Debt

Gold and Equities

I have been asked to explain two elements of the previous blog.

  1. Why did I take a negative view of Gold last year and warn in January this year that it will test $1,000 before it sees $2,000
  2. Why did I state that QE includes buying Equities.

Gold (chart in Sterling). Firstly, lets not forget that it is just a lump of metal, shiny I grant you but never the less nothing more. Three main features stand out in the above chart. Central Banks are now net buyers, Investors have raised participation greatly and last but by no means least, Jewelry demand has fallen. In January I highlighted a visit to a local jeweler who informed me that he now takes in more gold for smelting and pawn than he sells new. This finally made me take a more negative stance. I reasoned that supply is no longer mine production but also the selling of old gold was supplying to no small extent a large proportion of jewelry demand. The higher the Gold price went jewelry demand waned. Clearly, in these austere times Gold above $1800 was having a very negative impact. Investors in a metal which unlike a company, pay no dividend, will not invent a new technology nor be subject to a hostile takeover bid, need to have positive momentum to maintain optimism. Clearly, as was seen in the recent collapse, the bubble has burst. I am beginning to think this move in Gold may be replicated in other commodities. My guess is Oil is ripe for a major downward shift. Perhaps to $60. This would have some huge implications for stocks and Governments. More of that in a later blog.

Equities. I included Equities in the classification of assets being purchased under the umbrella of QE. A recent study highlighted that many Central Banks have started buying equities because bond yields have been driven so low by QE that they can no longer find sufficient return. Out of the three big QE countries USA, UK and Japan, only the latter is buying equities. However, the huge scale of QE by the three has indirectly driven others to the equity table. That worries me. If you look at the Gold chart again, can you see something about Central Banks investment timing? At the lower levels of Gold they were net sellers and at its peak they were net buyers. What worries me more is that Jim O`Neill (or lucky Jim as I first referred to him in BRICs and Steel) has given the go ahead by stating

“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it?”  “To help their future returns for their citizens, why would they not invest in equity?”

Well Jim, the main reason that the Bank of England was known as the lender of last resort was because it had reserves in the most liquid format. To suggest otherwise just turns them into state investment trusts. Remember, in equities,  we are talking about a finite investment. If Central Banks invest on mass, equities will be driven (higher)  to levels where the yield will be not much more than that of bonds. QE is clearly giving supposedly sound individuals some absurd ideas.

 

 

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Quantitative Easing (QE)

What is QE?

Printing or creating vast quantities of paper or electronic money by supposedly intelligent people (Central Bankers) on behalf of the population of a country to

Allow Compliment Condone Encourage supposedly intelligent people (Politicians) to borrow and spend vast sums of money on behalf of the population of a country.

Q: What has been done with the QE proceeds?

A: Buy Assets

Q: What Assets?

A: Firstly Government Bonds, then lesser quality bonds and fixed income securities…and now Equities.

Q: What is the impact on these assets?

A: Given they all have, to varying degrees, a finite supply, they have all gained substantially in value, driving interest rates and future returns on investment much lower.

Q: Who has benefited from QE?

A: Generally the wealthiest 10% of society who tend to have savings ex pension in these assets

Q: Who suffers?

A: Generally speaking, the poor and the majority of pensioners who have little more than the basic defined contribution pensions.

Q:Why them?

A: The excess of cheap money is primarily channeled into balance sheet repair for banks and low cost speculation investment in commodities etc which has kept inflation stubbornly high whilst annuity rates have imploded with lower bond yields.

Q: Why has demand not rocketed with the record low interest rates that have resulted in QE?

A: Since the 1960`s politicians have used the magic wand of increased debt to buy their way out of economic downturns (see Economic Seismic Shift)  but debt, both private and public in most major economies is past being able to grow as before. Additionally, commodity inflation has lead to a fall in disposable incomes.

The long term implications are as yet unknown but a quick reflection on what forms an asset valuation. When assets are exchanged in a trade, an assumption is made by both parties about the current and future value of those assets. For instance, when the Native Indians sold Manhattan in 1626 to the Dutch both parties were happy with the trade. Of course the shiny trinkets given to the Indians indicate just how badly valuations of assets can be perceived in the future. History might be as equally harsh when it looks back on QE. Asset valuation is based on two important factors. Supply and Demand. Look at the difference in valuation of a Van Gogh masterpiece and a Zimbabwe 100 trillion dollar note. Whilst masterpieces of this quality have a very finite supply, awful political and economic policy of the Zimbabwe government lead to a supply of untold magnitude. Sound familiar?

Currently, the levels of debt being amassed by some (most) developed economies are approaching a point of no return. Of course some lesser countries have already cir cum to reality. The debt has been grown in the compost of progress and society. It was thought to have been used to build a better life for today and tomorrow. Whilst it has to be said life for many has been greatly improved that cant be said for all. Whats more, it has only improved life for the yesterday and today. The tomorrow has been totally forgotten. Sadly, vast political and government empires have flourished.

I am firmly in the camp that believes we must face our demons and cut government spending drastically. Yes this will cause significant economic hardship, but it will be a hardship more even than QE. Commodity prices will get crushed and allow us to rebuild a fairer society in the future. Of course, the wealthy will be screaming from the rooftops 1930`s style. It has come to pass that I must quote Churchill in his first speech to the House of Commons after being made Prime Minister during the first and worst year of WW11.

“I have nothing to offer but blood, toil, tears, and sweat,” He knew that when faced with adversity a country has to dig deep together in order to move forward. QE is just delaying the inevitable at the expense of all in society who will be made to pick up the bill whilst in the meantime, only a small proportion enjoy the riches it bestowes.

Other very apt Churchill quotes:

  • There is no such thing as a good tax.
  • If you are going to go through hell, keep going.
  • We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
  • Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon
  • You can always count on Americans to do the right thing—after they’ve tried everything else.

Next blog topics….I am watching the hefty falls in the Shanghai Container Index with interest. …Japan consumption will implode over the next 12 months as food prices jump 10-15% in Q1 and the 2014 consumption tax arrives….BRICs are still a target of mine and going to suffer…Gold, I forecast in January that it will hit $1,000 before $2,000. Looking good.

 

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Saturday, April 27th, 2013 BRICs, Consumer Debt, Debt, National Debt, Predictions, QE 4 Comments

Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

As an update to my big calls in 2012 I am going to start with the subject which has taken up most of my verbiage, STEEL. I am so pleased with the results that you could say I am;

Inebriated with the exuberance of my own verbosity. I first heard this phrase as a child quoted by my amazing aunt Nancy who is still with us today and rapidly approaching 100! Of course, the 19th century British Prime Minister, Benjamin Disraeli, is credited with it first.

I digress. Back in May last year I wrote Are Steel Producers a Buy? The share price chart of two steel companies were highlighted. ArcelorMittal and US Steel.  I said then, and still say today, that oversupply in China and a lack of final demand in the world will keep downward pressure on the steel sector. So how have these companies fared since then? ArcelorMittal is 23% lower and US Steel is 34% lower. Lets not forget that the market has risen around 15% since then so the net affect has been very dramatic. Also mentioned negatively in the blog were Joy Global and Caterpillar and they are down 14% and 13% respectively. The truth is I started warning about the Steel sector back in January 2012 with the BRICs and Steel blog. I tied the fortunes of the BRICs to this sector as, in my opinion, it was the demand for the raw material, Iron Ore, that drove the fortunes of the BRIC economies. As I stated then, Jim O`Niell was lucky that when coining this now famous acronym, the Chinese authorities were prepared to spend vast fortunes on infrastructure projects (which are of course steel dominant) and the stupid governments of the west were allowing the finance industry to lend beyond the realms of their normal Avarice. Since January 2012 specialist Iron Ore and Coal producer Cliffs Natural Resources has fallen around 70% but my favourite pick (for a short) in the May blog and since has been BHP. I stated then that I thought it had 30% downside. So far it is down 3% (still not forgetting the market is up 15%). Luckily for me, it has just broken a five year uptrend which points to a decline to the £16.50 triple four year bottom support (-12% from current price).

Chinese inventories of Steel are at an all time high and growing. The authorities, as I have stated many times, are more interested in employing the masses than making a profit. Hence the 98% fall in profit last year. The production capacity is frightening. They are not concerned with the steel companies around the globe. Interestingly, tighter controls by Europe on wider steel pipe imports (from China) were announced and the US Military have just stated that all military supplies must be made from US produced steel. Other countries are doing similar things (Smoot-Hawley anyone).

China is taking a similar of attitude to employment over profit in other industries. Solar panels, Aluminium and more importantly Shipping. In a way it is a grander version of Kurzarbeit see Kurzarbeit achieved where Blitzkrieg failed!.

Amazing Performance: Part 2 Reviews the staggering gains from my recommendations in Be Prepared for a Wedgefest October 2012

MASSIVE Japanese QE. Let me be quite clear. Japan will not, and has no intention of, creating strong domestic demand. With the devaluation of the Yen (Japan has no fossil fuels) and the significant increases in consumer taxes 2014/15, disposable income will be squeezed even further. Yes, I hear you, they have potentially large shale gas reserves but that will take years at those depths. They have only one intention, export and survive. I have written at length about the ills of Japanese government debt and the demographic eruption. If you think this large QE will help global demand, think again. Japan has suffered greatly with the strong Yen. Its traditionally strong heavy industries of Steel and Shipbuilding were decimated. They intend to regain the upper hand. Asian countries are faced with a global exporter (in many fields) which has huge spare capacity and technological know how and they intend to compete.

 

 

 

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Friday, April 5th, 2013 BRICs, China, Debt, Japan, Predictions, QE, Shipping, Steel, Yen No Comments

UK Budget…2013 Review

UK Budget and the continued austerity measures. I will not look at the details of a bland pointless budget just its focus.

(Click to enlarge) Thank you to my good friend M.Jones for the artwork.

George Osborne. As I see him. Monopoly money or Sterling? There will not be a lot of difference in value by the time he has finished.

First off, why is George Osborne dressed as the Statue of Liberty?

