You can also listen to this podcast on iono.fm here.
CIARAN RYAN: Donald Trump is poised to make his return to the White House in January for a second term as US president. Will he promptly begin implementing his promises to boost job growth in the US? What consequences might this have for South Africa, particularly with rising tariffs from key trade partners? Numerous uncertainties are casting shadows over the economic horizon as we approach the new year.
To explore these developments with us, we have Adriaan Pask, the chief investment officer at PSG Wealth, here to discuss what we can expect as we transition from 2024 into the unpredictable year of 2025.
Hi Adriaan, thank you for joining us once again. Please share your perspective on the US economy and the pivotal outlook for 2025.
ADRIAAN PASK: Hello Ciaran, and greetings to all our listeners. This subject is intriguing, as there exists a notable contrast between the widespread optimism and some of the data we are currently analyzing.
Overall, there is a predominantly positive forecast driven by economic expansion, manageable inflation, and stable unemployment rates. Yet many find it tough to identify causes for pessimism.
This viewpoint seems to resonate among global investors. While various emerging and developed markets are facing challenges, the US appears to stand out positively.
However, if we dig deeper into additional data and dissect the statistics, we uncover troubling indicators that could begin to influence 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 have been slow in terms of real-world impact, mainly because mortgage adjustments only occur when a property is sold and a new mortgage is taken out. Therefore, interim interest rate hikes have a minimal immediate effect since homeowners are tied to their original mortgage rates.
As more individuals transition to new properties, they’ll encounter higher mortgage rates; however, this is a gradual process since moving isn’t a frequent event. Meanwhile, other types of debt are increasing at a quicker pace. Non-mortgage consumer debt is actually on course to exceed the interest costs of mortgages, which currently hover at around $600 billion for both categories.
This trend is largely driven by escalating credit card debt, which has soared to about $1.5 trillion in the US—a remarkable 50% rise since 2021.
The interest rates on credit cards correlate with the Federal Reserve’s rates, and as these have increased, so too have the consumers’ interest payments, reaching levels unseen in decades. This growing burden of debt is becoming increasingly concerning.
At the same time, the consumer savings rate has significantly dropped, halved from its historical average of about 8% to roughly 4% at present. This drop suggests that consumers are under pressure and increasingly dependent on credit.
It’s important to note that these mortgage rates will inevitably come into effect as well.
A crucial question arises: why have interest rates had such a lagged effect on the US economy?
Interest rates began climbing in late 2021, ramping up in 2022, yet economic activity has continued, which contradicts standard economic theory.
This delay, in my opinion, is primarily due to the over $2 trillion in excess savings that accumulated during the pandemic, which has mitigated the economic repercussions of rising rates. However, that savings buffer is now diminishing, and consumers are starting to feel the pressure.
Additionally, wage growth is now falling behind the unemployment rate for the first time since COVID, adding another layer of complexity.
These consumer metrics are vital, as they represent approximately 70% of US GDP. If consumers are under strain or if any issues surface, it’s an essential detail that we must consider.
Interestingly, corporate trends reveal similar worries. Corporate bankruptcies have surged since 2022, with quarterly filings doubling from around 12,000 to about 24,000. Furthermore, nearly 50% of corporate debt will mature in the next three years, which will need refinancing at rates 2.5% to 3.5% higher than just two years ago, affecting profit margins similarly to how increasing funding costs are impacting consumers.
On the governmental side, it’s well known that we are dealing with twin deficits: a debt-to-GDP ratio soaring past 100% and net interest expenses surpassing $1 trillion. This is beginning to put strain on government finances and its ability to invest significantly.
In South Africa, there’s frequent criticism regarding government spending on personnel and associated financing costs, which take up a large share of our revenues, leaving scant resources for investments.
However, the situation in the US is not entirely different. Social security and Medicare expenditures consume nearly 50% of total revenues, while defense takes up another 14%. It’s crucial to recognize that a substantial part of tax revenue comes from consumers rather than corporations, creating a somewhat healthier perspective in some ways, yet corporate tax contributions still only account for about 8% of overall revenue.
