The calm before the storm. The eye of the hurricane. Uncertainty and silence have long been understood to not only be opposites, but intrinsically linked.
As the words form on the page, there is little that is certain in the world. While the major news networks have called the election for Joe Biden, there are already calls for recounts and court challenges. Looking at the shambles of the final polling, in what was described by pundits from the left and the right as the most existential election in the last 100 years, it is truly shocking. With more and better data than ever before and the most sophisticated methods, this state of affairs leaves one disheartened. What was supposed to be a blue wave passed with both sound and fury, but resulted in barely a ripple. The current state of the US elections left us no more certain about our future than a week ago – especially given that it is likely that the US Senate will remain in Republican hands.
Yet uncertainty and vulnerability can focus the mind, stripping away the illusion that we have more than the slightest insight into what the future may hold, focusing our thoughts on what can be predicted with any degree of certainty.
Everywhere we look, we see rising debt. Governments, corporates and households have all been indulging. For those lucky enough to be in the US, Japan, Germany or other zero rate countries, this has not been too much of a burden, as continuously falling yields have softened the cost of interest. For corporates, this was further reinforced by central bank support, leading to a historically low cost of debt for everyone involved. Yet we know that once you are in this space, it is very hard to leave. Even the smallest rise in rates can lead to a doubling of the cost of debt, leading to unsustainable government finances and failing companies. So, we sit with the inefficient allocation of government finances and the continual survival of zombie companies*. The logical result is lower growth.
We know that higher government debt levels (75%-100%) lead to lower growth for the countries involved – and that the higher this debt becomes, the more drastic the effect. We also know that each additional rand or dollar spent by the government has a slightly lesser effect on gross domestic product (GDP) growth compared to the previous one.
We know that demographics determine destiny and that much of what is currently described as the West and central Asia is in demographic decline. Once again, lower growth and lower inflation result.
It is hard to see our world rebounding into high growth and high returns. Inflation and growth everywhere are likely to remain subdued, and South Africa will be no exception. Our consumer price index (CPI) numbers are likely to hover around 3% for the rest of the year. In this world, earning 5%-9% on income funds may be much more certain than aiming for double digit numbers in other assets and both falling short, while facing volatility.
If this election has taught us anything, it is that certainty is illusive, and it should be valued.