Oil

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

2022 World Cup in Doubt?

Qatar has a budget breakeven (with Oil) around $77 but intends to spend $210bn over seven years on related infrastructure. Will it be able to if Oil does not rally? Its stock market fell 5.9% today and is down 23% since September. just saying

Sunday, December 14th, 2014 Oil No Comments

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

Sterling…Beware the Reaper!!!!

Just a quick note on the seismic change going on in the world. Oil has now hit my target set over a year ago. This could be the big move I have been talking about for a long while. The chart below highlights how governments have ramped up spending along with the increase in Oil prices. If todays move to $70 is maintained or even moves lower, huge budget/spending cuts by these governments will follow at some time. Of course, prudent governments will have sufficient reserves to wait and watch for six months, beyond that, they have no option. If you read my thread on commodities and deflation you will find I talk about the potential collapse of Bonds backed by energy companies. To highlight that, Energy bonds make up 15.7 per cent of the $1.3tn junk bond market, according to Barclays data – compared with 4.3 per cent a decade ago. In the not too distant future, screams of anguish will be heard from investors.

My reason for this article, and I have not got much time, is the currency market. The move in Oil prices has lead to weakness in (Oil producing currencies) the Norwegian Krone. Yes, they have a lot of Oil but if this rout in commodities in general continues, I can assure you, the Norwegian Krone is where you want to be. I have said on many occasions that the fiscal approach of saving a large percentage of their oil income will make them the ultimate safe haven if the going gets as bad as I have constantly warned about. To my absolute disbelief, STERLING, has not moved. I know that our revenue (from Oil) has declined significantly. I have attached a copy of a recent government report. Nevertheless, the important fact to remember is how expensive it has become to extract the oil from beneath the North Sea. I believe the current costing is between $55-60. If oil were to fall below that, our entire energy sector would be in turmoil. Scotland would see mass unemployment on the east coast. The £7-8bn direct revenue would be in jeopardy and investment would collapse. These might not sound like big numbers but with a  deficit growing day by day, the implications for the whole of the UK are catastrophic. I reiterate my long term forecast for Sterling/dollar (Cable) to retest its all time low at $1.08…worrying stuff

Iron Ore is getting close to the 50% decline I have warned of…regular readers will know how and why this is occurring…all is not well in the world. I have said that equities are constantly supported by direct Central Bank purchases. Company Buy Backs and Sovereign Wealth Funds. The time may be upon us where even that support will not be enough. I will suggest a deep out of the money PUT OPTION in my next blog. Sorry, I have to dash…politics awaits..

 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323371/140620_UK_oil_and_gas_tables_for_publication_in_June_2014.pdf

 

 

Oil price graphic

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Thursday, November 27th, 2014 Norway, Oil, USD 1 Comment

Roosting Chickens….

Not got much time so how about a quickie…

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

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

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

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

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

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

 

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

Global 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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Shanghai to Europe Rate Drop Questions Chinese Export Claim.

Shanghai Containerised Freight Index (SCFI)…(An indication of the shipping cost of a 20ft Container)

It appears all is not what it seems in trade. Over the past six weeks, the SCFI (Shanghai to Northern Europe component) has fallen 36% (10%last week) and is now 21% below the corresponding period in 2012. The Mediterranean Ports have not faired any better with a 33% six week and 19% year on year, decline.

 

The same applies to the USA. Shanghai to the West Coast is 30% below 2012 with the East Coast down 16%.

 

Now of course this is a complex issue. The glut of vessels is nothing new and something I have written about on many occasions. It cannot only be an oversupply of transport, volume must come into the equation somewhere. I get a sneaky feeling that the forth quarter may be an interesting one when it comes to earnings. For now, this decline in demand for transportation has to ring some alarm bells. China is using its financial mussel in order to secure new shipbuilding orders for its vastly oversized industry. Whilst they mutter about merging some yards and maybe shutting others, the plain fact is (just as in the other heavy industries in China. Aluminium, Steel etc) the overwhelming urge to keep the people in work has drowned out any commercial economic considerations.

