Episode Transcript
The Finance Ghost: Welcome to episode 256 of Magic Markets. I’m excited to do this with my long-term partner and friend, Mohammed Nalla, who lives in a state of America called Canada. Or is it an independent country, Moe? I really have to check with you each time at the moment, it’s…
Mohammed Nalla: We're not the 51st state.
The Finance Ghost: Not. Okay.
Mohammed Nalla: Although I think 51 might be taken by Greenland, right?
The Finance Ghost: Well, by now you’d be 53rd, 54th…
Mohammed Nalla: [laughing] Yeah, exactly. It’s Greenland, Venezuela…
The Finance Ghost: Yeah. It's very hard. It's like trying to remember what episode number we're doing. I don't even know how many states there are anymore. But is it still independent? You are, in fact, an independent country?
Mohammed Nalla: For now – and I say that with a lot of trepidation, but maybe a little bit of seriousness behind that as well, because it's an absolutely crazy time to be alive. And that’s why we're discussing geopolitics this week, right?
Right now, what I always find is, on Twitter or X – on any social media platform – whenever there is some sort of blow up internationally, everyone becomes the resident expert on that particular crisis.
Now, that’s not what we're pretending to be. I’m not an expert on Venezuela, I’m not an expert on Iran, but we do look at geopolitics. We’ve looked at geopolitics for the longest time, because that’s part and parcel of what we do. It’s part and parcel of what I do as a macro analyst, certainly, over the last, call it two decades of my career.
And so, whilst I am not the de facto expert on this, I think we have something to offer in terms of a differential lens here, just to highlight what some of the key flashpoints are.
The last two shows we’ve done – one at the tail end of last year, one just last week – one was retrospective: what happened over the year? Then last week's show was what the crystal ball view is of the year ahead.
But you can’t do that without a proper look at some of the geopolitical risks. And so, I’ll say the same thing I said last week, that not a lot of this is new – some of it bleeds in from last year.
But some of it is very new. When you go in and effectively extract a leader of another sovereign country, that’s new. When you potentially want to take over another piece of another country, that’s new.
We just have to pay attention to what is priced into the market, because we’ve seen this historically.
When Russia-Ukraine happened, there was a lot of panic around, specifically, I remember, wheat prices, because Ukraine produces a lot of wheat. You saw that come through in the market, and then very quickly that dissolved.
The question is, you’ve got to sort this out. You’ve got to see the wood for the trees.
Let’s jump in, Ghost. I think we’ve got a lot to discuss here. I don’t even know where you want to start. I’ll tell you what’s on my list…
The Finance Ghost: I want to ask you something. So, in South Africa, when things aren’t going well, you can technically go and look at the 10-year bond yield and you can pretty much see our cost of borrowing going up. It’s painful and it’s ugly and it’s not nice.
You go to the US and draw a chart of 10-year treasuries, I’ve got to tell you – yeah, there’s been some volatility, but the yields are where they were in 2022. And yet, it feels like everything has changed in terms of US country risk.
You’ve got caps on credit card interest rates, and you’ve got a president who is quite literally just treating the world like a great big game of Risk where he can kind of pick which piece he wants next.
We say this tongue in cheek, but when I read headlines like “Europe is getting very worried about Greenland” and you’ve got European defence stocks rallying all over again because of something America is doing – not Russia, not China; America – it’s a pretty wild environment.
Obviously, the gold price went bananas last year, and I think it’s all-time highs again. All of this is a reflection of risk, but US 10-year yields are where they were in mid-2022.
It just feels like a disconnect. Shouldn’t the US's cost of borrowing be starting to go up?
Mohammed Nalla: Wrong indicator. That’s all I am going to say, right? Okay, so let’s unpack it.
When I say ‘wrong indicator’, when you look at the US 10-year yield, you’re getting all of the stuff that’s happening around the Fed. So obviously, policy rates moving lower (yes, the risk, even there), and (we can talk about this) Jerome Powell's renewal and…
The Finance Ghost: Yeah, we’ve got to talk about Jerome Powell.
Mohammed Nalla: …criminal charges, whatever it might be. So, we’ll talk about that. But the reason it’s the wrong indicator is that, remember, if you look at the US, something very interesting has happened.
