Macro Economic Commentary – March 2021

Author: Ntsekhe Moiloa


Karima Brown. She was indefatigable, reporting on the skeletons in the closets of those who had the means to end her life. In the end, it was none of them but COVID-19. RIP.

Peter Matlare. He was enthusiastic about the opportunities for South African businesses on the African continent. Nothing ever doused that optimism, but COVID-19 took away his voice. RIP.

March is rather notorious for marking the deaths of prominent personalities. Indeed, it is perhaps most memorable for the Ides of March marking Gaius Julius Caesar’s sudden death 2065 years ago. Most will recall that he was assassinated by a band of senators led by Marcus Brutus. With his firm grip loosened, the Roman Empire began its unravelling. So powerful was Caesar that his cognomen became a title that we are familiar with today in titles such as Kaiser, Tsar, and even Ghayser in Persian. Roman emperors from 69AD were proclaimed caesar for at least the first half of the first millennium.

King Goodwill Zwelethini kaBhekuzulu. RIP.

South Africa laid uBhejane — the black rhinoceros — to rest this month, losing another high-profile leader to complications exacerbated by the current pandemic. The Zulu monarch was hailed by the political spectrum for not only his longevity in office, but for his keen interest in how politics were ultimately going to benefit his millions of subjects. Phumula uyiphethile indima yakho Isilo Samabandla. An apt saying comes to mind which holds that one campaigns in poetry and governs in prose. In other words, beautiful political promises are all well and good, but ultimately the electorate wants leadership to be precise and diligent in the execution of its plans.

With the great interest in Brexit recently, the mind naturally wanders to the United Kingdom for an examination of whether leadership has indeed been precise and diligent in the execution of its plans. There one finds that the government of the UK used its newfound independence from the EU to sign contracts sooner than Brussels, allowing it to begin thinking earlier about approvals and distribution. Well played. However, be wary of the narrative that it would not have been possible as part of the EU. For while all 27 EU countries delegated vaccine negotiations to Brussels, they were under no obligation to do so. The UK-bound vaccines are manufactured in both the UK and Belgium, plus the UK could have secured as much in the way of doses even as a member of the EU.

The problems that countries like Germany have experienced in their rollouts have been more national in nature, for example, not recognising that elderly people in their society are less likely to take themselves to a drive-in vaccination centre for a stranger to inject them rather than their family physician of however many decades. Or that municipalities that have finished vaccinations of a certain age cohort are being prevented from proceeding to the next cohort by regional authorities who want all municipalities to move in lockstep. The power of Brussels has been over-emphasised in the bingo hall debate.

What has the UK ultimately gained by leaving the EU? A rejuvenated sense of self perhaps? Agility arguably? Yet agility has its limits when the essential nature of trade negotiations is that the larger party can make demands and the smaller party tries to minimise its own pain in satisfying the demands it absolutely must. The most recent US threat to impose duties on UK products as a response to a UK proposal to tax technology firm revenues at 2 percent, is a case in point. It will impact American companies and even the Biden administration is planning to act in its national interest, agility and special relationships be damned. It is worth highlighting that when faced with the same issue against the EU, the US shied away from proposing retaliatory duties.

When the UK was a member of the EU, it helped craft exclusionary rules and benefitted from them. For while the EU is a number of things, it is most obviously a free trade bloc. Amongst those rules was a set of rules that excluded entry into the Single Market for bi-valve molluscs (such as clams, oysters, mussels and scallops) farmed in less pristine Class B waters of third countries, unless first purified to prepare them for human consumption. The UK has not previously needed such facilities and therefore hardly has any, because in the past the molluscs could be treated at any facility within the EU. The industry consensus is that the establishment of such facilities in the UK would not be a cost-effective undertaking from a commercial perspective, even though as a third country the UK can no longer send unpurified molluscs into the EU. Guess which lobby in which nation is asking its government to seek a waiver from those rules? Never mind that an individual exception would bring a WTO-sized headache upon the EU as other third countries objected, nor that government-provided purification facilities would amount to asking taxpayers for a subsidy.

But whose problem is that? The point of Brexit was to exit the orbit of EU rules, so tell whomever else to make a plan!

Perhaps the fishing lobby took Michael Gove seriously. Just prior to the Brexit vote, he famously declared that, “The day after we vote to leave, we hold all the cards and we can choose the path we want.” Well, not quite. The UK has walked into the casino of global trade negotiations to find that it may hold some cards but those cards always belong to the casino; the odds always favour the casino; and the casino only privileges “whales” with a key to the penthouse suite. Everyone else can sleep in the barn. Nationalists have climbed into the hay loft with political conservatives who apart from anything jingoistic, tend to prioritise minimal government influence in their lives. Hence, John Kenneth Galbraith’s snide remark that, “The modern [political] conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.” The conservative riposte, of course, is that the plenteous benefits of the masses are unfairly subsidised by the sweat of the few. Ironically, the British fishing industry reflects the opposite dynamic. Nevertheless, we hear that conservative riposte often enough in South Africa where wealth and income disparities are so stark that there are not many other alternatives to the preservation of the nation.