China raised its capital spending dramatically in June and July with house building and railway lines seeing significant investment. For now, it has reduced the huge industrial material inventory which was building beyond sustainable levels. Steel production was maintained or even increased by some allowing Iron Ore to rally. These investments are reducing the raw material inventory but  increasing the stock of un-sold real estate (most of which is priced at 20 times annual earnings…very rough guide) and in totally under used rail infrastructure. Eventually something will have to give. Wage growth of 20% per annum has underpinned the valuation of real estate. Wages going forward, in my opinion, will start to reflect the weakening profit picture in China. Tens of millions of un-sold overpriced property could spell disaster if they fail to keep all the balls in the air. I cannot help but think this is just another piece in my Global Deflation theory that I started in June.

If the oversupply builds to a point where finally common sense is applied, the consequences would be catastrophic for some industries and countries. Over the last two years I have berated Lucky Jim O`Niell and the BRIC economies. Given the huge decline in their fortunes over that period you might begin to think that the recent emerging markets rally has legs. One of the major consequences of any pullback would be a collapse in the Iron Ore price to around $40…yes $40, below even the cheapest of suppliers production cost. Previous blogs have given the price charts going back many years together with the countries and companies who have gained the most. Briefly though, Austarlia and Brazil would implode. Shipping companies (Maersk is the biggest but Greeks big in Iron Ore) would collapse wholesale and a few Scandi, German and British Banks would need major help not to mention problems for the largest shipping builders China, Sth Korea and Japan. Steel companies are already priced at 20 year lows so some may survive. Global Deflation would follow with Oil at $30-40. The suppliers to the Mining/Drilling Industry, mentioned all too frequently in my blogs, would have to be rescued. Sweden, which has a massive exposure to this field would be in a mess. As for Green Industries, made to look very expensive. British Government, well they have ben making fools of them and us for so long it would probably go un-noticed (Green Policy).

The problems some companies would face will be greatly exaggerated because the Investment Bonkers have encouraged them to shrink their balance sheet (capital) via share buy backs. Great for the Bankers income but when losses for companies start to accrue, the loss per share from such a big business with a shrunken capital base, will be startling. Share prices for all will collapse but more so for the biggest buy back companies. Deflation will be the result…hey ho…Its being so happy that keeps me going.

Below, me and the `Old Duchess` all dressed up to celebrate our 29th Wedding Anniversary

 

 

Tomorrow morning, off to the Olympic White Water course with my old pal Barry…who is not as good as me…he he he he

 

 

 

 

 

 

 

 

 

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Saturday, September 14th, 2013 BRICs, China, Japan, Oil, Predictions, Shipping, Steel, UK, US Economy 1 Comment

Gold and Equities

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

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

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

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

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

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

 

 

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What is the Fiscal Cliff made of?

Answer. Iron Ore.

A theme has run through my blog this year. It includes Steel, Iron Ore, Transport (Shipping/Trucks), Machinery and Global Economic growth.

I have written many blogs on the worlds second most traded commodity (behind Oil) as I believe it held the key to the BRICs rise onto everyone’s investment radar. My expectation earlier in the year for a significantly weaker price were all too evident yesterday when the largest US miner of the Ore fell significantly following a negative note from Goldman Sachs. The company is mothballing some output and reducing cap-ex. Cliffs Natural Resources have now fallen around 60% since earlier in the year. Other high cost producers have fallen across the board around 30-40%. I say higher cost producers as this is very important. The difference between the low cost producers like BHP (c.$40 per ton.) and the higher cost (c.$80 per ton) producers makes for interesting commentary. Yes, Goldman downgraded Cliffs yesterday helping the stock to fall 13%. However, something more interesting may have been giving a helping hand. China (consumer of 2/3s of the worlds seabourn Iron Ore) are very concerned that when Ore fell 50% to its low point ($85 per ton) a few months ago, its mines had to significantly reduce production and in many cases stop all together. Average Chinese production costs are around $85 per ton. They have now proposed measures to help them compete with the likes of BHP, these include cutting taxation by up to 50%. It is clear that they intend to keep the economy from weakening further in certain areas. To this end, the government is adding to the already high levels of industrial inventories (of raw material and finished goods) by purchasing Steel, Aluminium, Rare Eath, Copper etc. Add to this the significant increase in Oil and Coal reserves (this year) and you can see that although they are not reflating the economy as they did in 2009, they are quietly trying to support some of the high labour intense industries. It will all end in tears.

