Predictions

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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Gerpel

No blog since January…You may have thought that Finance Reaper was taken by the Grim Reaper…but no. I have been busy fighting for a seat in Parliament. With the General Election on Thursday, I am pleased to say that the most challenging 3 months of my life will be over. The bookies are offering 40-1 on me becoming the MP for Ilford North but hey ho, god loves a trier.

The only reason I have broken away is the article in todays Daily Telegraph. Regular readers will know that I have been calling for Germany to leave the Euro as the simplest way of restoring order .

GERPEL or Germany Expel. I have stated that Germany is using the weak currency basket to dominate the export world whilst holding back its own consumption. This has created such huge income that the state debt is shrinking and the trade surplus is eye watering. Two years of my commentary and the real picture of its utter contempt for the people of Europe is becoming clear to many others. Read the article and see for yourself. Then search my articles on Germany and see if all I have been saying is true.

They are laughing at Europe and its stupid bureaucratic governance by free loading MEPs who are more interested in their own self wealth and importance to care.

THAT IS WHY I AM STANDING FOR UKIP! THIS UNION OF EUROPEAN STATES IS A FAILED VANITY PROJECT.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11584031/Germanys-record-trade-surplus-is-a-bigger-threat-to-euro-than-Greece.html

Tuesday, May 5th, 2015 Predictions No Comments

Geman Engineering.

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

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

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

 

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

Greece Has Trump Card…USE IT!!!

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

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

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

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

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

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

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

 

 

 

 

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

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

UKIP or Marie Antoinette (Madame Déficit as she was known)

HOW ON EARTH CAN IT BE RIGHT FOR US TO ORDER CAVIAR OR FOIE GRAS AND HAND THE BILL TO PEOPLE WHO HAVE NOT YET BEEN BORN?  OH YES, I KNOW, LET THEM EAT CAKE.

It will take a bit of reading to get at the headline above but stay with it.

 Commodities News…  Smaller less profitable (higher production cost) Iron Ore miners in Australia are cutting management jobs/ wages and are applying to the government for a reduction in state royalty payments. Large exporters of Coal eg Indonesia and Columbia have announced higher 2015 production /export production targets to make up the governments revenue shortfall from weaker prices. These are two examples I have been expecting and helps prove why this is an economic turning point see BRICs..The Future Looks Cabbage Like.. and others including Chinese Deflation Cancer Spreads. Oil is mentioned later.
Social Unrest… Worldwide anti-government protests, which I foretold in Global Dissatisfaction with Governments Can Only Spread…are on the increase but for some reason the BBC ( and the wider media) seem reluctant to publicise.  As I talked about in Profound inequality in America…Time To Act!… the depth of disparity between haves and have nots is now  close to breaking point. The reasons for disruption differ but the catalyst is truly born out of a sense of injustice. The political landscape, like commodities, is getting closer to a once in a lifetime earth quake. UKIP along with anti conformist EU parties are well and truly on the march. France, Germany, Greece, Sweden, Spain are all experiencing the movement. Globally, protests  in many countries are aimed at bringing down failing and corrupt governments. Others are based on religious grounds. The significant loss of revenue commodity rich economies will experience in 2015 will not allow corrupt governments  continuity in bribing the electorate. Whilst, as mentioned earlier, they will attempt to expand export volumes, the overall economic reality is they will cut spending or in some cases huge energy subsidies thus exposing the core failure of the global economy. It is built on wasteful unsustainable  government spending.  This is either financed by over valued commodities, due to excessive QE (numerous blogs on the subject starting with Quantitative Easing …April 2013)… Or mammoth government spending/debt which is only allowed to exist because of??… Yes you guess it excessive non debt reduction linked    QE.
This story does not end well. Be afraid, be very afraid. I only hope my allegance to UKIP is not misplaced and they remain an un-whipped political party where their elected officials are allowed to vote with their conscience and in line with the wishes of their respective  electorates.

