Yen

BRICs…Future Looks Cabbage Like…

The significant fall in major industrial commodities is, as I have said for so long, a result of massive QE. The unprecedented level of cash injection by the worlds major powers, has driven investment far beyond economic reality. Let me explain. The quest for investment returns of this avalanche of money, first drove assets widely construed as safe investments. Government Bonds and Good Quality Equities. Once these had been driven hard, investors slowly moved along the risk curve with Commodities being swept along on the near zero cost of finance. This boom in commodity prices was followed by a dramatic pick up in capital investment by mining and exploration companies. Once again, with the aid of near zero finance costs. With the BRIC block being major beneficiaries of this boom, Emerging Markets (EM) became the place to be. The economies of these countries plus other EMs were also swept along with employment and consumption creating a belief that this bounty will last forever. This positive atmosphere drove huge infrastructure projects on two fronts. Firstly, to enable the vast quantities of commodities being mined and transported and, secondly, in response to the consumption this investment boom employment created. The problem with all this wonderful economic activity was that the demand was not as a result of genuine global investment. The developed world is mired in both personal and government debt to an extent that the future course of debt fuelled consumption has hit a brick wall… see Profound Inequality In America…Time To Act!  So with that in mind, where was all this productive capacity going to go. Well, I have talked about that crazy problem over many past blogs. It is the backbone of my belief that Deflation can be the only result and to that end I have penned many related articles since mid 2013.

So how far have commodities fallen…Iron Ore -44% @ $75 and getting closer to my forecast of $60 when it was nearer $140…Citibank have this week dropped their forecast in line with mine. Albeit nearly 18mths later. Oil -40% @$80 and getting closer to my forecast of $70 when it was nearer $120…Coal -30%…I never forecast a price just that it would fall dramatically. this industry is in a total mess…other metals are falling as are softs such as foods and rubber…interesting data points to the first decline in shale oil/gas wells in America down 1%, this could be the start of bigger declines. Remember, as stated in Chinese Deflation Cancer Spreads, the shale industry is at the heart of the economic expansion in America…see this web site below for graphical confirmation. Data of Chinese export expectations, the main growth in a lacklustre Chinese output picture, fell 50% this month. If confirmed, 2015 output projections will need to be cut dramatically.

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

 

The regular readers would have spotted the three main ingredients of Steel which itself is now cheaper by the ton in China than Cabbage. Over investment, thus creating mass employment, driven by cheap money is now backfiring. The recent move by major commodity countries and producers to continue production but lower price is a real inflection point in global economics and the death knell of QE. Low cost producers are so heavily invested in full and growing production that they cannot afford to loose market share. The high cost producers are more likely, although not all, to be state producers and the politicians are very,  very reluctant to cut. Losses are now the norm for a myriad of commodity producers. The pressure to cut costs is gaining momentum and will intensify further. Wages and capital investment (see numerous blogs on the subject) will be two areas where costs are cut. For the state or semi state companies, taxation sweeteners will become common place. This will lead to a race to the bottom with massive amounts of commodity related bonds defaulting.

Consequences of the above

At the outset of 2014 I wrote an article entitled…Global Dissatisfaction With Governments Can Only Spread…I think this is becoming a worrying prophecy…A lot of unrest is going on around the world but there seems too be little mainstream reporting. I guess that several large flashpoints are taking all the headlines. However, European unrest is certainly growing and with the planned austerity for the next fiscal, that can only grow. Recent disturbances throughout Italy, in Belgium, France and soon I expect, Sweden. South America is in a very precarious place. Argentina, Venezuela are basket cases with huge unrest. Brazil is looking very unstable and smaller commodity reliant countries like will Chile will suffer.

Hey ho…over the last 2 years I have talked of the Equity Markets being propped by Company Buyback and Central Banks buying…I am beginning to think it may be time to buy a deep out of the money PUT OPTION…Just thinking at the mo..