Go and have a look at the difference between the short end of the yield curve and the long end of the yield curve (and when I say ‘long end’, I’m not talking the 10-year; look at the 30-year). You’ll see that there’s some pressure coming through on that 30-year point.
Now, again – not rocket science. We’ve spoken about the fiscal risks that are coming through in the US. They haven’t fixed their fiscal story, so you’re seeing those divergences occur across where, in the yield curve, you’re seeing the pressure point.
But I’m going to draw your attention to the indicator that I think reflects the US economic risk and geopolitical risk: the dollar index. The code I use for that is DXY.
If you have a look at the dollar index – and don’t even look at it over the very long term, just look at it from January 2025 (so, pre-liberation day) – that was trading at around 110 index points or thereabouts.
That has traded as low as 96 to the downside and now, currently around 100. So, I would argue that that is your expression of risk that you’re seeing in the US.
And if you continue to see this level of ‘crazy’, let’s call it that, from the Trump administration doubling down on some pretty inflammatory stuff, I think you’re going to see some sort of pressure continue to materialise on the US dollar.
And remember, that then flows through. How do you express that? You can’t trade DXY, but you can go and express that on the euro/dollar exchange rate. Or go look at sterling versus the dollar, go look at any of those. Those would be an expression of that US risk.
So, I hope that answers your question. That’s how I would see it coming through.
The Finance Ghost: Is South Africa different then, Moe? When I look at our 10-year yield, for example, January 2018 is where it was at these levels last time. March 2018, 8.3%. That’s the last time we were down there.
Mohammed Nalla: Yeah, so let’s unpack South Africa. I’ve unpacked the US for you; let's unpack South Africa. It's a valid question.
In South Africa, you've got a couple of other levers that are at play here. So, South African bonds have done remarkably well. They’ve actually been a pretty decent asset class – solid double-digit total returns coming through there, on a solid risk-adjusted basis.
If you compare that on a risk-adjusted basis to equities, going back the last three to four years, there have been many years where bonds were actually the trade versus equities. Now, last year, obviously, you had the stellar performance from equities, so yes, on a risk-adjusted basis, maybe equities compensated you (albeit really a gold/PGM story).
Going back to it, if you look at the expression of South African risk, you would pick some of that up in the rand, right? And the reason I say you’re getting a couple of levers that are moving here is that the other thing that’s driving South African bonds and the rand would be the global carry trade.
South Africa is still seen as a pretty decent, highly liquid emerging market where the central bank is really responsible, so you don't have concerns around runaway inflation there. That makes it very, very attractive from a carry trade perspective.
And that comes through. If you look at foreign ownership of South African bonds, that is one of the litmus tests you can use there.
For me, the expression of – or rather, where you want to see the compression in – South Africa's risk profile is, ironically, the CDS (the credit default swap). And even on the CDS, you’ve seen a massive compression come through. So, that’s a compression in South Africa's risk premium.
And it's for a variety of reasons. South Africa is not a growth play. It’s been a yield play for the longest time, but they see policy as credible and predictable (it's not like forward guidance from some of the other central banks).
Globally, if you see policy credibility and some sort of line of sight, that starts to express itself in a compression in risk premia.
And that’s the reason I get a lot of pushback for this, but I’m a big fan of the South African Reserve Bank (SARB), because I really think they are a cornerstone of why South Africa's risk premium hasn’t blown out fantastically, as you’ve seen in some of the other emerging markets out there.
The Finance Ghost: Yeah, I mean, here’s an amazing stat for you. If you draw a long-term chart of the dollar to the rand – and obviously it's nice to occasionally be able to beat our chest and be like, "Oh, look at the rand. It's so great." But for context, obviously it still sucks, and it's just less sucky than it was.
But here’s what’s really fun: if you draw a really long-term chart, the rand is trading at the moment at super similar levels to what we saw in very early 2016.
Cast your mind back. What happened in December 2015? Our ‘Weekend Special’ Finance Minister…
Mohammed Nalla: Nenegate.
The Finance Ghost: There we go! So, the rand now is where it was in the middle of the ‘lost decade’, around that time that all of that happened, and we have clawed our way back a lot.
