raymondparson

Simon Brown

I’ve got Warwick Lucas, private client portfolio manager at Vunani and also Professor Raymond Parsons. from the Northwest University Business School and the University of the Western Cape. I want to delve right into it: Fed chair Kevin Warsh at the Jackson Hole meeting today. Warsh is saying that he doesn’t like to talk too much. He wants to let the market forces make the interest rate decisions. What do we think we will hear? Anything of substance, Raymond?

Raymond Parsons

Hi Simon. Up until now – from both the Treasury Secretary Bessent and the Chairman of the Fed Warsh – we’ve so far seen more ‘signals’ than substance. But you’re quite right to say that the keynote speech he’s going to be giving today at the big central bank gathering at Jackson Hole, Wyoming, is going to be an important one. He’s going to have to come out of his shell because so much has happened in the last few weeks.

And when you look at what Treasury Secretary Bessent in the US is trying to do to reduce bond yields, we must realise there are now questions about institutional credibility in US monetary policy, on the latest US inflation outlook, and of course, about the record national debt there. So that’s why what Warsh is going to say at Jackson Hole today as a central banker becomes very important. And we’ve got to see it also in its global context, because financial markets will be watching very carefully to assess to what extent Warsh shows his hand today.

We therefore also need to look at the global picture. It seems the biggest global risks at the moment are really an interaction between several factors: a combination of the Iran conflict, we’ve got the sanctions scenario, the energy prices, and now we’ve got bond yields story. None of these is going to be the sole determinant of outcomes. What Warsh has to do today is nonetheless to give us a view on how he sees his mandate and the way ahead for the Fed’s role within the broader context.

Simon Brown

I get that. Warwick, if I can bring you in. Can central bankers really communicate less? And I’m reminded of Alan Greenspan, who said, you know, famously, ‘if you understood me, I misspoke’. Do we need central bankers, or can they go into the background? Do we need their views, and do they need to talk more? How do you view it as a money manager?

Warwick Lucas

So, Warsh has to strike a bit of a difficult balance here. He wants to communicate less as a Fed chair, because he thinks central bankers eventually wound up, whether by accident or design, ‘over-training’ markets to expect constant ‘hand-holding’ by the Fed. But that doesn’t mean that the opinion of the Fed chairman isn’t important to markets – I think it is. So, the markets need some reaction function. I mean, he doesn’t have to say what he will do, but he should say what would make the Fed hike, hold, or eventually cut rates.

He also needs to maintain his independence, as the Fed operates in a very politically charged environment. Including one where you now have Treasury mucking around in the bond market, which frankly is Fed territory. And he must explain the parameters of ‘less guidance’ and what that means. Less forward guidance can restore some healthy uncertainty, but you know: uncertainty isn’t the same as confusion. If there is too much confusion out there it creates a bond market ‘risk premium’, and that is not a desirable outcome. So, Warsh needs to clarify what his reset is.

Simon Brown

And I like that: uncertainty isn’t confusion. That’s a great point. Raymond, if I can bring you back in. We did have Treasury Secretary Bessent saying that he was going increase purchases of long-dated US bonds, the ten and thirty-year. This is trying to bring US borrowing costs down. This is typically being a Fed position, rather than a Treasury Secretary position. It blurs the lines between important distinctions that, in ‘South Africa’s speak’, would be a central bank and a finance minister respective role.

Raymond Parsons

Simon, that’s an important point. And it is a significant challenge that someone like Kevin Warsh faces today to clarify his mandate. It’s not that he has a passive Treasury in the background and he therefore sets the pace on how the Fed sees inflation, interest rates and the US economy. He’s indeed now got a Treasury Secretary who is taking a different path altogether on interest rates. And so, the chances are high that there could be a clash emerging and a blurring here of what are their respective roles. So this is the additional element to his challenge at Jackson Hole later today.

Over and above the purely technical economic factors, he’s therefore now got to find a way to navigate his message against the background of a US Treasury that is intent on bringing down interest rates. In contrast, the debate in the Minutes of the last Fed meeting was whether or not they should increase interest rates. By 9 – 3 vote it was decided to again go for a pause for now. So, I think the important point here is he’s got a bigger challenge in defining what he sees as his ‘message’, the US inflation outlook and what the Fed’s role will be leading up to their next meeting in September.

Simon Brown

And to bring you in here, Warwick. So on interest rates, you know, economics 101 – high rates are bad for an economy and that’s why we raise rates to slow an economy down. Yet, notwithstanding, we’ve seen US inflation, what, for five years above the Fed’s target? The higher rates may come that no one’s particularly liking. Yet the US economy is strong – we’ve got consumer spending positive so far, and the last earnings season was an absolute knockout.

