Euro

Geman Engineering.

I have been asked to explain why I believe Germany should leave the Euro…A quick note ahead of the ECB QE announcement.

It all started with the re-unification of East and West Germany…at the time, many were flabbergasted at the very generous offer by West Germany of currency conversion terms. The Ost Mark was converted at parity with the Deutsch Mark for the first 4000 marks and at 2:1 for other legitimate savings. This was seen at the time, as a very, very, generous offer and one that seemed economic suicide by the rest of the world. So, Germany was now lumbered with a country full of globally uncompetitive industries in the East. It needed to expand its output and export potential very quickly if this seemingly stupid offer was to succeed. Lets have a currency union with the basket cases of Europe who had traditionally relied on currency devaluation to allow them to continue their imprudent economic models. Of course, these poor economic models had always led to high structural interest rates which had been an impediment to consumer and in most cases government debt. Along comes the Euro. Suddenly, Germany is in bed with these lou lous and the currency falls dramatically. From its launch in 1999, the Euro lost 25% during the first three year’s. Great for Germany trying to re-capitalise an entire country. Around this time, mega investment was taking shape in the Mediterranean Counties. Low interest rates were spurring massive consumption and the big gainer in all this economic activity was construction. For instance, prior to the crash, Spain was the second biggest influence in global growth behind China. Of course, who was the biggest beneficiary of all this debt fuelled consumption and investment…come on you can guess….YES! Well done…Germany. Now, with the Eurozone credit cards maxed out, what does the worlds most prolific exporter need to do…Correct again. Encourage a weak Euro so as to sell its exports under the veil of a tin pot currency. All the prevarication since the crisis began has done little to install confidence in the Eurozone.

So, if Germany were outside the Euro, two things would happen. Firstly, a German currency would be in great demand. I believe vs the Dollar it would be 25% higher than the Euro today. Remember, Germany is in rude economic health. Like Switzerland, only possibly more so, it would have significantly negative interest rates. Secondly, the Euro without Germany would be 25% lower vs the Dollar than it is now. This would allow the strict austerity measures, strongly encouraged by the Germans, to be adhered to whilst giving a dramatic to boost to the industrial potential. It would reverse the deflationary pressures currently exhibited. Yes, interest rates would rise but investment would flow providing this ejection of Germany was linked to not only a continuation of strict austerity but also a complete overhaul of restrictive work practises as seen in places like France. OK, bond holders would get burnt but surely the people of Europe have suffered enough whilst bankers and financiers have grown fat on the spoils of a ridiculous situation.

 

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Thursday, January 22nd, 2015 Consumer Debt, Debt, Euro, National Debt, Predictions, USD No Comments

Greece Has Trump Card…USE IT!!!

Germany, as I have stated on many occasions, starting with  =”The Elephant in the Room.”  (June 2012) and again in =”Kurzarbeit achieved where Blitzkrieg failed!”  (January 2013)… is hiding in a weak economic zone to conquer the export world with an unfair advantage.

Heads up to IGINDEX and other Spread betting companies….trading idea : Short EURO notes with the GREEK suffix of Y  vs  Long EURO notes suffix X (Germany)…just an idea in the run up to 25th Jan election….I digress, back to GERPEL…

Todays move by the Swiss National Bank just reinforces just how important it is to the German economy to be linked with basket cases such as Greece. To put it mildly, Germany is a parasite of Europe. Its fortunes in economic terms are going from strength to strength. The weaker the Euro gets, the better its globally dominant export industry gets. So, Greece has a chance to play dare with Germany. As I write, the DAX is nearing 10,000 which is not far from an all time high. If the Greek elections go according to the polls and we have a new government hell bent on refusing to play by the debt rules set out by the Troika ..EU..IMF…ECB… it will lead to a Mexican Standoff between Greece the EU and Germany (not the IMF). The EU has stated that it will not renegotiate the terms of the bailout, primarily due to the snowball effect of demands from Spain, Portugal and Ireland should it do so. If Greece decides to leave the EURO as a result, the economic implications for Spain and Portugal, would be significant as they share similar economic profiles.

The mere hint of the basket cases leaving the Euro would, potentially, imply that a REVALUATION of the Euro could take place. This could result in a 30% appreciation once the anchors are removed from the economic group remaining. Excluding Greece, Portugal, Spain, Cyprus, Malta and possibly Ireland the focus would be squarely on a more solid economic footing. Sadly, such a currency move would prove fatal to the newer members situated in Eastern Europe and they would need to think seriously about membership of a club which is dominated by the German export machine.