I see his and indeed his predecessors policies as encouraging large scale immigration. Below is part of the poem by Emma Lazarus which is mounted on a bronze plaque on the statue.

“Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!”

This sentiment epitomises exactly how the Labour chancellor Gordon Brown treated these islands. He turned a blind eye to the massive influx of immigrants both legal and illegal. By doing so he helped push the UK economy along with the growing population demanding ever more housing and consumption. The positive economic affects of this policy now have to be paid for. The housing demand drove average pricing to an historic high verses average wages. This overvaluation is still much in place today. Whats more the debt accumulated during that housing boom is still very much in evidence. The total debt, both Government, Corporate and Private, is around 515% (highest in the developed world with Japan) of our total GDP and RISING!…To give you some history on the numbers, in 1987 we had accumulated 200% and in 2003 it was 300%. In 1976, when the then Labour Government went cap in hand to the IMF to rescue the country from bankruptcy, our total (Government) debt was only half where it is now adjusted for inflation.

The Budget focus is very much on getting people to invest in housing. Not by cutting Stamp Duty thus making it cheaper but by getting you the public to take on more debt! By doing this, you are not only buying new houses which are priced way above the equivalent second hand property, but you are generating significant extra tax for the Government (VAT on fees, moving etc and Stamp Duty). This is a cynical move which only benefits share holders and senior executives at the major property companies. The additional loan exposure assumed by the Government only adds to the narrow focus of our economy on internal combustion, instead of, solid exposure to the rest of the world by exporting. Two subtle major negatives of this policy are lost on this government. Firstly, the machinery and equipment used in the construction industry is mostly imported. Secondly, the large developers are giving very short term contracts to the companies (sub-contractors) building the properties. This allows the companies that lost out in the first round of contracts to come back and cut costs further. This policy is driving wages lower. Being the only major component with enough flexibility, it is being driven by the availability of cheap foreign labour. To help this sector in the way he is proposing is just mad! The huddled Masses and Wretched Refuse will keep on coming despite Mr Cameron’s latest policy announcement. Closing the gate after the horse has bolted comes to mind. In 20011, 87% of all jobs created in this country went to migrants!!!

Austerity. Is this budget really what it says on the box??

No!!! The way I see Austerity is this (allowing all to share in our problem)

The Poor who go by Bus will have to Walk more. The Car Driving Class (Ford) will have to take the Bus more. The Luxurx Car Driver will have to buy Ford`s from now on. The Uber Rich will have to give the Chaufer the push and drive the Luxury Car  themselves. The Super Uber Rich will have to get rid of the Helicopter Pilot and get a Chauffeur.

 

The Austerity that George (and his soon to be financial wizard at the Bank of England) see it, is somewhat different. By pretending to cut spending, which has actually risen throughout the coalitions term of office, we all think they are turning back the tide of debt. Wrong! In this parliament alone (2010-2015) they intend to borrow around 150% of the total DEBT ACCUMALTED BY ALL THE GOVERNMENTS from 1694 (Bof E founded) to 1997 when Labour came to power…Yes, more money in 5 years that the total debt accumulated over 303 years. To get away with such prolific spending, they have encouraged the Bank of England to buy 1/3 (£375bn)  of all outstanding Government securities (QE). This of course puts vast pots of money into the hands of the people who created the Banking Crisis in the first place. The major net affect is to drive up financial asset prices in the hope that it will drag other assets with it. The only big winners from this policy at the moment are the Uber and Super Uber Rich.

So, the way Osborne Austerity works is this.

The Poor (British) who go by Bus will have to Walk to the job Centre as an Immigrant has taken his job. The Poor Immigrant will no longer starve in his own country but will now take a bus to work in the UK.  The Car Driving Class (Ford) will have to take the Bus more. The Luxury Car Driver will have to buy Ford`s from now on. The Uber Rich will give the Chauffeur the push and HIRE A HELICOPTER PILOT. The Super Uber Rich will ADD A PILOT (Private Jet) to his payroll alongside his Helicopter Pilot.

The longer we go on spending as much as we are makes the eventual disaster all the more painful. Our economy is driven to such a large extent by internal demand, which is driven by Government handouts paid for with debt, that the total debt will get to a point where we cannot pay it back. I think we are there already but the markets are only just getting it.

Since I warned on December 23rd, that George had three months before the worry set in, Sterling has fallen, we have lost our AAA rating and the cost of insuring our state debt has risen by 70%. I think the tide is on the way out for him and sadly for us.

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Tuesday, March 26th, 2013 Consumer Debt, Debt, GBP, GDP, National Debt, QE, UK No Comments

Cyprus vs Rhode Island, New England.

Arthur (aka the late great Dudley Moore) said `Rhode Island could beat the crap out of it in a fight and it is so small they recently had the whole Island carpeted`

Now of course he was not talking about Cyprus but he could well of. In economic terms, Cyprus is a pimple on the arse of the world.

However, it speaks volumes about how Europe is run. Politicians and unelected officials revelling in spending the electorates money on ever grander, wilder uneconomic schemes. Building up debts for future generations without concern whilst drawing magnificent rewards for them and their families. If you want to look at some of these projects, look no further than the new airports in Spain which have never been used. Or, the Harbour in Madeira ( Marina do Lugar de Baixo) which was built on the most exposed Atlantic coast which has now been abandoned, after three attempts to repair it,  having been crushed by the huge waves so popular with local surfers. In fact Madeira is a far better example of the EU crazy wasteful system. It has a population of 250,000 but with encouragement from the EU and its Portuguese parent, they now have EU 6,000,000,000 DEBT. yes EU6bn for just 250,000 people. Not bad for an Island of only 309 square miles.

Lets look at the wider issue. The real anger of UKIP voting people in the UK is why we should be paying so much into this corrupt financial and economic  system (EU). Vast amounts of money have been spent giving villages lavish civic buildings and grand sports facilities whilst employing vast swathes of the local population from the public purse. This was not spending along the German lines, which is focused on expanding the export potential of the country. A lesson we in the UK need to emulate.

Rhode Island, which some believe was named after the Greek island, has a similar population (1.1m ish) to Cyprus but has only one third of the land mass (1,214 sqr miles vs 3,572 sqr miles). On that smaller land mass they generate double the GDP of Cyprus and has managed on a debt to GDP of slightly less than 50%. The debt of Cyprus is of course, when banks bad debt taken into account,  completely out of sync with economic reality.

The EU has not had its accounts signed off by accountants for as long as I can recall. All because the level of fraud and corruption is too big to quantify. Why then should we allow these thieves to pick our pockets day in and day out. We give around £45 million per day to the EU. On top of that we gave Ireland £8bn to help its bailout. The sad truth of the matter is, we need revolution. People need to revolt and who is more revolting that the French. Sadly, they are taking soo much money out of our pockets with the Common Agricultural Policy (CAP) they are reluctant to do what they are famous for.

I would love to stand for UKIP at the next election. I did stand as an Independent in the 2010 General Election. I believe they will win as people have had enough of the main political parties.

On another issue. The Central Banks which have employed QE so aggressively, to help governments carry on running large annual budget deficits, should now demand far more fiscal prudence from those governments before any further monetary stimulus is applied. At the moment they are just helping them add to what is already a frightening level of state debt. Japan, USA and Europe are all in that boat. Yes, the adjustment will be painful, but how painful will it be when this mad experiment with excessive QE finally unravels.

YOU HAVE BEEN WARNED.

I still think the only way out of this mess is GERPEL see Kurzarbeit achieved where Blitzkrieg failed!

 

 

 

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Monday, March 18th, 2013 Debt, Euro, National Debt, Predictions, UK No Comments

UK Trade Figures Shine Poor Light On Ireland.

UK Trade Volumes are shrinking.

Whilst the trade balance, either positive or negative is of extreme importance, the total volume of Imports and Exports can be far more important on certain occasions. Given recent trends I think this is now worth looking at.

Overall trade shrunk in January 2013 vs Jan. 2012. Exports down 4.98% and Imports down 3.58%. Of course one has to look beyond Oil and Erratics to get a clear picture. But even excluding these it is still contracting. -1.8% and -1.6% .  Overall 2012 saw a growth in trade with Imports up 1.87% and Exports up 0.46%. However, this was a significant slowdown from the 2011 performance which saw double digit growth in trade. As the year  (2012) progressed the positive start turned weaker. Q1 2012 vs 2011 saw growth in both Imports 5.7% and Exports 3.94%. By Q4 both had turned negative, Imports -0.46% and Exports -3.60% (ex-Oil and erratics -1.01% and -2.40% respectively) .

If the current scenario continues, 2013 GDP could turn very ugly. The contraction in trade will financially impact two main areas, corporate profitability and Government revenues. So lets not get carried away with a shrinking trade deficit. Growth in trade begets compound growth. Contraction, if sustained, can do like wise.

Within today’s figures was a rather remarkable and altogether worrying development for Ireland and its European partners who are bailing it out. In the last 3 months to January, imports from Ireland have shrunk 19%. This is an acceleration from the 4Q 2012 contraction of 13% vs 4Q 2011.

Why is this important?

The UK is Irealnd`s biggest trading partner and accounts for 31% of its Imports and 15% of its Exports (in 2012).  On the other hand Ireland is also important to the UK being its 5th largest export destination (5.8% of total) and its 9th biggest supplier (3.2% of total). If Ireland cannot arrest this fall in trade, two things will happen. Firstly, it will see its already huge budget deficit start to grow again …see IRELAND… Never Was a Silk Purse!.. bringing about a second crisis, and Secondly, a sharp reduction in the demand for British goods. Hey ho…

Sterling is not helping and the decline in its value is becoming more pronounced see Sterling Looks over its Own Cliff. Other countries seen weakening exports to the UK were Belgium, Italy, Holland, Spain and Sweden. I am growing increasingly concerned with Sweden’s very narrow focus of exports and how the weakness of Sterling and more importantly the Yen (major competitors in its industry focus) will weaken its economy sharply.