Yet for any who have caught snippets of testimony at the Zondo Commission over the past several months, the notion that those with means should always bear a starkly heavier weight for supporting the fiscus is an idea that has been pushed beyond endurance. It is exhausting when we look at how much is spent in education even though educational outcomes remain so poor on average. A former Deputy Director-General at the National Treasury, Andrew Donaldson, has remarked that the results of educational spending were also connected to other development areas such as housing because studies have revealed that a significant proportion of a child’s overall learning takes place in the community and environment that the child grows up in. Writing in a paper they published in the American Scientist journal back in 2010, John Falk and Lynn Dierking pointed out that less than 5 percent of science learning takes place in the classroom for the average American school-going child. In the same year Sue Waite published a report in the journal, Education 3-13. The report was a survey of over 330 settings in an English county that found that child-initiated learning outside the classroom was especially effective. If the South African state is poetic about housing but lacks the prose to deliver, it has greater consequences than merely a wet head on a rainy evening.

Unfortunately, the sharply steepening US yield curve during March was not like a rising pole raising a roof ahead of a rainy day. The 10-year Treasury yield moved above 1.7 percent after beginning the month at about 1.4 percent. The sharp move upward weighed on equities, however, the correction expected above 1.5 percent was now being rescheduled for a move above 2 percent. The point is that figuring out the tipping point is as much art as it is science, leaving investors to apply their own estimates for when the music stops. The music has not stopped but the volatility in yield markets certainly caused some nail-biting in equity markets both in the US and around the world.

Should investors really be so worried?

Historically, rising US bond yields alone have not been sufficient to stall a positive equity market. Equities have found themselves challenged when rising yields have caused a recession. With the Fed’s current focus on economic health; good liquidity conditions; an expanding vaccination campaign; and low borrowing costs in absolute terms, there seem to be sufficient reasons to remain exposed to equities in portfolios. The economic re-opening theme has given long-forgotten impetus to industrial shares and banking shares. If history does not repeat but rather rhymes, the rhyme is pleasing.

In the second half of March, the US Federal Reserve kept its monetary policy stance broadly unchanged, despite the increasing worry about excessive inflation in the medium term. The Jerome Powell-led central bank has been dovish, more concerned about overall economic strength, and expectations are that the economy will pop back above the pre-COVID-19 trend growth path by the third quarter of this year. The risk to that expectation currently appears to be the possible path of US Treasury yields further upward. It will require brass orbs to ride out the view that risk assets are safe into the end of 2021.Karima Brown. She was indefatigable, reporting on the skeletons in the closets of those who had the means to end her life. In the end, it was none of them but COVID-19. RIP.

Peter Matlare. He was enthusiastic about the opportunities for South African businesses on the African continent. Nothing ever doused that optimism, but COVID-19 took away his voice. RIP.

March is rather notorious for marking the deaths of prominent personalities. Indeed, it is perhaps most memorable for the Ides of March marking Gaius Julius Caesar’s sudden death 2065 years ago. Most will recall that he was assassinated by a band of senators led by Marcus Brutus. With his firm grip loosened, the Roman Empire began its unravelling. So powerful was Caesar that his cognomen became a title that we are familiar with today in titles such as Kaiser, Tsar, and even Ghayser in Persian. Roman emperors from 69AD were proclaimed caesar for at least the first half of the first millennium.

King Goodwill Zwelethini kaBhekuzulu. RIP.

South Africa laid uBhejane — the black rhinoceros — to rest this month, losing another high-profile leader to complications exacerbated by the current pandemic. The Zulu monarch was hailed by the political spectrum for not only his longevity in office, but for his keen interest in how politics were ultimately going to benefit his millions of subjects. Phumula uyiphethile indima yakho Isilo Samabandla. An apt saying comes to mind which holds that one campaigns in poetry and governs in prose. In other words, beautiful political promises are all well and good, but ultimately the electorate wants leadership to be precise and diligent in the execution of its plans.

With the great interest in Brexit recently, the mind naturally wanders to the United Kingdom for an examination of whether leadership has indeed been precise and diligent in the execution of its plans. There one finds that the government of the UK used its newfound independence from the EU to sign contracts sooner than Brussels, allowing it to begin thinking earlier about approvals and distribution. Well played. However, be wary of the narrative that it would not have been possible as part of the EU. For while all 27 EU countries delegated vaccine negotiations to Brussels, they were under no obligation to do so. The UK-bound vaccines are manufactured in both the UK and Belgium, plus the UK could have secured as much in the way of doses even as a member of the EU.

The problems that countries like Germany have experienced in their rollouts have been more national in nature, for example, not recognising that elderly people in their society are less likely to take themselves to a drive-in vaccination centre for a stranger to inject them rather than their family physician of however many decades. Or that municipalities that have finished vaccinations of a certain age cohort are being prevented from proceeding to the next cohort by regional authorities who want all municipalities to move in lockstep. The power of Brussels has been over-emphasised in the bingo hall debate.

