UK

The Future

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

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

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

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

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

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

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

You have been warned..again…

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

 

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The Conservatives Are Liars…We Need Hyperloop Ideas.

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

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

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

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

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

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

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

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

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

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

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

 

 

 

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

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

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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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

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

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

GLOBAL DEFLATION

A Monster which is as rare as the one in  Loch Ness could be about to appear.

This is not a long winded formal blog, just a work in progress. I am growing increasingly concerned that the ingredients for this most disastrous of economic environments are coming together. I have spoken at length about the growing overcapacity of production in the industrial environment. My concerns have been centred on Steel and Shipbuilding. However, overcapacity exists in nearly every facet of the global economy. I have been a huge bear of the BRIC`s since this blog started (and Lucky JIM O`NEILL who coined the phrase) and this has been totally vindicated with their awful stock market performance.

The Japanese are now going to export the deflation bug which has gripped them for so long. 2014 sees the start of a significant rise in consumption tax which they believe will help the massive fiscal debt (235% 0f GDP) they have accumulated, DREAM ON!!!!

Global Consumption is the key to my concerns for Deflation. Developed world governments have only added to the debt pile which so spooked the world 4 years ago. Even in the UK, where the B of E  purchased a third of all government debt (accumulated since we started borrowing to fight Napoleon) the net debt less the QE (£375bn) is now back to where it was. This is because the QE was not linked to a long term solution like a huge cut in spending, it was merely a way of allowing the government to keep running annual deficits in excess of £120bn. George Osborne was wrong to claim the UK economy is back on an even keel. As I have stated before, government spending coupled with the huge uplift from the PPI scandal have kept our heads above water. These two factors are not foundations for a positive long term future.

China is lying about many of the aspects in its economy and this will come home to roost. I have stated before that its drive to create employment without any concerns for the economic consequences will act like a cancer on the developed world. Unemployment (or under employment ) is growing rapidly in the developed world. This together with wage deflation is a powerful element in my argument.

sorry, have to go the plant wholesalers (Rochfords) so I will continue later

 

Is Stephen King a plagiarist?

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

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

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

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

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

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

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

Global Economy Update 

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

UK

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

The only way forward is to put our hands up and say we fluffed it. The Gilts held by the BofE (approx 30% of debt) should be cancelled. As this would quite rightly horrify the markets, a few provisos need to be applied with the intention of shrinking government significantly. So much discretionary spending exists that radical changes be forced on government to cut all but essential spending. This will make the first few years of adjustment very painful. It is imperative to point out that during the massive build up of government debt, the only group of society to have made gains are the wealthy who have seen a massive increase in net worth. The poor have by and large remained poor. The middle class have just been saddled with an almighty level of debt. A degree of balance is required in the fortunes of the UK population.

1)  Government debt must never go above the new lower Debt to GDP ratio (following the 30% write off)

2) Budget deficits are never to be above 2% of GDP  whilst ensuring the above is adhered to (excluding War of course)

Several aggressive changes need to be made to fiscal policy. I have a complete array of ideas but below are just a few.

1) Public sector wages to be cut 30%. No bonuses ever to be paid in Public Sector.

2 )Tax free earnings threshold doubled to £16,000

3) A 90% Tax on earnings/compensation above 30x the average employee earnings in a company. This tax is waived if 51% of shareholders vote in favour of an employee receiving such a pay-out. Owners of private companies should have no problems being majority shareholders.

4) No benefits of any kind paid to families with £40,000 income (combined or otherwise)

5) Corporation tax cut to 12%.

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

ps

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

 

 

 

 

 

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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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UK Budget…2013 Review

UK Budget and the continued austerity measures. I will not look at the details of a bland pointless budget just its focus.

(Click to enlarge) Thank you to my good friend M.Jones for the artwork.

George Osborne. As I see him. Monopoly money or Sterling? There will not be a lot of difference in value by the time he has finished.

First off, why is George Osborne dressed as the Statue of Liberty?

I see his and indeed his predecessors policies as encouraging large scale immigration. Below is part of the poem by Emma Lazarus which is mounted on a bronze plaque on the statue.

“Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!”

