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CIARAN RYAN: Donald Trump is expected to return to the White House in January next year for his second term as the US president. Will he quickly begin addressing his commitment to revitalizing job growth in the US? What consequences could this hold for South Africa, particularly with rising tariffs from key trading partners? As we approach the new year, numerous uncertainties are hovering over the economic landscape.

Joining us now is Adriaan Pask, the chief investment officer at PSG Wealth, to discuss what we might expect as we conclude 2024 and venture into the unpredictable year of 2025.

Hi Adriaan, thank you for being here again. Please share your insights on the US economy and the crucial outlook for 2025.

ADRIAAN PASK: Hi Ciaran, and greetings to all listeners. This subject is quite intriguing, as there’s a clear divide between the prevailing optimism and some of the data we are currently examining.

Despite an overall favorable outlook supported by economic growth, manageable inflation, and stable unemployment rates, many struggle to identify causes for pessimism.

This seems to be the general sentiment among global investors. While various emerging and developed markets are experiencing difficulties, the US stands out as a leader.

However, when we dive deeper into additional data and analyze the statistics, there are alarming indicators that could begin to impact investor confidence in the coming year.

For example, consumer debt levels are rising, along with the associated costs of that debt. Changes in mortgage rates in the real economy have been sluggish, primarily because mortgages are recalibrated only when a property is sold and a new mortgage is established. Therefore, interim interest rate hikes don’t yield immediate results since individuals remain locked into their original rates.

Ultimately, as people transition to new properties, they will encounter higher mortgage rates, but this transition occurs gradually since moving isn’t frequent. Nevertheless, other kinds of debt are escalating more rapidly. In fact, non-mortgage consumer debt is poised to exceed the interest costs tied to mortgages, currently hovering around $600 billion for both.

This trend is largely driven by surging credit card debt, which has ballooned to about $1.5 trillion in the US—a staggering 50% increase since 2021.

These credit card rates are linked to the Federal Reserve’s rates, and as they have increased, so have consumers’ interest payments, which are now at levels unseen in decades. This rising debt burden is becoming a challenge.

Simultaneously, the consumer savings rate has plummeted, halving from the historical average of about 8% to roughly 4% now. This decline indicates that consumers are under pressure and becoming increasingly reliant on credit cards.

It’s also important to mention that these mortgage rates will inevitably come into play as well.

A key question arises: why have interest rates had such a delayed impact on the US economy?

Rates began to rise in late 2021, with significant increases occurring in 2022, yet economic activity has continued, defying traditional economic models.

This lag, in my opinion, is largely tied to the over $2 trillion of excess savings amassed during the pandemic, which has helped cushion the economic impact of rising rates. However, that savings cushion is depleting, and consumers are beginning to feel the pressure.

Lastly, wage growth is now trailing behind the unemployment rate for the first time since COVID, which adds another layer to this narrative.

These consumer figures are vital, representing about 70% of US GDP. If the consumer is under strain or if any cracks begin to show, it’s a critical factor that cannot be ignored.

At the same time, corporate trends reveal similar concerns. Corporate bankruptcies have increased since 2022, with quarterly filings doubling from around 12,000 to about 24,000. Furthermore, approximately 50% of corporate debt is due to mature within the next three years, requiring refinancing at rates 2.5% to 3.5% higher than just two years ago, which will affect profit margins similar to how rising funding costs impact consumers.

From a governmental perspective, we’re experiencing twin deficits: a debt-to-GDP ratio exceeding 100%, and net interest expenses surpassing $1 trillion. This scenario is beginning to compromise government finances and its ability to make substantial investments.

In South Africa, we often come under fire for government spending on employees and related financing costs, which consume a majority of our revenues, leaving little room for investment.

However, the US situation isn’t vastly different. Social security and Medicare expenditures account for nearly 50% of total revenues, while defense consumes an additional 14%. It’s crucial to understand that most tax revenue derives from consumers rather than corporations, painting a somewhat healthier picture in certain respects, yet corporate tax contributions remain only 8% of overall revenue.

Therefore, if we closely examine these metrics, it becomes evident that the situation may diverge from the current prevailing mindset. Awareness of these elements will be essential as we move into the new year, and we could face intriguing challenges.