Yen..Falling like a stone…any major sell off in Equities will halt it temporarily…talk now of a snap election. Who knows if they will go ahead with the Consumption Tax increase next year. One thing is for sure, it will hit the economy hard just like the last one…BASKET CASE

 

 

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Wednesday, November 12th, 2014 BRICs, China, Consumer Debt, Debt, Japan, National Debt, Predictions, QE, Steel, Yen 1 Comment

Yen Has 10% Further To Fall.

OK…This could be the end of me…However, I feel it is worth the effort. Since I posted Nippon soon to Nip Off  and A Yen For Your Faults (Nov 2013) which recommended option trades to short the Yen, the currency has faltered. However, my first recommendation to sell the Yen was in Be Prepared For A Wedgefest  (Oct 2012) when it stood at $77.50…

Following the announcement of a significant increase in money printing (QE) by the Japanese authorities this week, I am now convinced more than ever that the Yen has further to fall. My best guess is for it to retrace to $123.5 which would of course really put the cat among the pigeons. The previous blogs went into detail of the debt burden but lets look at few stats to update. The Central Bank has now cut its growth forecast again, this time by 50% to 0.5%. The QE programme is now increased to Yen80 trillion or 16% of GDP where as the US never exceeded 5.5%. The asset mix being purchased has been altered. Purchases of local bonds will only make up 35% of the enlarged intervention vs 60%. Local equities will rise to 25% vs 12% whilst overseas assets are included at 25% equities and 15% bonds.

Whilst the government continues to spend wildly the consumer is still not convinced. Average household spending fell an annual 5.6% in September which is not surprising when incomes fell 6% year on year. With the nations debt to GDP ratio nearing 250% its once envied savings ratio is falling rapidly. The demographic time bomb has exploded and this can only maintain that decline. The weak Yen has seen food prices rise rapidly along with fuel costs. Remember Japan has little if no natural energy resources. If I am right and the Yen continues lower, their will be two main consequences. Continued consumer weakness due to imported inflation and most importantly GLOBAL DEFLATION EXPORT. Yes…I know, a common theme of mine.

Its worth noting which countries are the winners and losers in this potential move. Winners (Biggest net importers from Japan)…US, HK, Sth Korea, Singapore and Thailand. Losers (ex energy)…China, Australia, Western Europe. These represent the biggest net exporters too Japan. Of course, the winners might not be happy about this surge of additional low priced competition. Given that Japan will likely ramp up heavy industry exports, its more than likely that (import) duties may well become a hot topic. The machinery sector will become very price driven, especially given the downdraft of mining exploration budgets, and big producers in the US (eg Joy Global) and the Swedish/Finnish economies in general, will suffer. I have been very negative about Sweden this year and that has been confirmed by its currency slump to a six year low.

Its difficult to see Japanese bonds being a sort after investment when they yield virtually nothing. This is not helped by the state pension fund reducing its portfolio exposure in domestic bonds from 60% to 35%. I must be the only person to think that  Japanese Government Bonds  are worth not much more than the paper they are printed on. Perhaps they could put them on a roll with perforations every six inches or so…just in case

 

NEXT BLOG…WHY! Since the birth of QE has the number of Billionaires doubled but the disposable income for the majority (developed world) , slipped back to levels not seen since the turn of the century. Indeed, figures out this week highlight the number of people in Italy dependant on food aid has doubled to 4 million…WELL FUNKING DONE CENTRAL BONKERS…

Then I will review companies like BHP and Volvo which I havhttp://www.redbridge.ukipbranch.org/e written extensively about..It might be time to think about Steel stocks…Crazy eh!

DONT MISS MY PICTURE ON THIS SITE…http://www.redbridge.ukipbranch.org/

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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

Nippon soon to Nip Off.

Japan and Yen update.