I am waiting until the next UK Government Borrowing figures ahead of next weeks budget to update…

 

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Tuesday, March 12th, 2013 GBP, GDP, National Debt, Predictions, UK No Comments

What have Spanish Villas and Ships got in Common?

We are getting awfully close to a Banking Crisis!  German Banking System in Crisis

This week saw another piece in the jig saw of collapse that I have been warning of for nearly 18 months.  The ClarkSea Index (see below for details) has just registered its lowest level in its 23 year history. Although its weekly decline of $223 (3.04%) to $7,111 per/day charter rate, is a far cry from the record $5,000 (12%) drop in the 2008 crash, it has to be put in perspective that the daily rate fell from $43,000 per/day at that time.

Why is all this so important?

With an estimated 60% of shipping loans now in the `not performing` bracket  it is important to bear in mind the attitude of the lenders. The biggest lenders won’t foreclose even if ships are worth less than the outstanding debt and owners can’t meet repayments. They would much rather restructure with the belief that valuations will rise following an expected pick up in overall shipping activity. This process of protecting ship valuations (by not foreclosing) helps the lenders to make provisions rather than crystallising losses. Perfect sense in normal business cycles and has indeed paid off in previous shipping downturns. I believe this time things are different. (see my many blogs on the subject) This years 20% decline (in the ClarkSea Index) to the all time low, makes the process of restructuring more difficult. We are now close to a point where new restructuring deals will be impossible to stack up economically. The additional debt being laid at the feet of borrowers is futile. Additionally, previously restructured deals must now be looking shaky. All this looks remarkably like the Spanish Banking crisis which I predicted in some of my blogs at the birth of Finance-Reaper. Two/Three years ago Spanish banks refused to sell off foreclosed property which was piling up on their books. Instead they were offering special zero rate mortgages to buyers  (at book price of the asset). The rest is history. This prolonged the process of restructuring and even allowed some developments to carry on adding to the surplus supply. With 2013 seeing a further surge in new ships hurtling off the slipways of Korea, China, Japan et all, supply is growing. Yes, I hear you, older ships are being scrapped at the fastest pace in many a year, still not enough to change my opinion. Meanwhile, I believe world trade is contracting. Yes, I hear you, I am crazy! But I do not believe a word China says. I have written many articles on the Steel industry as a bellwether for China producing at a loss just to maintain employment. This is true of many industries in that country. Chinese steel inventories are mounting, now reaching 9 year highs. The EU is now threatening to impose further trade dumping duties of steep pipes from China. All non- Chinese steel companies share prices are close to 15 year lows with the likelihood of further production closures to come. All this whilst China is hitting all time high production output. IRON ORE will retrace the losses seen late last year when common sense prevails. Problem is, with 20 million farm hands joining the urban sprawl per annum, they need to have jobs. China needs to keep production of basic material like Steel and Aluminium at full tilt as they are such big employers. The longer the excess production goes on the bigger the downturn when it comes. All this is alarming for those bankers who are sitting on shipping loans with the hope of a significant pick up in trade. Confusing!

ClarkSea Index (Compiled by the worlds leading ship broker, Clarkson PLC)

A weighted average index of earnings for the main vessel types where the weighting is based on the number of vessels in each fleet sector.

UK…I will follow up on my many recent warnings about the economy and Sterling. The January Public Sector Accounts were on the face of it better. Believe me, they were not! I will review them next week.

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Sunday, March 3rd, 2013 China, Debt, Shipping, Steel No Comments

German Banking System in Crisis

I have warned repeatedly that exposure to the shipping industry would create a grave crisis for the European Banking System with particular attention to Germany. My initial article on the subject `The Perfect Storm` (Jan 2012) was followed by many updates.

The front page of today’s Lloyd`s List carries the headline `Shipping Crisis Threatens German Banking System` It highlights a warning from the Bundesbank no less. I am sorry to say that most of my forecasts tend to be right in the end even if a timely delay exists.

Below is an extract from The Perfect Storm. Of course some players eg RBS have sold or reduced their exposure. If you look at my most recent article on flow through the suez canal, you can see that shipping volume has dropped significantly. This is highlighted in the Baltic Freight Index which reflects the income levels achieved per voyage. The past three months have done the damage but I must confess that volume in February is currently running at an unchanged level vs Feb 2012. A crisis in Germany would see many ships owners fall into receivership, thus pushing to new depths, pricing of second hand ships. This has been the cornerstone of my concern for the big fleet owners (listed below).

….Greece along with Japan are the largest merchant ship owning nations in the world. For Greece, shipping is second only to Tourism. Thus it is a large employer. That fact has obvious implication given the bleak economic prospects they face. When it comes to financing that fleet the largest player with nearly 20% of the total debt of $66bn is RBS. Way down in % exposure come Commerzbank and Cr. Suisse. The Chinese have used their financial muscle since the financial crash to offer huge financing for new ships built in their yards. The Greek fleet has benefited from the cheap money bonanza pre-crash and has reduced the average fleet age from 23 years in 2005 to 15.9 years in 2011, whilst slightly growing tonnage.

Financing the global fleet is in the hands of only a select band of players (appro.39). Six banks account for around 40% of total debt. HSH Nordbanken (majority owned by 2 German federal states + 11% JC Flowers) $50bn. Commerzbank (via subsid.) $33bn, Dnb $28bn, RBS $23bn, Nordea $18.4bn. BNP $18bn. Interestingly Lloyds and Unicredit are well involved.

The Scandinavian banks have the largest exposure in balance sheet terms and therefore have the most to lose.

The largest corporate owners of ships are AP Moeller Maersk (840) COSCO Group (725), Nippon Yusen 554, Mitsui OSK 509 and China Shipping Group 482. The share prices of the Japanese and Danish companies have reflected weakness in new charter rates up to a point but still trade with an element of optimism that the global economy will grow around 4% this year. If the Index continues to portray significant weakness and pricing does not improve, I can see the like of AP Moeller trading 20% lower to its September 2011 low. Should my worst fears for the global economy be borne out, the 13 year head and shoulder formation would imply something far more unimaginable, so lets not go there.

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Wednesday, February 20th, 2013 Debt, National Debt, Norway, Shipping, Steel 1 Comment

GDP Decline vs Employment Growth

Journalist Conundrum.

I am at a loss as to what all the Financial Journalists do all day. I have read so many articles recently perplexing over the disconnect between employment growth and GDP weakness. Perhaps if they looked at the data they could start to understand what is going on. Admittedly, I am applying my own reasoning to come up with my conclusion but it is still better than just scratching your head as these hacks are doing. Almost to a man they are all saying that GDP must be understated. I of course have my own idea.

Between September 2012 and September 2011 542,000 employees have joined the nations payroll which now totals 31.946m. As you can see from the chart below Income Tax paid to the revenue over the last year has barely changed. Adjusted for wage growth, it has not changed since 2010. Interestingly despite record numbers in work and total hours close to record, national output has barely changed since 2010.

 

I believe two things are at play. One, many of those joining employment from the unemployed register, were already working. Secondly, and as I first warned of in February 2012, the quality of jobs being created is very poor. As you can see form the comparison from September last year, employment has been primarily in the service sector. Wholesale/Retail jobs have blossomed but Coffee shops an economy do not make. I am aware that many large retailers are favouring employing workers on 20 hour weeks. This gives the employee far less rights and in most cases keeps the employees salary below the tax threshold. So, two poor quality jobs (c £7.50 per hour) are created for every position, neither of them pay tax but will still be needing social support. The rise in transport/storage probably relates to the growth in Internet shopping.

The primary reason for me being very negative about the UK Budget Deficit and my three month warning to George Osborne (blog 23 December 2012) is clearly identified in the data box at the foot of the page. Since 1997 there has been a structural change to the UK economy. We have an additional 1.7m Public Servants (Health 1.1m Education 0.65m) but Manufacturing has 1.674m less employees. The gain in Admin/Support worries me that Red tape has created many of these posts. All in all, the Blair/Brown years were really a massive shift in the dynamism of the UK economy. Public Servants now account for 26% of the workforce as opposed to 17% in 1997. The reality is that this figure when compared to points in history is much higher. Over the last 20 years Central and Local Government have been outsourcing many tasks. The growth in Admin/Support and Professional advisers is no doubt influenced by this process. With that in mind, I guess the Public Sector activities account for over 30% of the economy. Go back even further prior to the Privatisation of Utilities, Telecoms etc and the the comparisons are even worse. If you throw in all those working on Government Infrastructure projects, it is possible to say that over half the working population are paid from the Public purse. Whilst the Property/Debt boom were in full swing, tax revenues were growing rapidly. Now that bubble has burst, the only way this Public Sector involvement is achieved, given our low level of real private sector output, is to borrow more money. This cannot go on forever. Spending has to be cut drastically.

George Osborne pledged to get the economy back on a more balanced footing. Sadly, he has wasted the first two (and most important) years in office. Last year Public Servants only declined by 0.61% (51,000). Meanwhile, very highly paid jobs in the Finance sector (which helped finance this crazy shift in employment) have been dropping sharply for 12 months. With bonus payments being slashed or deferred via a greater proportion of share payout, the January tax hump may be very disappointing.The Budget Deficit has grown in fiscal 2012/13 (to date) and sadly is getting no help from the employment figures.

The UK Office for National Statistics breaks down employment into two categories. Services and Productive.  It is then broken down into 19 sub sections which includes three for public services which I have combined. To try and get a handle on why Income Tax paid to the Treasury is not keeping pace with employment and earnings growth we have to look at the data in detail. The latest data available is to September 2012. Below is the change in percentage terms and actual numbers since September 2011

Productive (6 sub sections  As a group, this category is down 10,000 employees. …Agriculture/Fisheries -9.21% -39.000. Mining/Quarrying +19.67% +12,000.  Manufacturing +2.98% +75,000. Electric/Gas Supply -5.75%  -8,000. Water/Sewerage +7.98% +15,000. Construction -3.21% -66,000.

