Different types of financial planning can aid you in achieving discipline over your finances and a layout a concise direction of where you wish to be in your life. In this article, we’ll discuss the four types of the practice and how sacrificing funds to support them will benefit your life now and in the future.
There is never a wrong time to begin with a financial planning strategy that will best suit your needs for your future. Starting as young as possible is always the best option but re-evaluating your financial situation later in life is also a healthy exercise. Having a financial plan assists you in assessing where you are today and where you want to be in the future. The leading financial planners at Efficient Wealth explain five steps to get you started.
For your business, Efficient Wealth’s business-related financial services involve managing your income revenue streams, cash management accounts for debts, assets and liabilities. Business assurance and fiduciary services also ensure that your business can continue even if you are not there anymore. Personal financial services on the other hand involve your financial security and the financial security of your family and loved ones. This could entail everything from expert advice on immediate budgeting adjustments and short-term insurance, to planning for a baby, dread disease and medical cover, retirement planning, and life assurance.
Competent, expert financial services for your personal and business ventures can help you to get a head start on your and your family’s financial well-being. The right time to seek advice on these sometimes-complicated, ever-changing financial decisions is always now. So, whether you are just starting out, re-assessing your liquidity or simply reaching a stage where you would like your money to start working for you, it is time to consider partnering with the trusted financial experts at Efficient Wealth.
If dreaded disease cover is left disregarded and you or a loved one is diagnosed with a serious ailment, it could lead to financial distress or even bankruptcy.
The global economic landscape has been experiencing a tightening cycle for roughly a year, and it is becoming apparent that its effects are both spreading and deepening as disequilibrium becomes more apparent. Recently, we have also experienced that the banking system is likely to be a contributor to the damage being done. The flow of liquidity from cash and credit to assets and spending is critical to the success of economies, and the combination of central banks raising interest rates and draining reserves, coupled with banks experiencing more constrained deposit and capital conditions and tightening credit standards, is likely to constrain the flow of money and credit to markets and economies. This, in turn, is likely to have a detrimental impact on spending and income.
Three major equilibriums and two major policy levers interact to drive markets and economies. The first equilibrium in the rich world is spending and output in line with capacity, which roughly translates into approximately 2% real growth with 2% inflation, a nominal spending growth rate of 4% to 5%, and an average unemployment rate. The second equilibrium is that debt growth must be in line with income growth, meaning credit growth that is not too high or too low, with interest rates that act as neither a major incentive nor disincentive to borrow. The third equilibrium is a normal level of risk premiums in assets relative to cash, meaning that bonds provide an expected return above cash, and equities an expected return above bonds, commensurate with these assets’ risks. The two policy levers are monetary policy and fiscal policy. The economic and market swings that we see reflect the never-ending struggles of the marketplace and of policymakers to achieve equilibrium. In the West, we are far from equilibrium, while in the East, we are closer to it. The closer an economy is to equilibrium, the easier it is to fix problems and the lower market volatility.
In developed economies, high nominal spending, when compared with the ability of an economy to produce more, remains the greatest disruption to equilibrium today. This leads to inflation that is significantly above target, leading to big policy shifts and high market volatility. Despite aggressive policy action, the United States (US), Europe, and the United Kingdom (UK) have not moved much closer to equilibrium. On the margin, the nature of the disequilibrium has shifted from too much inflation to not enough growth, with the risk premiums on assets decreasing relative to cash.
The path from disequilibrium to equilibrium allows for big market swings. When looking at why the economy is in bearish disequilibrium, we see that inflation is too high. Nominal spending, in turn, is too high to bring inflation down and unemployment is too low to bring wages down, and despite nominal growth being too high, the real growth rate is lower than desired. In the end, a weaker real growth rate, that is, an earnings recession of sorts, is required to resolve the other imbalances.
In conclusion, the effects of the recent tightening cycle are spreading and deepening, and the damage to the banking system is a manifestation of this tightening. Markets are in disequilibrium and the high level of nominal spending remains the greatest disruption to equilibrium today. Despite aggressive policy action, the US, Europe, and the UK have not moved much closer to equilibrium. The path from disequilibrium to equilibrium allows for big market swings, which is a frame of reference for longer-term positioning. It is thus crucial for policymakers and market participants to remain vigilant and proactive when managing these risks and when taking steps towards a more stable and sustainable economic environment.
Dr Francois Stofberg
Managing Director: Efficient Private Clients.
To understand why more interest rate increases in South Africa (SA) may not effectively combat inflation, one must first understand the broader economic factors that contribute to higher inflation rates in emerging countries when compared with developed nations. According to research conducted by various institutions, including the International Monetary Fund (2018), the World Bank (2021), Alhassan and Biekpe (2020), and our own studies, weak economic fundamentals, political instability, commodity dependence, exchange rate volatility, and the United States (US) dollar surcharge, are major contributors to relatively higher levels of inflation in these countries.