Due to the weakness of commodity revenue, Australia is cutting overseas aid, civil servants and departments…tomorrow they will announce the extent to which the commodity crash has raised its budget deficit. The current deterioration in its global trade position is the biggest since records began in 1959. It is interesting the measures this realistic government is taking in view of the deficit escalation it faces, as opposed to those by the Coalition in the UK.  This sensible approach, whilst short term negative for all concerned is better in the long term. Unlike of course, the UK and for that matter many other nations in huge debt, who have chosen to spend and borrow even more to plaster over the cracks on their watch. This gives them immediate credibility eg George Osbrown (Osborne/Brown)  but just lumbers future generations with the liability. HOW ON EARTH CAN IT BE RIGHT FOR US TO ORDER CAVIAR or FOISGRAS AND HAND THE BILL TO PEOPLE WHO HAVE NOT YET BEEN BORN. OH YES, I KNOW, LET THEM EAT CAKE!…see we got there in the end. Remember, this was the start of the French Revoloution…Hopefully, Farrage, I and my colleagues will do like wise but in the whole of Europe.

EU… So, we are being asked to pay more into the budget pot whilst France gets the lions share of our additional contribution. This is justified due to their weaker economic performance… well bear this in mind.

A 2013 global study of working hours revealed the French worked the fewest hours of any country in the world. The report by Swiss bank UBS found the French graft for just 1,480 hours a year, with 27 days annual holiday.Britons work 1,782 hours a year – 301 more than the French – and have 20 days holiday a year… still happy to work your socks off to stay in Europe?… I could go on and tell you about the extent of black market activities in many EU countries which lowers their official GDP thus reducing the amount they pay…but I wont.

OIL   A quick update on a topical issue. Below is an extract from a recent press article (Daily Telegraph)

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry.The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.This is a major departure from historical trends. Such a shortfall typically happens only in or just after recessions. For it to occur five years into an economic expansion points to a deep structural malaise.The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.The EIA said the shortfall between cash earnings from operations and expenditure — mostly CAPEX and dividends — has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.

When analysts talk of the big boon to consumption from lower Oil prices, bear in mind four things. Global Annual Investment in fossil fuels is $1 trillion most currently based on $80 brake even. Companies have been encouraged by Investment Banks to buy back large swathes of share capital (Very good in expansion…possibly fatal in contraction) Governments are spending revenues which at current $60 price, do not exist. Consumers (and Governments) are burdened  with huge debts.

Sadly, todays article front page of the business section Telegraph` £55bn of Oil projects face axe (North Sea)` fails in the most important issue. Namely that the UK Treasury takes around a third of the profits made by companies in the UK Continental Shelf. I suggest they read my last blog Sterling…Beware The Reaper!!!  Lets not forget the GREENS. Last year 62% of all money invested in UK Enterprise Investment Schemes (EIS) were made in Renewable Energy…MY GUESS…They all need Oil above $100 to be viable…All this leads me to my favourite Warren Buffett saying…

“When the tide goes out you can see who is swimming without trunks” Ladies, be prepared to avert your gaze!

Issues for future blogs

Is Globalisation or EU causing depopulation of rural areas eg Spain has one area twice the land mass of Belgium that is almost deserted. French villages shrinking (FT Weekend)…Deflation tsunami on the way?..Summer 2015 very bad for European and North African holiday resorts as Russian holidaymakers disappear…Why is UK  paying more into EU pot than countries that spend far more as a percentage of income on pensioners?

 

 

 

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Sunday, December 14th, 2014 Consumer Debt, Debt, GDP, Japan, National Debt, Oil, Predictions, QE No Comments

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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Italy Could Beat UKIP To Braking The EU

Finally, the good ship Gravy Train is taking on water below the water line. Comments by Beppe Grillo, leader of the 5 Star political movement, will send a shudder down the necks of the overpaid numties dictating how Europeans should go about their daily lives with little concern for the misery they are causing.

“We must leave the Euro as soon as possible” said the learder of a party that polled 21.5% in the recent European Elections…This will be, if it becomes reality, a hammer blow to the German economy. No self respecting politician in the Mediterranean Countries would be able to stay if it happened and Germany would be uncovered as the worlds biggest exporter hiding in a weak currency. Of course, this is only one voice in the Italian political arena but Beppe has a soild following and the black hole of debt that is facing the government will only force voters into his clutches.

