GBP

Size Is Not Always Everything…Economically Speaking

The UK is one giant PONZI scheme….STERLING WILL RE-TEST £/$ 1.08….ITS HISTORIC LOW.

I have been considering this post for a long while. I have written on many occasions how the political leaders of this once great nation have systematically, over the last 40 years, dismantled our strong financial position. Making short term decisions which resonated with the electorate have caused the very fibre of society to be diminished. I will attempt to keep this as short as possible but as you can imagine, calling the destruction of the once biggest manufacturing nation in the world cannot be just a few lines.

First up, consistency. I am not like all those highly paid economists in the City. I have a long term interpretation of economics and stick to it. In January 2015 I wrote “Sterling Crisis Looms” …The post examined the history of our trade relationship with the world. It is easy to see that even with a strong economy and a positive trading balance  it was still possible to have a currency weakening against another. In 1948 we had a trade surplus of 10% of GDP. This was no match for the soon to be biggest economy in the world. The management of our finances over the last 20 years has been nothing short of a disaster (see second chart)…this coupled with our ever growing trade deficit in goods and you get the picture as to why I still believe that Sterling is heading down. Overseas investors have been happy to buy UK assets to park money in a supposedly safe haven. Chinese, Russian, Greek…you name it they have all been desperate to get money out of their own countries.

As you can see. The trajectory of our debt profile has taken on an ugly look. Admittedly, very high inflation following the Middle East Oil shock of the 1970s did not help. Nevertheless, the picture is grim…what’s more, where the chart below finished in 2010/11…..

This one picks up the pace somewhat. You can see that austerity is just a figment of George Osborne’s imagination. The annual deficit for fiscal 2015/16 will come in around £75-80bn. That’s quite a staggering sum in itself despite Mr Osborne claiming he has done much to get it down from the staggering deficits post the financial crash. A more sobering thought might be to consider that the TOTAL DEBT ACCUMALATED by this country from the birth of the Bank of England (1694) to the turn of the 21st century was around £350bn..not bad…In 15 years the UK has borrowed, during a low inflation period, around 350% of the previous 306 years…ok, inflation has greatly exaggerated the maths but you need to be shocked to understand.

 

The UK debt growth does not stand out as particularly different to many developed nations. Indeed, the USA has similar profile of state debt to GDP from the 1960s. Its what has been done to both undermine our countries underlying value and to quantify its quality of service now. Lets break those three things down. First, our underlying value as a nation. Think of the UK as a company balance sheet. Our assets, from the Thatcher era onwards have been stripped and continue to be stripped. Once publicly owned assets such as Energy Retail (Gas/Elec.), Post Office (incl. BT), Water, Banks/Savings, Housing (Social), Energy Wholesale, Transport (Rail/Busses), Land…the list is endless both here in the UK but also overseas (assets). These would normally be found on the assets page of our balance sheet. Not any more. The selling of assets is continuing with this government. Basically, if its not nailed down, its got to be considered. Now look back at the second chart and ask why has debt ballooned so much whilst our governments have been harvesting billions from the sale of public assets. THATS not even the finish of it…no, there is one more important fact that we must not overlook. Since North Sea Oil started flowing in the early 1970s governments have enjoyed a bounty of riches, both direct (tax) and indirect (jobs, investment) of around £ 1 TRILLION…that’s my estimate. Now that the oil is rapidly running out and our kitty of assets to sell easily is wearing thin. How can any government continue to run our economy without a serious change in our overall spending.

Economists will say that the important thing is to look at overall debt to GDP and the governments spending as a % of GDP. Yes, they are right…to a degree. But, what if that GDP number were not a true reflection of a nations long term output potential? I will explain why that is exactly the case later.

If you listen to any socialist, they will tell you that Mrs Thatcher killed manufacturing in the UK. OK, maybe she did allow many basket case, poorly run, investment starved big companies go to the wall but you can see from the chart above things got worse after Blair 1997. The Labour government saw manufacturing jobs of around 1.5 million disappear whilst adding roughly that number to our public services. This reminds me of a fantastic TV interview by Sir Kenneth Cork (world renown insolvency accountant who formed Cork Gully…now Coopers and Lybrand) with Harold Macmillan. I remember it to this day. I was only a young man but both men were so full of wisdom the memory is fresh with me. Macmillan was asked to explain the success and subsequent fall of the British economy. He put up his ten fingers on the grainy black and white TV. He said that in a strong economy, seven people must have a productive influence whilst it leaves the remaining three to service the country. He went on to explain that the balance had shifted whereby the percentage of the population involved in servicing the needs of our people had risen far to high and our trade balance and hence wealth, were starting to deteriorate. Since then it has been easier for politicians to spend found money (Oil or Assets) to keep the country moving rather than concerning themselves with Macmillan’s simple but honest explanation. manufacturing accounts for 11% of our economy today vs 25% in 1980.

The chart above shows how the trade picture is not improving globally but interestingly, the EU is the main problem. This is because Germany HIDES IN THE WEAK CURRENCY in order to be the worlds greatest exporter. It knew that re-unification (with East Germany) was going to be painful. Not least with a strong Deutsche Mark. So being in a currency with a basket of economically corrupt countries suits them just fine. The chart below highlights just how important the UK is to industrial production in the EU. The recent Deutsche Bank report stating that Europe would suffer badly if the UK pulled out, is spot on. To further exacerbate my concern, our deficit in Oil trade has remained remarkably stable at around £750m per month. I worry that the high cost of production in the north sea will see that deficit begin to increase if oil prices remain below $40. The chart below highlights our ten biggest trade partners performance (Deficit/Surplus) in the 3 months to November 2015.

None of that explains completely why I believe the UK is a Ponzi or why I expect £/$ to re-test its all time low of 1.08. The real explanation is quality of quantity. I refer to the economy. Yes, growth during the Osborne years has been good. Unemployment has shocked many commentators with its significant decline. Despite all that, I still believe our economy is based on unsound foundations. Just like the Gordon Brown, Mr Osborne continually looks for ways of bringing forward taxes or cash flows whilst delaying costs. The PFI debacle is just one example. I will not elaborate as it is a well documented disaster. Changes to pension laws is one way of bringing forward consumption (taxes). Allowing people over the age of 55 to release pensions… was sold as giving people more flexibility. Total hogwash. It was so the government could continue with the consumer economy. By inflating the housing market, just as previous chancellors, the ball continues to roll. Only, we are now getting close to a point where the whole basis of our economy is so overpriced that it will become out of reach for an entire generation, as the chart below shows.

 

regional-house-prices-ratio

 

But this does not reflect the whole story. For it is not the ratio of prices to earnings which is the primary importance. It is the level of disposable income. Whilst the ratio of the governments tax take to GDP has not exploded, the demands of households has materialised in other ways. I f we were to take a ratio of disposable earnings to house prices, things would look a far lot worse.