Despite the South African Reserve Bank’s (SARB’s) status as an independent and healthy institution, the country’s poorly-managed state and lack of fiscal discipline negate many of the benefits that a strong central bank may provide. Political instability further exacerbates the issue. Also, as a commodity-dependent country, SA is susceptible to inflationary pressures when global demand for scarce resources increases. Furthermore, with a volatile currency and a reliance on imports, SA is vulnerable to import inflation.
Typically, exchange rate disparities are driven by inflation differentials between countries and a ‘sentiment’ factor, which represents consumers’, businesses’, and investors’ perceptions of a country. In SA, inflation differentials have accounted for nearly 73% of the difference in the USD/ZAR exchange rate since 1980, with sentiment contributing to the remaining 27%. However, sentiment can be volatile in the short term, resulting in exchange rate fluctuations. For example, negative long-term sentiment towards emerging markets, particularly SA, most likely caused the rand to depreciate by 7.75% and 16.42% in 2021 and 2022, respectively, despite having lower inflation rates than the US.
Developed and competitive countries, such as the US, Japan, German, and Switzerland, typically have strong exchange rates owing to lower inflation rates and supportive sentiment, which attract short-term capital for investment in their financial markets. In contrast, countries that are competitive but not developed, such as China, India, Malaysia, and Mexico, may have strong exchange rates in the short term owing to supportive sentiment but weaker rates in the long term owing to higher inflation rates. These countries often attract long-term capital in periods of positive sentiment where the return on investment can more than make up for an underperforming currency in the long term. The SARB’s attempt to attract either short- or long-term capital and support the exchange rate, and thereby inflation, is, therefore, rather futile. Higher real interest rates in SA have been largely ineffective in supporting the rand. Since 2008, while the SARB persistently kept real interest rates higher than those in the US, the rand depreciated more than 125% from R8/$1 to more than R18/$1 in 2023. It even depreciated more than the 96% average depreciation of counterparts such as Brazil, Russia, India, China, Indonesia, and Malaysia, among others. The only ones who have benefitted from higher positive rates in SA are the handful of households with more assets than liabilities.
Finally, there is the US dollar surcharge, whereby the US uses their reserve currency status and their ability to generate excessive demand for globally-traded goods and commodities by using tools such as record-low interest rates, quantitative easing, and large stimulus checks to drive up prices. When inflation eventually occurs in the US, the Federal Reserve will increase interest rates, causing the dollar to appreciate significantly, thus exerting inflationary pressure on emerging countries owing to their declining buying power.
For these reasons, we have consistently cautioned against the rate and the size of the SARB’s interest rate increases. In the past, this blunt tool might have been sufficient to address inflation. But today, where broader economic factors contribute to relatively higher inflation, it is more likely to be ineffective and places an unnecessary burden on a country that is already under severe strain. We agree that price stability is important for a healthy, growing economy, but we believe that the SARB has lost touch with the citizens they serve. Slightly higher inflation with lower interest rates would be easier for most families to stomach.
Dr Francois Stofberg
Managing Director: Efficient Private Clients.
Welcome to the world of banking crises, where there is a consistent flow of money and the stability of a shaky Jenga tower! Here, banks can go from being the pillars of the economy to crumbling ruins faster than you can say “subprime mortgage”. So, grab your wallets and hold on tight as we unpack the events that unfolded in March.
Banking crises have a long history, with notable events including the Great Depression in the 1930s, Latin America in the 1980s, Japan and South-East Asia in the 1990s, and, of course, the Global Financial Crisis (GFC) in 2008. These financial fiascos have been like a bad penny over the years that will just not go away. They have been caused by a range of factors, including inflation, unhealthy monetary policy, poor banking practices, and a lack of regulation, to name but a few. They have led to significant economic downturns, widespread unemployment, and poverty, but have also led to reforms and changes in the banking industry to prevent future crises. Despite previous efforts to increase oversight, the current banking fiasco, once again, highlights the need for ongoing vigilance in the financial sector.
The most recent events started with the startup-focussed lender, Silicon Valley Bank (SVB) Financial Group, previously the sixteenth largest bank in the United States (US), which became the largest bank to fail since the GFC in 2008. The reason for the recent collapse was owing to the US Federal Reserve’s (Fed’s) aggressive interest rate hikes over the last year, which crippled financial conditions in the startup environment in which SVB was a notable player. Unfortunately, other banks, such as Signature and Silvergate, followed suit as a potential bank run threatened the stability of the overall banking system. Financial markets initially contracted by 4% but, by the end of the month, when the dust had settled, markets made up more than the initial loss.