Regular readers will know I have been negative on Japan for a long time. Having called the Yen decline in September 2012, I now believe the second and more meaningful breakdown of the currency is around the corner. The first chart highlights the narrowing pattern developed since the mid 2013 low point (high for $) of £/Y 103.7. The breakout of the higher or lower lines could lead to a significant shift. If 97 is broken on the downside, against my expectation, a return to significant Yen strength would see the Nikkei equity index fall sharply. If, as I expect, 99 is broken on the upside (Yen weakness) the second long term chart comes into play. The $/Yen would likely test the May high of 103.7 which if breached would lead to a move to the 1998 downtrend. This is where I will try and explain why I think that will be breached and the Yen will fall by a further 10% from there. To try and capture this movement the $/Yen 102 calls which expire December 18th are worth a look. They are currently trading around 20 pips. If the move does not occur you loose 20 pips. If it does, you are in for the ride at 102.20.

Chart A) Short Term $/Yen Sept 2012-Nov 2013

Chart 2) Long Term $/Yen 1996-2013

Why so negative?

I believe the ratings agencies may downgrade the nations debt before the end of the year. The planned tax hike due to be implemented in April 2014 will weigh very heavily on what is a weak consumer backdrop. I still believe this (tax) will not go ahead as planned. To sweeten the passage of this tax, which is expected to raise an extra Y8 Trillion, the government has announced a Y5 Trillion stimulus to help the economy. The debt profile of Japan is well known. It makes Greece look well run!

Lets remind ourselves of the position:

  • Total Debt is 500% vs 370% in USA
  • By 2018 gross debt will be 295% of GDP (higher than the UK crisis peak of 250% in 1815 and 1945)
  • Net debt will be 190%
  • 50% of total spending is borrowed new money

 

25% of tax revenues go to debt interest with rates at near zero

  • 25% of all bank assets are in government bonds (JGBs)
  • equals 900% of tier 1 capital vs 25% UK banks (Gilts) and 100% US banks (Treasuries)

I have highlighted above, a very important fact. With interest rates at near zero, the government is funding at very attractive rates. However, with debt still growing rapidly (c 8-10%GDP) the fact that a quarter of tax revenue is spent on interest, it is not difficult to imagine how, with rates near zero, a higher rate scenario could completely overwhelm the countries finances. Of course, current QE will not let that happen. The 20% devaluation of the Yen in the past twelve months has helped the economic backdrop. Exports up 11.5% in September was the recent headline. Look a little closer and you will find that yes, in value terms they were up. However, in volume terms, they were down 4.4%.

The return to wage growth ( September 2013 vs 2012) was seen as significant. I cant help but feel that the 0.1% increase will do little to offset the sharp increase in energy related costs being heaped on the consumer because of the Yen decline. With continued declines in disposable incomes, the proposed tax increase will be a bitter pill for consumption to swallow. Exports are the only straw that Japan can cling too. Recent export figures from the continent (Asia) are not promising. China exports to SE Asia are at a 17 month low whilst Taiwan and Korea are reporting declines. The Japan time bomb is ticking!!

Coming Soon……Update on my call for Global Deflation  and A review of my bearish 18 month stance on Volvo and other Scandi plays

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Friday, November 1st, 2013 Debt, Japan, National Debt, Predictions, QE, Yen 1 Comment

Iron Ore, China and Steel

As a side issue to the blog on Global Deflation, I have updated some charts on my pet bears. BHP, ArcelorMittal and Swedish Steel. Regular readers will know how negative I have been and today sees BHP getting close to the trap door with a close below £16.84 being the trigger. This is the double closing bottom established over 4 years. I am still firmly of the belief that Iron Ore will continue its downward path and re-test last years lows. Only this time, the bounce will not happen. Chinese Steel production must slow soon and slow dramatically. Time will tell. Lets not forget that Iron Ore was the key to the BRIC story (my theory)

Swedish Steel has made a new 10 year low today with Arcelor nearing its equivalent.

 

 

This is what happens to companies when China produces to employ, not to make money. This will become a familiar picture in many industries. The collapse of the Yen will only serve to do more harm to global players. Sweden is still on my watch list as a significant looser. see previous blogs on all these subject via the search

 

 

 

 

 

Thursday, June 20th, 2013 BRICs, China, Japan, Predictions, Steel, Yen No Comments

Is Stephen King a plagiarist?

