Episode Transcript
[00:00:00] Speaker A: The markets, we just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts, the Finance Ghost and Mohammed Nala.
[00:00:12] Speaker B: Together we have more than 25 years of combined experience in the markets.
[00:00:16] Speaker A: For those looking to take their market and business knowledge to the next level, we offer Magic Markets Premium. Our recent shows have included technology giants like Amazon and Microsoft, as well as a smaller tech play like Intuit. We've also covered content and streaming group Disney as well as retailer Walmart. To add to the retail insights, we recently covered Lululemon as well. And this is just a taste of what's available. Visit magic-markets.com today and go premium to get these insights. Welcome to episode 210 of Magic Markets. What an absolutely insane start to the week. It was for South Africans, but mo also for Canadians. I mean, it's amazing, right? We live on opposite ends of the world and yet the same issue has been plaguing both of the countries that we live in. So it's a fun time to be alive. I suppose this is what happens when you have someone who is, I don't know, I don't even know what to say. A bit of a firebrand. Some might say absolutely crazy, others might say very admirable. I mean, there's no topic more divisive than Donald Trump. And we thankfully managed to avoid getting political alignment on this show. We focus rather on what the impact is on economies and markets and things you can invest in, even though it's sometimes tempting to move into a little bit of talking about the politics as well. And sometimes they're just very intertwined, aren't they? And that's the case here.
[00:01:32] Speaker B: Indeed. Ghost. I think it's certainly a very fractious time globally and we certainly stay apolitical. But that doesn't stop us from having a look at what this actually means for markets, for economies, because we've actually seen a massive market impact both to the upside as well as to the downside around this U.S. i'm gonna call it the tariff tantrum. Right? I don't know if you remember some time ago, but we had what was called the taper tantru as the Fed was tapering its balance sheet. And I call this the tariff tantrum. In fact, just last week I was at a lunch, we had the former central bank governor of Canada speaking in terms of invest in Canada. But again, against this backdrop of US Tariff threats against Canada, that's now obviously spilled over to South Africa. South Africa and the crosshairs there. And someone at the lunch actually referred to Trump as the tariff man. So I think that might actually stick. I can picture him with a cape and a American flag cape and so forth. But let's maybe start off with what's actually going on, because it's changed just from when we actually discussed that this is what we were going to be talking about on the show yesterday till this point in time when we were recording it. There's actually been a change as well. And again, this, I guess, is something that is very symptomatic of the Trump presidency and just how policies actually affected under this administration. So dialing that back a little bit, first and foremost, we had the threat of tariffs against Canada, Mexico, and China. I think that's really at the forefront of Trump's agenda globally. Again, remember, these are the economies that the US is most exposed to. He certainly bangs on about, you know, the kind of trade deficits that he runs with these countries. And Canada is understandably one of the US's largest trading partners. So President Trump announcing that he was going to levy a 25% tariff on imports from Canada and from Mexico. And some of his concerns are well grounded. You know, he cited concerns over illegal immigration. He cited concerns around drug trafficking, particularly fentanyl. We know there was an opioid crisis in the us, and fentanyl really falling into that bucket. And Trump really looking to apply pressure on his neighbors to say, stop the stuff coming into the us, because it's really affecting them quite badly now, certainly when it comes to Canada, Canada has long been at pains to stress that only around 2% of the fentanyl entering the US comes from Canada. So, yes, there might be a problem, but it's certainly not the type of scale that you're seeing across the southern border, across Mexico. Now, what's happened is initial rhetoric from both Mexico and Canada was effectively very retaliatory. Both countries announced that they would retaliate with countermeasures with tariffs, including 25% on US goods