CIARAN RYAN: Quite fascinating. What about the US political landscape and its broader implications on the global stage with Trump’s return to the White House? He has adopted a very assertive stance regarding foreign policy and trade. What practical measures do you anticipate upon his return to office?

ADRIAAN PASK: I believe the previous term from 2016 provides useful insights. I don’t think he has changed significantly.

We can likely expect significant turbulence and numerous direct, sometimes controversial, comments that will create instability.

There’s also an awareness of the pressures surrounding the US fiscal situation; efforts will likely focus on alleviating consumer hardships and addressing the state of US finances.

China has notably encroached upon US interests from several fronts. Thus, I anticipate increased pressure on China, which could escalate tensions, potentially leading to unexpected developments in our analyses.

While it could be argued that increased pressure on China will have negative effects, it may also compel China to stimulate its economy, a choice that might no longer be within their control, which could benefit emerging markets—a somewhat unconventional viewpoint that we consider in our planning.

Nevertheless, we should expect aggressive trade negotiations aimed at bolstering the US position.

The incoming president is a seasoned negotiator who will likely use his leverage to pursue goals aligned with our expectations.

When it comes to tariffs, their impact on inflation is significant. Although inflation appears to be stabilizing, these evolving economic factors can rapidly shift the situation.

Some of these policies could be inflationary, as the push for onshoring to reduce reliance on others leads to a focus on domestic production rather than seeking the most affordable products. This shift inevitably contributes to inflationary pressures from current price levels.

Taxation policies have also been a point of extensive discussion. It seems that Trump has aspirations in this area that were left unmet during his first term, and while he may face limitations in reducing incomes due to fiscal challenges, I suspect he might proceed anyway, potentially resulting in painful long-term consequences if it doesn’t spur growth.

Deregulation is another aspect to consider. Generally, I see it as beneficial for business fluidity and growth, although it comes with risks. While some regulations may obstruct industries that are over-regulated, others are essential for ensuring marketplace participant behavior.

Finding the right balance between advantageous and detrimental regulations will be key, and it remains uncertain how the new administration will approach this.

Finally, regarding immigration, voter expectations will be paramount, and numerous promises have been made. However, I am concerned that Trump’s last presidency was disrupted, culminating in unexpected events on Capitol Hill that took many global investors by surprise, highlighting the potential for unrest in a country once considered the epitome of civility among developed nations. The current political environment seems ill-prepared for such occurrences.

We should closely observe social tensions, as they might exacerbate existing dilemmas.

CIARAN RYAN: To conclude, Adriaan, how will all of this affect the markets? We have already seen some anticipatory movements, with markets reacting positively to Trump’s imminent return as a sign of profitability. Will this trend continue?

ADRIAAN PASK: We have noticed intriguing developments; for instance, Bitcoin has seen remarkable performance. Companies associated with Trump, such as his media firm and Tesla, have also benefited from positive movements. However, the rapidity of these changes raises questions regarding their validity given the scant evidence prompting such alterations.

This market behavior likely reflects broader speculation prevalent within US markets.

The best reference point might remain 2016, a year characterized by extreme volatility sparked by provocative comments across the political landscape—leading to significant fluctuations. It was indeed a tough period for analysts attempting to decipher Trump’s often contradictory assertions.

Regarding China, as I mentioned earlier, there could be a paradoxically positive shift despite the mounting tensions.

The critical consideration today is that nearly nine years later, valuations have significantly inflated since 2016. When valuations stretch too thin, they become sensitive to potential challenges.

Thus, I foresee increased volatility. If unfavorable news emerges regarding the economy, the markets may respond sharply.

Our counsel is that now is an opportune time to seek investments outside US borders. There are excellent global companies presenting valuable opportunities, and diversifying away from the US could be wise. Although it may take time, the fundamentals and data support our outlook.

CIARAN RYAN: Let’s conclude our discussion there. Thank you, Adriaan Pask, chief investment officer at PSG Wealth, for joining us.

ADRIAAN PASK: Thank you, Ciaran. I appreciate it.

Brought to you by PSG Wealth.

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