This is what I wrote in February this year in my Article Nothing Sucks Like an Electrolux …I still believe the simple solution is GERPELLED …Germany Expelled

….Germany to be expelled from the Euro. I first hinted at this in The Elephant in the Room (June 2012) and again in Kurzarbeit achieved where Blitzkrieg Failed (January 2013)…basically Germany is hiding in a weak economic zone to conquer the export world with an unfair advantage.

GLOBAL UPDATE…

China.. Sales of excavators fell in September by 33% versus 2012…This is an acceleration of the 15% decline seen during the first nine months. Regular readers will know how important construction in China is to the Economy.,..If the Chinese economy is expanding anywhere near the 7.5% it states…You can call me Waung Kin Phil!!!

Slowing House sales means slowing Excavator sales which means slower Steel sales which means slower Iron Ore/Coal sales which means slower Shipping traffic which means slower ship sales which means slower Steel sales whi…you get the point I guess…

 

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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

Nothing Sucks Like An Electrolux!

This blog is by no way a swipe at Electrolux or the wonderful people of Poland and Croatia. I feel the story highlights some of my favourite themes of late which are global demand and the EU.

Late last month, Lux dropped a bombshell on the 5000 employees it has in Italy. The company has insisted that wage costs must come down significantly. The benchmark they set was the level of pay in Poland. The company claim that the wage cut would be in the region of 15% over the next three years. Of course, they are being economical with the reality (as pointed out by the unions) and if you factor in a reduction of shift hours (plus some fringe benefits) the monthly take home pay could fall by 40%. This move by Lux is nothing new and quite frankly quite understandable in this current economic climate. In 2006 they closed a German plant and in 2012 announced a French plant closure. The biggest shock came last year when they announced the closure of their Australian facility in Orange NSW. Nearly 5% of the town is employed one way or another and has been the largest employer since 1946. The local council did offer to wave taxes for 10 years but when you consider the wage differential (80% cheaper) in Thailand where production is shifting they were never going to reverse the decision.

The chances are that the Italian closure will go ahead despite serious political pressure and promises of tax brakes. So here we are. Poland gets into the European Union. It then gets significant aid of which it spends around $80 billion (last 6 years) upgrading its transport infrastructure. This helps bring inward investment and why not. Wages in Poland are around 1/3 of Germany and even less compared to Italy where the tax system adds an extra 10% to employers contributions verses the EU average.

The EU

The whole idea of a system where new countries are welcome into a trading bloc, given massive aid (to improve the potential living standards of its inhabitants) is a wonderful concept. Much like Communism, the EU is a complete folly. The unemployment rate in Italy is currently 12.7% (with youth unemployment at 40%) the highest rate since modern record started 40 years ago. The debt to GDP is around 132% which is the highest since 1925. GDP is likely to fall for the third year and drop to 2001 levels. But lets all rejoice, Poland has been voted (in a recent Bloomberg poll) the best place to do business amongst its Eastern European and Central Asian partners. Why has Italy fallen so drastically? Because the EU system is not fit for purpose. How can countries which share a common currency allow wage costs diverge so badly. Since 2000 Italian labour costs grew by 36% whilst Germany grew by 11%. If Italy were a small player joining, maybe that would be understandable. However, Italy accounts for around 16% of the EU pie and is a G7 nation. At least it was, at this rate it might just get into the G20 in a few years.

The misery now being inflicted on Italy is no different to that on all the Mediterranean members where unemployment is causing complete despair. But lets all rejoice, living standards are rising fast in Poland. Given further expansion of the EU in recent years, this process of driving down wages for blue collar workers can only continue. It is not only shifting manufacturing that is causing the problem. Migration, as seen by the recent uproar over mobility given to Bulgarians and Romanians, is also driving wage growth down. But lets rejoice, Poles can now afford to holiday in the sun. In my opinion, the only way to save the EU (AND I WOULD NOT) is Gerpell! …Germany to be expelled from the Euro. I first hinted at this in The Elephant in the Room (June 2012) and again in Kurzarbeit achieved where Blitzkrieg Failed (January 2013)…basically Germany is hiding in a weak economic zone to conquer the export world with an unfair advantage.