Whilst the tax take ratios have not been pushed too high. You need to look at the fact that the government is doing less and less, for free, than it did in the past, hence, far more services are requiring a fee. The quality of the services they do provide has deteriorated beyond all recognition. For instance, the elderly. The state had significant institutions to house our elderly. They would receive round the clock supervision and care. The problem is, the local authorities could not afford the £32 per hour cost of staffing our the upkeep of the buildings. Once again, we saw a harvest of assets by selling off the building to developers whilst farming our elderly out to the private sector. The problem is, the authorities are only prepared to pay around £16 per hour and hence the private companies are increasingly relying on cheap overseas labour. This is a total dis-service to our elderly but reduces the cost to the state. This has happened in all public services. Police/Fire stations have been closed wholesale. Hospitals and care facilities (mental health etc) have reduced significantly. One only needs to look at the size of our Navy to recognise that, yes, we are still taxng our people but they are getting less and less for that money. So many previously free services are now subject to fees. Additionally, councils are encouraged to raise money by any means which has seen regressive cuts to disposable incomes such as parking costs. The list is endless. This government is aware more than any about the importance of the LAFFER CURVE. That is why, rather than tax at a higher ratio of GDP, they just keep reducing what they give in return for taxation and make you pay out of your disposable or post tax monies.

The economy has grown since the turn of the century but the quality of that growth is very negative for the future. Our ability to supply our own industrial and economic needs has deteriorated. Instead, rising housing prices driven by mass immigration has maintained a level of wealth for most families. As I have suggested, the elasticity of that mirage must be close to breaking point. With official immigration around 350,000 per annum (500,000 unofficially) and personal and public debt expanding sharply, how can an economy not grow. The problem is, sustainability. Within those official population statistics is the sorry tale of professional people eg GPs, leaving in their droves. The really worrying element of Osbornes claim of austerity is central government staff costs. These have grown from £94bn when he first took office but are now £105bn…

If our budget deficit is to be brought under control, surplus, it is the spending side of the equation that needs seriously addressing. Looking at the revenue it is clear the intention to bring in more from indirect tax as early as the radical changes of 1979. VAT was doubled to 15% in order to reduce direct income tax rates, both basic and top end. The problem is, whilst indirect taxes have kept coming, VAT now 20% Air Travel and Insurance Premiums 1994, Landfill 1996, Climate 2001, Aggregates 2002 etc the real position of Income tax has become more onerous. Whereas in 1979 only 2.6% of workers were paying higher taxation, 16% now pay it. Not because salaries have grown excessively but because of fiscal drag. A measure whereby chancellors do not increase the tax bands as salaries/inflation moves higher. The problem of hiding our taxation by stealth is it is very regressive and affects those that can least afford it. Because we have allowed our Manufacturing/Engineering/Scientific ability to decay, employment is centred around service related sector.  Average take home pay has not kept pace with either house prices or the cost of living in general. To allow this to continue, whilst still harvest taxation, it has been important for the government to give expensive, in work related, tax benefits whilst encouraging the public to join the government in piling on yet more debt. It cannot and will not last. Yes, changes in the form of UNIVERSAL CREDIT are coming but with 5 million people claiming housing benefit, at a cost of around £23bn, it will have repercussions.

The ring-fenced spending by the government will ultimately be where the strain of austerity will fall. Our overseas aid is maintained at 0.7 of GDP whilst our spending on Scientific Research (which is known to repay with economic benefits at around 6 to 1) is nearer 0.4%. The major nations of the world have  overseas aid around 0.4% and Scientific Research close to 0.9%. Spending on the EU has cost us far more than just the annual contributions. Interestingly, we recently had to pay an extra £2.4bn because the calculation by which the EU gauges the size of your economy, VAT receipts, showed we were far stronger than our counterparts. I have a real problem with this primarily as it is well known that the black economy of some countries, especially Mediterranean, can be as high as 50%.

To sum up..our tax revenue is far too focused on the house price/Debt timebomb…Fuel Duty at the pump £27bn….Housing Stamp Duty £11bn…VAT £130bn…Whilst our spending on services is being cut to the bone. The chancellor has been the primary beneficiary of low interest rates with our national debt costing less (£45bn in interest) now at £1.5trn  than it did when it was £1trn. Of course, offsetting that is the savings of the thrifty who now get next to nothing but more importantly, the pension industry. The current deficit of the public sector pension scheme is estimated to be around £1.6trn. We pay out around £10bn in pensions each year more than we receive in contributions.

If you add our recognised government debt and then add all the other liabilities eg PFI, Pensions etc…our economy has been living on borrowed time and money for far too long. The Oil is nearly gone (x fracking) the low hanging fruit of assets have been sold…our services are crumbling…THE FUTURE IS VERY BLEAK…Brexit!

 

 

 

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Monday, February 1st, 2016 Consumer Debt, Debt, GBP, GDP, National Debt, Oil, Predictions, USD No Comments

The Future

Over the past two years I have been writing about the affects QE is having on the over production of industrial goods from Steel, Ships, Cars and many other items used directly or indirectly in the consumer cycle. I have constantly called into question Lord Lucky Jim O’Neill and his BRIC revolution.  I have advised divesting of all steel stocks, Iron Ore and Coal producers across the globe…all suppliers of mining equipment…all commodity based currencies and emerging markets in general…you can search any of these subject matters and find my blogs to confirm.

Well that baby has now come firmly home to roost. It took a while but my radar is always far on the horizon. What now. Well, one prediction which is yet to come good is the UK. I firmly believe that the UK economy has no foundation whatsoever. All piss and wind so to speak. The trade deficit continues to grow in line with our nations debt profile…consumption equals imports. Our manufacturing capacity/output has barely improved over the last decade. House building for the 5 million population increase together with the demands those extra mouths generate, is the only driving force of GDP growth. Public and private debt is still growing at historic disaster proportions. House price to income ratios continue to defy reality ranging from 6 in the rest of the UK to 12 in the South East. Wages are mired in the immigration glue and zero hours continue to grow. Local council pension deficits, not a common theme anywhere in the financial world, are a hidden time bomb. The recent John Lewis weekly sales data show sales down 4% in August (yes poor weather is a factor) across the UK but more worryingly -13% in Scotland. If super cheap financing/lease deals and huge upticks in MPG savings were not available to car buyers, consumption would be even lower. The incredible gains in MPG are now slowing and the explosion of lease deals three years ago means a tsunami of second hand cars are on the horizon. So fragile is our economy that despite the officially significant gains in employment, more tenants are being evicted than ever before. Rents are moving with capital increase but wages are lagging far behind. Disposable incomes are being squeezed more than ever. The governments spending cuts will be longer and deeper than expected. Local Authorities are nearing the bone when it comes to social care choosing to apply minimal national standards which is causing great discourse to those in need.