So, Greece really has the entire German economic testicles in its hand. If they look squarely in Angela Dorothea Merkels eyes and say goodbye! The DAX would fall dramatically and all hell would be let loose. France would fall into a steep recession and Italy would itself consider bringing back the Lira as unemployment would be out of control. Interestingly, German bonds would be very volatile. Who knows where investors would go to find sanctuary. Negative interest rates in the EURO region could be the norm. Bonds markets would be in disarray as no one would know how to value. Shares, Property and other assets, in the countries leaving the Euro, would be bid up. Greek ship owners would repatriate the huge hoards of money they transferred to Northern European banks at the outset of the Greek crisis.

Currency printers like DeLaRue could make a fortune if national printers could not cope. It currently prints for UK, Finland, Portugal, Holland and Ireland (Not Greece). There is around 16bn banknotes in Euorland worth around Eur 1 trillion…

With reference to the various banknotes in the EURO: Y= Greece, M=Portugal, V=Spain. I have no idea what would happen to the value if a country left the EURO block but I would rather not have Y denominated Euros just in case….The country letter is part of the 12 digit code NOT the six digit code which just identifies who printed it.

 

 

 

 

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Thursday, January 15th, 2015 Euro, Predictions No Comments

A Yen For Your Faults!

I know its a crass headline but hey ho… ho ho ho.

Update on the previous blog re Dollar/Yen exchange rate.

If anyone was brave enough to follow my idea, may I make another suggestion. The option I suggested buying, the $/Y 102 call at 20 pips or basis points, is now trading at 100 basis points. Hence a 400% gain in less than one month. Whoppeeee it has helped pay for my daughters 21st party. As I need the money I have taken some chips off the table. I still fear however, that Japan is on a collision course with Economageddon. I still expect the five year low for the $/Yen (103.73) to be reached (and breached to test the 1998 downtrend: see last blog)  but time is running out with these options and breaching a five year high may take a while. The expiry is 18th December and with less than three weeks left, I have taken out some protection. I have sold (or written to give it its correct term) the 103 calls which are trading around 50 basis points. Hence, if the momentum is lost here and no further gains are made (in $/Y) then at least I collect all the premium from the 103 calls which will expire at zero. Sounds complicated but believe me with a little explanation it is quite easy. I would be more than happy to elaborate to any subscribers if required.

It is worth noting that the Yen has been far weaker against the Euro, falling 50% in 18 months. Yes! 50%…and 40% against Sterling. So when I say that the Nikkei Index will be above the Dow soon, it makes some sense. Additionally, when as I have said in previous blogs regarding Japan, they are exporting their deflation, again it makes sense.

UK…The Great Lie.

You cannot be serious, I am referring to all those very highly paid economists who walk around swanky streets with their head wedged firmly up their fundamental orifice. If they looked around the country, they will see that it is only debt fuelled demand that is driving our economy. In the recent 3Q GDP data much heralded by one and all, the most important element was the 2.5% fall in exports.  So much for re-balancing the economy away from Gordon buffoons appalling economic model. The trade deficit can only widen still further from here on in and that is no good prospect (other than for those lucky overseas companies who are selling happily into our debt binge).

Because of all these dum-fuchs speaking of the economic upswing with reverence, Sterling has this week broken out of its 5 year downtrend against the Dollar. Little seems to stand in its way of reaching $/£ 1.70. I would caution (as you would expect of a debt perma bear on the UK) that this glorious new found optimism is just digging us deeper into the mire. So, I have no option but to abandoned my idea that Sterling will fall in the short term. However, my long term goal (often mentioned in previous blogs)  of Sterling testing the all time low against the Dollar (1.08 ish) is still firmly my expectation. To that end I have scraped the barrel with a very long term chart which I feel shows the growth of a vague head and shoulders going back to 1996. This confirms 1.70 as a massive resistance. Maybe by then this crazy accretive currency will finally kill off any hope of a recovery in Manufacturing we so desperately need. If you were wondering how Sterling was doing against other trading partners, take a look at the other charts below.

This is Sterling Yen. Just imagine how much harder it is becoming for companies like JCB to compete or for Whiskey companies for that matter (anyone for independence?) I could go on.

Even against the Euro things are getting tougher. The huge benefit exporters got at the beginning of the year are steadily being taken away. British prices have got 5% dearer in currency terms since August.

