services, charges and 'extras' can get messy. But not the actual hard process.
It won't be enough, we'll have to do many more. Likely this will take us into the third quarter at best (note the extra grants end in October and COVID-19 is expected to peak around September for South Africa). But eventually we'll need well in excess of R1trillion, I think maybe some R2trillion to take us into the end of 2021.
How do we pay for the R500billion? Well as per above, majority of this is not real money. But short answer is we borrow and print money, especially for the next rounds we'll have to do later in the year. US$4billion is available for South Africa from the IMF (via the rapid financing instrument, here are the T&Cs of those loans) with pretty much no strings attached, that's almost R100billion. Is that all a risk to the currency and inflation, indeed it is.
But firstly if all countries are doing the same, we're all in the same boat and it becomes moot?
Also understand inflation, it means every Rand a person has is worth a little less in terms of what it can buy. Now the rich have the most Rands so end up paying the most, and why not pay up a little to help save the country? Certainly I happy with that as one of the rich.
The president also promised 'structural reforms' and 'radical economic transformation' which is trying to work both sides of the fence. We'll see which side he really ends up on in the end, but don't forget Minister Mboweni, he not going quietly into any night. He did speak a bit on essentially a new way of doing things, on that he's right.
Post COVID-19 the world will be a different place and we as individuals need to give serious thought as to how we want this new world to look. Then we need to start making it happen otherwise before we know it, we'll all be back to the same old same old.
A concern is about the actual process and fears of looting of the monies. Not unfounded considering our recent past. But thoughts on this.
One questions is does this 10% of GDP offset the expected 10% or so drop in GDP? The answer is no, it means maybe we only drop by the expected 6%-10%, not more.
As a last aside, the president said that the 2% repo rate cut adds R80billion into the economy in lower debt repayments. This is massive and helps middle to upper LSMs with their prime linked debt. Unsecured debt of the lower LSMs is not linked to prime, rather it regulated by the usury act, but that's why the increased social grants.
JSE – The JSE is a registered trademark of the JSE Limited.
JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.
Lockdown day 25
22million unemployment claims in US in 4 weeks (entire 2008 saw only 8.8million) opening economy
China GDP fell by 6.8% YoY in Q1 (first fall since 1992)
Wall Street gained 15% in the past two weeks, its strongest fortnight in 80 years.
Oil price .. crude oil getting smashed as global storage fills up
Earnigs season kicks off in US this week, includes March so some sense of impact but not entirely
Goldman Sachs cuts Apple to sell & cut its price target to $233 from $250 as it sees revenue dropping a third
Amazon trading at all time highs
Big cabinet meeting today (Monday)
End of the road for SAA (US airlines getting $25bn, and that not enough)
Another 1% repo rate cut, but still SARB expects SA to contract by 6.1% this year
Treasury looking to borrow $60bn, potentially from IMF
Lockdowns being extend everywhere (Spain +15 days, Italy +2 weeks, US wait and see, but likely end April)
ZAR blowing out
US jobless claims 6.6m this week Unemployment at 4.4%, non-farm payroll down 701k jobs (first down in a decade), -100k expected Numbers don’t add up, latter is only to mid March
Lots of lagging data, two issues here, one is data coming out at record worst, and even just a 1 month delay makes data largely useless
Woolies update
Famous Brands bails on GBK
Spur suspends franchise fees amid Covid-19 closures
Nampak gets their R1.5billion for selling glass biz
Anchor reports record demand for fixed-income assets
British American Tobacco working on COVID-19 vaccine
New weekly podcast in the RSS feed every Monday late morning. BUT only in the RSS feed, not on the website. So subscribe to the feed, it is here.
Lockdown, day six as I record (seven as you listen). COVID-19 numbers globally continue to rise, but I'm watching Italy. They're now at three weeks of lockdown and are seeing daily new cases decline, but still at 4,000 a day. I am also seeing reports that they'll extend lockdown to after
Easter, which is bad news for us. Our new cases are minimal, but still likely to spike higher and come the end of three weeks surely we'll be winning but not wanting to let the virus back in the front door, so lockdown extended? My thinking is extended to first weekend in May. It's after the two public holidays and means we'd have been in lockdown for 5 weeks.
Longer term we're waiting for a vaccine, and that's 2021 at best, so even if lockdown gets lifted, heavy restrictions will be the norm and new lockdown periods very likely if the virus starts to spread with speed. Remember all data is two weeks old due to a 14 day incubation period.
Overall I agree with our governments response and think the president and health minister are doing a great job under unimaginable conditions.
Hardest hit is without doubt small business. Closing for even just 21 days with zero revenue can kill a business, even a strong one.
We also have extreme inequality in South Africa that makes lockdown frankly just not impossible for most South Africans. It's easy in Bryanston, but impossible in Alex and add in poverty we have an entire extra layer of impossible.
Questions is if the worst is behind us and the honest answer is that nobody knows. We've seen a massive rally in the last ten days, but that is more about liquidity as governments (especially the US) pump cash into the system. Certainly rallies of around 15% in a bear market are totally normal, we saw about half a dozen during the 2008/9 crisis. I also don't think the market is going to be able to ignore the horror data that will be coming out over the next many months.
The other issue is that markets try and price in the future, but our forward view is limited to days, maybe weeks. Markets want to price in the next 12-18 months and we have zero visibility that far out. The data for the rest of 2020 will be bad, very bad. But we have no real idea or reference as to just how bad.
We're going to see a number of bankruptcies, large and small, local and global. Some are easy to spot; airlines, high debt companies, cruise companies. But a lot will surprise us.
I continue to only buy ETFs (ASHGEQ my preferred).
And now we're junk. Full junk status, or in the lingo ~ non investment grade.
The outlook was negative and this is significant, means we can go further into junk status at the next review in October. Ideally we don't want to slip too far down that status because it makes coming back that very much harder.
The immediate response was the local market green, Rand weaker at R17.95/USD and bonds about 1.5% higher yields.
The yields are what matters. We issue new bonds every week to cover costs, so far his weeks auction was over subscribed and that's what I expect. We're not actually at risk of default so the +11% yield is very attractive. Also with SARB buying in the secondary market we've got lots of liquidity.
But overall, it was pretty much priced in, now government needs to get us out.
Practically we're now also out of the Citi World Government Bond Index (WGBI) at the end of April. This will see selling in our bonds, also a lot of mandates don't allow junk bonds, so more selling. The flip side is a lot of mandates only want junk bonds (for yield albeit at higher risk). So in a way we've gone from a tiny fish in a giant pond to a large one in a large pond. Nice, but still not want any country wants.
We'll also see the local banks downgraded to junk, when the sovereign is junk so go the banks. But it will potentially increase their borrowing costs and that will be passed onto consumers.
Question from Njabulo Nsibande
What happens if all REITs or the top ten REITs (as they make up about 50% in the case of CoreShares income property fund) in an ETF all go bankrupt.
JSE – The JSE is a registered trademark of the JSE Limited.
JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.