The government have pulled so much revenue and consumption forward that only a fool would not expect a parched landscape in the not too distant future. Income tax for many is now paid in advance. Pensions released, so far 80,000 individuals and rising coupled with Equity release, a significant proportion of mortgages each month, is borrowing from what were, historically,  tomorrows nest eggs. So despite all the levers of front end priming to consumption and tax receipts, the governments budget deficit is still running around £70bn this year. Adding to the £1.6trillion already accumulated. The public sector pension shortfall I alluded to earlier, is without doubt, one of the most under recognised non-balance sheet contingent liabilities of them all.  If stock markets are now reflecting a new valuation reality, the deficit could easterly be  £1.5 to £1.7trillion or in other words 100% of the current deficit. Lets not forget that other off balance sheet liabilities, whilst not anywhere as a large (PFI etc.) but still an additional burden being kicked down the road.

If my scenario is correct and overseas investors finally smell the rat, sterling will be at the forefront of the attack. I have, on many occasions I admit, been negative on the currency. I have a target of the all time low against the $ of $1.08…I can see a period where the Bank of England is forced to buy and possibly cancel the entire supply of government bonds…CRAZY I hear you say…well, consider that Oil has delivered a bounty in revenue of around £1 trillion since 1975 ish..since 1997 we have borrowed an extra £1 trillion pounds to keep the lights on. So, we are coming to the end of the Oil boom income. North Sea currently has a cost base of around $43 so not much tax revenue there. Borrowing has to stop, if not we will be Greece. We have not built, during the oil tax and debt bonanza, a sustainable economy with Innovation, Investment, Creativity and Production (IICP) at its heart. Instead, we have a large benefit dependant society which is priced out of poor quality employment by poor people from the underemployed rest of the world. In previous recessions, the unemployed need just wait for an uptick in the economy before employment became easier to come by. Eventually, the pool of employment, limited to UK residents, was whittled away until NAIRU took over (Non Accelerating Inflation Rate of Unemployment)…So, eventually, employers had a much smaller pool of unemployed and wage inflation took over thus bringing economic benefit to all. Now, we no longer have just a pool of UK unemployed, we have the entire worlds under or un employed to choose from. Employers love the EU and general open border policy. It has allowed a minimum wage or zero hour culture to take hold. The masses cannot benefit from economic growth as before because wages are immigrant suppressed. Of course, someone is benefiting in all this…YES…business owners and senior management. In 1980 the average CEO of a major quoted company would be paid around 30 times that of the average salary in his company. Now, that ratio is around 200 times.

This illusion of a growing economy is going to explode at some stage. No longer can we consume like there is no tomorrow. Germany, Japan and China, the worlds biggest exporters, do not have economies based on consumption. Its industrialisation that is the heartbeat of their economy. The problem with them all is a dwindling or rapidly ageing population. Nevertheless, Germany and China are running massive trade surpluses as will Japan again when it restarts all the nuclear reactors. Germany is running a budget surplus of around E22bn, to boot. The UK has sucked in 4.5 million immigrants (since 2000) which can be good for an economy generating  industrially based jobs for them to fill. When they come here and fulfil any roll possible. The competition amongst those in the bottom 50% of earners is unbalanced with the rest of the economy. Immigration based on supply and demand works. Immigration because life is better here than is on offer for 5 billion people in the rest of the world, is not.

We are not governed with even a cursory glance at the distant future. Live and govern for today. The only way we will be able to regain our industrial strength is by admitting we have been wrong for the last several decades. It will be painful and will lead to a significant reduction in house prices.  The high street will collapse as we know it and unemployment will rocket. The government will have to put an agreement in place to keep budgets balanced over economic cycles (no fudging) in exchange for the B of E buying up most of the government debt. Overseas aid and the EU will have to go. This will accelerate the EU collapse. A, we finance a large part of the (EU) budget and B, we are the EUs biggest customer. The experiment will finally be seen for what it is…a total waste of money and a fraud. The German Mark will return much to the consternation of its industrial base.

This sounds awful but it could be managed and lead to a new era of investment in IICP for the UK. With the exit from the EU industries like fishing will flourish creating tens of thousands of new direct and indirect jobs. If we just go on sticking our heads in the sand…someone will come along and see our pert bottom sticking up and..hey ho…as the old saying goes…sing if you like, scream if you don’t…aaaaaaaaaaaaaahhhhhhhh….me name is paddy maginty im the leader of the band…Sorry but you have to know the rest of the joke to get that.

You have been warned..again…

I have been completely bogged down with Council work over the summer but hope to get back in the swing over the winter.

 

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The Conservatives Are Liars…We Need Hyperloop Ideas.

Cameron and Osborne have gone to great lengths to convince the electorate that they have halved the budget deficit…This is the official statement on the web site of The Office for National Statistics.

While the deficit in 2013/14 has fallen by a third since its peak in 2009/10, the continued reliance on borrowing has seen public sector net debt reach £1,483.3 billion, or 80.9% of GDP in December 2014.

So much for that lie…They also claim that they have been very austere in order to balance the books…well…on the same official website

Central government expenditure (current and capital) in December 2014 was £61.0 billion, an increase of £3.5 billion, or 6.2%, compared with December 2013.

And if you think they really care about you, the British Public…well this statement says it all

other current expenditure (mainly departmental spending) increased by £5.7 billion, or 1.9%, to £301.9 billion, mainly as a result of increases in departmental spending on goods & services and contributions to the EU, being partially offset by decreases in transfers to local government and current grants;

This chart just shows how our debt pile is growing at breakneck pace…

And this chart shows how this government have raised taxes and spending….not quite the picture they are hawking around the country..no wonder the economy can grow when you are spending so much money…sadly, £22bn a year is being spent on the EU and Overseas Aid…Imagine what could be done if just 50% of that was invested in long term industrial growth in the UK…Good quality jobs for our working people…not the zero hour, part time low pay no benefits this government has encouraged…

UKIP have pledged to stop this waste of money along with HS2 which will be a white elephant by the time it is completed. I would rather we invested in the Elon Musk HYPERLOOP SYSTEM.

In case you still feel they are committed to spending cuts…Central Office Staff Costs.. 2010/11 £93.6m…2011/12 £96.2m…2012/13 £99.3m…2013/14 £100.8m…2014/15 £104.7 (estimated )…

DEFINITION of ‘Austerity‘ A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits

 

 

 

Thursday, January 22nd, 2015 Consumer Debt, GBP, National Debt, UK No Comments

Sterling Crisis Looms.