Therefore, if we scrutinize these metrics, it becomes clear that the narrative may diverge from the current prevailing sentiment. Understanding these aspects will be vital as we approach the new year, and we might encounter intriguing challenges.
CIARAN RYAN: That’s fascinating. What about the US political situation and its broader implications for the world with Trump’s return to the presidency? He has employed a very assertive approach regarding foreign policy and trade. What concrete actions do you anticipate upon his return to office?
ADRIAAN PASK: I think the prior term from 2016 offers significant insights. I don’t believe he has changed much.
We can likely expect substantial turbulence and numerous direct, sometimes contentious remarks, which will fuel volatility.
It’s clear that there is awareness of the pressures surrounding the US fiscal situation; efforts will likely center on alleviating consumer challenges and addressing the financial health of the US.
China has notably encroached upon US interests from multiple angles. Thus, I anticipate increased pressure on China, which could result in heightened tensions, potentially leading to unforeseen developments in our analyses.
While it’s debatable that escalating pressure on China might have negative repercussions, it could also compel China to stimulate its economy, a choice they may find increasingly out of their control, which could ultimately benefit emerging markets—an unconventional perspective, yet one we consider in our planning.
Regardless, we should expect aggressive trade negotiations aimed at bolstering the US stance.
The new president is a seasoned negotiator, likely to leverage his position to accomplish goals in alignment with our expectations.
Regarding tariffs, the implications for inflation are significant. Although inflation appears to be stabilizing, these dynamic economic variables can swiftly transform the landscape.
Some policies may indeed drive inflation, as advocating for onshoring to lessen dependency on foreign products means concentrating on domestic resources rather than seeking cost-effective solutions abroad. This shift naturally contributes to inflation from current price levels.
Taxation policies are another key topic. It seems Trump has ambitions regarding this domain that were left unmet during his previous term, and although he may lack substantial flexibility in terms of income reductions due to US fiscal constraints, I reckon he might pursue these goals regardless, which could have painful long-term ramifications if it doesn’t stimulate growth.
Deregulation is another factor we must consider. Generally, I perceive it as positive for business dynamism and expansion, albeit with inherent risks. While some regulations may hinder over-regulated sectors, others are essential for maintaining appropriate conduct among market participants.
Finding the optimal balance between advantageous and detrimental regulations will be vital, and it remains to be seen how the new administration will interpret this.
Finally, immigration will be a focal point, with public expectations at the forefront, and multiple promises having been made. I do worry, however, that Trump’s previous presidency was marked by disruptions that culminated in surprising events on Capitol Hill, highlighting the potential for unrest in a nation once viewed as the epitome of civility among developed countries. The current political climate appears unprepared for such occurrences.
We ought to closely monitor social tensions, as these could exacerbate existing challenges.
CIARAN RYAN: Finally, Adriaan, how will all of this influence the markets? We’ve already witnessed some anticipatory movements, with markets reacting positively to Trump’s expected return as a sign of potential profitability. Will this trend continue?
ADRIAAN PASK: We’ve noticed intriguing patterns; for instance, Bitcoin has demonstrated remarkable performance. Companies linked to Trump, such as his media venture and Tesla, have also shown positive trends. However, the speed of these changes raises questions about their justification given the limited evidence supporting such shifts.
This market behavior likely reflects a broader wave of speculation prevalent within the US markets.
The best historical reference point might still be 2016, which was characterized by extreme volatility driven by provocative statements across the political spectrum—leading to significant market fluctuations. It was a particularly challenging time for analysts attempting to make sense of Trump’s often counterproductive claims.
Concerning China, as previously mentioned, there could be a paradoxically positive change emerging from the tensions.
The key consideration now is that nearly nine years later, valuations have markedly increased from 2016. When valuations become overly stretched, they become sensitive to potential adverse developments.
Accordingly, I expect heightened volatility. Should negative news arise regarding the economy, markets might respond sharply.
We recommend that now is an opportune time to investigate investments beyond US borders. There are excellent global companies that present valuable prospects, and diversifying away from the US could be wise. Although this may require patience, the fundamentals and data support our perspective.
CIARAN RYAN: Let’s conclude here. 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.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.