Now obviously, that’s like ten years’ worth (almost exactly) of inflation differential, and the rand should theoretically weaken over time, etcetera, etcetera. And we're actually kind of back where we were ten years ago. So, it's just really fascinating, right?
This macro stuff – people say, "Oh, you know, you can't really look at it, you've got to just look at the companies, whatever.” You absolutely have to look at the macro, because at that time, South African companies were running around trying to do big offshore acquisitions, especially retailers. We’ve seen, over the past decade, how bad many of those acquisitions were.
And part of the thesis was, “Well, the rand is simply going to go to the dogs.” I remember reports that the rand “will reach 30” and all the clickbait nonsense, and it hasn’t. It's back where it was 10 years ago.
Mohammed Nalla: Yeah, and I don't want to make this a rand show, but maybe my last comment on this is, over the super long term, I look at various fair value models. I always say fair value is just an academic construct, but what it does is it gives you an anchor, and around that anchor you’re going to see the rand effectively oscillate or mean revert.
So, I look at fair value, and then I look at where the rand is trading, and that gives you an expression of what risk premium is priced in. I then map that against other risk premia, so like I say, the CDS or if you look at South African 10-year versus US 10-year.
Now, bear in mind (I mentioned this on last week's show), there are some structural changes. There is a structural shift in where South Africa's been running inflation versus the US, and you've got to calibrate somewhat for those structural shifts.
But for me, what I use as my “It's time to go offshore” versus “It's time to hold off on going offshore”, that litmus test is really how richly priced risk is in South Africa.
So yes, we’ve pulled back a lot closer to fair value. And if you feel it's compressed, these are ironically the times when you should be considering international diversification.
But superimpose on that, let's circle all the way back to our original kind of thesis of the show: pay attention to the dollar. Because I think that you have a real risk of a sustained dollar downdraft. It's in a bear trend already.
And I think some of this will likely persist over the next three years, if we continue to see some of these geopolitical flashpoints play out.
The Finance Ghost: It's crazy, right? You talk about central banks and the SARB and how lucky we are to actually still have these proper independent bodies and everything else. They’re talking at the moment about relooking at the prime rate.
Probably not great news for the banks, who I think have been able to be a little bit lazy with pricing because they have this beautiful anchor called ‘prime’ that they can just point to and say, "Well, that’s what we lend at.”
Take that away, and suddenly there’s a nice big space above the repo rate where we're going to start to see some very fascinating pricing. So, I think that’s kind of cool, but probably not great for the banks themselves, let's be honest.
And then in the US, you've got headlines around Jerome Powell and potential criminal charges and how it's all a political agenda. It feels like it should be the other way around.
Everyone talks about “emerging market risk” and “US safe haven”. If you swap these headlines, the banana republic is not the one that I live in right now. It doesn’t seem that way!
Mohammed Nalla: [laughing] I tend to concur, right? It's why, if you look at gold as an expression of a safe haven, it has done remarkably well. Historically, gold and the dollar would theoretically serve as safe havens – dollar cash, effectively.
I think that dollar story has eroded. If you look at central bank behaviour over the course of the last couple of years, major central banks (China specifically, but certainly out of the East) have been allocating a lot more to gold.
Heck, if you look at South Africa's forex reserves, they’ve benefited from the gold valuation as well. So, I think that is the expression of what the real banana republic is out there.
But at the end of the day, going back to your point around interest rates, I found that announcement around a potential look at prime very interesting in South Africa. Because remember, the SARB has recalibrated. They’ve moved their inflation target lower. And again, I agreed with that simply because when these targets were set, they were set in a world where inflation for emerging markets was running a lot hotter, a lot higher, so they were anchored a lot higher. And so, in my view, it was appropriate to just move that anchor. We are in different times.
And then that spread between prime and the repo, that has been the spread based on where base rates were at that point in time. So, I guess this is a bit of a signal to say that the SARB's done their bit. It's time for the rest of the economy, specifically the financial sector, to maybe do its bit. It will be interesting.
Talking about the US, cap rates on credit cards – oh boy, don’t even get me started, right?