Services (11 sub sections)..As a group, this category is up 532,000 employees Wholesale/Retail +1.40% +67,000. Transport/Storage +4.30% +63,000. Hotels/Catering +6.48% +130,000. Information/Comms +4.90% +60,000. Finance/Insurance +0.27% +3,000. Real Estate +7.71% +32,000.  Prof/Tech/Scientific +5.38% +131,000. Admin/Support Services +5.92 +145,000. Arts/ Entertainment n/c. Other Service -4.17% -38,000. Public Services -0.61% -51,000.

Employment in the biggest sectors.

 

 

 

 

 

 

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Tuesday, January 29th, 2013 Debt, GBP, GDP, National Debt, Predictions, UK No Comments

UK Debt

I was going to study  yesterdays December Public Finance data before writing but having read an article by Alister Heath (Telegraph) I wanted to share. He highlights a recent OECD report on UK borrowing. As I have been saying since late 2011, George Osborne has failed to stem spending. In my most recent UK blog (23/12/12) I gave the UK 3 months before the markets see through his cloak of invisibility. I have forecast in the past that Sterling will test its all time low vs the Dollar of $1.08. Gilt Yield will rise much further than already seen in 2013. You can read the Telegraph article online.

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Wednesday, January 23rd, 2013 Consumer Debt, Debt, GBP, National Debt, UK, USD No Comments

China is Ly`ing

First of all…Can you trust a country that restricts its citizens to one child per couple. Openly supports oppressive regimes against the wishes of the UN. Suppresses political opposition. Controls the media both web and hard copy. Restricts access to the the World Wide Web. Allows political leaders to amass great wealth whilst claiming no such wealth exists…OK That’s cleared that up.

Having come to the conclusion that it is a corrupt institution, it is right to question anything they say. Hence, I am questioning the December trade figures which they released on the 10th January. The Year on Year growth of 14.1% was substantially above forecast of 4.6%. Such a disparity is very rare. So, why do I think they have cooked the books in order to meet export targets.

Regular readers will know that 90% of goods are transported (or have components) by sea at some stage in their life. Hence I take a big interest in the flow of goods around the world. As I explained in a previous blog, the continents are the worlds organs which require the life blood of trade to survive. The specific maritime trade routes are the arteries which carry that life blood. Just as in a animals, certain pinch point exist which allow us to take a reading of that flow rate (pulse). 

I have  been writing about the Suez Canal for a long time so regular readers will be familiar with the charts below. If we are to believe the Chines data we must look into the data. They claimed that strong exports to the USA (+10.3%) and a rebound into the EU (2.3%) were behind the out performance. I will deal with the EU first. Below are the regular charts showing flow through the Suez Canal. Chart 1 just gives an overview of total trade. As you can see net tonnage flowing through the canal is 5% below December 2011.

More importantly, the trend in trade is negative. Chart two gives the percentage year on year change in volume broken down into the two trade routes, North and South. As you can see the total volume of goods (x energy) going North in December was down 2.8% vs 2011. It was also down 2.13% vs November. Given that the vast majority of the Northbound traffic ends up in Europe (10% to the USA) it  appears that something is afoot.

If you think that a good percentage of that trade from China is finished goods, then you would expect it to be transported by Container. Chart three shows the pure Container element of flow through the canal. As you can see, Northbound flow has been negative for the past six months. December was 4.3% lower vs 2011 and down 2.57% on November. Yet more cause for concern.

Just as a point of interest to my various blogs on the shipping industry and its further downfall. Chart four shows the growth/decline rate of ships transiting on a monthly basis. We are now in a double digit percentage decline (November and December) with 1399 ships in December vs 1574 in December. I will blog about the implications next week, but with so many modern, bigger ships being delivered, the decline in voyages is far outstripping the decline in tonnage. Currently, preliminary data for January is also running 10% below Jan 2012. Volume ahead of the Chinese new year normally expand. So far this year that is not happening!

So lets look at the USA element of these figures. Up 10.3%. I have looked at several factors to help illuminate the situation. Firstly, my weekly BNSF data that was last published in `Am I Right to be Bearish` Chart two breaks down the two primary forms of traffic.  Both of these were on a weakening path at the end of November and that trend was indeed continued through out December  (Update in next blog). The impact of the weak weekly numbers forced the year on year growth rate (black dotted line in chart one) down below 2% for the first time since July. If we look further afield, economies that you would expect to have shared in this bonanza, do not show the same excessive pattern. Yes Taiwan had good December export numbers but Singapore saw an 8% decline and Shanghai throughput was down 0.44%. Chinese order books in the autumn were weak which flies in the face of the December outcome. The USA west coast port strike between the end of November and December 5th will have backed up and delayed imports.

What is abundantly clear is that China, as I stated in  `A Quickie for Christmas` is not investing for profit, it is investing to keep the migrating peasants in jobs. 21 million people moved to cities in 2011 and 2012. If China is to keep all the plates spinning, they need to export. The trade surplus in 2012 grew by 48% to $231bn. Sadly, the global consumption position is not one of growth. The significantly weaker Yen will help Japan compete more aggressively in the export market. Europe is implementing deeper austerity measures and the USA will have to bite the bullet on spending cuts sooner rather than later. If you are making investment decisions based upon China and its fantastic economic growth potential, caution should be your watchword.

Future blogs:

Iron Ore rally is built on sand. How can a steel glut (in China) suddenly disappear, especially during the worst winter in 30 years…more smoke and mirrors

How the world is copying Germany and not making people redundant…the KURZURBEIT system.

Today’s UK Government debt figures reviewed.

 

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Tuesday, January 22nd, 2013 BNSF, BRICs, China, Debt, Japan, Predictions, QE, Shipping, US Economy 2 Comments

UK Retail Revoloution

UK The clock is ticking!

In my blog of 23rd December I gave George Osborne 3 moths before the proverbial hits the fan. Today’s release of the December Retail Sales data gives me comfort that my prediction is on track. I have broken down the various components of retail activity giving the year on year growth /decline and in some case, commentary. I have been firmly of the opinion for a long time that conversion (into residential) of the wasteland that is vacant retail space will be the catalyst for a much weaker pricing of the residential property market. The process of conversion has taken hold in Germany but as yet is only talked about on the fringes of UK politics. To give you an idea of the glut in UK retail space,  a recent study highlighted that the UK has 0.36 sq. mtrs. of (retail) floor space per head of population vs 0.21 in Italy and 0.14 in West Germany. Of course, the UK has (had) a more aggressive consumer culture which, as I have talked about in previous blogs, was as a result of the excessive growth in (privately owned) property prices which lead to an approx. 20% uplift in disposable income over 15 years prior to 2008. However, having recently surveyed my local high street I am beginning to think another potential outcome may be possible. The fifty or so outlets are all owned by our local London council. The vacancy rate has increased by another six outlets over the last six months. This puts the vacancy rate at around 20%. These six most recent closures resulted in a loss of income (for the Council) of around £150,000 per annum. I guess this picture is being played out up and down the country. Add this revenue shortfall to the governments cut in payments (to councils) from the central tax pool and one of the biggest employers in the country will have a strong negative affect on 2013 GDP.

So what is the revolution? As we are all aware, the large out of town retail parks have been the catalyst for the high street downturn. However, it is the decline in retail volume growth see The Mayans might be wrong but for George Osborne..time is up and the Internet revolution that has been the executioner. Given that no conversion to residential is forthcoming, we are getting close to the point where the level of vacancies will trigger a significant downward re-rating of high street rents. This adjustment could be in the magnitude of 25-35% for busier environments and 50-60% for the all too familiar ghost areas. This revolution will deal a big blow to the large supermarkets and owners of shopping malls. As you will see below, fuel consumption is falling so any regeneration of the high street (within walking distance) will be greeted with open arms.

December Retail Sales Data Year on year (+0.3) volume grew at the weakest since 1998 excluding the horrendous winter storm ravaged Dec 2010. Over the last six years, volume has grown 4% which given the huge immigration influx, just matches population growth. The figures below are December year on year comparisons for some of the interesting sectors.

Tobacco,Alcohol and other beverages  -37.2% (The volume has fallen every year this millennium and is down 60% in ten years. Supermarkets have taken the trade!)…Floor Coverings + 25% (I presumed it was flooding that helped and indeed in this historically wet year 2012 as a total (+22.3%) reverses the 50% decline in volume over the previous 4 years…Mail Order +13.8% (Credit!)…Textiles (x clothing) -11.6%Cosmetics +9.5% (Clearly just a seasonal favourite as 2012 as a whole is only + 2.3%)…Music, Videos recordings and equipment -7.3% (HMV AND Blockbuster)… Books, Periodicals and Newspapers – 7.3%Flowers, Plants, Seeds, Ferts and pet food +7% ( Strange one, probably warm weather and seasonal) …Furniture +6% (Possibly flooding related as only + 2.7% in 2012 as a whole)…Computers and Telco equip +4%Watches/Jewelry -1.5% (Volume fell every single month (vs 2011) in 2012 and overall were down 7.8%. Our local jeweler is taking in more gold for melting down than he is selling new or second hand. I have been a bear of Gold all year and believe it will touch $1000 long before $2000)…DIY -0.5% (Seeing xmas more seasonal activity at the likes of B &Q but 2012 overall was down 7.1% and is down 26% over 5 years (property market). With the revolution, it may be that small hardware shops with knowledgeable craftsman will make a comeback)

In 2012 the 500 biggest and busiest retail locations saw 2000 (net) outlets fall vacant. A recent survey puts that at 4000 for 2013. Remember these are the busy areas where volume is polarising. Think what will happen in the vast majority of smaller locations. VIVA LA REVOLUTION!

Next blog…CHINA IS LYING!  is on hold awaiting the release of some December data which I believe will confirm my view. It relates to the recent December trade figures.

ps Happy New Year!

 

 

 

 

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Friday, January 18th, 2013 China, Consumer Debt, Debt, GBP, GDP, National Debt, Predictions, UK 1 Comment

The Mayans might be wrong but for George Osborne..Time is up!

The UK has got 3 months. Then time is up!