This argument can only drive further the wedge of inequality. Those that own companies or generally in the elite, can drive down the costs of doing business helping to raise or maintain profitability. The more people (admitted) from greater poverty levels than the core, the worse it becomes. So, all the people in the EU paying taxes to Brussels ( indirect via state tax) are watching the MEPs give ever larger monies to people who will ultimately keep them in poverty. An example of this is the newest member Croatia. Unemployment is over 20% and the economy has contracted for 5 years. The EU has just announced that the youth unemployment scheme will give Croatia EUR128 million. The result of all this re-distribution of manufacturing cost is the potential to re-distribute  (or devalue society) in the wealthier areas. This bodes very badly for Italian infrastruc/Housing values if they stay in the Euro.

Demand

My recent blog hinted that demand globally could be the driving force behind further unrest. This move by Electrolux is just another example of how I believe the end game will play out. Whilst relocating production to cheaper countries is nothing new, after all China was born on the idea, the previous 50 years have seen the developed world substitute manufacturing job losses with service or more commonly Government jobs. For example, in the UK, 1.5 million jobs lost in the last twenty years were offset by state employment rising by over a million. All this was fine whilst debt was not a dirty word and austerity not even mentioned in the corridors of power. All that has changed. When Australian jobs paying around $25 (hourly) are substituted with Thai at $3 the net loss of demand is palpable.

 

 

 

 

 

Monday, February 10th, 2014 Predictions 1 Comment

Global Dissatisifaction With Governments Can Only Spread

Hi all. I am back with my first blog of 2014. No charts in this one as it is just a thought provoking piece.

The recent turmoil in global asset markets could be just the beginning of a more significant shift in the way the world is run. If a fairer, more just and balanced society is to endure, the immediate road ahead is likely to be bumpy.The unrest in Thailand, Turkey, Ukraine, Argentina, Brazil and Venezuela (TTUABV) are all linked to corruption and inequality. People are no longer prepared to stand by and watch the ruling elite grow ever richer and more powerful whilst the majority get little by way of a better life.The peasants have always revolted before so why should this not be just another short term blip? The answer could be debt—

Over the past 50 years governments have been allowed to raise the level of overall debt to astonishing levels. This debt has been used to prop up the world economy, whilst just enough of this money went to the masses ( to quell their rage) the bulk went to the small minority at the top. Well, I feel the show is nearly over and the accumulated debt level is at a stage where it can be raised no more.The USA, Japan, UK and France are a few of the developed economies who have plans to curtail spending further in the coming years. This is the complete opposite to the profligate abuse of public funds previously. This will not be the catalyst for change only another link in the chain of events.

Since 2012 I have written extensively on the subject of China and the other BRIC economies. My concerns about this group of countries which have been the primary drivers of the world economy in the 21st century, have been well founded. I have said it before and I will say it again `China is a cancer on the world economy`. Just ask yourself why we trust a country that tells you what its GDP will be in advance. It then uses one of two means (or a combination) to achieve that goal. Firstly it uses statistics which are doctored to tell investors what they want to hear. Secondly, to make sure growth is achieved they will build a few extra thousand miles of railway or build a few million additional houses. These investments would not be a problem if they were driven by demand and paid homage to a return on investment. Sadly that is not the case. Both railways and housing are so overdeveloped that empty trains and platforms abound and tens of millions of homes are unsold or just uninhabited. As finance becomes less abundant, driven by tapering of QE and concerns on Chinese debt quality, this oversupply will cripple construction, steel, Iron Ore and transportation etc etc. Despite all this, China and the BRICs are once again just further links in the chain. My real concerns for 2014 surround my old favourite Japan and a new one for me, the Middle Eastern Oil producers.

We are on the cusp of Japans big fiscal tightening. Consumer taxes will increase in April from 5% to 8% in the first step towards 10% in 2015. This might not seem too onerous but in an economy that has only seen deflation over the past two decades (coupled with negative wage growth) believe me, this will stifle consumption… I have highlighted a myriad of interesting facts on Japanese debt and society over the past two years. Go to the categories filter to read.