The Finance Ghost: I thought America was a capitalist system. What is going on there?
Mohammed Nalla: [laughing] Let's think of the effects that flow downstream from this, right? You could argue that if they cap interest rates, remember banks (and effectively credit card companies) are compensating - effectively, their rewards programmes are funded out of the higher spread that they earn on the credit cards.
Over and above that, in the US, you can get credit pretty easily still, right? And the only reason for that, the reason the banks can kind of go down that risk spectrum and allow some people into the ecosystem, is because they’re compensated with these pretty juicy interest rates.
Now, I’m certainly not a fan of that. I think it gets people into a lot of financial distress, so let's park that. But if you effectively cap interest rates at 10%, you remove the incentive of the firms offering that credit to let a lot of those people into the ecosystem.
And so, I think you might actually see them curtailing credit limits. You might see them cancelling a lot of cards. It may have an unintended consequence.
Where the administration is saying, “Let's cap rates, let's get spending up. Let's get some economic momentum, volatility of money coming through.” It may actually have an adverse or the opposite effect of that.
So, let's pay attention. But again, cloud cuckoo land on a lot of this stuff out there. That’s not going to make me very popular if we ever become the 52nd, 53rd, or 54th state, but I’ve got to say what I’ve got to say.
The Finance Ghost: I think you’ll come home, Moe. I think you’ll be on a plane out of there. That’s my personal forecast, if that happens.
But back to stocks perhaps. It's interesting with this cap because we’ve covered some of these credit card-type companies in Magic Markets Premium before. As we were talking about it, it's interesting how the Visa- and Mastercard-type share prices get hit by this, but actually, they might do better if there are more volumes going through cards, because it's cheaper to use cards.
It's actually American Express that shares the credit risk, and therefore the pricing, with the banks. And if you look at the market, American Express is down more than Visa and Mastercard.
So, the really weird pairs trade over the past couple of days was Visa and Mastercard versus American Express, thanks to what is happening with the US government. It's pretty nuts.
Mohammed Nalla: And again, you’re not going to pick that up if you don't do some deeper research. It's why we’ve covered those names in Magic Markets Premium. We understand where each of those companies plays in their respective value chains.
If you’re just blindly going out there and saying there’s a narrative driving here and that narrative is bad for credit card companies, you’re going to go and hit the sell button on Visa and Mastercard.
Now, it might be bad for them. If volumes are constrained, it might be bad for them, but the point around who takes the credit risk – I think that’s the bigger point. If this actually lands, the firms that are taking the credit risk are the ones that are going to have to cut back. So again, just understand where you are in that value chain.
Ghost, we haven’t even touched on oil, right? I want to touch on oil because there are so many geopolitical flashpoints that are touching on oil right now. We've got Venezuela, so we’ll touch on that.
There’s Iran – what’s going on in Iran right now, that’s all over the headlines. Whether you believe what you see or not, I think that’s an oil touchpoint.
And then, even if you look at Greenland, right? Greenland, for me, is an expression of US insecurities around Russia. Because at the end of the day, if there’s some sort of escalation with Russia, Russian missiles literally would need to fly over the Arctic.
So, from a geopolitical or geostructural standpoint, the US is saying they need Greenland to position their missile defences because (lots of technicalities here, but) the missiles apparently would reach their apogee over Greenland, and that’s the most optimal point to intercept those missiles.
So, that’s the geostructural rationale behind it, but this all comes through in an oil expression. And it's why, over the last year, I was so wrong on oil, because I certainly expected oil to be supported a lot more by some of these geopolitical risks that have come through.
But then you've got to counterbalance that with a glut of supply that’s come through on the market, certainly from a lot of the OPEC players as well. And so oil, for me, has been the surprising ‘disappointment’, if you want to call it that.
Now, it's not all doom and gloom. If you have a look at some of the oil companies, even though it hasn’t done as well as you would have thought, some of them, based certainly on my entry points (maybe it was just good timing), they’ve done okay.
I’m still up on some of the big oil names, but I also chose a different part of the value chain. I went with kind of oil services, pipelines and that kind of stuff, and they seem to do okay regardless of where the spot price of oil is actually going.