 

WALL STREET JOURNAL April 1975…….Headline was ‘Goodbye, Great Britain `

I have been bearish on Sterling for quite a while now. My latest recommendation to trade was in the late June blog UK OK? I Think Not… where I recommended buying Sterling/Dollar (Cable) put options. Luckily, Sterling peaked a week later around £/$ 1.72. I have on several occasions expressed my concern that Cable could retest its all time low of £/$ 1.085. My reasoning has been outlined in many blogs on the subject but the significant fall in Oil is just the catalyst to push on what I believe is an open door. The UK is not likely to reduce its annual budget deficit, which is running around £100bn, anytime soon. The Oil price will, if anything, reduce tax take significantly. With the production cost of North Sea around $55 it is possible that the £8bn direct profits tax take will be eliminated. The significantly lower price at the pumps will reduce the excise duties which as a percentage of price account for a significant slug of the final forecourt retail price. Yes, consumption of other VAT items may see increased demand but this is unlikely to offset fully. Salaries in the energy sector are already being cut this month. With nearly 500,000 workers exposed to this sector, the positives for consumption will be offset. So the budget deficit will continue at vastly elevated levels. On the trade front, the governments focus on reflating the economy by encouraging consumption, is a complete folly which only serves overseas suppliers with a boost to demand. Our previous currency calamities have been focused around poor trade performance. In 1948 a deficit (albeit only 2%) was too much for the government finance and Sterling fell dramatically from £/$ 4.20 to £/$ 2.80….this lead to a revival of manufacturing to its zenith. In the sixties (1967), the Labour government devalued the £ from £/$ 2.80 to £/$ 2.40 due to the drop in exports from a protracted dock strike coupled with middle east tensions. In 1964 when the trade deficit rose unexpectedly the Labour government went cap in hand to the G10 for a loan. Had they acted quicker to rebalance the economy the crisis to follow may have been averted.  In the seventies, the balance of payments were sent into shock by the Oil crisis. Eventually the UK would have to go cap in hand to the IMF for a loan. Prior to the loan £/$ dropped from 2.40 to 1.60. During the eighties, Thatchers battle with the unions lead to a significant fall in industrial activity and economic turmoil. In 1985 the currency hit its all time low of £/$ 1.085. Eventually, her economic formula worked and the economy recovered. It was however, the start of a long terminal decline in our manufacturing capabilities. No government since has taken this sector seriously, instead they have preferred to encourage consumer debt which in turn boosted house prices significantly which in turn drove consumption even higher. Gordon Brown took this to the all time high encouraging consumption as the mainstay of his economic miracle. From around 7.5 million people in the 1930`s, manufacturing is now a small part player in the make up of our total output. Since Thatcher, the UK has sold off a large portion of its assets. Whether it be utility companies or real estate, its been a huge sell off. Couple that with around £1 trillion of Oil taxation (both direct and indirect) and you can see the consumption bloom was finance by various short term cash injections. To make things worse, the financing of long term investments like schools and hospitals were financed off balance sheet via PFI (£240bn) only to cost a fortune over the next 30 years. University reforms have kicked massive liabilities into the future and the public sector pension scheme is in a perilous position with all liabilities also kicked into the future.

In short, the UK has lived off its income from past wealth. It has deferred costs and has mortgaged the future. Below is a chart from my blog in November 2012. We cannot continue to live like this. Employment is not growing in productive industries. The driver of lower unemployment is consumption based service sector. Eventually questions will be asked of our economic performance and the coalition will be found wanting.

This official measure of debt does not include all the off balance sheet funding liabilities which have grown substantially this millennium.

In 1997 Gordon Brown began his consumer lead socialist economy…we have to reverse this decline in our trade balance

 

If Cable breaks the 1.40 support line, the next stop is 1.085…Inflation will become a problem offsetting the strong global deflation winds blowing around.

Click to enlarge…

Post war Cable. Following the 1948 devaluation, exports bloomed and we reached a surplus around 10% of GDP. Since then, the rest of the world has beaten us at the production game. Instead of using design, research and investment  to continue strong manufacturing (like Germany) we have rested on our laurels. This is going to cost us dear as a nation.

Politicians have taken the easier short term gains and to hell with the future. Our children will inherit a very sad state of affairs.

 

 

 

 

 

 

 

 

 

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Friday, January 2nd, 2015 Consumer Debt, Debt, GBP, National Debt, Predictions, USD 1 Comment

Roosting Chickens….

Not got much time so how about a quickie…

My gut is telling me that further trouble is brewing…But first, a quick round-up of my recent blogs…Late June I recommended one of my rare trades UK OK? I think not which at its peak in early September offered a 4,000% return. Of course, I only took 100% because quite frankly I need the money and that’s OK by me. Previous blogs warned that Iron Ore would fall drastically and by Christ has it done so. Now below $80 it is getting close to but still some way off my target of $60. Many producers are mothballing production, due to high cost of production, and more will follow. Oil, as I suggested is falling and my target would be around $60-$70. This is very important. Over the fat years of economic growth, driven in the main in the last 20 years by government debt accumulation, middle east producers have got used to huge spending programmes. This has lead to there needing a minimum of around $90 to meet the budgets they are currently running. Furthermore, a significant decline from current levels, around $91, would start to make fracking in the US a little questionable. Current thinking is that below $80 would shut some producers. If you look at the growth pattern in this current recover (US economy) as I highlighted in Chinese Deflation Cancer Spreads you will see just how important Fracking has been…

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

I have harped on about Steel in so many blogs and the statement from ThyssenKrupp of its consideration to cease/sell production after 200 years, well I state my case.

The Yen hit my target this week with a quick monthly 5% decline. Good timing. Worse is still to come and my many blogs explain my reasoning. With China and Japan exporting deflation the rest of the world will suffer. With interest rates at near zero, this current downdraft in economic activity will make it very difficult for Central Banks to have any real impact. Helicopters full of cash flying over consumer might be the last resort. Of course, that will only result in hyperinflation. For now, be content that the end is nearing for the politics of help the wealthy and to hell with the rest.

So, to go back to the beginning. What ales me? As a Councillor in a London Borough I have seen first hand how budget cuts are taking shape for fiscal 2015/16. Significant further cuts in staffing is going to happen across the public sector in the UK. They will not stand for this and with an election coming next year will push for significant disruptive activity. The recent dispute at Electrolux in Italy which I highlighted in Nothing Sucks Like an Electrolux is now taking shape in France. The deficits of most major European economies, and indeed the world, have continued to grow since the 2007 shock. Only now is real spending cuts taking shape. Public sector employment explosion over the last 20 years has to be reversed, the question is, will the unions allow it?

Sorry. Time has caught up with me and have lunch booked with my Mother…back soon…

 

Tuesday, October 7th, 2014 China, Debt, GBP, Japan, National Debt, Oil, Predictions, QE, Steel, USD, Yen No Comments

Global Economic Roundup

USA…An interesting development from a barometer (BNSF) that I followed very closely up until early 2013 ,when the data became polluted with Petroleum distortions. This is now largely working out of the system and it once again is worth a look.