No! not that Stephen King… although the book he claims inspired him to write has a very apt title for this blog. It was The Lurker in the Shadows.

I refer to the author of When the Money Runs Out  Stephen King (HSBC Global Economist). Having read an interview with him in last sundays Daily Telegraph, it became clear that many of his fears and ideas have been the central thread running through my blog for a long time. I will not bore you with the content just highlight two comments. Firstly, QE has acted like a regressive tax, punishing the poor and enriching the wealthy see Quantitative Easing and secondly, Stimulus policies have allowed politicians to live in a fantasy world which is financed by excessively high debt.

Recent volatility in the markets has spawned a great deal of commentary questioning the whole concept of such huge monetary intervention. The short term benefits for a specific element of society are without question a nightmare waiting to happen. Bernanke, King and Abe consider themselves the John Coffey (Green Mile) of the worlds fiscal ills. Instead I believe they will more likely resemble Jack Torrance (The Shining). I just prey that one day that politicians will govern with the following proverb in mind

“A society grows great when old men plant trees whose shade they know they shall never sit in”

We must look to the future whilst reflecting on the past, this leads us to remember that the best time to plant a tree (cut debt) was 20 years ago, the second best time is now.

I must at this point issue a warning to Goldman Sachs and all the other investment banks around the world. If you continue to encourage the Central Banks, by not shouting STOP, to printing more money. Then equity holdings (as I mentioned in the last blog) will be raised further. This will continue to impair, or even decline further, equity trading from the current lows. The likelihood is that when purchased, the stock will not see the light of day till hell freezes over.

Two of my big calls in early 2012 were regarding Japan. I said that the Nikkei would be higher than the Dow in 2013…so shoot me for being 5 months late on a seismic shift. I cant remember anybody making that call. What’s more I highlighted almost to the day, the right time to put the trade on see Be Prepared for a Wedgefest! The Dow was at a premium of 4,660 to the Nikkei on the day of publication. The Nikkei did close above the Dow earlier this week. In the same article I said the Dollar/Yen would go above 100, again an out on its own forecast. Yes last week that happened. I have to admit that my 2012 forecasts were all expecting the economic reality to create lower equity markets but I did not foresee open ended QE.

Global Economy Update 

Regular readers will have watched my series of data on the Suez Canal (shipping) and BNSF (USA rail) volumes with interest (or not). I have not published either recently due to irregularities. For BNSF it is just the case that significant changes to the transport of Oil (products) and Coal have rendered the barometer useless for the moment. If I had the time to strip energy out, may be, but I do not. As for the Suez Canal, I believe something very sinister is at work. Ever since time began they have produced monthly stats. This year things have changed and I believe it is a ploy to delay knowledge on the significant slowdown in trade between Europe and Asia, being highlighted. Over the last two months freight rates have collapsed on some important trade routes. This is completely overlooked by the markets. My focus on the importance of shipping activity (Finance, Trade, Building etc) has become boring to most but it will prove to be a correct focus, I am sure.

UK

Recent data on the economy has proved to be a small fillip for Mr Osborne the chancellor. All is not as it seems. Q1 2013 GDP was not revised down as I thought they would be but boy was the component breakdown very negative. Substantial Inventory growth and services (lions share of the economy) held it together. I have written extensively about why I feel services have grown recently and the short term nature of that growth. The April monthly budget numbers saw higher tax paid, what a surprise given the changes to the way companies have to pay income tax at the point of salary payment. The deficit is still out of control and will eventually leads us into full blown depression. Unless of course…Below is an extract from my blog in November 2012 entitled RIP George Osborne

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 employee earnings in a company. This tax is waived if 51% of shareholders vote in favour of an employee receiving such a pay-out. 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%.