Back in December last year I started a series of UK blogs explaining why George Osborne will be in a worse financial position by now than he and the overpaid city analysts expected. Yes, sadly to say all the factors I alluded to are coming home to roost. Going forward they are going to get a lot worse, very rapidly. Following data released by Revenue and Customs on Thursday, it is clear that more is less when it comes to employment in this current environment. Tax paid by the highest earners is declining in both total and as a percentage of revenue. With last weeks Government budget data for November, it is clear the deterioration in finances is becoming apparent to all those who have been backing Mr Osborne`s policy of wishy washy austerity.

In the fiscal year to date Government receipts are £339.0bn down 0.1% on November 2011 (£339.3bn) and expenditure is £419bn up 2.7% (£408bn Nov 2011). This growth in expenditure would have been significantly higher if interest rates for Gilts were not so low. The interest bill this year is likely to be the same (£44bn) as in 2010/2011. The difference being, total outstanding Gilts then was £918bn where as it is now £1.113 Trillion. Whilst this is great for the government, it does show that spending excluding interest is way above expectations. Of course, this is a back door tax on pensioners who have been crucified by lower annuity rates as a result of lower bond yields. God forbid should/when interest rates ever go up again.

Chart One shows Government Income

whilst chart two shows expenditure.

More importantly, the third chart shows expenditure excluding interest.

The significance of the obvious but subtle difference between the second and third chart is lower interest spending this year (£31.6bn year to date vs £33.7bn) is masking even greater structural spending which will be all the more difficult to reverse when interest rates go up. Where are tax revenues heading? Well, as I have said on many occasions, total income tax take is not growing despite a higher level of employment. The low quality job growth is reducing higher tax, no income support families, as a percentage of the workforce. This, coupled with higher taxation, both direct and in-direct, have had a downward affect on VAT receipts. Of course, annual salary increases lower than inflation impact still further. Consumption in the UK and wider Europe will fall this year as further tax hikes bite. see previous blogs on Shipping and Trucks…remember 90% all goods have been or have components, that have been, shipped.

The chart below highlights the plight of the consumer. It shows the Total Volume Growth of UK Retail Sales this millennium.

The lack of consumption in volume terms highlights why high street retailers are disappearing. The growing market share of Internet sales explains how the volume being sold on the high street is being funneled into large retailers who can afford rents in high footfall shopping centers. All this will eventually confirm my view that law changes will be put in place to allow vacant Retail/ Industrial/Office space to be converted into residential, thus being the supply element which will lower house prices 20%.

Be aware that the January 2013 Government Borrowing data (released 3rd week in Feb) is likely to be shocking. This is traditionally the biggest revenue month of the year. Advance and Final Income tax Payments swell the months (Income Tax) take to around £25bn with Corporation and Petroleum throwing in another £9bn. It is my belief that the shortfall will be in the region of ten percent. This will put the final nail in the coffin of wishy washy austerity and put the UK in direct conflict with the markets which have been very patient. I believe Sterling will bear the brunt.

see RIP George Osborne for my way out……..plus many previous blogs under the UK section of the menu highlighting my thoughts which have been consistent since the blog started.

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Sunday, December 23rd, 2012 Consumer Debt, GDP, National Debt, Predictions, Shipping, UK 1 Comment

Am I Right to Be Bearish

I have been Bearish since 1999. How do I know that. It was then that I was the only employee of Lehman Brothers to opt out of the generous Direct Benefit Pension into a Direct Contribution pot of money under my control. I still have that pot which has had a positive return every year since. All those who remained were trampled on by the companies collapse. I had taken a negative stance on the management style but more importantly on the global economy which was being increasingly driven by government spending and loose monetary policy. None of that has changed. The four big Economies of the world (USA/Europe/China/Japan) are being held up by massive government spending. The level of spending above tax receipts is shocking and cannot continue. Three of those economies (x China) have existing Debt to GDP ratios which are unsustainable. So, to continue to stimulate consumption by spending more is not an option.

It is becoming clear that the global economy cannot consume at a rate which would help drive tax revenues for those governments to meet their future commitments. Central Banks have been using every trick in the book to help those politicians keep the debt illusion alive. They are all complicit in treating the electorate of those countries like fools. For it is they and their offspring who will have to meet the ever growing burden of this debt. The politicians  have ingratitude themselves with vast riches and on the whole do not live in the real world. This vast state sponsored global economy has to be drastically changed, sadly to do that, great pain will have to be felt by all.

Every time the central banks add to previous QE it is further vindication that being bearish on the economy has been correct. Being bearish on equities is another matter. Each bout of QE adds fresh impetus to the camp that says you must be invested because the bankers and politicians will win, eventually. The  charts below are updates of a regular series of data which I have published. My reasoning is well documented in previous blogs. The first chart is the now familiar BNSF traffic flow of various elements of economic activity. As this is the yearly comparison it is difficult to pick up recent trends. Hence chart two which shows the weekly change in volume growth since July for Containers and Freight Wagons. I think the direction speaks volumes. If you are in the camp that the fiscal cliff will be resolved quickly, what shape do you expect it to take. The $1trillion annual budget deficit that existed throughout the first Obama term must be cut. If it is not cut substantially the Debt to GDP and its growing servicing cost will just be kicked down the road until the next time. Whether it is spending cuts or tax increases, it matters not. The net affect will be to reduce economic activity. That would not be a problem if the other big economic powers were in good financial shape, but they are not. It is only a matter of  time before  Japan implodes in a sea of debt whilst Europe is adjusting to a new norm of significantly lower consumer activity.

 

 

To highlight this shift to lower consumption I have regularly updated my Suez Canal data. The first chart is the simple total volume flowing through the canal.

 

Secondly, the traffic growth in either direction.

Finally, the growth in Container traffic. As I explained in previous blogs on the subject, containers tend to reflect the consumer sentiment as it reflects more on finished goods and blocks out the noise from the vast and volatile commodity sector. As you can see, the flow in the direction of China went negative for the first time since the big fiscal stimulus which created the 2009 updraft.

 

2013 will introduce many new austerity programmes apart from the fiscal cliff. In Europe these are just as negative. France will be pushing the boundaries of reality in its attempts to cut its budget deficit back to 3%. The scale of the spending cuts and tax increases will likely cause significant union and social unrest. The French are in a league of their own when it comes to protesting. Greece and Spain are amateurs when pitched against the cake eating peasants. Heavy industrial companies are coming under strong political pressure to protect jobs but in the end reality will prevail. The UK, SUBJECT OF MY NEXT BLOG, will be plunged into chaos as the budget deficit continues to deteriorate.

In this environment, company profits cannot increase. Despite strong balance sheets, the corporate sector has a chilling few years ahead. Most equity fund managers are overweight strong cash flow companies. Pricing power is about to become far weaker as consumers recoil from yet more austerity. Overcapacity is and will continue to be a major problem.

Shipping and Trucking, my two most frequently blogged subjects, will bear the brunt of this slowdown in global trade volume.

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RIP George Osborne

The UK Chancellor has failed to implement austerity deep enough to make a difference to the overall debt momentum and now risks a total collapse in confidence. He has squandered the Countries and the Conservatives future.

When this government came to power in 2010 they had a chance of changing the UK debt profile whilst all the blame would have fallen on the out going administration. Sadly that chance was missed so I believe the next two years will be very painful to watch as George Osborne pays the price of trying to keep his coalition partners happy whilst believing in his own rosy economic outlook. Recently, George made much of his backing for gay marriage, a subject in which he has shown very little interest in the past. Is he trying to deflect future economic commentary?

The UK budget deficit is growing, not contracting, as is claimed. Two one off gains (Post Office £28bn BofE £2.3bn) were given to the government in April of this year totalling £30.3bn. These are accounting entries and should not cloud the overall problem so I wont let it. The real deficit in this fiscal is £5bn higher than 2011/12 putting it in line with 2010/11. If my concerns below are correct, then the deficit, net of the chancellors windfalls from the post office and the proposed BofE QE payment, could be as high as the 2009/10 deficit.

Lets look at the government receipts year to date (April-Sept) of £255.5bn. These are up £2bn on last year equivalent period. Within that gain is an increase of £2bn in VAT and an increase of £2bn in Nat. Ins. Contributions (NIC). However, taxes on Income and Wealth were down £2.4bn. Breaking down the Income and Wealth, Income tax is down £0.6bn in the six month period but more importantly £2.4bn in 2012 thus far versus the 2011 period. Many economists have been confused at the positive unemployment data whilst GDP is so weak. As I stated in several blogs on the UK earlier this year (See UK blogs) employment creation is of poor quality whilst job losses are of many high earners. This is clearly borne out in the NIC receipts vs Income tax receipts. This tells me that disposable incomes are falling much faster than is currently implied by inflation rate (c 3%) minus  wage growth (c 2%). The only way consumption is holding on to current levels (apart from lower mortgage rates) is the creative ways consumers are raising money. Equity Release, Pawn Brokers, Jewelry Sales, Payday Loans etc. With net Income falling and the government needing to raise more taxes, this bodes very badly for the high street and commercial property prices, as I have mentioned before. The biggest hit to the tax take will come in the January harvest which is the biggest single month for tax payment. This year will be a disaster. High income earners in the city have shrunk in number with a majority of those left seeing a further 20-40% reduction in total compensation. I expect this will contribute to a reduction in the tax take by £3-4bn in January alone. Windfall taxes (from Banking) experienced by the outgoing Labour government may never be repeated. Consumption will be focused into a shrinking band of strong retailers with the pound shops also seeing positive growth.

Lets look at the government expenditure year to date (Apr-Sept) of £313bn. These are up £6.5bn on last year equivalent period. A couple of items stick out. An increase of £5bn in benefit payments hardly indicates employment is strong. It just makes me believe even more that the jobs being created are little better than minimum wage hence still in the social benefit net but not earning sufficient to generate much tax. Interest payments on the accumulated debt are actually lower than last year which indicates just how much QE is helping the government. This debt servicing benefit comes at a price. The elderly who rely on savings or annuity rates to generate an income are blown away. So I class QE as just another hidden tax. Of course, if Sterling collapses as I expect, interest rates may well rise pushing the debt servicing bill much higher.