Finally we get to the catalyst of what I believe will bring about the end of borrow and binge politics. Demand…Global demand or consumption and its growth/decline is how governments and central banks keep the world turning. Every economic crisis in the last 50 years has ultimately been resolved with debt and or cheaper borrowing costs. So, back to the unrest in the TTUABV bloc. The resulting currency declines by all will lead to a contraction of overseas demand due to import price inflation. In many cases government finances will have to be re-balanced so past demand becomes future austerity. Taken solely as a group the world economy would only hiccup. But, add in further austerity by developed nations and world demand looks very fragile. China can no longer come to the rescue as it did in 2009 (with a massive investment programme) as it now has debt problems of its own.

So demand could fall globally. What then? Russia and the Middle Eastern Oil producers become the final catalyst. Lower demand will weaken commodity prices and unlike previous economic declines this is where it all unravels. Because commodity rich countries have grown so rapidly on the strength of the commodity revenues their production costs have grown sharply. The production costs are not just the extraction element but the debt and annual deficits required to run  infrastructure, social spending and corruption wastage. Saudi Arabia, I am led to believe, needs $100 per barrel to maintain its budget. A far cry from previous economic crises where producers would simply cut supply and wait for prices to stabilise (maybe spending a little less in the casino’s of London etc). Not any more. This time round they too would be caught up in the financial meltdown and have to cut spending aggressively. This in turn will lead to yet more government dissatisfaction. Iron Ore will fall below all but the cheapest producers causing further pain to the BRIC and other suppliers who have ramped up production and with it costs.Whilst all this sounds dire. It could lead to (further) widespread buying of equities by Central Banks… see Gold and Equities April 2013 and Olympic legacy for the Finance-reaper August 2013 for comments previously…and maybe one last ditch effort by the elite of the banking world which would help the politicians carry on spending for another few years. It would be a simple plan. Just write off the government debt held by central banks. Of course. this would lead a move by every country (other than the EU which has no mandate) to print money buy their own bonds and spend spend spend. Inflation would rocket and unrest would ensue…

HAPPY 2014!!!!!!!!!!

PS I have been pestering Nigel Farage (via his office) to meet me for lunch and discuss a new political approach for the UK. Sadly he is far too busy. I will continue as I would love to change the way politics are done, not only in the UK but globally.

 

 

 

 

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Profound Inequality in America…Time to Act!

I have been spurred to write today following yesterdays speech by President Obama in which he called for action to alleviate the `Profound Inequality in America`…I make no apology in re-publishing my blog AMERICA: THE HOME OF THE FREE?…NO,THE HOME OF THE FOOL!  repeated at the end of blog.

 

HORAY…At last the problem is starting to get recognised as significant for the majority of the population. Whilst Wall Street grows ever richer on the generosity of the wider populace (Bank bailouts and QE) the majority are facing a bleak future. I believe the end is nigh for the Dollar as the Global Reserve Currency. If not, it will end up like the British Pound at the end of its dominant period. The adjustment after that was very painful. China, as I have stated in the past, is an economic cancer on the rest of the world. I have said on many occasions that the level of productive investment in China is driven by need to employ (people) not the need to employ capital for profit. Regular readers will know that this has been one of my reasons to expect Global Deflation and just out of interest, todays article in the Daily Telegraph highlights some of my concerns.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10495902/Europe-repeating-all-the-errors-of-Japan-as-deflation-draws-closer.html

Unemployment figures are being heralded by Wall Street as signs of growing prosperity. As I have pointed out on several occasions, poor quality jobs with low pay will not cure Americas ills (nor the UK for that matter) The recent data on spending (to date) in the festive season highlights that employment growth is not the focus. The real focus should be on the Participation Rate (which stands at a the lowest percentage of population since before Ronald Regan)  and the GINI COEFFICIENT.

The participation rate, or the percentage of people actively in employment, peaked at the beginning of the millennium and then began its fall. The decline accelerated following the financial crash and has not stopped. Several factors are at play here. The most important being the loss of manufacturing jobs. Then Demographics, with the baby boomers coming of age (retirement that is) and lets not forget Disability. This group of people now stands at 8.8 million which has curiously doubled since 1995.

I will not go on about Gini Coefficient suffice to say it is a globally recognised barometer of the distribution of wealth…America sucks! All Americans (the poorer majority that is) should go to their elected official (who will be wearing a great suit and probably an expensive watch) and demand to know what he doing about the GINI! He will be too busy counting his money to give a damn about you.