Do not expect our Manufacturing Industry to be able to compete in this environment. All the heavy lifting of the British economy will have to be done with Government and Private debt. Sound familiar????

YOU HAVE BEEN WARNED!

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Thursday, November 28th, 2013 Consumer Debt, Debt, Euro, GBP, GDP, National Debt, Predictions, UK, USD, Yen 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

Kurzarbeit achieved where Blitzkrieg failed!

All Bow to the Conquering Germans.

I wrote in June last year `The Elephant in the Room` which called for GERPEL (Germany to be Expelled). Of course this was just my silly acronym to counter GREXIT (Greek Exit). Why am I writing today? Germany has released its January employment data which shows unemployment has fallen to its lowest level in 20 years or since the Euro was formed. Now look at the rest of Europe. French unemployment is at a 15 year high and going higher rapidly. Southern Europe all time highs. Holland is at an all time high. The official number of unemployed in the EU is around 19 million people with a whole generation of young without a job and little if any prospects of getting one. Except that is, for the youth of Germany where the unemployment rate is astonishingly low. Let me give you two reasons why I think this has happened. First, KURZARBEIT, a reference to a system whereby German companies can temporarily lay off, idle or part-time use, at the expense of the Government. During the 2008/9 financial crash, 1.4 million workers were kept employed on this temporary basis (costing the Government Eur 5.1bn in 2009 alone) allowing German companies to cut costs dramatically but retain a skilled labour force. Stupid countries like the UK have never done such a thing (Nationalisation does not count), instead relying on fair play and economics to play there role allowing companies to go bust. Hence we have lost most of our manufacturing capability over the last 50 years. Admittedly, unions and poor management have played there role too. Nevertheless, during the recent downturn, the UK pledged support for the economy by doing such crass things as Cash for Clunkers. As most of our cars were imported, who benefited most from that policy? Leave it with you. We pledged billions of pounds on green projects making the UK the biggest global player in wind turbines (55% of the Worlds Capacity see `City of London Rapes Pensioners` for details) who do you think supplied most of them? Yes, you guessed it! Our attempts to reflate the economy during the crisis cost us dear but did no real good. Germany on the other hand, benefited from the collapse of the Euro. This helped keep there place at the top table of world exporters and subsequently lead to the re-employment of sheltered workers.

Now you would think that with this ultra low unemployment consumer activity would be growing dramatically. This would hopefully imply that Germany would be coming to the aid of its the struggling EU partners by importing vast quantities of goods. Wrong!!! German Retail Sales for December were also released today and they could not have been worse. Down 1.7% vs November, Down 4.7% vs December 2011 (although 2 less days) and 2012 was down 0.3% on 2011. Germany has no intention of helping the industrial capabilities of the rest of Europe, only itself! Its recent decision to exempt 1550 large industrial companies from the Green energy surcharge other countries are imposing, especially the UK, and put all the cost onto the public and small domestic economy focus companies, gives you one idea how they strengthen their export focused industry and restrain disposable incomes.

Japan has now decided that it wants to export more to the rest of the world whilst not encouraging consumption. In fact the finances are in such a mess that consumption is the last thing that is going to happen in Japan. The budget proposals which will raise spending via public works and corporate tax brakes, lowers welfare spending and raises taxes for the rich in both income and inheritance. With little oil reserves of its own, the near 20% fall in the Yen (since November) will have a huge impact on consumer activity. With Zero wage growth and a budget designed to raise the tax take, lets face it they need to, disposable incomes are going to be squeezed. Of course, we should not forget, Japan has its own cliff. The Consumer Cliff. From 2014 consumer taxes are due to rise by 100% (in two stages). The good news just keeps on coming. The World is in just too much debt and all the Central Bank hype in the world cannot change that. The risk is just shifting from the people via Government Debt to the people via Central Bank balance sheets.