One million interest only mortgages expire by 2020 which will put a burden on many who have no credible repayment plan. Changes to the Income Drawing Pensions of 400,000 pensioners will greatly reduce their disposable income over the next year or so as 10,000 a month face a re-calculation of payouts. Tax increases both planned and proposed will drain the consumption potential of the populous still further. Can you honestly think that toying with austerity is going to work. The option of spending more to reflate as proposed by the stupid Mr Balls, will not work either. As I have explained in recent blogs, spending on infrastructure, benefits mainly the overseas manufacturers of machinery and immigrant workers who will work for far less than the indigenous population can afford to take.

The only way forward is to put our hands up and say we fluffed it. The Gilts held by the BofE (approx 30% of debt) should be cancelled. As this would quite rightly horrify the markets, a few provisos need to be applied with the intention of shrinking government significantly. So much discretionary spending exists that radical changes be forced on government to cut all but essential spending. This will make the first few years of adjustment very painful. It is imperative to point out that during the massive build up of government debt, the only group of society to have made gains are the wealthy who have seen a massive increase in net worth. The poor have by and large remained poor. The middle class have just been saddled with an almighty level of debt. A degree of balance is required in the fortunes of the UK population.

1)  Government debt must never go above the new lower Debt to GDP ratio (following the 30% write off)

2) Budget deficits are never to be above 2% of GDP  whilst ensuring the above is adhered to (excluding War of course)

Several aggressive changes need to be made to fiscal policy. I have a complete array of ideas but below are just a few.

1) Public sector wages to be cut 30%. No bonuses ever to be paid in Public Sector.

2 )Tax free earnings threshold doubled to £16,000

3) A 90% Tax on earnings/compensation above 30x the average earnings in a company. This tax is waived if 51% of shareholders vote in favour of an employee receiving such a payout. Owners of private companies should have no problems being majority shareholders.

4) No benefits of any kind paid to families with £40,000 income (combined or otherwise)

5) Corporation tax cut to 12%.

I have many social ideas which I proposed in my manifesto for the 2010 General Election including school class sizes based upon the surrounding density of population (with a maximum of 15 for the densest inner city areas) in order to give teachers a chance. A unique Foreign Aid package based on the Ark Royal painted in the Union Jack staffed with x-service personnel and furnished with all the equipment to build schools, hospitals etc which of course would be supplied by UK companies. It would sail the world doing great things and loved wherever it goes with a fleet of UK built support ships. If you would like to see a full read of my policies on Government, Europe, Immigration, Health, Transport, Banking/Savings, Economy and Defence please contact me via this site and I will forward a copy.

 

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Tuesday, November 20th, 2012 Consumer Debt, Debt, GBP, National Debt, Predictions, UK 2 Comments

Economic Seismic Shift.

I am becoming more concerned that economic activity throughout the world is slowing so rapidly that a global meltdown could be around the corner. My worry for equity markets is that the last seismic shift that occurred between 1958 and 1960 is about to be reversed. In 1958, equity dividend yields were around 7.1% and the Price Earnings Ratio (PE) was 5.6. During the next two years the market rose 122% and the first reverse yield gap appeared (Aug 1959 when equity yields @ 4.76%  dropped below gilts,2 1/2% Consols @4.77%) and it stayed with us until 2008 when central banks initiated QE. The inspiration for this seismic shift was a reassessment of the belief that equities were not safe investments for pension funds and should not make up a large part of any portfolio. A speech by George Ross Goobey in 1956 put the cat amongst the pigeons but it was not until the Manchester Corporation lead the charge (into Equities) did the earthquake really hit. It is interesting to note that for the first time since that shift, UK Pension funds have raised the Bond holdings in their porfolios (43%) above that of Equities (38%).

Why has this obsession with Equities been so compelling for the last 60+ years? My answer is very simple. Governments have become increasingly short term in their outlook. Politicians, along with Central Bank Governors, have been increasingly happy to borrow out of trouble, a policy which up until a few tears ago worked remarkably well for them. The problem is at some point the music has to stop. If you take a look at Charts 5 and 6, you will see the rise of the US and UK debt pile. Whilst these charts do not take into account inflation, they do illustrate very graphically, how the stakes have got ever bigger. Chart 7 just shows how each of the most recent US Presidents have raised borrowing. Mr Obama made many pledges when he first came to office. If he had said that he was going to spend $4 Trillion more than tax receipts trying to implement them, he would have been hounded out of town. Chart 8 shows just how sad this whole process has become. It is the simple cost of servicing (interest) the near 230% of Debt to GDP that Japan has accumulated. It indicates that the lion share of tax revenue is being spent on paying for all that previous spending. I have written several blogs on the imminent demise of that country.

If the global planned austerity measures for 2013/14 are implemented, tax take by governments will rise dramatically. Disposable income will be the main looser,NO! Sorry, the main loser will be company profits. One of the most commonly used reasons to buy Equities is that they are cheap according to the current multiple or PE vs the average of the past twenty years or so. What if the economic conditions that lead to the market being cheap in 1958 are no longer applicable to the future. Governments must reduce the level of debt or the cost of servicing will engulf tax revenues and disaster will ensue. Indeed, we may already be close to that point. It is not a fiscal cliff the world faces but a fiscal earthquake. As disposable incomes decline, company earnings will become far more unpredictable. This should demand a far lower PE (higher yield) than the previous 20 or 30 years. Whilst a return to 1958 levels is a bit outrageous, a rebasing to around 8 or 9 appears more apt. This would imply equities 30% lower. Commodity markets will feel the full force of this consumption decline thus putting the BRICs squarely back into lesser developed catergory. Gold will not be the place to put your money but more of that in my next blog

 

Economics in pictures.

I have updated some data which will be familiar to regular readers. First up, the Suez Canal transit data. This shows monthly cargo volumes passing through the canal. I have written about why I feel this is an important gauge on several occasions. Primarily, it is the fact that 90% of goods that you purchase have, or have components that have, travelled by sea. Pinch points like the canal act as a pulse reading. As you can see from the first chart, growth is going nowhere. In fact the total number of ships passing through has fallen each month since March vs 2011 (yes, new ships are bigger). Another note of interest, is the explosive growth  of  Crude transiting southbound. I guess the Arab Spring and the Iranian embargo will have some distorting affect but I am more inclined to believe it is the build up of Chinese strategic reserve. This volume is likely to slow dramatically in 2013 as storage facilities are at capacity. LNG has slowed significantly which is why the gap between the two sets of data has not grown more.

Click on charts to expand

Next up is the direction of traffic through the canal. No prizes for this one. As you can see, Northbound (90% Europe and 8% USA) is contracting. The January 2012 spike (southbound) was caused by an enormous inventory build ahead of the Chinese new year. Products such as Cereal and Coal jumped significantly but it was Iron Ore which had a big impact. I wrote several times in the spring regarding inventory levels and predicted correctly a large fall in the Ore price. The seasonal build will occur as usual prior to the next new year but I fear it will be more reserved than 2012. This will have a distorting negative impact on the year on year data.

Within the traffic data is a breakdown of particular ship cargoes. Containers are always interesting as they drown out the noise of the volatile commodities which transit in huge volume. More finished goods and components travel this way so it can be a good handle on consumer demand or at least confidence in the inventory level of consumer products. The chart starts just after the Chinese injected $586bn to reflate the economy alongside the first US QE (see above chart for full impact of these two measures). As expected, it balloooooned. Of course, this year the authorities have been more concerned with inflation and a housing bubble. Thus, the rate of growth has slowed and in fact turned negative last month. When the new leaders are announced this week, it will be interesting to see if they start with a big bang of reflationary policies. The outgoing regime have recently raised road, rail, sewer and port infrastructure spending, so little scope exists for a big whammy.

USA. I have updated this regular feature. It shows the traffic flows on Warren Buffet`s BNSF railroad. The Total Freight annual growth rate peaked eight weeks ago and has declined each week since. This somewhat confirms the recent picture being painted by corporate America during the current earnings season. As you can see the Housing materials appear to be in fine shape but the rest are starting to slow. In fact the star of the year has been containers which have been up around 7% all year, last week however, the weekly number was negative for the first time in 2012. The lower diesel price may have had an influence as it helps trucking with competitiveness. I will eat my hat if housing continues its uplift in 2013.

Chart 5

Chart 6 

 

 

Borrowing by governments is the drug that fuels Equity performance.

 

Chart 7

Chart 8

My next blog will be an attack on George Osbourne`s inability to make a real difference. The UK is damned by his torpor!

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City of London Rapes Pensioners

The British Government has little room for error if it is to get the economy ready for expansion. I have written on several occasions about our growing debt problem and its long term negative implications….  Never have so many owed so much, because so few did so little  ……  Will the next Italy step forward  …… Where is all this money coming from?    were some of my earliest blogs on the subject. Since then my fears for the budget deficit have been well founded as it continues to be way above target. The UK is running out of time if it is to achieve the re balancing of the economy which will eventually lead to growth. Many coalition ministers have talked about shifting the economy more towards manufacturing/Engineering but little has been done. As I have stated before, Sterling vs the Dollar and the Euro has been a problem but more importantly red tape from Europe and a complete lack of business acumen from our politicians. As a point in case, the wind generation industry. Britain has more than 50% of the worlds (yes! the worlds, 2.7 gigawatts out of 5 gigs total) wind turbine capacity so you would think that it has a dominance in the productive side of the industry. NO! It has virtually no capacity whatsoever, instead over half have come from Siemens in Germany, a third from Vestas in Denmark with the rest from a German subsidiary of an Indian company. What absolute b—-cks is that. All I hear from politicians of all persuasion is spend more on infrastructure and housing, throw money at it! YET MORE B—OCKS! If they were to look at a major road project for instance, they would see (mentioned in UK Debt blog)  around 85% of the machinery was imported and over 50% of the labour could hardly speak English. So why raise more debt to help other countries! We need to target our spending where it will have a chance of paying back in the future. Just throwing it at short term projects helps the immediate economic statistics but it will not build a sustainable future. We must realise the debt pile is getting bigger and all we are doing is feeding other countries employment. Employment in the UK is on the face of it going up but believe me the quality of that employment is diminishing rapidly. Just because you create another few thousand coffee shop jobs (very topical re Starbucks)  it does not mean all is rosy. Just take a look at the significant profit warnings from some of the UK largest engineering companies in the last few weeks.