BNSF weekly railway stats show that upto the halfway point in the third quarter 2014, the economy seems to have changed down a gear. The series of quarterly volume flows are always fairly consistent with the underlying GDP data. The halfway point so far indicates a decline, which would be odd.

In Q3 and 4 2013, BNSF volume grew around 5% and GDP averaged 4%…In Q1, when a poor winter saw GDP declined 2%, rail volume barely grew and would have fallen had it not been for Coal demand. Q2 saw a 5% rebound in rail volume and the GDP data came in at 4%…So as you can see, there is a strong correlation. So what has happened to 3Q rail volume with BNSF?  currently, total volumes have contracted 1.16%. Without the significant influence of Coal, the numbers would have been unchanged. It is likely that industrial action at some ports may have affected container traffic but this does not explain the sharp reversal from the second quarter recovery. Unless there is a sudden pick up, the GDP outlook for Q3 is at best unchanged. That is certainly below all forecasts of around 2.5 – 3.0 %…hey ho, just saying

 

China…How low can the coal price go?  Currently, around 30% of global coal miners are losing money and 70%, yes,70% of Chinese miners losing money. The interesting thing is, China is slowing imports to support its own production. SOUND FAMILIAL? First half 2014 imports of coaking coal (used for Steel production) were down 12%. Overall coal imports, including thermal for energy production, is down slightly. The China coal authorities have called on domestic producers to cut production by 10% in the second half. The shift to sustainable energy appears to be paying off with the first decline in overall demand this century. Australia, USA and Canada are the biggest shippers and are currently suffering with mine closures on the agenda…If China sticks to the cut, maybe prices can stabilise. I would not hold your breath.

Coal and Steel currently at six year lows.

Sterling…I got a little impatient with my $/£ options and decided to book the 100% profit available late last week. I still feel Sterling is flawed, its just time was running out with a September expiry. The $/Yen has started to move and a break of Y105.30 would see it on its way to the first stop of Y110

 

 

 

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Monday, August 25th, 2014 BNSF, China, GBP, Predictions, Steel, USD, Yen No Comments

Chinese Deflation Cancer Spreads

OK here I go. This blog has been building in my head for a long while. It will tie in with my record of forecast since I started a few years ago. The economic world is close to a catastrophic collapse. Yes, I know, I have been concerned about the world since I started. I am firmly of the belief that QE has not only just delayed the inevitable collapse of the global economy, it has made the impending scenario much worse. In fact, it has taken it from a situation that was manageable, with old fashioned crash, burn and re-build, to a situation where the fallout will make the 1930`s look like a walk in the park. The central pillar of my argument is the significant positive impact QE has had on asset prices is mirrored by the equally significant negative impact on inequality in the developed world. This is mainly due to the tsunami of cheap finance which has swept the developing world and spawned huge production potential.

Yes, bond and equity prices have risen significantly. And why shouldn’t they. With QE pumping so much money into the hands of the people who created the 2007 crash, what else would they do with it. As I have written before, lower bond yields have helped governments continue priming economies through direct state spending (debt) or policies which have encouraged significant new consumer debt. The problem is, whilst the central banks of the G7 were sleeping, China changed. It is no longer the worlds growth engine due to internal demand. It is a cancer on the supply demand curve.

Let me expand on my theory of why China will be the catalyst that sparks this almighty upheaval. BRICs have been a constant theme in the history of this blog. Iron Ore is the prime reason. They all have it. The growth in China over the last 20 years was centred around Housing, Railways and Heavy Industry. The problem is, as I explained in China and its Export Claim, the supply curve within all these aspects of growth had become overstretched. In normal developed economies, this would have sparked a flight to quality as earnings concerns came to the fore. Of course, as I have pointed out many times, return on capital is not a primary concern of state industry dominated China. Employment of the masses is the ONLY concern. I have a back of the fag packet calculation. For every 20 million Chinese workers employed, 5 million employed people in the developed world become superfluous in the current demand cycle. Now, I am not saying these people will be unemployed, just that there well paid manufacturing jobs will be replaced by low paid service jobs. That is why, over the last thirty years, inequality has been taking a hold. I explained this in Profound Inequality in America.

So how is China accelerating this process in the current environment? An example is Steel (So many blogs on the subject I cant note them all). This one vital element has been the growth engine which has sustained this process of converting rural peasant into semi-skilled townies. To produce steel, you need two primary elements, Iron Ore and Energy. In Chinas case, energy has been via Coal. Together, these three elements are all required in huge bulk, so we must include transportation into the mix

As inventory of housing has built to an unsustainable level, prices are starting to drop. Sales in the first half of 2014 are down sharply on last year. This still does not explain my theory. If China cannot consume all it produces, what can it do? Export. To this end it has done several things outside its recent state induced currency weakness. Firstly, export the raw material. Globally, these are running 30% higher than 2013.  South American countries have seen (China imports) rises of around 90%. Of course, the ire of western producers have raised the spectre of further import duties. So, this leads to the second point. Cheap exports to fellow Asian economies eg Sth. Korea, forces them to export themselves. Couple this with import restrictions on Taiwan’s exports to China and it becomes evident this is a way round tariffs from Europe and America. Thirdly, and a little more opportunistic. Export of ships, Rigs etc. Since the financial crash, shipbuilding finance from dominant European banks became scarce. This lead China to flex its mussels. It has lent, via state banks, billions of dollars to mainly Greek ship owners (I have many blogs on the subject) in exchange for the orders to be placed with Chinese yards. This has allowed China to wrestle the mantle of dominant player from Sth. Korea and Japan. The problem is, this cheap finance is creating a bubble in supply of vessels. All this at a time when the Baltic Freight Index is once aging flagging concern. Of course, the Bulk Carriers which are supplying the low cost Iron Ore from the likes of Australia and Brazil are benefiting.

Many economic forecasters are pinning their hope on China becoming a consumer society in order to create growth globally. This is a faint hope at best. For now they are flooding the world with low cost products which is leading to one main import from the developed world, Jobs. This leads me to the main crux of my argument. Demand.

I have written about a demand shortfall verses the supply boom and its resulting Deflation before. I have stated that wage growth will decline and turn negative. I am writing now as this is all becoming a reality. Wages in the UK and Australia have already registered there first ever declines. Elsewhere the downward pressure is building. Since 2008, American wages for the bottom 20% of earners has declined. The web site below gives a good view of how growth has  been distorted towards shale gas and not industrial important manufacturing:

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

With employment in poorly paid service jobs being the illusion that has driven low unemployment in the USA and UK, income tax receipts are not dampening the budget deficits. Yes, the USA has a smaller perceived deficit but strip out income from the Federal Reserve (QE gains) and things are not so rosy. Both have adopted policies which have driven property prices to pre-recession peaks. The problem is, the China affect on wages has just made the valuation to income ratio stretched beyond affordability. Now that the boom in speculative demand is turning to net sellers, the future is not so promising.