For the next blog I am thinking of Sweden which I believe is extremely exposed to global industrial competition in its very narrowly focused exports. I started thinking more cautiously about this country, which incidentally I love with a passion, back in September Swedish Macinery. Even earlier and since proved totally correct `Hazard Warning Lights for Volvo, Scania and Man`. I will be arguing for Volvo, (who did, as I said they would, a deal in China last week to cement there global leadership) to spin off the Industrial/construction machinery division and merge it with Atlas Copco. Or just buy Atlas Copco and spin the division into it. More later

 

 

 

 

 

Thursday, January 31st, 2013 Euro, Predictions, Yen 2 Comments

Swedish Machinery

Transportation and Steel

Today’s release of the Swedish Purchasing Managers Report for August shows a really significant drop in one of the components. The New Orders element dropped from 51.2 in July to 41.1 in August. Why is this significant? Well, the economy in Sweden is very focused. Machinery,Transport and Equipment make up 44% of Exports and 40% of Imports. As transportation is a leading barometer of economic activity it is important to watch this sector closely when the global economy is so finely balanced. I have blogged several times about my concerns for Volvo and this most recent data, whilst not suggesting transportation was to blame for the decline, can only reflect badly on the sector due to its high proportion of GDP.

Interestingly, mining machinery manufacturers globally, have warned of slowing sales in the past two weeks. I have been talking of my concerns in this sector many times. Sweden is a leading player in this field Atlas Copco, Sandvik etc. What must not be forgotten of course is that this is the most Steel hungry industry group. Regular readers will know my major concerns in this field. See regular blogs on Iron Ore , Steel and BRICs and Lucky Jim Oneill

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Monday, September 3rd, 2012 BRICs, Euro, Steel No Comments

Hazard Warning Lights for Volvo, Scania and MAN.

Kenworth trucks announces job cuts.

The number two manufacturer of heavy trucks in the USA announced a 10% cut in employees at its Ohio plant last week. As I stated in Look beyond the noise, the potential for disappointment and production gluts was more than real. Following last years 70% increase in sales, expectations for a strong 2012 looked, to many, well founded. If the disappointing first quarter sales are not reversed, expect more substantial job cuts across the industry.

I believe European truck demand will shock the industry this year. The heavy segment saw (in March) its first year on year fall since the upturn began. Production has already been pared back to allow for a decline in 2012. I expect significant heavy job losses as it becomes clear demand will be far weaker. Why? Disposable income implosion. Demand throughout Europe will, in volume terms, fall throughout 2012. Disposable incomes are being squeezed from both sides. Higher taxation and real salary cuts on the one hand and erosion via inflation on the other. The most recent industrial/manufacturing output and sales data highlight the significant falls many industries are experiencing. I realise these were expected in the first quarter and most analysts have pencilled in a recovery in the second half. Somehow I just cant see that happening. Austerity is here to stay, at least for the next 3-5 years. In this benign economic environment the only way governments can reduce deficits is to tax more or spend less. Either way, disposable incomes fall. The economic peaks of yester year were achieved by the disposable incomes being greatly enhanced by the asset boom frenzy created by the Euro. The apparent elimination of risk in lending to poorly run, corrupt countries like Greece, Spain, Ireland and Italy reduced their borrowing costs to AAA levels. Of course they were going to spend! Now the rose tinted glasses have come off, reality has prevailed. It will be a long time before they positively affect consumption in Europe. In the mean time, the flow (volume) of goods throughout Europe will slow.

Daimler is number one in sales followed by Volvo, Man and Scania. Volvo has forecast a 9% reduction in European sales but a 20% increase in US sales. They have a very big margin of error on both, to the downside of course. I expect them to under-perform badly this year. The other players in the game are interesting. Scania is now effectively controlled by VW. MAN own 13% of the capital (result of failed take over) whilst VW own 45%. Last year VW gained a controlling stake in MAN thus combining the two into control (87% votes). It is clear VW wants to challenge Daimler’s global lead. It is only a matter of time before VW makes a bid for the rest of Scania. Scania has a reputation of high profitability and has excellent exposure to developing economies. It has one other very important factor. It is in the EU but outside the Euro. If the Euro core nations are forced (as I believe they will be) to break away from the weaker, debt laden, life support aided PIIGS, then production in Germany will become very expensive as the EuroMark becomes a global safe haven. The situation of VW, MAN and Scania reminds me of the ambitions of Deautsche Post who owned various shareholdings in the intermodal transport arena back in the late 1990`s. They saw the Internet shopping boom coming and put all those pieces together which included a full takeover of the Swedish transport group Bilspedition (BTL).

The UK is my next port of call. The next blog will highlight why I think the valiant efforts of George Osborne will not be able to avert the disastrous economic consequences resulting from the policies of Tony I Couldnotcare and Gordon Brafoon. The end is nigh for the UK.