coming into those economies. But subsequent to that, and I think both leaders were very smart in terms of leaving the door open for discussions. I know when the Canadian prime minister spoke, he actually said that he hadn't spoken to Donald Trump yet. I think Trump just wasn't taking his calls. For those not familiar, Canada's currently in the midst of a political transition. The Prime Minister has announced that he will be stepping down. And so Canada looking for a new leader. I'm not going to go into that detail, but that Perhaps behind some of the reason why Trump certainly wasn't taking Justin Trudeau's calls. Subsequent to that, though, Ghost, in fact, yesterday afternoon, Justin Trudeau had a discussion with Donald Trump. It followed a discussion that Trump had with the Mexican president president on the same issue. And both countries have now actually agreed to step up, you know, effectively policing the borders. And Trump has subsequently dialed back on the tariff risk. What he said is it's not off the table yet, but he will actually delay that for a month and see what progress is being made. So the market reaction, understandably what's happened is on the announcement of the tariffs, very negative. We saw equities really falling quite hard. But subsequent to this announcement of, let's call it an understanding or a delay, at least on the tariffs, we then saw a sharp upward reaction to markets as well. So expect to see this volatility because as Trump has stressed, it's not off the table yet. The tariffs are still there. They're just delayed for another month. The interesting thing for me coast is that when you look at the Canadian position specifically, what the Canadians effectively announced was that they've got about a $1.3 billion plan in terms of tightening up on the border. They're going to be putting more troops on the border just to make sure, you know, bad agents don't get across. But this is nothing new. This is actually something that Canada announced it was doing back in Dec. December last year. So Trump's certainly going to claim it as a win from his side. He's going to say, look, we got these countries to back down and again, let him take the win. If this actually means less friction in terms of tariff response as well as on the markets. But effectively from the Canadian perspective, you could argue it's a win as well. They've not actually done anything new, but they've actually got this tariff threat to recede somewhat over the shorter term. Now, that's the backdrop up here. Certainly been seen positive on the markets, hasn't really filtered through in terms of the gold price, gold remaining very strong because again, people want that as the safe haven hedge. But South Africa finding itself in the crosshairs and Ghost, I know you're going to jump into that and give us a bit of a breakdown.
[00:06:32] Speaker A: Yeah, look, I mean, we probably don't need to go into what really happened other than just a lot of rhetoric waking up to this crazy news. Donald Trump on one hand, Elon Musk on the other. There's obviously been a lot of lobbying in the background from certain Special interest groups. And it's kind of now all added up into this whole thing around expropriation without compensation. Bee. Although it's still kind of up to interpretation what exactly everyone is referring to. And all these terrible, terrible things, as Donald calls them, that are happening here in South Africa. And it's really just a whole big political mess. And, you know, it really calls into question just the behavior of the US on the global stage. It's very much a situation where Trump, you know, it's just waving the biggest stick, right? And he's happy to wave that stick at Mexico, at Canada, at poor little South Africa. We are tiny in that context. And I think that's the one thing we need to talk about here, is clearly, in this case, the tariffs are not really a. Hey, this will definitely happen. It's a negotiating tool, it's a threat. And that's very much in line with how Trump behaves, and that's fine. But in a negotiation, it's all about what each party is bringing to the table. Right? And I think from chats with you, Canada just has a better ability to fight this. I'm not really sure about Mexico. You know, the Gulf of Mexico being renamed the Gulf of America, by the way, was one of the most ridiculous things I've read in a long time. But what is the sort of negotiating power that they have relative to your perception of South Africa's negotiating power? If things do escalate, which they still might, I mean, we don't know.