Outcomes of my theory:

CHINA…Will try and maintain the illusion of 7.5% economic growth via internal demand acceleration. This is an illusion. Just yesterday they announced significant cuts to pay of higher paid state employees. With Iron Ore production costs double of Australia, they will probably reduce the tax disadvantage to protect this mass employer. The coal industry is losing demand and will have to make big cuts. Housing will continue to slow and eventually lead to huge bond default. Steel production will collapse and with it Iron Ore demand. Hence Coal and Oil price decline. Recent trade figures confirmed export growth and import contraction

Australia (BRICs)…The significant decline in Iron Ore price in 2014 has slowed investment but a second leg down in price (around $50-60) will put a big downer on the economy. The currency will retreat still further. Once again, housing demand will implode. High paid jobs in mining will be a big loser. Wage deflation will halt demand.

Japan…Sadly, they are likely to be the hardest hit from this China export drive. The economy will continue to struggle until eventually the currency has to give. They will have to return to nuclear power to reduce the huge energy import costs. This will slam the builders and operators of natural gas ships. Demand is going to contract still further as the Yen has its second currency decline to around Y125, the 2007 low. This will spread the deflation spores even more aggressively. I know most people take flight to the Yen during periods of uncertainty so my prediction seems odd to most. Over the last 5 years, significant moves, up and down, have been followed by stable periods of between 6-8 months before going again. Given the last significant decline bottomed in January, the next big move is just round the corner. First stop Y110 then on to 125. If you have to own equities, currency hedged Japanese are the ones.

UK…The chancellor has completely ruined the UK. I thought no one could have topped the incompetence of Gordon Braffoon. But George Osborne has done just that. Many recent posts will explain my reasoning, but put simply, he has borrowed and wasted more money than people who should know better are prepared to acknowledge. Its a bit like the Kings Clothes…George is parading naked as a Jaybird but no one has the balls to state the obvious. Let me give you a microcosm of a looming disaster. The Local Authority I have the honour to represent, has a pension shortfall of four times the income from rates. Every 0.5% move in bond yields makes a shift of around £70m. If I am right, and deflation takes hold, government bond yields could go to zero. Couple this with a decline in the underlying portfolio, which currently stands at £500m, and the shortfall could double. If you take this a fairly typical local authority, the time bomb is ticking loud and clear. Sadly, I am the only one who can hear it. I still think Sterling will test its all time dollar low of $1.08.

Sweden (Finland)…As I have stated in previous blogs, I love the Sweeds, sadly however, the writing is firmly on the wall. The primary reason is the importance of the mining sector on its industrial heritage. My scenario would see exports implode as mining companies cut still further the budget for new investment. The usual housing boom appears here and will come to an abrupt end. The currency will decline still further and the globally important companies will be snapped up by American players. Or, as I have stated in the past, a Swedish solution is forthcoming and many internal mergers take place.

USA…Here, more than any country, inequality abounds. As per my post of December last year. This will lead to significant social unrest.

EQUITIES…..I have said in the past that they cannot go down significantly at the moment as demand from Central Banks and Company buy backs is reducing supply. I have explained the role QE plays in this before. Considering the global unrest, markets during my city career of 28 years, would be significantly lower than they are now. This just highlights the influence these QE induced buyers have on prices. But what about the future? Quite frankly, I am unsure. What is clear, if prices continue to defy gravity, volume will continue to decline. Not wanting to short markets during these difficult times, because bears have been massacred since 2008, means individual stock prices will only move when poor results are released. Then the declines will be eye watering. Shrinking capital bases (due to buybacks) will make these moves more aggressive. For now, equities are an unknown beast for those of us who were brought up in a world of boom, bust, re-build economics. Not the QE induced ether they are fuelled by currently.

Bonds…I do not want to bore you all too much so that’s the end for now. Plus, my wife is giving me grief as I have chores to do. Mainly, putting a new Cedar shingle roof on our summer house…

 

 

 

 

 

 

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UK OK? I Think Not.

No blogs since Feb. It has been a very hectic year (so far) with a daughters wedding (another one in October) and the usual spring rush for Landscaping. On top of that, I have fought and won an election to become a Councillor in London…So lets take stock of where we are…ooh, that will be no change. Central banks still pumping money into the system and final demand not growing sufficient to allow the world escape trajectory in economic terms. The gravitational pull of debt will not diminish. Unless, of course, you do the old fashioned thing and allow the system to purge bad debts, allowing weak banks and companies to fail.

So, to review previous blogs with what’s happening today.

UK…I cannot for the life of me, understand all the well paid economist in the City. They fawn over George Osborne and his economic growth like babes to the slaughter. A reduction of a billion or two (£) in our annual budget deficit is vaulted as good housekeeping. I was tempted to say “Bollox is it!” but thought better of it now I am a Councillor. The real truth of the matter is that government spending is still growing. 2013 saw government expenditure rise £9bn to £640. That figure would have been far higher had QE not lent a hand and reduced the interest burden see Osborne good fortune finances by Pensioners and Savers. The truth is, without government spending, both directly (capital spending +51% in May vs 2013) or indirectly (via help to buy g`tees for houses) this economy would be on its knees. Why? Our trade deficit, namely exports, is a good place to start. Excluding cars (driven by cheap debt/lease deals) our traditional industries are struggling. Capital goods, Chemicals and Semi-finished all saw contraction last month in the region of 4%. This is not a blip but a continuation, if accelerated, of the long term trend.  Due to our debt fuelled housing boom, imports are not so subdued. Three areas of trade deficit really stand out and explain why reduced unemployment has not raised tax revenue. We have £27bn deficit in Electrical Machinery, £10bn in non-car Road Vehicles  eg Lorries and Construction and a £6bn deficit in Mechanical Machinery. These are the biggest elements of our trade imbalance. So tell me why you would inflate the very sector that’s reliant on our weakest industrial ability to supply. If you look at these sectors, it is striking that they tend to be heavy industries with large employment and reliant on even heavier industries eg steel which is an even larger user of semi-skilled labour. These are exactly the industries the UK is crying out for. I have said all this before. The lack of meaningful reduction in our deficit despite headline gains in GDP and Employment are simple to explain. I did warn of this in Jan 2013 with GDP vs Employment Growth. In a nut shell, two things are happening. Poor quality low paid jobs are being created and a large proportion of the unemployed and disability benefit claimants (who have declared they have found a job) were already working. The problem now is, they are registered as active but with no gain to output. This is why productivity has been so poor. Financially, its a negative for the exchequer. They earn so little so as to pay very low tax but they now qualify for income support.