So, let's maybe dig into some of the geopolitics around that. I don't know from a South African perspective. South Africa is apparently doing military drills with some of the, let's call it ‘undesirables’, according to the Trump administration. So, let's touch on that.
The Finance Ghost: I suspect we're providing them with boerewors rolls while they train. I can't imagine what else we could possibly be doing. The last time they did military drills down here, people got stuck on the beach.
Mohammed Nalla: [laughing]
The Finance Ghost: It's not good.
Mohammed Nalla: Let's start with Venezuela, right? We know Maduro's been arrested, but what’s been interesting for me following that has been – and again, everyone’s an expert, so I’m not going to go into the fact that you've got to look at the type of crude you’re getting; there’s very heavy crude, and then there’s light sweet.
We know Venezuela's heavy, but apparently (and I’ve read this from people who are experts, I’m not an expert), even if you look at the sulfur differentials in some of this. It means that, long story short, the refining of Venezuelan crude is going to be a lot more difficult than the headlines suggest.
That’s the reason you haven’t seen a sharper reaction come through, in terms of oil markets, to the downside. Because it's not as though there’s going to be a massive supply coming through from Venezuela.
But, I digress. The point that is most interesting to me around Venezuela, LatAm, what’s happening there, is pay attention to Cuba. Because now, the US administration is using Venezuelan crude as a choke point on Cuba.
Again, for those of you who watch closely, Marco Rubio doesn’t like Cuba a heck of a lot. He happens to be of Cuban descent. In fact, I saw something (I had to validate whether this was true a while ago). I think someone had asked Donald Trump how he would feel about Marco Rubio being president of Cuba, and he said, "Yeah, I would very much like that."
Again, social media is a dangerous place. Go and validate whether that actually happened or not. But I think there is a lot more going on there that is less oil-related.
Then, Iran. If we're talking oil, we're talking Iran. Obviously, the sensitivities there around the Strait of Hormuz, which is the thin point between Iran and the rest of the GCC (Gulf Co-Operation Council) countries, right?
It's a choke point, because a lot of the GCC countries' oil has to flow out through the Strait of Hormuz. So, watch that as a potential choke point.
Yes, I think it's a risk, but it’s been a risk for a very long time. You see it come through in the market, and then it's alleviated, because the market believes that, if it really comes down to that choke point, the US will deploy military forces to keep the Strait of Hormuz open and to keep the oil flowing.
It reminds me of Dune – I’m a nerd, you’re a nerd; anyone who has watched Dune – "The spice must flow.” Well, the ‘spice’ in this case is the oil.
The Finance Ghost: Yeah. A lot of what is going on right now can remind you of a whole bunch of different fantasy things. We won't even get into that, but yeah, it's crazy. I think the days of "there's war, buy oil" are definitely behind us.
There's been little indication that that's the right trade in the world where it finds itself today. As you say, lots of supply. It just feels like – and I don't know, I'd actually love to see the stats on this – the level of actual demand for oil, and to what extent the renewable energy push, the efficiency push, has actually reduced demand for oil.
Maybe we should go and check that out, but yeah, it's not the right trade anymore. I (generally speaking) am not someone who would go long oil.
Mohammed Nalla: Yeah, I want to touch on that. Because what was part of my thesis around oil was not the geopolitical risk – that gives you some asymmetry to the upside, sure.
I was kind of long oil (or just long energy in general) because I believe that the infrastructure buildout around AI technology – we spoke about that a while ago – gives you some demand for energy.
I think the administration in the US is very much pro-fossil fuels. And again, that was like, “Maybe you should be bullish oil.” But that might mean more supply. So, slightly more nuanced there.
I think the key displacing factor when it comes to main oil supply – when it comes to fossils, at least – would be natural gas. If you have a look at that composition, the breakdown. Yes, renewables are important, certainly, in certain geographies. The natural gas has come through quite strongly, as well.
Energy markets are very complex. I’m not an energy sector specialist, but there is a lot of interesting research and a lot of very clever people out there that you can go and speak to and get some of that.