Next will be back to shipping. An update of the AP Moeller Maersk chart will be interesting and a chat about why Japan has just announced a new low interest finance deal for anyone building ships in Japan. Once the worlds biggest builder and now on the verge of having no order book for 2014.

Remember, tranportation is the life blood of the world economy.

 

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Monday, April 16th, 2012 Euro, Shipping, UK 1 Comment

Review of blogs to date

Nov 10thTesco (being the only company mentioned to date) was highlighted as losing out to discount stores. Luxury retailing was a sector to watch and I still expect that bubble to burst in 2012. They have the highest earnings multiples in the sector. I still think the US Postal service will be a major headache for US Gov in 2012 with possible job losses of 150,000.

Nov 26th…UK Retail… Internet sales, Money Supply and Velocity thoughts all still apply.

Dec 18thGreece. I still believe the chances of them leaving the Euro by April 2012 are about 85%. Just an update since them. Take a look at Defence spending. In 2010 it was E7bn and at 3% of GDP second only (in GDP terms) to USA among NATO members. Whilst 2011 saw its procurement spending fall by E500m, proposals for 2012 include a 50% increase in NATO contribution to E60m and Defence procurement up by 18%. Sadly, the Social welfare budget in slated to fall 9% or E2bn. The most important point I wish to make is that Germany is the main beneficiary of this spending (France second). Portugal and Greece are the two biggest customers for  the German defence industry. I propose that Europe throw a blanket over Greece in terms of border concerns allowing it to slash defence spending by billions. Surely Germany and France should focus on Greek wasteful spending before throwing the people into poverty. Maybe they are more concerned with employment in their own countries!!!! Maybe when Greek people start dying from the huge shortage of life saving medicine, as is widely reported, they will focus on the important things in life.

Spain…Nothing has changed other than the reality of regional deficit deceit is now out in the open. The new government has raised 2011 budget deficit to 8% vs 6% previously stated. Headlines of regional debt downgrade will continue. Property is still 20% over valued with the banks complicit in holding up the value of their vast portfolios. Local authorities continue to cut services, lighting, salaries and general spending. Spain will return to a tourist country. Long live the Peseta, cheap holidays, sangria and Una Paloma Blanca!

Japan…Nothing further to be said. Debt (Y1 Quadrillion) and average citizen age growing fast.

Dec 19th…The Indian Government did remove the import tariff on Jute but this has not stopped the negativity in the industry.

Dec 19thChina. with the growth in auto sales below that of the US for the first time in 14 years, Inflation down to 4.1% and a slower economic growth expectation for 2012, many now forecast the authorities will ease monetary policy. I am not so sure they will want to push the growth button too early. If the world is slowing down, why not wait until that slowdown is well underway and commodity prices have weakened still further. They cannot save the debt laden world from its fate so why try.

Jan 2nd Ireland (Rep. of) Strong growth in the 2011 exports of the Agrifood Industry were reported today. I still believe Ireland will go back to what it does best.

Jan 8th…Sterling closed below its important £/$1.5350 level yesterday. As is the norm with these breaks, it has regained that level today following a fall to its 12mth intraday low of 1.5270. I believe it is now on a downward path to levels mentioned in earlier blog. Of course this is great for the FTSE 100 companies which have $ earnings. Inflation will prove  stubbornly high vs average earnings growth.

News in the media regarding employment has a particularly bleak bias today with news of job losses from Vestas, Delhaize, RBS, UlsterBank (RBS sub in both Rep of Ireland and N. Ireland) and Ladbrokes (Rep Ireland)

Thank goodness the Spanish and Italian Government bond auctions have been well received today. Perhaps all is now OK?

 

 

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Thursday, January 12th, 2012 China, Consumer Debt, Debt, Euro, GBP, GDP, National Debt, UK, USD No Comments

Beauty Queen suffers ill wind…Phew!!

Important FX Chart points in £ vs. the $ and Euro.

David Cameron and his chancellor are basking in the glow of accolades bestowed upon them for their tough budgetary approach to the UK`s dire debt problem. Markets have rewarded them with borrowing costs at lows not seen since the 19th century. They should be careful of Greeks bearing gifts!

The coalition are following a correct path of attempting to reduce the government led economy and raise the Industrial Private sector. Firstly, they need to reverse a legacy of the Blair/Brown era which oversaw a reduction of 1 million manufacturing/engineering jobs (a continuation of the previous government) to be replaced by 1 million additional civil servants. At the end of the 19th century, Britain was the leading global manufacturer with 15% of total production. Today it is 9th with 2.2%. Still not bad considering we have less than 1% of total population.