Investors may be excused for mistaking the SVB banking fiasco for the Lehman Brothers and the GFC. But even though there are similarities, there are also substantial differences. For one, the GFC was triggered by a combination of a housing bubble, subprime mortgages, a lack of regulation, and oversight problems. In contrast, the current fiasco has been caused primarily by the COVID-19 pandemic, the associated economic downturn, and the structural shift in monetary policy. Furthermore, there is the severity of the impact to consider. The GFC was a global event that led to a significant downturn in the global economy. The current fiasco, while serious, has been largely limited to the US. It has also been well contained by the US Fed, US Treasury, and the Federal Deposit Insurance Corporation, who have offered to provide support where needed. Hence, the recovery and optimism in stock markets.
Locally, despite the impact of load shedding, downgrades, and our recent greylisting, South African banks have been able to weather the ongoing global sell-off extremely well as they were already well capitalised with high levels of liquidity. Additionally, South African banks have some of the best reputations among global banks. In fact, First National Bank was recently awarded the strongest banking brand in the world, closely followed by Capitec Bank. Overall, there are risks and challenges, but the South African banking system is strong and well regulated.
It is because of reasons like these that we continue to favour South African and emerging market equities, especially at a time when developed markets appear shaky. Emerging markets are only now starting their growth engines.
Dr Francois Stofberg
Managing Director: Efficient Private Clients.
South Africa (SA) is in a peculiar place. For the first time, in a long time, the ruling party might not remain in power. Since the African National Congress came into power in 1994 many South Africans have started to question the party and their policies. Very few, if any, of the promises that were made almost three decades ago, have come to fruition. Weak, unaccountable leaders have left millions of South Africans wanting and there is simply no more room for excuses. Unfortunately, the prevailing economic policies that have taken root in our politics are insufficient. Although these policies were necessary for social upliftment, they have proven to be insufficient for economic upliftment, that is for long-term sustainable economic growth and job creation.
To create a growth environment where income rises rapidly, and unemployment falls at a similar pace, centralising power can help, although too much of it can lead to more corruption and state capture. But centralising power can only work if it is paired with right-leaning economic policies that create wealth. These policies include effective spending on infrastructure, education, and healthcare, and making it as easy as possible to do business in a country. Ease of doing business includes allowing citizens to contract freely with one another without hindrance or interference, making it easy to hire and fire employees, but also making it easy to start, finance, and sustain businesses. China, and possibly even Saudi Arabia, proved this. But when centralising power is paired with left-leaning social policies that focus more on wealth redistribution, governments fall short. SA has proven this time and again. What we have been left with is a country where citizens are socially free but economically imprisoned. We can vote, but half the population lives in poverty.
It is, however, important to understand that redistributive policies are not necessarily less effective, their outcomes are just vastly different from wealth-creative policies. Right-leaning, wealth-creative economic policies lead to economic freedom (high income and low unemployment), whereas left-leaning, redistributive policies lead to social freedom. Wealth-creative economic policies are the only policies that have been proven to generate a return on investment that is greater than their cost because their rate of return is higher. A good example is effective spending on primary and secondary education. What this does is that it rapidly increases the productivity in a country, this not only fills the skills shortage and makes employees more employable, but also gives citizens the basic tools they need to start their own businesses. Redistributive social policies can help to bring social equality, but because they often do not allocate resources effectively, their rate of return is too low to cover their cost, which ends up reducing the potential and relative size of an economy. This is one of the main reasons why we have record-high levels of unemployment. A simple example: Black economic empowerment (BEE) was effective in allowing more social development and inclusion. But because BEE allowed many candidates to receive jobs they might not have been the best, most productive fit for, inefficiencies entered and reduced the overall potential and size of the economy in the long term. BEE should have been a short-term solution that would later have been substituted with effective government spending, support, and the execution of education.
The answer, however, is not in either/or, but in both/and, because focussing too much on either wealth-creative or redistributive policies cannot lead to a sustainable outcome. Similarly, the answer is not in government, but in public-private relationships. No political party has the proven track record of most corporations in SA, therefore, it is a shame that government has been unwilling to learn more from them. United we stand, divided we fall.
Dr Francois Stofberg
Managing Director: Efficient Private Clients, with Specialist Input From Renier Van Zyl
Ray Dalio, a billionaire hedge fund manager, once described politicians who continuously raise the debt ceiling in the United States (US) as “a bunch of alcoholics who write laws to enforce drinking limits”. And to no one’s surprise, the US has, once again, reached the point where they need to increase the debt ceiling.
In January, the US hit its $31.4 trillion debt ceiling and, essentially, set itself up for D-Day (Default Day) a few months later. Janet Yellen, Head of the US Treasury, had to inform House Speaker, Kevin McCarthy, that Treasury was taking measures to ensure that government will be able to keep on paying its bills. Over the next three months, McCarthy will have the near-impossible task of uniting two deeply divided parties, especially in terms of who is to blame for the current debt crisis. What is certain is that, with the looming 2024 elections, neither of the parties will let the other off the hook.