Warwick Lucas

Yes, the US is actually going through massive private-sector stimulus here. So, the kind of political involvement here, for example, with Bessent passing comments that the Fed is too concerned about inflation, breaks a longstanding precedent of not commenting on monetary policy. But the government’s purchase of bonds is a bit concerning because, realistically speaking, the Treasury can’t sustain it. When the US is forty trillion dollars in debt, you can’t keep that kind of lockup.

So that’s the issue here. Can Washington tolerate the true market price of its borrowings? And that, of course, is another question. But what it does show is that national debt is now starting to dictate policy. The US has got enormous advantages: the dollar, deep capital markets, reserve currency status. But this is not – I won’t say it’s a fiscal crisis – but it’s a warning. US debt is no longer just background scenery.

Simon Brown

Yes, I’d take that a hundred percent. Raymond, if I can bring you back in and bring it back home. We saw good tourism data out – seventeen percent up in July compared with June. I’m reminded of Spain, where tourism is a huge part of their economy. Could tourism become a ‘fast track’ to job creation and, therefore, growth in our economy?

Raymond Parsons

Allow me to first say something else positive, before I talk about growth and the need for growth-friendly policies, especially on the tourism front. It’s about the inflation outlook in South Africa. We’ve had better news with the lower-than-expected CPI last month, as well also better news now with the lower factory gate inflation. So I’m more optimistic on the inflation outlook for the rest of 2026 if present trends continue, and which is relevant to future growth. Of course, given the time lags, fuel prices will still go up next week. Still, if we look into the medium term, barring global shocks, we can hope to wind down inflation by the end of the year, to keep interest rates on pause for now, and maybe resume the interest rate cutting cycle in due course.

But on the growth front, an important recent development was Phase 3 of the government-business partnership arrangement. Among the sectors singled out was the clear emphasis on tourism. And in particular that is a labor-intensive growth potential sector. What we need to do is exploit the underestimated potential that this country does indeed have. And because of that, we need to show that whatever regulations or obstacles may be inhibiting tourism reaching its full potential in South Africa will be addressed.

It’s a key sector we need to go for. It also helps smaller businesses because they now have the opportunity to get involved in the accessible tourism sector. So it’s a very important pillar in which to build future job-rich economic growth. But the important general issue, whether it’s tourism or the other sectors that have growth potential, is to see a ‘step change’ in effectively implementing the reforms needed that create the favourable business and economic environment,

Simon Brown

And that, Warwick, means it’s got direct relevance for investors, for folks such as yourself who run portfolios, because we have hotel groups, we have car hire companies in our market. If tourism goes, it’s great for the bigger economy. It also creates investment opportunities for portfolio managers, private clients, and the like?

Warwick Lucas

It’s very wide. As Raymond pointed out, it’s labour intensive, and in addition, it’s geographically widespread. It can absorb a wider range of skills than industries such as mining, finance, or manufacturing, and it has a much lower cost per job to implement. And also it’s relatively easy for business to implement. So it’s the kind of industry where you can get a decent ‘rollout’. Moreover, if you’re going take a 30-year view on what’s going happen – well, we can see that electrical vehicles worldwide will come to predominate, and net result is that fuel costs will actually stay quite stable.

And ‘baby boomers’ and others will have lots of tourist spare cash. They’ll fly all over the place. If you have a good tourism offering, you can have a decent economic run out of it. You know, our last 30-year strategy was the vehicle industry, and it’s really been a total dud. And finally, tourism jobs are actually what you call decent employment. The main thing is, let’s not tie them up with red tape. Let’s actually make it easy to get in business, easy for tourists to come in – at least that’s been sorted out with Home Affairs and visas. But for we need to fix many things – such as fix the water, deal with crime, municipal cleanliness, et cetera, et cetera. But tourism could actually rescue this economy.

Simon Brown

Raymond, that’s part of it. We have the beauty. From Cape Town to Kruger Park – few places in the world are better. There is a lot that we need to do as a country and as a government, as Warwick was saying, to make this work, to really, you know, make tourists feel safe, make them feel welcome, and as he said, to step out of the way and let industry do what it does best.

Raymond Parsons

Yes, absolutely. We must accept that our tourism potential is, in some ways, still ‘among the best-kept secrets in the world’ And we’ve got to unlock it now and show what our potential is – and that it can make a major contribution to the job-rich growth that we are now searching for on several fronts.

Simon Brown

Yes, and because we want and we need growth with jobs. We have a huge unemployment crisis, and frankly, we have a GDP crisis as well. We’ll leave it there. That’s Warwick Lucas. You can find him, of course, as the private clients portfolio manager at Vunani. and Professor Raymond Parsons is at Northwest University Business School and at the University of the Western Cape