It is clear that QE has done nothing other than put more money in the hands of the wealthy. The real problem for America is having the Chinese currency loosely pegged to the Dollar. How can a mature economic country with massive financial and trade imbalances expect to keep pace with a dynamic (and second biggest in the world) economy growing at around 8%. The answer is it cant.

If this nose dive is to be reversed it is not via a hike in minimum wage, that will make it worse, it needs to be fed by America making more of what it uses eg shrinking its trade deficit. This way jobs will become more abundant and wages will rise accordingly. YES!…That means upsetting the Chineseand maybe the Germans for that matter but see my next blog which will expand on Kurzarbeit achieved where Blitzkrieg Failed and The Elephant in the Room (2 earlier blogs)

WHY!!! Should ordinary Americans see their living standards fall back to the 1970`s just to let China move 20 million people (a year) out of the paddy fields into new apartments. It seems crazy to me. The simple truth is that China is growing far faster than its restricted currency is implying. A realignment is required where by the Yuan would appreciate rapidly. Whilst the implications in the financial markets might be adverse in the initial stages (slower Chinese growth) longer term it would help to balance prosperity. The world has too much cheap capital as a result of QE. This has lead to far too much output capacity investment which will eventually lead to Global Deflation. We need to bite the bullet now and re-balance the worlds economy at a lower level that today but one that is fair to all. Otherwise, the simple truth is that history will repeat itself and the disaffected will take matters into their own hands…

YOU HAVE BEEN WARNED!

BELOW IS REPEAT OF EARLIER BLOG…………………………………………

I am very sorry if this headline has upset my American friends and relatives. Having worked for many US companies (Conti-Commodities, Refco, Merrill Lynch, Chase Manhattan and Lehman Bros.) I can safely say I have had the pleasure of working with and meeting many wonderful people. That will not, however, stop me from saying:

YOU STUPID AMERICANS!……..At least 80% of you.

Of course the headline is a bit sensational but I feel the majority of Americans really do need to wake up and smell the coffee.

I will start with the visuals, then explain. Firstly, a chart of US Govt. debt build from 1942 used in blog Economic Seismic Shift, November 2012. Secondly, a link which has some revealing information on the US economic data. Third, inflation adjusted version of the first chart, and finally, the wonderfully visual and informative US Debt Clock.

Item 1)

Item 2)

http://xkcd.com/980/huge/#x=-6416&y=-8544&z=2

Item 3)

 

 

Item 4)  http://www.usdebtclock.org/index.html

So, why such a downer on Americans. I have been involved in American Economics (not professionally) since the 1970`s.  I first travelled (on business) to New York and Chicago in  1982 when poverty was evident.  I cant help but feel “That the actions taken in the name of the American people by the American people on behalf of the American people, have only benefitted a few American people”

So this report of Lincolns Gettysburg Address (yes, sorry but its from Wickedpedia) is at the heart of my argument.

Abraham Lincoln’s carefully crafted address, secondary to other presentations that day, came to be regarded as one of the greatest speeches in American history. In just over two minutes, Lincoln reiterated the principles of human equality espoused by the  Declaration of Independence and proclaimed the Civil War as a struggle for the preservation of the Union sundered by the secession crisis with a new birth of freedom that would bring true equality to all of its citizens. Lincoln also redefined the Civil War as a struggle not just for the union, but also for the principle of human equality.

 

If you look at Item 1, you will see that since the mid-late 1970`s government spending has grown dramatically. Yes, inflation at that time was an influence (Oil crisis) but the seed was set for ever grater peaks. More Importantly Item 3 shows how debt has risen dramatically inflation adjusted. Between 1947 and 1979 the top 1% earners accounted for 7.3% of total national income. From 1979 to 2006 the rate rose to 13.6% (of total national income).Today, it is believed that figure is closer to 25%. I am making a direct link between earnings growth of the top people in America and the acceleration of nation debt. When you bear in mind that the people making the decisions,  both politically and economically, to raise debt aggressively, are (most probably) in that top 1% then it starts to look wrong. Consider these facts:

  • 1% of Americans own 40% of overall wealth and 50% of all Equity, Bond and Mutual Fund Assets.
  • 400 Richest people have more than the combined wealth of the poorest 50% see Quantitative Easing
  • The poorest 40% have no discernible wealth.
  • 80% of the population only accounts for 7% of total wealth.
  • In 1965 the average hourly earnings (inflation adjusted) of a production worker was $19.61 and today the  rate is only $19.71.
  • In 1965 the average hourly earnings (inflation adjusted) of a CEO was $490.31 and today the rate is $ 5,419.97

The last two points are taken from Item 2. If you click on the link and zoom you can navigate around finding these facts in the dark green section. I have no reason to doubt the author as it has a comprehensive reference.

In the name of the population, America has now borrowed $17.1 Trillion. That is now $53,000 per citizen. Of course both those numbers are increasing rapidly, see Item 4. To highlight significant growth in debt per citizen, in 2000 it was only $20,000. So the top 1% hit the credit card of all Americans to the tune of $53,000. The trouble is, the bottom 40% have never really benefitted from that spending. 125 million people have no wealth but are on the hook for $7.2 Trillion. The next 40% up the wealth league are not much better off and collectively they owe $14.4 Trillion.

What has all this debt bought the American citizens as a whole. That is forgetting massive wealth for the few.

Amongst its Economic peers the USA (x China)

  • has the lowest life expectancy
  • highest infant mortality
  • spends highest % of GDP on healthcare
  • is the only country not to have Universal Health Care (pre Obamacare??)

Amongst OECD members

  • highest income inequality
  • highest poverty
  • child poverty twice the average

also

  • 17th in Education table of 40 most developed countries
  • down 10 places in 30 years
  • only 6% performed at advanced level placing it 31st out of 56 nations
  • annual investment differential (per pupil) between most and least selective colleges in 1967 $13,500 (adjusted) and today it is $80,000
  • wealthy students outperformance over poorest is the highest in the developed world
  • Food stamps are now used by 48,000,000 vs 28,000,000 in 2008.
  • Since 1965, employer benefits most notably in Health and Pension have been significantly eroded.
  • for a brief moment in 1928 inequality was higher…hhhmmmnnn

I know it sounds offensive and it is not meant that way but…if the wealthy put chains around the ankles of the poorest 40% and taught them the words to old man river. They could sing it whilst they were contemplating just what Abraham Lincoln meant when he claimed victory brought a new birth of freedom that would bring true equality to all of its citizens. Maybe the real losers in the Civil War were the slaves. At least they could dream one day that rightful freedom would be granted. What dreams have the poor Americans got today. Not only have they poor education and health but they are also being used to borrow money to benefit the rich. The Federal reserve should all be taken out and put against a wall. They above all in the financial world have been responsible for allowing this unfair system to go on. QE as I have highlighted before, is passing more wealth to the few. These people are likely to bid up Art and other assets which help show off the individuals ranking in the top tier. It does not transfer directly to consumption for all. Politicians of all sides of the spectrum should hang their collective heads in shame. Whilst they have grown fat on the corn of increased spending, they have allowed jobs of the working class to be shipped to China (etc) so that the owners and senior employees can share in the bottom line profit improvements it allowed. The big mistake (yes, with hindsight) was to not invest heavily in the wider nations education, allowing people who would normally have aspired to a full time blue collar job, be more in tune with the modern world. Instead, politicians, influenced heavily by industry, kept the consumer stuffed with borrowed dollars so he could keep the profits rolling. If this borrowing was kept in check (the world over) people would not have become so throw away, growth would have been much slower and more importantly, balanced.

I can only refer to this shift in wealth as theft. Probably the greatest Sting of all time. How will it all end?

“America will never be destroyed from the outside. If we falter and lose our freedoms, it will be  because we destroyed ourselves” Abraham Lincoln

http://www.upworthy.com/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact-2?g=6

 

 

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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

Osborne Good Fortune Financed by Pensioners and Savers.

Osborne Good Fortune Financed by Pensioners and Savers.