[00:07:56] Speaker B: I think that's a great question. Right? I mean, I laugh at the whole Gulf of America thing because I see, again, Google's actually bowed down kiss the ring. And for North American users, it's actually been renamed to the Gulf of America, which is just absurd. But, but let's maybe dial back in terms of what is each country's exposure here, because I think this then takes us through to specific sectors of the market. I'm going to actually start off with something we haven't mentioned, which is Panama. Right. Because I think some of the initial threats were against Panama. Trump was really quite aggrieved by the fact that China certainly seems to be growing its, its influence in Panama, certainly over the Panama Canal. Whether that's correct or not, again, is. Is debatable. But Trump basically saying we're going to take the Panama Canal back now that becomes an existential risk for a country like Panama. I mean, literally, they've got the Canal. That's one of the key sources of revenue there. And Panama was probably the first country, and Panama was probably the first country to fold. You know, they've actually announced to China that they will not be partaking in the next leg of the Belt and Road negotiations. This has been seen as a win for the us For Trump. Then we had Mexico. Now, what does Mexico actually send up to the us? They send some oil. They also send a lot of cheap workers. Now, we know Trump wants to send those back. And the impact there is that this is going to have a bearing in terms of labor costs in the us. There's also a lot of food products that go up from Mexico into the us, into Canada as well. And so arguably, you're going to start impacting wages, you're going to start impacting food prices in the us. It's also going to hurt Mexico quite a bit. It's also going to hurt countries that were looking at Mexico as the back door to the United States. What I mean when I say this is the US has been focusing on onshoring. You know, certainly over the course of the last several years, the US wants to onshore a lot of production into the United States. And some companies were setting up factories in Mexico, using the cheap labor in Mexico and then effectively sending it up into the US to take advantage of the free trade agreements. And again, the US basically saying we're going to have none of that. So watch the automotive sector specifically there. If we're talking automotives, we've also got to bring in Europe. They certainly haven't been on the chopping block yet. But Trump has discussed levying tariffs against Europe. Again, very aggrieved by the fact that, you know, the US takes in all of the European auto manufacturers. You've got Mercedes, Benz, BMW. He actually mentioned some of those Volkswagen, and he says Europe's not been very friendly to us. They don't take a lot of American cars. Again, a bit of a simplistic assessment there, but that's the sector that's likely to be impacted. When you look at Europe, when you look at Canada, Canada's actually a lot of people don't know this, But Canada supplies 60% of the US's oil imports come from Canada. And some technicalities here, but US refineries are basically built to process Canadian crude. They can't process the light sweet crude that is produced in the us, but they can process the heavy sour crude that comes from Canada. And this has a bearing in terms of oil markets and energy markets because it's not as simple as drill, baby, drill when it comes to the oil market, their refineries are just not built for it. And if they need to repurpose that, that's going to entail billions, if not hundreds of billions of dollars worth of investment as well as delays. So watch for choke points on energy markets. Now let's bring that back to your original question, which was South Africa. If we look at South Africa's exposure to the US and first of all, let's look at South Africa's largest trading partners. When you're looking at the import side, the largest trading partner is China by a country mile. And then Europe features very prominently the US as a country, very large as well. But Europe, remember, you can probably look at Europe and say, okay, just Germany is probably the size of the US in terms of the importance to South Africa on the import as well as on the export side. If you wrap up the rest of Europe collectively, Europe is arguably a lot more important to South Africa than, than the United States. If you look at products, what kind of products does South Africa send out? We know there have been significant automotive sector investments in South Africa. We know about all the car plants. It's not just cars. It's not just finished product. It's also components. A lot of those find their way into supply chains, into North America, into the United States as well. And then we also have some dependencies in terms of energy. Now when we talk Agoa specifically, this is an, an agreement that's been in place for some time. It's been largely beneficial to countries in Africa around textiles. That's certainly been a strong point for country like Lesotho, where interesting story here, the Chinese were basically setting up factories in Lesotho, sending semi finished products there, finishing the product in Lesotho and then getting it into the United States under Agoa. And arguably this lends some credence to Trump. Just saying, is the US being taken advantage of. Now if we come back to Starlink, you know, Elon Musk's influence here, Starlink has been a bone of contention. I would argue that South Africa using Starlink would be very beneficial in terms of unlocking high speed Internet to lots of areas where the infrastructure just doesn't exist. And South Africa's actually been behind other African countries here. I've got a story of a friend who's actually tried to piggyback off Mozambican or Zimbabwe and Starlink and use that in South Africa. I don't know if that's been successful or not, but again, that's been a bone of contention, certainly for Elon Musk who says you know, why should he have a be partner? I'm going to take politics out of this year. All I'm going to say is that when it comes to leverage, when it comes to bargaining room, South Africa is not Mexico, South Africa is not Canada, and South Africa is not Europe. And so your bargaining chips, just what you have to put on the table and what it will cost the United States to actually fracture some of these relationships. It's a lot less important to the United States. South Africa not a key counterparty, but the US Is a key counterparty to South Africa. And so I would say trading carefully here for a country a small open economy like South Africa would probably be the right course to take. But that being said, you have to be very sensitive to the fact that when you're dealing with a bully, they're going to actually exact their demands. Now, if you cave very easily, then they're going to exact some further demand. So just be sensitive to that dynamic. I think that does complicate things somewhat. Ghost.