Ghost, before we even wrap the show, the one that we haven’t touched on (we’ve spoken about oil and Greenland and the Middle East, but let's just touch on this very quickly) would be Taiwan and China, right? Because last year this time, that was the big concern. The choke point. But it hasn’t gone away.
The question for me is, does the US's behaviour in the rest of the world (certainly around Greenland and Venezuela, what they’ve done there, specifically) scare the Chinese into not acting on Taiwan? Or does that embolden the Chinese to say, "Hey, we can actually have a go at Taiwan"?
For me, that Taiwan risk has not gone away. And the ability to de-risk away from the semiconductor manufacturing that is disproportionately located in Taiwan takes a very long time. Yes, the US is working towards building out those fabs and the semiconductor manufacturing in the US, but that does not happen overnight.
So, for me, I would say that is a tail risk that I would pay attention to, because that choke point for me may be a lot more devastating than a choke point in the Strait of Hormuz on oil.
The Finance Ghost: I just want to make one final comment on oil before we sign off this week. So, I checked on Google (let's hope the AI is not lying to me, I guess), but global oil demand has increased over the last 20 years, definitely.
It's just that supply, I think, has gotten a lot stronger over that period, and that’s why there hasn’t really been much price support. But it's not that people are using less oil overall.
In fact (again, AI disclaimer here because that is the answer I got), a fun fact is that oil demand in 2020 (and that’s the middle of Covid) was actually more, significantly more – looks like about 10% more – than it was in 2005.
Pretty interesting. It's definitely picked up, and there are lots of reports here around why people think peak oil demand will be in 2030. Look, who knows? As I say, I stay out of that market, but it's interesting to go and see these stats.
Mohammed Nalla: Yeah, Ghost, what I love about these shows is it gives us a lot of avenues to explore. Something we haven’t even touched on (but certainly one that I think we would want to touch on somewhere in our Magic Markets ecosystem) would be nuclear.
What happens around uranium? What happens around nuclear power? That’s an interesting one as well.
And then, your AI disclaimer. I’m going to use this to wrap the show because it's quite fun. I saw something online on X over the weekend where someone was saying, "This is what we're trusting with our requests.” We’re trusting AI, and it's really scary. He went to ChatGPT and said, "Can you tell me how many Rs there are in the word strawberry?"
The Finance Ghost: I saw that. It’s terrible. [laughing]
Mohammed Nalla: And ChatGPT very authoritatively tells you two Rs. I could not believe this. So, I replicated this. I tried it…
The Finance Ghost: And then spells it out! It's crazy.
Mohammed Nalla: Spells it out, right? Eventually, I got ChatGPT to agree with me because I said, "How many Rs in the letter strawberry? Spell it out for me. After each R, count the number and then use that to tell me how many Rs." And then it got the right answer.
But again, strong disclaimer – go and try it. Maybe they’ve fixed it by now, but go and try that out. I thought that maybe it was related to the voice version, because I initially tried it on the voice version, like it was on X, and it got it wrong.
I thought, “Maybe it's just getting the sound and is trying to associate the sound with the letter.” So then I actually asked it in the text version, and it still got it wrong.
So, AI caveats out there, for those of you that are AI die-hards: pay a lot of attention, be very circumspect around how we're using this tech. Yes, it will get better, but it's not the be-all and end-all at this point.
The Finance Ghost: No, absolutely. And that is probably a good place to sign off. We’ll be back next week. We’ll wait and see whether Canada is still independent. We’ll wait and see what else happens in the next week. At least it makes for a fun discussion.
Moe, you can always move back home if anything goes wrong. Do it quickly, because the rand is getting stronger all the time. Don’t leave it too late there, with banana republic land and your currency risks.
I would hate it if it went Zimbabwe-style up there, but we’ll welcome you back nonetheless. What a crazy situation.
Mohammed Nalla: Thank you, Ghost. Always love coming back to SA. Hope the rand continues to do as well as it does because South Africa, I think, was pretty hard done by by a couple of own goals there. But, story for another day.
To our listeners, what did you think of the show? Let us know, hit us up on social media. It's @MagicMarketsPod, @FinanceGhost and @MohammedNalla all on X, or go find us on LinkedIn. Pop us a note on there.
We hope you’ve enjoyed this. Until next week, same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