What has the UK ultimately gained by leaving the EU? A rejuvenated sense of self perhaps? Agility arguably? Yet agility has its limits when the essential nature of trade negotiations is that the larger party can make demands and the smaller party tries to minimise its own pain in satisfying the demands it absolutely must. The most recent US threat to impose duties on UK products as a response to a UK proposal to tax technology firm revenues at 2 percent, is a case in point. It will impact American companies and even the Biden administration is planning to act in its national interest, agility and special relationships be damned. It is worth highlighting that when faced with the same issue against the EU, the US shied away from proposing retaliatory duties.

When the UK was a member of the EU, it helped craft exclusionary rules and benefitted from them. For while the EU is a number of things, it is most obviously a free trade bloc. Amongst those rules was a set of rules that excluded entry into the Single Market for bi-valve molluscs (such as clams, oysters, mussels and scallops) farmed in less pristine Class B waters of third countries, unless first purified to prepare them for human consumption. The UK has not previously needed such facilities and therefore hardly has any, because in the past the molluscs could be treated at any facility within the EU. The industry consensus is that the establishment of such facilities in the UK would not be a cost-effective undertaking from a commercial perspective, even though as a third country the UK can no longer send unpurified molluscs into the EU. Guess which lobby in which nation is asking its government to seek a waiver from those rules? Never mind that an individual exception would bring a WTO-sized headache upon the EU as other third countries objected, nor that government-provided purification facilities would amount to asking taxpayers for a subsidy.

But whose problem is that? The point of Brexit was to exit the orbit of EU rules, so tell whomever else to make a plan!

Perhaps the fishing lobby took Michael Gove seriously. Just prior to the Brexit vote, he famously declared that, “The day after we vote to leave, we hold all the cards and we can choose the path we want.” Well, not quite. The UK has walked into the casino of global trade negotiations to find that it may hold some cards but those cards always belong to the casino; the odds always favour the casino; and the casino only privileges “whales” with a key to the penthouse suite. Everyone else can sleep in the barn. Nationalists have climbed into the hay loft with political conservatives who apart from anything jingoistic, tend to prioritise minimal government influence in their lives. Hence, John Kenneth Galbraith’s snide remark that, “The modern [political] conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.” The conservative riposte, of course, is that the plenteous benefits of the masses are unfairly subsidised by the sweat of the few. Ironically, the British fishing industry reflects the opposite dynamic. Nevertheless, we hear that conservative riposte often enough in South Africa where wealth and income disparities are so stark that there are not many other alternatives to the preservation of the nation.

Yet for any who have caught snippets of testimony at the Zondo Commission over the past several months, the notion that those with means should always bear a starkly heavier weight for supporting the fiscus is an idea that has been pushed beyond endurance. It is exhausting when we look at how much is spent in education even though educational outcomes remain so poor on average. A former Deputy Director-General at the National Treasury, Andrew Donaldson, has remarked that the results of educational spending were also connected to other development areas such as housing because studies have revealed that a significant proportion of a child’s overall learning takes place in the community and environment that the child grows up in. Writing in a paper they published in the American Scientist journal back in 2010, John Falk and Lynn Dierking pointed out that less than 5 percent of science learning takes place in the classroom for the average American school-going child. In the same year Sue Waite published a report in the journal, Education 3-13. The report was a survey of over 330 settings in an English county that found that child-initiated learning outside the classroom was especially effective. If the South African state is poetic about housing but lacks the prose to deliver, it has greater consequences than merely a wet head on a rainy evening.

Unfortunately, the sharply steepening US yield curve during March was not like a rising pole raising a roof ahead of a rainy day. The 10-year Treasury yield moved above 1.7 percent after beginning the month at about 1.4 percent. The sharp move upward weighed on equities, however, the correction expected above 1.5 percent was now being rescheduled for a move above 2 percent. The point is that figuring out the tipping point is as much art as it is science, leaving investors to apply their own estimates for when the music stops. The music has not stopped but the volatility in yield markets certainly caused some nail-biting in equity markets both in the US and around the world.

Should investors really be so worried?

Historically, rising US bond yields alone have not been sufficient to stall a positive equity market. Equities have found themselves challenged when rising yields have caused a recession. With the Fed’s current focus on economic health; good liquidity conditions; an expanding vaccination campaign; and low borrowing costs in absolute terms, there seem to be sufficient reasons to remain exposed to equities in portfolios. The economic re-opening theme has given long-forgotten impetus to industrial shares and banking shares. If history does not repeat but rather rhymes, the rhyme is pleasing.

In the second half of March, the US Federal Reserve kept its monetary policy stance broadly unchanged, despite the increasing worry about excessive inflation in the medium term. The Jerome Powell-led central bank has been dovish, more concerned about overall economic strength, and expectations are that the economy will pop back above the pre-COVID-19 trend growth path by the third quarter of this year. The risk to that expectation currently appears to be the possible path of US Treasury yields further upward. It will require brass orbs to ride out the view that risk assets are safe into the end of 2021.