[00:13:55] Speaker A: No, it does absolutely side this crazy start to the week where I tweeted or X. I mean, hilariously, it's on Elon Musk's platform, of course, and I said, south Africa may be sovereign in the streets, but we are welfare in the sheets. Going to be interesting to see how this plays out. Very few people made any effort whatsoever to engage. But for those who perhaps do want to understand what I was actually pointing to, and there were many who did that just opted not to comment. So the point is exactly that. Around South Africa's negotiating power, of course we are sovereign and goodness knows we should be sovereign. And it's ridiculous that we even have to have that conversation. But reality is also, when there's a very big bully, it's your ability to fight back. And I think what people miss is the word aid is broader than people actually realize. And it's very, very narrow definition. It means giving you money and expecting nothing in return. Great. That is aid. I absolutely agree. And I deliberately made the point about South Africa being welfare in the sheets. You know that actually we try and look strong, but we are more of a welfare state than anything else because the entire country's tax base is a well known problem. Right? You have this very, very large group of people who are living off the taxes paid by a very, very small group of people. Now, where did the very, very small group of people get their money from? They get it from employment, they get it from businesses, etc. We operate in a global economy. We send stuff out, we bring stuff in, we attract investment, we are generally seen as a decent global citizen. And if you become a pariah, and I'm definitely not suggesting that that's where South Africa is going, but if you do become a pariah and a state where people just don't want to work with you, stuff dries up. That goes way beyond just, hey, here's some foreign aid, use it for healthcare. Impact investing goes away. Sovereign funds don't invest in you. Agencies that are close to government, companies that are close to government won't trade with you necessarily. The last to go would typically be your sort of third party corporates or the last is probably tourism, actually. I mean, that's really an extreme where people just don't go to your country anymore. We are nowhere near that, obviously. The point I was trying to make is our negotiating position, as you've confirmed, is not as strong as some of the other countries that America has relationships with. So we cannot afford and should not just flippantly say, hey, this is such a small part of the money that comes into South Africa, who cares? You know, just tell them to get lost, just whatever, it doesn't matter. We don't care. Take the U.S. we don't need their money, et cetera, et cetera. That's not how capital flows work. I mean, another great example is it's just one company example. Renogen is looking to pretty much raise everything they need for the helium project in South Africa by going to the nasdaq. That's still the dream. I mean, they've had a lot of wobblies along the way. So will it happen? Won't it happen? Honestly, who knows? But it's definitely not going to work. If we get to a point where America is sanctioning South Africa at an extreme, thankfully we're not there. I don't think we'll get there. I hope we won't get there. But then that's that, right? The show is over from that perspective and that's just one example. So we're not going to get there, I hope, I hope you agree with me, Mo. That would be a very, very sad day. And I don't think we will. But we definitely don't have the strength from a negotiating position. And it's our own fault, unfortunately, it's because of years and years and years of very slow growth and this whole tough economic situation in South Africa, this very strained tax base, all these chickens eventually come home to roosters. And that unfortunately, is the risk we face.