Lets look at the UK. Average Weekly Earnings for September 2013 are £ 474 which compares to £473 in September 2012. With Inflation running around 3% (far higher for pensioners and low paid) it must beg the question as to how Retail Sales have grown and house prices are up 4%. Are we really to believe the grinning Chancellor who talks of a turnaround in the economic fortunes and a lower Budget Deficit.

Lets look at some facts;

  • Provident Financial (Largest Doorstep Lender 130 yrs Old) Claims that more families are taking out short term loans (26%) and they are seeing an increase in late payments.
  • Foodbank usage up 300% on last year. 350,000 people fed by the Trussell Trust in the six months to September 2013.
  • Red Cross to distribute aid for the first time since WW2
  • Pawnbrokers… 650 in 2007 with 2250 today. Gold scrapped in 2006 10.7 tonnes but 70 tonnes in 2012 or $3.25bn.
  • Industrial Production is 1.5% lower than 2012.
  • UK Current A/C in Deficit for 30 yrs despite Sterling devaluation.
  • Gross Fixed Capital Formation (Gauge of investment vs consumption) at 14% by far the lowest in the OECD.
  • Industrial Output per hour worked lower vs 2012 and 2011.
  • Part Time working highest ever recorded.
  • Manufacturing only 11% of economy vs 25% in 1980
  • Car Sales booming but finance to buy is around 80% of sales vs norm of 54% with PPI pay-outs acting as deposits.
  • Government spending has increased throughout Osborne`s tenure.
  • UK Birth rate growth highest since 1972 whilst Germany has the lowest ever recorded and only 50% of 1964.
  • The UK Govt is spending £120bn a year more than it receives in tax. If that figure were zero, I believe the economy would contract by around 15%

So we have economic growth but we also have growing poverty. see Quantitative Easing. This is just as I forecast back at the beginning of 2012. Job creation but no deep rooted wealth creation. The jobs being created are (on the whole) very poor quality. Earnings growth is negligible so consumption has to be financed by a mixture of savings drawdown, debt and asset disposal. Asset disposal can be a mixture of Gold sales, Equity Release or Pension withdrawal. We need quality of economic output not quantity. Immigration has for some years helped to keep the quantity of growth from falling. With around 0.7% population growth each year you would expect some positive demand growth. This Government has not done what it promised which was to rebalance the economy away from consumption and back to manufacturing based output. Instead, it has used the QE benefits of lower interest rates to encourage further consumption. This will keep our Balance of Payments in deficit with imports continuing to flourish.  The large export orientated nations are not encouraging consumption, if anything they are doing the opposite. When will we learn that a continued imbalance between imports and exports will not help the quality of the economy.

So what of the UK Budget Deficit improvement. Lets not get carried away with a billion pounds here or there. The plain truth is that government is getting bigger. Bigger tax receipts and bigger spending. Tax receipts from consumption have increased driven by government polices on housing. Can the increase in house prices really be a positive to young families? How can they, with disposable incomes continuing to fall. Osborne is looking increasingly like Gordon Brown. Take what you can in the short term and let the long term implications be someone else’s problem.

If it were not for QE the deficit would not be falling at all. With the UK debt growing by £120bn a year ( chart 1) you would expect the interest payable to be growing. Not so. The lower interest rate environment resulting from QE has saved the chancellor a fortune. The average rate applicable to the debt (chart 2) has dropped significantly. If you assumed that the rate (chart 3) is at least 1.5% lower than it should be (given the appalling state of fiancés and the current rate of inflation) then the chancellor is saving around £15bn a year. This would imply that the deficit is still growing. So the chancellor has saved all this money thanks to the Bank of England (and the Fed) but someone has to be loosing. Yes, my dear old pensioner, it is you! That to my mind is just another tax.

Chart 1

Chart 2

Chart 3

An update of a previous chart. This highlights the income via bonus payments held back prior to the reduction in top rate tax in April. The income tax data also includes Capital Gains which have no doubt been positively influenced by the FTSE 100. Yet more tax income for the government due to global QE. I have to conclude that Central Bankers are totally in cahoots with politicians. As I have stated before, QE should be linked to fiscal prudence guarantees from the various governments.

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Tuesday, October 22nd, 2013 Consumer Debt, Debt, GDP, National Debt, Predictions, QE, UK 1 Comment
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