Overall, taxation receipts have grown in VAT and Stamp Duty (Land/Shares) but not Income related. With house prices elevated to crazy multiples of average salary, the outlook for further annual deficit reductions look grim. Remember this, at the turn of the century, our National Debt was around £350bn. It is now close to £1,300bn and growing by over £100bn per annum. Relying on smoke and mirrors to grow the economy will only put us further in debt and extend our trade deficit. Hence, my recommendation for a trade below. Timing is everything and going into the summer brake options are very cheap. FX volatility is at 25 year lows. This is not surprising given the similar low volume and volatility being registered in Equities. Something I warned of in May 2013 “Is Stephen King a Plagiarist”

TRADE

Sterling (£) has had a honeymoon period on all the growth and employment ballyhoo. I believe the truth will out and soon. I will be buying the September $/£ 1.64 puts on Monday. The cost is miniscule as volatility is soooo low. It will buy me the right to be short  Sterling at 1.64 up to the contract expiry on the 17 September 2014. A meaningful break above the 2009 high of 1.7050 would test the 2005 low around 1.72. Should it brake higher, our trade deficit would boom still further. And, of course, I would loose the premium I paid to sell at a lower level.

My next updates will be on my old favourite CHINA…Its plunging real-estate industry and the sharp fall in Iron-Ore. Commodity fraud on a huge scale involving Copper, Ali and Gold……Five year low for its equity market and my often used belief that they are a cancer on world stability (industrially speaking)…I have said all along, they are investing to employ not for ROC. The workforce is shrinking 3 million per annum and migrants and wage growth are down 50%

Then…Japan, where spending by households is down 8% and not surprising given 23 unbroken months of wage deflation and price rises of 11% in Electricity, 10% in Petrol and 14% in fresh Sea Food…all this with a shrinking working population and debt to GDP of 230%…MY NEXT TRADE will once again be shorting the Yen. More of that when it gets to around $/Y 100.80

 

Saturday, June 28th, 2014 BRICs, Debt, GBP, Japan, National Debt, Predictions, UK, USD, Yen 1 Comment

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

UK GDP…Growth? I think not!

UK First Quarter GDP estimate +0.3%

I have not blogged for some time as the spring sees a bigger demand for Landscaping (my company) services. However, having had a few hours free this morning  I ran a quick eye over today’s GDP data. Two things come to mind.

  • Q1 GDP will be revised sharply lower; Data from March played a very insignificant part in this release. Given the hefty reduction in seasonal activity over that period vs 2012 it can only lead to a large downward correction. The spring season begins in March and players like B & Q saw reductions of around 15-20%. The estimated use of Electricity and Gas was raised due to the very cold weather but no similar allowance seems to have been made for the negative impact this would have had (Construction,Farming, Horticulture etc). As most seasonal players were seeing larger double digit reductions in demand, this will surely shine through in later revisions.
  • Q1 GDP is of poor quality; A look through some of the high points of these figures will not help you sleep easier at night. Again, Services, the biggest component of the UK economy came to the rescue. Productive industries continued to weaken which is exactly the opposite to what should be happening! The Services growth was helped by two components which should be highlighted. Legal Activities and Government/Other. Legal Activities were higher for two reasons. Firstly, employment due to PPI miss-selling is still going gang-buster. I imagine that this has now created some 20,000 jobs and given away around £10bn. These jobs will go in an instant once this is over. The pay-outs will have helped (for now) keep Retail Sales from falling further and helped UK car sales outperform Europe. Secondly, and I can bear witness to this, see Clash of the Titans, the extreme cold weather caused a far higher level of car accidents than 2012. Anyone unfortunate to have experienced one will know that the legal industry is parasitic and just loves a good whip-lashing. Government/Other are sadly not broken down but I guess that Government is the bigger of the two. This should be contracting if austerity were really happening. Of course austerity is not really happening. That’s for another day when I sit down and look at the latest Budget Deficit figures out recently.

For now its back to the sunshine!

 

Thursday, April 25th, 2013 GBP, GDP 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

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

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

Sterling Looks over its own Cliff

Sterling/ Dollar.

Regular readers will know that I believe Sterling will follow the fortunes of the UK`s financial position which is down. In my blog `Be prepared for a Wedgefest` I highlighted the charts of Sterling and Yen. Following the recent December budget deficit and today’s GDP data, the bottom trend line, which is in its fifth year of obedience, is getting awfully close. A close below $1.57 will see it on its way down. I have said before that I can see it testing its all time low of $1.08 at some point in the distant future. In the mean time, lets all focus on the inflationary affect any downward move has. Today newspapers are warning of a 4p per litre rise in fuel costs. With salaries entering a fourth year of below inflation increase, consumer activity will be challenged further see UK Retail Revolution as the latest blog (of many) on the subject. If Sterling does not break down just yet, the final nail will come following the publication of the January budget data in February see The Mayans might be Wrong but for George Osborne… Time is Up

The FTSE which is over populated with global Dollar earning companies will not reflect the severity of the situation. Not yet at least.

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Friday, January 25th, 2013 GBP, 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

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

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

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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The Medicine is Not Working.

Finance-Reaper returns..with a warning!

It has been a couple of months since my last blog (holidays and a large landscaping project to occupy me) so I think a refresher as to where we are in the global economy. During my absence the equity market has rallied strongly on the perceived wisdom that the Central Banks of USA, Europe (inc UK), China and Japan will breath new life into a flagging world with yet more monetary stimulus. The problem is, they have done this so many times over the past 30 years that it reminds me of Brazil 20 years ago. They took anti-biotics as a cure for all ills so became immune and many people died when a common illness struck. The repeated intervention of the primary banking authorities has given governments and investors alike, a laisse faire attitude to debt and risk. I believe the time has come, just as it did for the Brazilians, when the world needs to take a different medicine and it wont taste very nice.

Since my last postings several important developments have occurred in the areas I have had great concern about.

Steel and Iron Ore are of particular interest. Both have fallen around 25% in the last month and are now at 2 and 2 1/2 year lows respectively. Over production of Steel in China is becoming a real problem which will have repercussions around the world. Inventory of finished material is getting to a point where serious cuts in production will be required. As the main raw material (Iron Ore) is also stockpiled to the roof, it will not take long for further setbacks in the Shipping industry that supplies China (see my numerous blogs on the subject for more info). The main barometer of how this is affecting the shipping industry is the Baltic Freight Index. This has fallen 9% in the last week, 30% since early July and more importantly, is 40% below this time last year. Shipbuilding orders have fallen off a cliff, shipping companies are going broke and mining companies are cutting back on capital expenditure. All things I have warned about. China is now relaxing some high quality steel export duties in order to help the vast production machine from backing up. This, together with encouragement for a weaker Yuan, makes the outlook for the other global players very grim.