Yes, I have some very difficult to swallow ideas but as the proverb in the beginning quite clearly points out. It is our children who really matter. For it is their future that is important. If all generations work on the principal that the actions they take will only enhance the next generation in our society, then we can look forward to a forest of trees to give us shade from the unknown difficulties that may come our way. Borrowing ever larger amounts builds not a sustainable future but a divided one with even greater inequalities.

ps

China and Sweden… I have said in many blogs that China is lying about its economic output and performance. It appears many economists now share that opinion. The build up of productive capacity will end up being a cancer on the world (see my many blogs under China)…I have stated several times how I thought Sweden was one of the best places I had the pleasure in visiting and doing business in. However, I have warned on several occasions recently that they face a grim future. The narrow focus of the very important export segment of the economy will suffer from two very painful headwinds. The mining and energy exploration industries scaling down of investment coupled with the huge devaluation of the Yen, will cause a very chilly wind. The slowdown they have experienced to date is only the beginning. The strength of the Swedish Krona will have to be reversed dramatically.

 

 

 

 

 

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Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

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

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

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

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

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

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

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

 

 

 

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

Kurzarbeit achieved where Blitzkrieg failed!

All Bow to the Conquering Germans.

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

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

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

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

 

 

 

 

 

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

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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Japan is all Smoke and Mirrors

From Swan to an Ugly Duckling!

I am spellbound by Japan`s ability to create an aura of stability whilst the economic picture deteriorates so rapidly. It reminds me of a swan gliding serenely over the water. Look below and the old `plates of meat` are going two to the dozen. Having read an article by `Yariko Koike` the former Minister of Defence and National Security adviser, I just want to highlight some facts.

  • Japan has $9 Trillion of debt vs $10.5 Tr for the entire 17 Euro-zone nations whilst having only a THIRD of the population.
  • Japan population is ageing rapidly with 23% over 65 vs 13% USA and 16% Europe
  • Japan total taxes accounts for only half of government spending, with tax revenues 30% below 1989 level.
  • Japan government debt is 230% of debt to GDP
  • MOST IMPORTANT OF ALL The newly passed legislation raising the consumer tax by 100% (in two stages) starting in 2014, has been hijacked by a provision that Nominal GDP has to be growing by (or forecast to grow by) 3% in 2015 for the tax to be implemented. They have not managed this in two decades!

I have written several blogs about Japan`s ageing population so I will not revisit. I also know that around 90% of the debt is owned by domestic investors (public and Institutional).

I do believe that the rating agencies will have to act soon to downgrade the debt profile of this beautiful swan to an ugly duckling! Therefore, today, I have sold the Yen and believe it will have to weaken significantly.  SEE `Update on Recent Blogs and Fantasy Finace Prediction` my January blog with a 40 year chart of $/¥ which I believe puts a floor under the short Yen trade with an upside 5 times your risk.

Plates of Meat= Cockney for `Feet`

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Wednesday, August 15th, 2012 Debt, Japan, National Debt, Predictions, Yen No Comments

Global Barometer indicates a possible chill.

Update from the 7th February blog…Iron Ore

I mentioned earlier that I believe Iron Ore is the barometer for global growth. See previous blogs for reasoning. As an update, last week saw the sharpest fall in steel re-bar prices since October last year. Iron Ore traded lower for the eight consecutive day to the lowest level since late December last year. Forward pricing is negative indicating further declines. With volumes low all eyes are on the beginning of the Chinese construction season in March which is hoped will stabilize prices. It is worth noting that if Iron Ore prices do not improve, the 100 million plus tonnes of inventories mentioned in Iron Ore will be throwing up losses of around $5bn for the owners.

Following last weeks warning of a grim outlook (Chinese Commerce Ministry) and falling house prices, the authorities have moved once again this weekend (second time in 3 months) , cutting banks reserve requirements by 50 basis points to 20.50%. We will have to see if this spurs positive price action.

Having been busy this past week with the day job, Landscaping, I have missed the continuation of the great equity bull market. Spurring things on was the positive economic data from USA which helped optimists with the belief that all global debts have been repaid and the US is moving into never never land.