[00:17:12] Speaker B: Yeah, Ghost, I mean, you've put a couple of things there that are worthy of scrutiny. You know, I think it's always very important to, to take a balanced approach to this. And I'm going to disagree with a couple of things. And I'll tell you what, right. I think, first of all, what I agree on is that South Africa's growth is dismal. You know, it's been dismal for the longest time. So if you're an emerging market that's looking for investment, no one's excited about. Even if South Africa got to 2% growth, no one's excited about 2% growth, because you can get more than that in a developed economy. And so if you do your risk reward analysis, South Africa doesn't stack up well. Where South Africa does stack up well is a lot of investors have liked South African government debt because they believe the government's going to pay the debt. It yields pretty high returns, even if adjusted for the currency risk. And that's also because we have a very responsible central bank. So South African capital flows, I think, have largely been skewed towards the debt markets rather than the equity markets or direct investment. Now, where I'm going to push back a little bit is that South Africa is not just dead in the water because there are other global players, right? I mean, the U.S. yes, is a massive source of capital. They're the world's largest capital market. And you don't want to alienate a player like that. But South Africa, being a small, open, emerging market economy, has always had to walk this line between, you know, keeping the west happy and then keeping the east happy as well. That's the delicate line. And it leads to a point. I'm going to point listeners to a post I did on LinkedIn. Go and find me on LinkedIn. Go and find that. But because I actually look at how the US is, in my view, dismantling decades of using their soft power to protect their interests. You know, they project and protect those interests. And I mean, this effectively came about a long time ago. Henry Kissinger, love him or hate him, was the architect of some of this. But what is soft power? Soft power is effectively cultural influence. You know, when people aspire towards the American dream. Soft power is the fact that most global economies use the US dollar as a reserve currency. Soft power is the fact that a lot of contracts, all contracts, material contracts, globally, commodities markets, are all denominated in US dollar. And that soft power, because you don't have to go around with a stick to beat people up to actually do this, it's just the way things are. And that has been, to the US's credit, a very, very strong tool. Now when you actually go and start, one could argue tariffs are also soft power. If used in a less aggressive manner, I would argue the way things are being weaponized right now. And that's tar, that's the US dollar. Remember in the Russia, Ukraine war, the US went and froze a lot of assets and they weaponized the payment systems. That's weaponizing the US dollar. That's not soft power anymore. That's starting to exact hard power. And so that's a change in terms of how the US is actually playing on the global stage now. The counterbalance to this is China. You know, that's obviously the big draw card here. And South Africa. Bring this back to South Africa. South Africa would do well to cultivate relationships with countries other than the United States. If the United States is being belligerent in many views. I'm not saying alienate and C the United States, but South Africa has been doing that relatively well. They've attracted massive investments from China. They've attracted massive investments from the Middle East. And again, remember, that is also a large pool of capital. It's not a developed capital market, but it's a very large pool of capital. And so I don't think it's, you know, the lights go off if South Africa alienates the United States. I think it's a realignment of geopolitical relationships. One could argue that in alienating countries like South Africa, the US effectively plays into China's hands because China just has to sit back, wait, wait for the US to make these mistakes. And then they can step in and say, look, we're your savior. We're going to build up some infrastructure, we're going to invest in your economies. And slowly that starts to change the influence of soft power. You could argue the Chinese are using soft power very effectively in this current era. So that's where I'll push back is I say it's not tickets if the US is actually seen as a belligerent, if South Africa loses some of that because there are other capital pools. But it does have material bearings in terms of South Africa's participation in other global multilateral organizations. That being said, I think a lot of the push is actually coming from the us. I don't think South Africa wants to alienate the us. The push is coming from the us. I don't think South Africa should necessarily cave or fold on a lot of things, but it doesn't have A lot of bargaining room to the extent it can actually supplement the losses that come through from a deteriorating relationship with the us. South Africa, I think would benefit from being, and I'm going to use this term, it's not mine. It was Marco Papak. He's great. He's a geopolitical strategist. He said being geopolitically promiscuous, you know, he was discussing another country. But South Africa would actually benefit by being geopolitically promiscuous because in that instance you look to exact, you know, where you have an advantage or benefit or relationship, you look to offset that against other countries where maybe that is deteriorating.