The Ill Wind  *

Sterling has a very important part to play in this re-habilitation. The decline of Sterling (c.25% trade weighted) following the financial collapse, helped, along with the promise of pro- industry reform, breathe life into the now feeble (in terms of total GDP) manufacturing sector. That strong uplift (resulting in a 15-20% improvement in European competitiveness) to export potential, is now showing signs of reversal.

In the second half of 2011, Sterling advanced 6.60% vs. the Euro and fell 5.48% vs. the Dollar. Given these movements UK plc has lost 5% in export competitiveness vs. our largest trading partner (Europe). It could have been worse (-9%) had Sterling matched the Dollar`s performance vs. the Euro.

The additional Pan European austerity measures implemented from January 1st 2012 will reduce disposable incomes still further than the negative wage growth I expect this year. Inflation adjusted incomes in Portugal, Ireland, Italy, Greece and Spain (PIIGS) public sector, will likely fall by 5%. These countries have extremely bloated public sectors which will suffer further as budget cuts take hold. This environment of lower spending is not one you want to be losing traction in.

Making things even worse is Sterling strength vs. the Eastern European currencies over the last 6 months e.g. Poland +17% Hungary +23%. Of course the dire prospects of Hungary and its possible economic collapse have not helped. Industrial investment in Eastern bloc countries has ballooned since EU membership, and as such, view the consumer markets of the rich western partners good hunting grounds for their cheap labour exports. Couple this with talk of significant labour reforms in the PIIGS (labour costs grew 20% vs. Germany 9% over last 5) and things start to look a little ominous for the UK in the coming year. Remember that if they (PIIGS) manage to reform stiff labour regulations, they have enormous unemployment e.g. 23% in Spain.

IMPORTANT CURRENCY LEVELS..I am not saying these chart points will be broken, just what if they were.

£/$  Is near a very important support level of 1.5350. Having been used as a technical support with several bounces from that level going back to Sept 2010. The more bounces the greater the move if breached. 4 such bounces make this a key level. Initial target being 1.50. Two reasons, one being it`s a big round number and they always act as support/resistance, secondly, a trend support line from March 2009 and May 2010 lows.

However, this break of 1.5350 is more likely to herald a move to £/$ 1.40 which is the low point of the last 10 years having acted as support in 2001 and 2009

£/Euro Is near an interesting but not so strong support of 0 .82 or as I prefer 1.22. A breach would indicate a fall (rise in Sterling) of around 3-5%. However, a breach of the 0.78 (1.28) level would indicate a retrench back to 0.68 (1.50 Euro`s to the £) …Unlikely…

So, to recap; if Sterling falls vs. the Dollar our input costs rise putting downward pressure on corporate margins (if prices can`t be raised). If Sterling rises vs. the Euro, will the last one leaving Britain please put the lights out!.

 

* I have assumed a 30% Industrial cost exposure to the $ via Energy and Commodities. I have no idea if that is right..

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Sunday, January 8th, 2012 Debt, Euro, GBP, GDP, National Debt, Predictions, UK, USD No Comments

IRELAND…Never was a silk purse!

Happy 2012 and good riddance to 2011. That seems to be the consensus of most economic journalists. The consensus seems to be that yes things will get worse in the first half but light can clearly be seen and by the latter stages of this new year, all will be fine and dandy.

As you might have guessed I beg to differ. 2011 as for several years prior, saw a 10% increase in global public debt. Various estimates put it at around $54 trillion. The thing to remember is that this has grown from around $20 trillion in 2000. There can be only one response to that degree of debt build up, GROWTH. And by George did we get it in the bucket load. To highlight just what happened on a more macro scale I am highlighting a small country which benefited significantly and in turn helped drive the world economy even faster.

IRELAND (Rep. of) It could be in worse than Greece.