A review of recent posts:

Oil nears all time high 6th February. In Sterling terms, Oil is now making new all time highs so expect another 3-4 pence per litre at the pumps.

Update on recent blogs 25th January. The Yen has started to weaken, I continue to expect further weakness. see chart. AP Moeller short got stopped out but I still fell the stock is not reflecting reality.

Beauty Queen suffers 8th January and Will the next Italy 18th December Both highlight the UK economy and Sterling. I have to admit Sterling has rallied strongly but again I still cannot see anyone wanting to own either Sterling or Gilts once the monthly budget deficit starts reflecting weaker employment and lower tax take overall whilst spending cuts are still just smoke and mirrors.  The Public Sector borrowing figures are released on Tuesday and are possibly the most important of the year. Income taxes peak in January and 2011 saw $33bn vs £27bn in 2010. However, the growth in revenue was halted in the second half of 2011 vs 2010. I would not be surprised to see a below expected figure which will weaken Sterling and Gilts. If this happens, expect even higher prices at the petrol pumps! Happy motoring.

Finally, good luck to Greece. I have made many happy visits to Greece, most memorably to jointly host a large dinner/reception at Posidoina festivals in the 80`s. I believe a Greece free of the Euro would be able to rebuild itself. A 40% weaker currency (Drachma) would see a flood of investment. The many billions shifted abroad by wealthy Greeks would be sucked back. I only hope they can choose politicians who can be trusted and not just lurch to the left as is possible.

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Sunday, February 19th, 2012 China, Debt, Oil, UK, Yen No Comments

BRICs and Steel

Its better to be lucky than clever!

When, in 2001, Jim O`Neill wrote a research paper for his employer (Goldman Sachs) he was unaware of the impact the acronym he used would have. In his global economic paper, he wisely forecast a greater role to be played on the world stage by four poor but highly populous nations ;Brazil, Russia, India and China. Since then the aggregate GDP of these four nations has virtually quadrupled to $12 trillion. So, was he right because he was astute or was he just lucky?

In these large populous, poor nations, insufficient infrastructure existed in 2000 to even dream about the levels of output achieved today. In getting to the current position of GDP, a lot of investment has taken place, more importantly, a lot of debt has been accumulated. In fact if you take a look at the global debt accumulated over the period its acceleration and volume are very similar. Global GDP went from $32 trillion in 2000 to $64 trillion in 2010. The big Anglo Saxon economies ran vast trade deficits which were financed by profligate governments not worrying about tomorrow. America and the UK tripled government debt while the citizens did the same. Driving the expansion was a lax approach by regulators on the financial system. The rest is history.

Where do we go from here ?

The biggest single investment a fledgling country can make in terms of employment and output potential is the steel industry. Construction/infrastructure and transportation all rely heavily on various forms. In the production of steel, two main ingredients are essential, iron ore and coal. A large cheap labour force also helps. Luckily for the BRIC theory, these countries had these commodities in abundance. In 1996 China produced 123m tonnes of steel. By 2011 that figure was nearer 700m tonnes. Global capacity is still being added and is expected to grow around 5% annually until 2014. Over the last 5 years the rate of output potential has grown more rapid e.g. South Korea has raised output by 72% since 2008. India has transformed its economy via industrialisation  from 58% agriculture to only 42% today. 61% of its steel output is for construction and infrastructure. The problem now is, total global output capacity of 1,890m tonnes whilst production is only 1,398m tonnes. That would be fine if GDP growth around the world was in good shape,if debt were at a manageable level and consumption increasing. Sadly, none of those factors support current thinking that demand will grow slightly in 2012 and beyond.