So, why the title of the blog? Well, I want to highlight the demise one of the main growth engines (of the past three decades) to the UK economy. The City of London post Big Bang was responsible for most of the growth in the UK economy over that period. WOOOWWW I hear you say, how on earth can you make that claim. Well having worked in the City from 1974 (Keyser Ullman Merchant Bank) to sometime in the next millennium, I have a clear idea of how it grew. That still does not make me qualified to make such a claim.  So what makes me think that. Velocity of money is why (Velocity explained in Where is all the Money coming from?)  Post big bang a new system was introduced for the transaction or trading of shares. It was called Dual Capacity and it has been a cancer which has stripped the City of the very moral fibre with which it was built. The motto of the London Stock Exchange was `My Word is My Bond`. Post big bang that was thrown out with the bath water. The old system `Single Capacity`had very strong demarcation lines between the various aspects of City life. I worked, at some stage in my career, for all of those various aspects. The responsibility of position taking in shares was the sole responsibility of stock jobbers (I worked for Akroyd & Smithers) . These partnerships had a limited capital base so were very responsible when it came to risk. They also knew the companies, in which they traded, very well, having a detailed knowledge of the various industries. The brokers were the middle men as Jobbers were not allowed contact with investors. Brokerage firms traded on behalf of both public and corporate customers. They researched companies and advised clients. The Merchant (British term) or Investment Bank (US term) were the deal makers with corporate action their bread and butter. Investment management companies were sometimes linked to the banks but on the whole were separate entities. Post big-bang (not a cigarette interlude between Jordan and Peter Andre) these various separate functions were brought under one roof. For instance UBS incorporated a jobber (Akroyd) Equity Broker (Rowe & Pitman) and a Gilt Broker (Mullens). These were put into SG Warburg, a merchant bank. So now one institution can offer research, advice, trading and finance. It all sounded like a good idea to the Americans but many in the old UK system had reservations and they were right. Greed took over and the Chinese walls which were supposed to protect clients from these new super powers rigging research and prices came falling down. With the Jobbers now replaced with highly capitalised banks, trading volumes exploded and the risk positions taken were  10`s if not 100`s  times bigger than under the old system. Eventually, a relatively new breed of institution began to evolve, Hedge Funds. Up until the big bang, only jobbing firms were able to hold a physical short position in stocks and shares. The bigger and more profitable the investment banks became the bigger the impact they had on the British Economy. Big bang was responsible for the creation of tens of thousands of jobs directly but more importantly hundreds of thousands of jobs indirectly. Salaries (and share awards) in the industry ballooned to rock star proportions, not just to a few but to many. In turn this money spawned a spending spree unheralded in the modern era. The South of Britain became the domain of white van man who was a bastard child of the big bang. The period since big bang has seen millions of manufacturing jobs disappear, but that did not matter because we had easy money. Total debt (Private and Govt) in the UK trebled between 1997 and 2008. Not bad when you consider that debt up to 1997 had taken 300 years to get to acumalate. This easy money lead to a an explosion in money supply and more importantly the Velocity of money. In turn that lead to an asset explosion which drove the white van man into a frenzy of activity. To further the investment banks ability to throw even more risk into the pot, the Glass-Steagall Act of 1933 was repealed. The very safety valve that was put into place following the last big depression, how can the regulators and Central Banks not be charged with serious offences over this!

At Akroyd & Smithers we were encouraged to read (and reimbursed weekly) the FT and other important papers together with Industry journals and periodicals. When I left the City, FT reading had become for dinosaurs. You were more likely to see traders with the Sun under their arm. Knowledge of companies was almost non existent choosing to concentrate on trading patterns (via mathematics) and the Greek alphabet. As an example of this new environment I offer two examples from my past. Both of which highlight the part Hedge Funds have to play in the City culture.

First up Gartmore. The then superstar head of Gartmore Hedge Fund made a presentation to the senior equity staff at an Investment Bank. He demanded that all price sensitive research and information should be given to him 24 hours before any other clients. If this were not agreed to, it would jeopardize the several millions of pounds paid to the Bank by Gartmore`s Pension Fund. Thus, in affect using the leverage of the pensioners of this country to gain him a huge salary but also to create massive returns for his investors who were in many cases senior people within the investment industry. It was not clever, it was fraud!

Secondly, I was sitting in for a colleague, and had to take charge of a large placing in a FTSE 100 company on behalf of a corporate client. So we were acting as adviser, broker and trader in the deal. When we got the green light to place the shares I made the decision to inform, first, the pension fund clients who were likely to be long term investors. Once this was done I opened it to Hedge Funds. Why? Well, we in the industry knew that telling them first (Hedge Funds) would have driven the price of the stock lower as they short the stock during the process then buying back in the placing. I knew this was a controversial decision because like all brokerage houses, the management fawned over hedge funds. Well, I was hauled over the coals for not telling a specific hedge fund who had close links to our management. I found out from my colleague later that they had been given a prior warning of the placing and had a large short position ready to make a fortune. Our management had a big interest in this Hedge Fund making big returns, I think you can guess why. Sadly, the individual who gave me the dressing down and implicated in the process is now in charge of the London Stock Exchange. Poacher turned game keeper I guess.

The City of London is now shrinking at an alarming rate with those highly paid jobs disappearing daily. As regulators demand banks hold more capital and separate commercial and investment banking activities, volume will continue its lower trajectory and hedge funds will find it more difficult to navigate and trade. They will have to get smarter or disappear. My guess the old Buffett adage will come into play `When the tide goes out you can see who has been swimming with no trunks on`.

As the City shrinks, the velocity of the spending which the industry had ignited will collapse. This will expose the South of England economy and house prices will fall which will put another nail in the tyre of white van man.

If the city is to be serious about rebuilding trust in the financial industry, first we need to venture back to the single capacity system. It has been proved with many high profile cases lately that the regulators and governing bodies have no will or ability to stop greed and dishonesty. I am not saying that the City was pure prior to big bang, indeed I know an old friend who was banned from the London Stock Exchange and the London Financial Futures Exchange for various insider and tax related reasons. All of which he was guilty of as he had a close network of Masonic contacts who raped the system. A certain religious group have also played a big part in city infringements.

Pension funds have been responsible for the biggest fraud committed in history. When I wrote an article for my election campaign in the 2010 General Election I highlighted that £100bn of Pension Funds in the UK actually lost money in the previous 10 years. The City grew over that period making ever greater profits. Where do you think those profits were coming from???? You the pensioner. Poor quality investment management (not to forget Gordon Brown) has blighted a whole generation of current and future  pensioners. All we have to show for this glorious period in financial growth is a banking system which only survived due to the generosity of the British government, with your money!

So when they tell you employment has gone up, just raise an eyebrow and wounder what quality of employment (and nationality) we have created. If all was so good, why have our high streets become ever more populated with Pawn, Betting, Pound and Payday Loan shops. We have had 20 years of some of the worst short termism a country could ever expect. The medicine to all this is not pleasant and no amount of sugar will take away the bad taste. Batten down the hatches for it will be a long hard slog. Cameron and Clegg have said much but done little other than spend more of the two precious commodities we have little of, MONEY and TIME.

 

 

 

 

Sunday, October 21st, 2012 Consumer Debt, Debt, National Debt, Predictions, UK 1 Comment

John `Bernanke` Wayne Rides to the Rescue. Too Late??

Hazard Warning Lights for Volvo, Scania and MAN (April 2012)… I wrote (back then and since) about my serious concern for the heavy truck industry at a time when the industry was talking of great things ahead in terms of sales. Just this week Paccar announced it expects third quarter (3Q) production to be 15-20% lower than the 2Q which is double the decline previously expected. August heavy truck sales in North America continued to indicate demand below total production. This leads me to a concern I raised back in March that at some point US inventory build would become a problem. The most recent data on Wholesale inventories confirms just that. The Inventory to Sales ratio is beginning to increase and of course with the fiscal cliff approaching this is not an ideal situation to be in. Overall industrial inventory data for last month is due soon. I believe this is becoming a global problem as consumption continues to struggle. Car dealers in China now have over 2 months of inventory on the forecourts vs half that last year. Hitachi Construction Machinery (Worlds 3rd biggest) announced that it will idle production at its China plant due to excessive inventory. This follows production cuts by  Caterpillar and Komatsu in the region. Everywhere you look in the heavy industry world, production is above demand. This is leading to the cancelling of upstream investment programmes as seen by the mining companies. Inventory of finished steel products at Chinese manufacturers is up to 12 days or +35% on 2011. This is on top of wholesale and final sale inventory outlets. The use of pre-registration cars to shift production is leading to a build up of nearly new cars in Europe too. With sales falling dramatically in the region as a whole, further production cuts will be forthcoming on top of Opel in Germany and the French manufacturers. The tonnage of ships being laid up is growing by the day and the Baltic Freight Index is now lower than the depths of 2008 and getting close to the all time low set in 1986.

In May I wrote Is Global Trade Growing? with the now familiar chart of trade flow via the Suez Canal. Below is an update which although on the face of it looks slightly more positive for Southbound (China) traffic, it is worth bearing in mind that total volume has fallen in the last quarter vs the corresponding year for the first time since late 2009.  The port of Shanghai handled 8% fewer Containers month on month in August which was down 7% year on year. Total cargo handled was down 15%. The southbound traffic data were influenced by a 100% uptick in fuel/energy products which masked a 50% month on month decline in the growth rate of containers, to only 2% (lowest growth rate since April)

 click on charts to expand

UK Commercial Property. I have been negative on this sector for the whole year. It was interesting to read the recent sector update by Savills highlighting the sector weakness in August. This is the forth month in a row of contracting activity and was the biggest monthly decline (-14.8%) since December 2011.