But how did the US get to this point? The US’ national debt has been growing for decades, owing to wars, economic downturns, and major policy initiatives. Two significant periods of debt growth occurred between 1940 and 1950, and between 1980 and 1990, when the US borrowed heavily to finance its war efforts and to support the economy. However, the most significant increase in US debt occurred after 2000, primarily owing to the Global Financial Crisis and the COVID-19 pandemic. During this period, low interest rates and government’s belief that they could pay back the debt later encouraged increased spending, which far exceeded their income. In fact, 2001 was the last time that the US government’s revenue exceeded its spending.
It seems an easy solution to continuously raise the debt ceiling without any repercussions but there is a point where it becomes more difficult, owing to higher interest rates. For example, this year the interest payment on US debt is estimated to total $395.5 billion, which is more than government will spend on primary and secondary education. Once the debt limit is reached, Treasury cannot sell any more bonds or securities to pay off the debt from previous deficits, which will result in a default of some sort. A default would severely damage the US government’s credit rating and erode confidence in the US bond market. This, in turn, will cause investors to panic-sell, which can lead to a financial crisis. However, it is important to note that the US has never defaulted on their debt before, and we doubt it will happen soon.
There are steps that the US government can take to avoid defaulting on its debt. Democrats and Republicans can agree to raise the debt ceiling again. Additionally, government can use some of the funds in its Exchange Stabilisation Fund to pay down its debt and it can even reduce some of its wasteful spending. Furthermore, government could consider increasing revenue through tax reforms, such as increasing taxes on high-income earners. Overall, a combination of responsible spending and tax reform can help the US government to avoid a default and to maintain its financial stability.
Even though the US government’s debt levels are a symptom of a bigger problem, it will need to take significant actions to address this problem to avert a fallout in the short term that can shake the entire global financial system. What is certain is that the US will almost certainly raise the debt ceiling again in the future, which will simply result in the debt bomb being kicked further down the road.
Dr Francois Stofberg
Managing Director: Efficient Private Clients
Research by the world’s largest financial institutions seems to support our view that the monetary policy tightening cycle in the United States (US) is approaching its third stage, an economic downturn. We have been expecting this for quite some time and have made the necessary changes to our investment strategies. Usually, when the US sneezes, the rest of the world catches a cold but, in today’s context, an economic downturn in the US will provide the necessary relief to many emerging markets and their currencies. Investors can, therefore, expect a persistently strong equity market in South Africa (SA) and a much stronger rand over the next 12 to 18 months.
The first stage of the monetary policy tightening cycle in the US occurred when markets recognised that the helicopter money provided by the US government produced a spending and inflation overshoot. Markets, consequently, started to price in the upcoming tightening cycle and central banks followed suit with rapid interest rate increases. The second stage occurred as tightening progressed, inflation peaked, and soon started to decline whilst the US economy avoided a more substantial economic contraction. Markets started to price in a soft landing, inflation would be back at 2% within months, and the US Federal Reserve would be able to start cutting interest rates. But, given the current conditions and cause-and-effect relationships, we will, most likely, not see the soft landing that markets have priced in, but an economic downturn; let us not scare everyone and call it what it is, a contraction or a recession.
To get US inflation back down to 2%, wage growth rates need to be cut in half, from their current levels of around 5% to 2.5%. But, for this to happen, household spending must be cut in half, from its persistent levels of around 7% to 3.5%. For this to happen, unemployment needs to be increased by at least 2%. But, to increase unemployment, nominal gross domestic product growth needs to be driven materially below wage growth rates and profit margins need to be compressed enough to produce a 20% decline in earnings. For now, however, the strong labour market is keeping nominal spending too high to slow wages down, which is keeping household incomes too high, which, in turn, is keeping earnings too high. For this reason, a third stage in the tightening cycle, where interest rates remain high or even higher, is more likely. Persistently higher interest rates can then continue to cut into spending and earnings. The funding that companies receive from profits and credit has already started to turn negative, which will eventually cause them to stop hiring. This is an initial indication that we are close to the suggested downturn.
Another favourite indicator used to signal an economic downturn in the US is the diffusion index. This index tracks the divergence of spending on goods versus spending on services. Since 1960, in each of the six prior cases where the diffusion index was negative, there was a contraction in economic growth. Currently, nominal spending on services has grown at a rapid annualised rate of about 6%, whereas real and nominal demand for goods has been on a gradual decline. As a result, the diffusion index has turned negative for the seventh time since 1960. Because spending on services puts upward pressure on employment and wages, inflation will finally be tamed once the contraction does occur and spending is reduced sufficiently.