Widely regarded as an economic miracle back in 2007, it is still a miracle. A miracle that people in power both political and business could be so stupid. The story started so well and with very good economic management following a crazy spend too much and then tax too much period (1977-81 debt binge 1981-1986 tax binge). Following a currency devaluation (ERM terms) in 1986 (Mainly due to the weakness of Sterling, Ireland’s biggest trading partner)  tough spending restraint was implemented to bring down borrowing. A wage/tax agreement meant wage growth stabilized. All this was agreed whilst the UK boosted consumption with heavy tax cutting. The real growth in the economy did not appear however, until 1993. Following a stormy entry and subsequent exit of the ERM by Sterling, Ireland needed another devaluation in 1993. From then on its economic performance was on a meteoric path. The large sums being donated by the European Structural Fund equivalent to 3% of GDP were helping to vastly improve infrastructure. Unemployment went from 16% to 4% by 2000. As the decade progressed and the 1999 EMU launch looked more certain, overseas investment piled into the high interest rate countries, Ireland Spain etc. Given that real interest rates in Ireland averaged 7% prior to the EURO and minus 1% from 1999 to 2007 you can see why. Government spending doubled between 1995 and 2007. GDP grew by 10%+ between 1995 and 2000, averaging 6% 1993 to 2007. Perhaps the most important change was in migration. Long known for high emigration and population decline the economic miracle drove the population higher via immigration, both returning migrants and overseas workers.

All this was of course great news to the Irish Exchequer. Tax revenue soared helping to fuel the machine. Sadly, this is where one of the early mistakes was made. The huge rise in cyclical tax revenue, stamp duty rose 1300% from 1993 to 2007, was seen as structural and its abundance was used as an excuse to reduce real structural taxes eg Income related. Housing starts went from 30,000 in 1995 to 93,000 in 2006. House price inflation between 1996 and 2007 was 330%. Car sales from 64,000 in 93  to 186,000 2007.

Sadly that is all in the past. The last few years have been well documented. 2012 could actually be even worse. Fiscal measures for 2012 include a 2% VAT increase. Motor tax rise between 7 & 30%,  a one off 100 euro household tax, Toll road duty up by 10% on many routes. Bus fares up by approx 10%. Additionally many local authority charges are being raised like a 50-100% increase in burial fees (certain areas).

Given the over reliance on cyclical taxes in the past, the likelihood is that these tax changes will only drive revenues lower not higher. Housing starts are likely to be below 1995 for some time due to a glut of unsold properties. House prices have dropped 47% from peak. Car sales could well be lower in 2012. January is responsible for 25% of annual sales and Q1 50%. The second half (traditionally vey low volume) of 2011 saw a 40% decline over 2010. If January continues this trend, expectations could be for a figure close to 2009 when total sales fell below 1993. The various tax increases applicable to motoring coupled with a decline in the Euro (1/3 of sales from US/Asia) could well confirm the worse. Average car age is only just getting close to long term trend (8 1/2 yrs) having been driven lower (5 1/2) during the boom times. Consumption comparisons got a boost in December from last year due to better weather and discounting. This has not stopped further closures in the retail market.

All things being equal the long term trend toward net migration, which has returned, will continue. More importantly, if the EU carries out its plan to change corporation tax rates to point of sale not production, Ireland will once more return to an Agri based economy. Non Agri employment as a % of the workforce went up 50% during the boom.

Why does history keep repeating itself. Ireland has assumed all the debt of its banking industry which centres mostly on the housing bubble. Its debts are unsustainable and as 2012 brings weaker consumption coupled with higher unemployment, the reality will finally dawn…

Warren Buffett once said `Only when the tide goes out can you see who is swimming with no trunks on` …well, until global public debt starts to decline the tide will not go out. So many naked bathers are yet to be discovered. 2012 could well be the year to cover up the eyes of the young and innocent.

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Monday, January 2nd, 2012 Consumer Debt, Debt, Euro, GBP, GDP, National Debt 3 Comments

Economageddon..The end is near..Thank goodness!

In the words of the late prime minister Harold Macmillan

 `A successful economy must be based on the production of wealth and marketable goods, We must transfer away from an overreliance on services, back to production. We cannot go on borrowing for ever`

During a televised interview at the time. He held up ten fingers stating that at the time of great prosperity in Britain, 7 out of these ten would be concentrating on exactly that (production) and the other 3 would be involved in support roles (National and Local govt) and services. He then stated that currently (1976) 3 people were involved in productive activities and the other 7 were in support roles. Hence, the government finances and social divide were in a mess.

Why is this important? The world is now closing in on the biggest economic catastrophe in history.

Greece will leave the Euro very soon.
Its finances are in exactly the same shape as explained by Macmillan. Prior to the financial collapse 70% of the working population were in the service sector (yes this includes tourism but the large inefficient  public sector is the problem).