Japan. I am still short the Yen but my resolve was surely tested last night when it traded at 77.13 after the FED QE3 announcement. If it trades below 77.00 I am out and feeling considerably poorer and mighty stupid. I am still strongly of the opinion that it will suffer a fiscal cliff of its own. See my many previous blogs on the subject. The chart below gives the short term prospective but for a 40 year chart showing the Yen at 360 to the dollar in the 1970s, see my blog  January 25th  this year. I believe this could be the start of a 25% decline in the Yens fortune. Today the Finace Minister warned of headwinds for the economy and that the strong Yen was doing harm. You are not kidding!

Sterling. I still believe it is only a matter of time before the markets realise that the UK is a busted flush. Once the Olympic dust has settled, unemployment will rise once again putting yet more upward pressure on the budget deficit. The UK Government must realise this softly softly approach to deficit reduction will not work in an environment of global austerity. Urgent action is needed to cut government spending circa 30% and reduce the corporate tax and red tape burden. If the narrowing band, which has been in place since 2009, should break 1.64. I will have egg on my face. Should it break 1.54 on the downside, I will be on the right path.

 

 US Car Sales. I have been sceptical about the significant growth of sales which has been somewhat at odds with the lacklustre employment data. Having read a blog by James Quinn (senior Director of planning at a major University, he claims) some light has been shed on the matter. Sadly, his explanation is all rather familiar, sub-prime lending is now accountable for 45% of all car loans. As 77% of all new cars are financed it shows the quality of the customer. Loan duration is being extended ( beyond 5 years) and loan to value is rising reaching 110% on new cars and 127% on used. Not only that but 10% of all loans are categorized as `Deep Sub-Prime` eg a credit score requirement akin to that of Yogi Bear..OK BOO BOO faster than the average bear! Worryingly, consumer credit is back (net of the banking write offs) to an all time high. Has the FED really learnt no lessons. Pumping cheap money into banks who lend with no real concern. All this on top of the US Governments deficit which yesterday showed an $191bn August shortfall taking the 11 months of 2012 to $1.16 Trillion not far short of last year and around 7.2% of GDP. Some social spending was brought forward from next month so September should not be such a big surprise. Of course, when the government brings forward social spending it is just helping the retail data for that month to the detriment of the next. The cliff is getting nearer. Can you hear the waves yet?

 

 

 

 

 

 

 

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Consumption vs Transportation.

Where is the global economy going?

I refer to previous blogs which were negative on Truck Makers, Shipping and Commercial Property

Today’s release by Markit Economics on August Eurozone retail activity helps paint a picture of global activity. A statement from the research company sums up Europe ` The current ten months of declines in Eurozone sales (to August) is the second longest in the surveys history behind that of the 2008/9 crisis`. I urge you to think of the world as a whole and gauge where total demand is heading. Lets start with Europe, retail activity is falling for now but where is it heading? Well, it is not difficult to understand that the austerity measures having and due to be implemented, will drain demand still further. Sadly, inflation is not helping anyone. It is constantly just above the anemic wage growth leading to a contraction in disposable income. Interest rates are at rock bottom so no matter how they try, central bankers cant get money into consumers pockets. Banks are all but defunct with untold losses in real estate and shipping, to name but a few areas. Now the second biggest global economy, China. Who knows where consumption is heading but yesterdays article in the Telegraph of business collapse and bad debts really only starts to open the can of worms of bad debts. With real estate (and other asset) profits having driven a tsunami of consumer growth over the last ten years, it is difficult to see how they can repeat the massive boost to the world economy they achieved in 2009. With house price to wages (ratio) the highest in the world can they really afford to re-ignite that inflationary spiral. They will continue to ease monetary policy at a pace which suits them not the rest of the world as in 2009. Now the third biggest economy Japan. Having written several blogs on their impending doom, today’s weak retail sales data were no surprise to me and  I feel herald a consumption contraction which will last for many years. The 230% of debt to GDP the government carries will make it very difficult to stimulate growth. The shift in the workforce over the last ten years tells me thay have the western disease. Manufacturing jobs have declined by around 1,500,000 to the lowest percentage of the workforce since 1953 whilst their has been an explosion of around 2,000,000 people in social services and healthcare. This is not a recipe for long term growth as these new jobs carry a greater likely hood of lower earning potential. Now the big daddy, USA. Ask yourself a question `Do you trust politicians?`OK thats was a resounding answer. In which case the fiscal cliff is a real danger. With an annual budget deficit of over $1 Trillion for the whole of the  Obama presidency, it is little wonder that the economy has managed some growth. Of course it needed extra help from the Federal Reserve. All that has to stop and at the end of 2012 the Bush/Obama tax cuts are due to expire. Where do you think consumption will be when they finally bite the bullet?

So that’s the biggest economies of the world taken care of. I think we should look at the BRICs. I have written many blogs on the subject mainly due to my concerns (dating back to January) for Iron Ore. The dynamic growth of these countries was centred around the explosive growth in commodity prices and hence the unbelievable investment that followed. Just bear in mind, Iron Ore, started the millenium below $20 per tonne and reached $200 two years ago. I believe they have a chill wind of reality blowing there way which will see a dramatic reversal in inward investment resulting in lower consumption.

Can you imagine what it is like living with me? A bundle of fun for Mrs H!

ps The landscaping business is very poor so would love to hear from anyone who wants to employ a crazy bear with 28 years experience in the City.

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Thursday, August 30th, 2012 BRICs, China, Debt, GDP, Japan, Shipping, UK, US Economy No Comments

Warning Signs

BHP Billiton and Iron Ore Price.

In a previous blog `Are Steel Producers a Buy? I highlighted my concern for a potential significant decline in Iron Ore prices. Well, last Friday this key ingredient of Steel making, fell below $100 for the first time since its significant climb towards $200 started in early 2009. As you can see from the chart in that earlier blog, this price rise started just above production costs of around $40. So why am I highlighting this fall from grace? Iron Ore is, to me, like a litmus test of how big supply and demand in one of the most important construction materials is heading. This recent slide, from $145 in May, is not good. It has been driven by the significant fall in Steel prices to around $550 per ton. China is the key to all this price movement, firstly to the upside in the big push following the massive stimulus spending in 2009, and secondly, by overproduction now. The total production targets for China (in 2012) is another record at around 720 million tonnes. The problem is, no one seems to care where all this production ends up. Inventory is high in all elements of the production process and finished goods are stacked high around the country. A few drivers of the economy over the past decade are now suffering and they just happen to use a great deal of steel. Ship building (see numerous previous blogs) is imploding and will lose many yards to closure this and next year. Mining is starting to suffer as the raw material (Iron Ore) is of poor quality and cannot compete with overseas quality at this price. Coal is piled to the moon and back. Aluminium (see previous blog). Car inventories are very high at the forecourt with sales incentives getting bigger. The Iron Ore price is telling you that production cuts are around the corner. Interestingly, the lower steel price could have a big impact on countries that do not produce steel. Pakistan and Bangladesh for instance are two of the worlds big 5 players (India,Turkey,China) in ship demolition. The price they pay for an old ship is quoted in $`s per ton for the ships weight. The only reason they have become large players is the cost of labour. Instead of high technology, they use muscle. This is a very slow process. So when you buy a second hand ship and the steel price is stable or rising, all well and good. When it falls however, you are left holding a very expensive piece of rusting junk. As the price for scrapping ships falls with the steel price, more and more shipping companies will go under. The new price for ships is coming down so a vast inventory of ships will need to be revalued on company balance sheets which will frighten the hell out of the banks.

Despite the expectations of further money being thrown around by the global Central Banks, I believe that little things like higher VAT in Spain from September, the end of the Japanese government car scrappage scheme and the Greek pharmacist insisting on cash payments from the government to issue prescription`s from next week will all keep pressure on the bad news. With volume in the equity markets imploding over the summer, investment banking bonus`s will be non-existent. The big loser in that is of course that old whipping boy of my angst. the British government. The large chunk of income tax it receives early each calender year helps pay for some EU contributions or a new mansion for an African dictator. Not next year! The UK as I have said in many blogs, is on the verge of financial collapse. Just like Japan, it is all smoke and mirrors with huge liabilities not being accounted for with a budget shortfall which will grow in this fiscal, not decline as predicted. The government in Japan is expected to announce a reduction in economic expectations tomorrow, which is no surprise to several investment banks which have recently released research indicating they believe Q3 will be the start of another recession there.

So what about BHP? If you take a look at the charts on the blog first mentioned above. You will see the performance of BHP and the Iron Ore price. Whilst BHP mines an array of minerals, Iron Ore is the key to its success. Maybe the Chinese government will come to the rescue with a massive spending package  (driving steel consumption). In the meantime, I believe its share price is ripe for a 30% decline. To be fair I have warned of this before as I felt it would perform more in line with the commodity. The reality now is, it is exposed to a global slowdown. It has invested massive amounts in moving vast quantities of materials and they have to keep that machine running at full pelt. Unlike OPEC they cannot afford to turn the taps off until things settle down.

Is China causing global warming and seismic activity? As a side issue, a very rough estimate of Australia’s exports of commodities in the last decade must be around 10 billion tonnes.  A great deal of which, ended up in China. How much do you have to move from one side of the globe to the other, or from one tectonic plate to another to affect the earths rotation or plate movement?? Just a thought.

BRICs (see numerous previous blogs) of course have been given a big lift by the Iron Ore price in the past. If this current price fall is maintained for some time or weakens again, their economies will be hit very hard as will the mining machinery producers eg Joy Global and Caterpillar, both of whom I have highlighted in the past. I am sorry Jim O`neill but your theory could all be about to be exposed as a short term blip.

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Monday, August 27th, 2012 China, GDP, Japan, National Debt, Predictions, Shipping, Steel, UK No Comments
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