At some stage, the low cost producers ( Iron Ore) will fall fowl of this policy of holding up what are mainly state run industries. Global trade (consumption) is contracting! I think the next update of my Suez Canal data will give a much clearer confirmation of this. As high and low cost producers reduce output and cap-ex still further, the transport and machinery sectors will have another leg down. Shipping (a regular theme with me) is falling apart with billions of Dollars of losses yet to be taken by the banks. Several more companies have recently filed Chapter 11 (and the like) with several more of the German consortium shippers on the brink. AP Moeller (regularly mentioned here) have shifted their investment programme away from shipping to focus more on Oil production and port handling facilities. Not good (short term) from the worlds biggest shipper who has just sold a small fleet of Gas ships and idled another two VLCC`s. Container volumes to Europe were down around 15% in the third quarter.

BHP and APMoeller being leaders in their fields have yet to perform as the smaller players. I forecast some months ago that they would and I still fell very strongly that significant downside to their share prices will happen. The Swedish economy is very dependant on the industrial transport and mining industries accounting for around 40% of trade. Incoming orders have declined over the last two months and further significant declines may well be on the cards. I have talked about a few of the players before… Volvo, Sandvik and Atlas Copco. We must not forget the likes of Joy Global and Caterpillar, also mentioned several times before.

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Wednesday, November 21st, 2012 BRICs, China, Oil, Predictions, Shipping, Steel No Comments

Is Global Trade Growing?

Suez Canal update.

This is a regular theme of mine and it all ties in with the constant reference to the shipping, Iron Ore and Steel theme. The spring rebound seems to have limited momentum with the year on year picture only marginally ahead. More importantly is the breakdown of what and where. What is being transported and where is it going?

This chart shows the direction flows through the canal. As you can see the southbound lane is keeping things afloat with January recording near 48% growth. It is important to know the product mix to understand the demand. Commodities were the driving force of the upswing with Ores and Minerals +189%, Cereals +226%, Coal and Coke 165% and LNG and Crude Oil +117%. Given the breakdown of destinations southbound it is quite reasonable to say that China is the primary destination. The intention of the Chinese to raise the inventory level of many resources to western world levels has help drive this flow of commodities. The current level of oil inventories is estimated at around 42 days of demand verses 90 for the USA. But what of the demand of manufactured goods?

I have taken a complete flyer on this one and converted southbound canal traffic data to reflect Chinese demand. In April 2009 when trade was in the carzy (see top chart) container imports were declining year on year and accounted for only 45.55% of total imports. However, by April 2011, containers were growing by 14.4$ annually and accounted for 59% of total volume. The latest data for April 2012 indicate an anemic growth level and the overall share having fallen to 52%. All in all this does not suggest the future is bleak. Just this weekend the authorities cut banks reserve rate for the third time in six months (To my mind this merely slows the rate of deceleration in the economy). It does make the point that as certain inventory levels start to look excessive, this pillar of support could give way rapidly. I am thinking more of industrial commodities rather than Energy or Food.

What of Europe? April 2012 saw a year on year contraction of overall trade with containerised traffic (which accounts for nearly 60% of total) down 1.1% verses a growth rate of 12% in April 2011. Chart 2 highlights the delayed reaction of Northbound growth following the reflation packages from China and the rest of the world. Austerity now has its hand firmly on the tiller. I suggest the crew lash the main sheets!

 

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Sunday, May 13th, 2012 China, Oil, QE, Shipping No Comments

Global Barometer indicates a possible chill.

Update from the 7th February blog…Iron Ore

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

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

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

A review of recent posts:

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

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

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

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

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

Oil nears all time high

UK Consumption.

Brent crude in Dollar terms is still $30 below its all time high of $145. However, in Sterling terms it is within a whisker of its all time high of £74.60. If Sterling falls from its current level, and I still believe it will, the inflationary impact may be just what the Bank of England and the Government could do without. Once again we have a factor which will assert downward pressure on disposable incomes. Even without any further Sterling weakness the higher pump prices will reduce demand. If this pricing persists until late summer the government may have to delay once again, the planned sharp increase in fuel duty.

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Monday, February 6th, 2012 Debt, GBP, National Debt, Oil, Predictions, UK No Comments
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