As you can see from the chart below, a regular feature, global trade is not growing. If anything it has started to decline. Last months tonnage was down on 2011 and lower than the corresponding period in 2008!

Of course, the primary driver of this weaker picture is Europe as the chart below highlights perfectly. What you have to worry about though, is when will the first and third biggest economies of the world grow up and realise they cannot continue growing the debt pile and calling it economic growth. IT IS NOT!!! USA will register its forth in a row $1 trillion annual budget deficit this year. It has to stop and the fiscal cliff of 2013 is rapidly approaching.   Japan has agreed this week to double VAT to 10% but in two stages and not starting till 2014. I believe Japan is only months away from economic disaster (see previous blogs).

 Europe.

Finished! The recent cuts (to the public sector and spending ) announced by the Italian government were shocking but necessary. They reflect the bloated system of the easy money life encouraged within the Euro arena by the non elected bureaucrats in Brussels. It applies to all the lying, cheating Mediterranean countries. I still believe Germany should be out of the Euro The Elephant in the Room.

UK

Finished! How on earth can the markets not see what is right under their nose. The UK budget deficit is not shrinking! It is getting bigger. Just like the USA and Japan, we are borrowing growth from a future generation with our continual debt build up. You can see from my numerous blogs on the UK that I have warned about Sterling strong vs the Euro and Weak vs the Dollar. As I predicted our trade deficit posted a record deficit in the second quarter. STERLING is doomed. I have predicted a fall vs the $ to the all time low of $1.08 and stand by that. The chart formation from the last blog is still in tact. Should Sterling fall as I have predicted, interest rates will go higher and the stupid banks who are rushing headlong into lending on Buy-to-Let (BTL) mortgages will come a cropper yet again. Just last week saw the release of data showing an alarming growth in repossessions of BTL properties. Property prices are still 10-20% too high.

 

Another issue that worries me is the estimate of UK car sales that are pre-registered. In fact I wrote about this issue in a recent China blog. According to reports, 30% of recent UK car sales are not actually ordered by an end buyer (the same as Germany). They are pre-reg by a dealer in order to secure large volume bonuses. This practice is not new but the scale of this practice is now alarming me. Why? Residual Value. Do any of you remember one of the largest and best known corporate collapses of the 1980`s. British and Commonwealth Holdings was the birth place of such companies as Gartmore and Oppenheimer fund management, Furness Withy and P& O shipping…plus many other big names. It was the biggest financial institution in the UK outside the four banks and was in the FTSE 100. It made one fatal error in the acquisition of Atlantic Computers. The problem of residual value was to be the undoing of B & C. I wont go into the story but if dealers are buying far too many vehicles than they have customers for, they have to sell at a whopping discount in other ways. This tends to be via a lease. Normally, to price a lease you have to make an assumption of residual value. The creation of demand via this process normally creates a wave of second hand cars which will depress prices further. If demand slows as I believe it will, second hand values and therefore residual values will not meet the estimated level when these cars come to an end. A worrying future bill bill for someone.

 USA

Below is my regular chart showing the growth/decline of transported goods on Warren Buffett`s railway BNSF. The Total Freight picture is running at around 2% the highest since the first quarter. Still very anemic and not strong enough to indicate employment growth. The various sectors of interest are Motor Vehicles which have started to decline and the four week moving average (not shown) indicates a rapid fall from current levels. Lumber/Sand/Gravel are positive and reflect optimism in the real estate sector. Coal has rebounded from its winter blues and helped move Freight Wagons into a slight positive. Overall not much to conclude. Steady as she goes for now but wait till we get to the Fiscal Cliff.  I have written about the US sales to inventory ratio and recently it started to rise. This is not a good sign, as I have talked about in March. I have to admit to being wrong about the growth in US car sales. It has turned out to be much stronger that I anticipated. I feel very strongly that this growth is temporary and is driven (excuse the pun) by a desperate urge to cut motoring costs via fuel consumption and is therefore not going to last beyond this year. Last month saw an 89% rise in alternative fuel vehicles. The big US car companies may well be heading back to the doldrums in the second half.

One of my other pet subjects has been in the news lately. The US Postal Service. Its ever growing problems and huge loss profile show just how inept the government are about dealing with real problems. Anyone can spend public money and be triumphant at its impact but no one seems to be able to grasp a nettle. The longer the authorities go on kicking the can the deeper the eventual depression will be.

Stay happy and start making plans for the new world. Hopefully, when we get to the other side of all this we will remember the mistakes of the past. There again why did they repeal the Glass-Steagall Act. Fear and Greed will always rule the world. And we mere mortals will always allow Greedy and Corrupt people to rule us, Why?

BNSF Weekly railway data.

Blogs to follow.

UK Money Supply is still falling, I have reviewed this problem in depth before. UK and US Govt. debt growth. Chart updates of BHP, AP Moeller-Maersk, £/$ rate. Maybe a look at the safest haven for savings in the world, Norway. It has Oil, Fresh Water, Fish and a sensible government policy of saving a portion of its oil wealth for future generations. It may become the lender of last resort should the world go belly up. I have championed this safe haven for a couple of years and I cannot see any reason why that should change. They do have a problem however, of where to put their money. I would offer this once customer of mine some timely advice. In times of trouble IT IS NOT THE RETURN ON YOUR MONEY THAT COUNTS, IT IS THE RETURN OF YOUR MONEY! So do not worry about interest income in this environment. Keep it under your mattress and cuddle up to the nearest blonde. It may be lumpy but it will give you a warm feeling, the mattress that is.

 

 

 

 

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Chart Updates

Below is an update of some of the charts I have highlighted in the past.

Sterling/ Dollar has bounced off its major support. I remain convinced that Sterling will collapse once its true financial picture (see previous blogs UK economy) becomes apparent to the markets. If so, $1.08 all time low could be tested.

AP Moeller-Maersk, the largest shipping company in the world, has come in for attention on many occasions and I still believe the 16 year head and shoulders is in play. With ship yards offering huge discounts on new ships and freight rates falling once again, the gloom continues.

 

BHP. With Iron Ore prices falling, it is only a matter of time before the head and shoulder neck line is broken with little technical support for a long way down.

US Steel and Arcelor-Mittal. As with BHP above, see Are Steel Producers a Buy? in which I asked exactly that question. My conclusion is that the support lines would not hold. Since then they have all fallen. BHP 15% US Steel 25% and Arcelor 10%

 

 

Europe. It is interesting to look at the wide array of economic statistics (released today) from many European countries. It all makes for very disappointing reading. Except that is, for Iceland, who had Q1 GDP growth of 2.4% and 4.5% year on year growth. Well done! Maybe defaulting on your debt is not the end of the world. ARE YOU LISTENING GREECE!

 

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Friday, June 8th, 2012 GBP, Shipping, UK, USD No Comments
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