The increases in taxation over the last year have made no impact on the annual debt increase. The economy is contracting at a 5-6% rate and has contracted for 4 years. Debt has increased in 2011 by €20.5bn vs €19.5bn in 2010. December will see a further cut in salaries (25%) this time for workers in 11 public sector companies (Electric,Gas,Water,Mining, Port Authorities, Postal and finance).
January 2012
will be the final straw as income tax is being increased and a property tax imposed collected via utility bills and Electricity bills are due to rise by 15%…Merry xmas… 2011 saw a ban on property repossession which is storing up further problems for the banking system. Consumption will implode further along with taxation. The one bright spot is the Black economy. Already estimated to be twice the size of Germany and the UK. This will clearly grow if Greece attempts to stay in the Euro. Thus hampering any further debt collection. Germany is reluctant to allow its default and departure as the repercussions will be vast not least of course in the German banks who have underwritten a large proportion of the Greek Credit Default Swaps (CDS or Debt Insurance to the lay man). Yesterday the IMF representative in Greece claimed further tax increase would be pointless and implied the
further spending cuts would be the best move. The implications on Greek departure are too numerous and best left for another day. However, an interesting thought. If you go and borrow E1million from a Greek bank in Athens, transfer the money to a London bank, would the debt de-value at the same rate as a deposit and become Drachma?  http://nationaldebtclocks.com/greece.htm

 

Spain is lying all the way to the ECB. Given that the Spanish banks are being kept afloat by the ECB it is important to feel that the Government and institutions are being honest about the problems they face. Think again, they are Mediterranean. How can you tell if they are lying? Simple, if their lips are moving they are lying! Local authorities have been delaying
paying wages all year eg the beach life guards and fireman in Benidorm (approx €2m) who were not paid in the summer, protested and were finally appeased when promised payment when the winter water rates were paid. Hospitals have a record of not paying Pharma suppliers, some owing several years back payment. Other are cutting off the lights on main roads, selling off fleet vehicles and cutting salaries sharply. A report out today states local authorities have 900,000 too many employees (remember Macmillan!). Although official government
debt is only 50% of that of Greece per capita, the devolved regions cannot be trusted to give a true level of debt. With so many bills going unpaid the debt must be significantly higher. Energy prices are going up 15% in January and several car manufacturers will be mothballing production during the first quarter. Unemployment will go higher from here. During the boom times Spain was building around 800,000 annually. It was importing so much that it was the third biggest driver of Global growth. Now, with 1.5million ish homes for sale
and only 25,000 per month selling rate, it could be prices have another 20% to fall in 2012. This will help to bring the fall in line with Ireland. The Partido Popular has confirmed it will scrap the E210 monthly housing allowance paid to young householders. As a side issue, the EU encouraged and financed some crazy investments in this country not least unwanted airports and approx E500m to refurbish the bullfighting facilities. As in Greece, here too the Black economy is higher than the norm and will only grow as further taxes are imposed. Both
Spain and Ireland are seeing modest but important population declines due to poor employment prospects. This makes the debt turn around all the more difficult. http://nationaldebtclocks.com/spain.htm

 

Japan. The Elephant in the room will soon roar! When
we talk about debt, Japan is the daddy of them all. Nearly Y1 Quadrillion or 200% of GDP. How can they sleep at night! It leaves my ghast well and truly flabbered when I hear people saying that all is ok as they have such a large savings pile via the public’s pension pot. The total population size has stagnated around 127m and is widely forecast to start a gradual downward path. However, the population is only holding steady due to the extended longevity of life. Over 65`s went from 7% in 1970 to 14% in 1994 then 20% in 2006. It took
Sweden 85 years and France 115 years to go from 7% to 14%. This is a double bad whammy. Firstly the economy is not benefiting from growth in numbers but secondly and more importantly, it is ageing rapidly. 2012 sees the start of the peak retirement cycle lasting some 20 years. This is the last thing you need with a massive debt mountain. Politicians have been indecisive and lack public backing. Talk of raising the 5% consumption tax is a hot potato. Salary cuts are being perused by big business, government officials and public service in
general. Consumption is slowing and the strong currency is strangling output. The re-build package is to be funded by a disputed measures of tax increases and disposals of the large Tobacco and Postal stakes. Deflation will become an extreme problem in 2012 which in turn will add to downward pressure on tax revenues.

http://nationaldebtclocks.com/japan.htm

 

 

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Sunday, December 18th, 2011 Debt, Euro, Japan, National Debt, UK, Uncategorized, Yen 5 Comments
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