Demand is on the wane. In the first 11 months of 2011, global sales were +7.4% but declined 1.1% m o m in November.  In the EU (173m tonnes ann.), November saw a 2.1% decline over Nov. 2010 whilst the annual figure was +3.1%. The EU became a net exporter in August after being a net importer for the previous six months. Imports were 28% lower between May and August. Germany and Spain saw a double digit decline m o m, whilst Italy was up 10% (I expect that to be revised or drop significantly in Dec). With Alcoa (aluminium) and Arcelor (steel) mothballing Spanish production, 2012 looks bleak for them.

China produces around 47% of world steel output. It also has the worlds biggest Iron Ore deposits and is second behind USA in smelting coal. In 2011 output was +8.9%, however,  m o m declines have been evident over the last 6 months with November being the lowest output for 13 months. Of course it is also the worlds biggest consumer (of steel) and with that in mind it is worth noting that the train disaster in Wenzhou froze railway spending from July ( $50bn lost output) losing around 3,000 miles of track construction. With annual GDP growth in the clouds, demand has soared. Construction/infrastructure spending has ballooned over the past decade and accounts for the lions share of output and demand. If the housing bubble is allowed to deflate and the railway ministry cuts 2012 spending by 42% (from $110bn 2010 levels) then demand may well be sluggish at best. Vehicle sales may not help either. In 2009 (incentive induced) sales grew 46%, 2010 + 32% and only +2.5% in 2011. The authorities may see fit to push domestic demand by easing monetary policy but with property and inflation still too high, that may not be just yet. Shipping is an area which will exert downward pressure on demand, see my previous blogs `The perfect storm` and `The plimsoll line is clearly visible` on the subject.

Japan is the third biggest producer (110m tonnes ann.) behind the EU. It has the Yen to contend with. Until its value reflects the economic outlook for the country, see recent blog `Economageddon` the outlook is bleak. It is difficult to assess accurately the current picture due to the post earthquake affects and the flooding in Thailand. However, production in December was down 8.4% on December last year, the biggest monthly decline in 2 years and the fourth m o m decline in a row. 2011 saw a 1.8% contraction overall. Japanese ship yards are struggling with the currency and weak demand. From the worlds biggest player it is now third behind China and Korea. Concerns have been raised that the order backlog could disappear by 2014. The shipbuilders are demanding further price cuts (in sheet steel) to match Chinese and Korean offers.

The Korean production levels (69m tonnes ann.) could be affected by the announcement from the local ship yards that they will order 12% less steel this year. With new orders falling further 2032 will be down as well.

The US car industry accounts for 24% of domestic steel production ( 80 m tonnes), so last years sales increase helped significantly. My recent blog `When is a car not a car?` suggested that a great deal of that sales momentum was down to 2011 capital tax relief.

In conclusion: I am of the opinion that unprecedented debt growth in both public and private sectors drove demand to unsustainable levels. The knock on affect in steel demand was implicit in driving ever more demand for infrastructure spending which in turn drove ever greater demand for commodities. Of course these commodities needed to be transported around the globe. Ship construction grew to record tonnage thus fueling the cycle of more demand. The BRICs along with commodity rich Australia, Canada etc also grew at a frenetic pace. If, as I suspect the debt accumulation is stretched to its limit, global steel production will fall. Capacity utilisation rates peaked in February 2011 at 83% and have since fallen to 71.7%. At some point this year, further mothballing of production will take place thus reducing further the demand for iron ore and coal. If ship owners cannot afford to put their vast fleets on the swing (at anchor) then the supply of steel from scrappage will grow. India currently generates 30% of its steel production from recycled steel. The link between debt and growth cannot be denied, the question is now, can the new world continue its growth trajectory whilst the developed world digs itself out of an almighty mess.

Yes, Mr O`Neill was right to point out the potential but he would not be where he is today had debt not been allowed to get out of control. The global economy could turn very ugly.

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Monday, January 23rd, 2012 BRICs, China, Debt, GDP, National Debt, Shipping, Steel, Yen 9 Comments

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

In the words of the late prime minister Harold Macmillan

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

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

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

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

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

 

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

 

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

http://nationaldebtclocks.com/japan.htm

 

 

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