[00:21:56] Speaker A: Yeah, Marco was great. We should try getting back sometime. Actually. I learned a lot from that show. He was really excellent. And you and I are not actually saying anything different. Mine is just a more short term view, which is to say, you know, don't underestimate the importance of that relationship. Yes. Long term. The whole Global south narrative and brics and is there lots of other money elsewhere? Yes, there is. You know, without a doubt, China at the moment growth has not been what people would like at all. I mean, just look at what's happened to Arselo Mital in South Africa. That's directly because of domestic steel demand in China or lack thereof. So, you know, if you're going to pick a superpower right now, where the growth is really happening is a China. I don't know, maybe, maybe not. But I think the point is that disruption to the South African recovery story is not helpful. And no matter how much we wish it was different, if there is a big blowout with the US and I'm hoping there won't be, but if there is, it's a disruption. It's a disruption to this whole post genuine recovery story. And you can kind of see some of that nervousness, some of that sentiment playing out on the JSE so far this year. You look at stuff like retail stocks, et cetera, and they are sharply down, you know, and that has a genuine impact on wealth creation for all South Africans. Now that's not specifically because of Trump and tariffs or any of that, but it's just understanding that the way sentiment works and the way capital flows has an effect on all of us. So yes, at some point we could replace some of that maybe with capital elsewhere. And you know, we would have to in that situation. It's going to be even more helpful though, if we don't have to.
[00:23:19] Speaker B: Indeed, Ghost. And maybe a final point for me, Ghost, is the argument around BRICS or the Global South. I mean, when Donald Trump commented around BRICS countries and if they form their own currency, you know, we're going to actually levy tariffs against them, that for me was actually almost a unique admission of weakness on behalf of the United States because I don't necessarily think a BRICS currency A is going to happen anytime soon or is a current threat to the United States dollar. But that being said, it does show you that he understands what some of those fracture points are. I mean, let's, let's not fool ourselves. Trump is actually a very smart man. A lot of people might disagree with that comment. But this entire tantrum, if you want to call it that, is basically Trump saying, I've got negotiating power. Let's see what concessions I can exact from other countries. And so the last point I actually want to make is that the only real material pushback you could get against US Hegemony here is if the Global south. And let's include China in that. I think it is including the Global south if countries that are disaffected by this US Behavior coalesce around themselves and they say, look, we know the US Is important, but let us cooperate a lot more. And that's a big if because you've already seen countries, arguably, and I'm going to invert commas here, cave. You know, you've seen Mexico cave, you've seen Canada cave, you've seen Panama cave. And that effectively erodes the probability of this massive coalition of Global south countries pushing back against the U.S. but the important point is that the United States economy is big. It is the world's largest economy. But if you throw China and Europe together, that's actually larger than the United States in totality. And that doesn't even include economies like Canada, which is a G7 economy, or South Africa or Mexico. So the US is not invincible. And again, it's going to actually boil down to how bad does this actually get to get that Global south, or at least a combination or a coalition of other global powers to push back against U.S. dominance. And there's a big question mark against that at this point in time.
[00:25:16] Speaker A: All I want to see, mo to bring this to a close is just for South Africa to just have those few years of decent economic growth so our negotiating power gets better and our ability to actually participate in the global economy is stronger and we are more geopolitically interesting. You know, that's, that's really all I want. And right now, we've had not even a year post elections so long Way to go. Long, long, long way to go. And we shouldn't be cocky about where we are.
[00:25:40] Speaker B: I'm chuckling and laughing because you're not even a year into uninterrupted power. You know they celebrated 300 days of no load shedding at Davos only to give you load shedding back a week later. South Africa is in a position of weakness. It's arguably those are structural and that's got to. Those are things that have to change in South Africa that can only be help by South Africa's relationships with other global powers. So I agree with you. We all want to see South Africa succeed here. But that starts off by doing the right thing domestically. And South Africa has to ask itself some pretty, pretty hard questions around what doing the right thing actually means. I mean, big question marks around the expropriation issue around be no definitive answers because South Africa has to achieve what it needs to achieve socially for its own population. But do that in a global context. Ghost. Unfortunately, that's all we've got time for this week. What do you think as our listeners hit us up on social media? It's at Magic Markets Pod, One word at Finance Ghost and at Muhammad Nala. All on Xor. Go and find us on LinkedIn. Go and find my post on LinkedIn talking about US soft power. Let me know what you think there. Until next week, same time, same place. Thanks and Cheers.
[00:26:47] Speaker A: Ciao. This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