This sentiment epitomises exactly how the Labour chancellor Gordon Brown treated these islands. He turned a blind eye to the massive influx of immigrants both legal and illegal. By doing so he helped push the UK economy along with the growing population demanding ever more housing and consumption. The positive economic affects of this policy now have to be paid for. The housing demand drove average pricing to an historic high verses average wages. This overvaluation is still much in place today. Whats more the debt accumulated during that housing boom is still very much in evidence. The total debt, both Government, Corporate and Private, is around 515% (highest in the developed world with Japan) of our total GDP and RISING!…To give you some history on the numbers, in 1987 we had accumulated 200% and in 2003 it was 300%. In 1976, when the then Labour Government went cap in hand to the IMF to rescue the country from bankruptcy, our total (Government) debt was only half where it is now adjusted for inflation.

The Budget focus is very much on getting people to invest in housing. Not by cutting Stamp Duty thus making it cheaper but by getting you the public to take on more debt! By doing this, you are not only buying new houses which are priced way above the equivalent second hand property, but you are generating significant extra tax for the Government (VAT on fees, moving etc and Stamp Duty). This is a cynical move which only benefits share holders and senior executives at the major property companies. The additional loan exposure assumed by the Government only adds to the narrow focus of our economy on internal combustion, instead of, solid exposure to the rest of the world by exporting. Two subtle major negatives of this policy are lost on this government. Firstly, the machinery and equipment used in the construction industry is mostly imported. Secondly, the large developers are giving very short term contracts to the companies (sub-contractors) building the properties. This allows the companies that lost out in the first round of contracts to come back and cut costs further. This policy is driving wages lower. Being the only major component with enough flexibility, it is being driven by the availability of cheap foreign labour. To help this sector in the way he is proposing is just mad! The huddled Masses and Wretched Refuse will keep on coming despite Mr Cameron’s latest policy announcement. Closing the gate after the horse has bolted comes to mind. In 20011, 87% of all jobs created in this country went to migrants!!!

Austerity. Is this budget really what it says on the box??

No!!! The way I see Austerity is this (allowing all to share in our problem)

The Poor who go by Bus will have to Walk more. The Car Driving Class (Ford) will have to take the Bus more. The Luxurx Car Driver will have to buy Ford`s from now on. The Uber Rich will have to give the Chaufer the push and drive the Luxury Car  themselves. The Super Uber Rich will have to get rid of the Helicopter Pilot and get a Chauffeur.

 

The Austerity that George (and his soon to be financial wizard at the Bank of England) see it, is somewhat different. By pretending to cut spending, which has actually risen throughout the coalitions term of office, we all think they are turning back the tide of debt. Wrong! In this parliament alone (2010-2015) they intend to borrow around 150% of the total DEBT ACCUMALTED BY ALL THE GOVERNMENTS from 1694 (Bof E founded) to 1997 when Labour came to power…Yes, more money in 5 years that the total debt accumulated over 303 years. To get away with such prolific spending, they have encouraged the Bank of England to buy 1/3 (£375bn)  of all outstanding Government securities (QE). This of course puts vast pots of money into the hands of the people who created the Banking Crisis in the first place. The major net affect is to drive up financial asset prices in the hope that it will drag other assets with it. The only big winners from this policy at the moment are the Uber and Super Uber Rich.

So, the way Osborne Austerity works is this.

The Poor (British) who go by Bus will have to Walk to the job Centre as an Immigrant has taken his job. The Poor Immigrant will no longer starve in his own country but will now take a bus to work in the UK.  The Car Driving Class (Ford) will have to take the Bus more. The Luxury Car Driver will have to buy Ford`s from now on. The Uber Rich will give the Chauffeur the push and HIRE A HELICOPTER PILOT. The Super Uber Rich will ADD A PILOT (Private Jet) to his payroll alongside his Helicopter Pilot.

The longer we go on spending as much as we are makes the eventual disaster all the more painful. Our economy is driven to such a large extent by internal demand, which is driven by Government handouts paid for with debt, that the total debt will get to a point where we cannot pay it back. I think we are there already but the markets are only just getting it.

Since I warned on December 23rd, that George had three months before the worry set in, Sterling has fallen, we have lost our AAA rating and the cost of insuring our state debt has risen by 70%. I think the tide is on the way out for him and sadly for us.

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Tuesday, March 26th, 2013 Consumer Debt, Debt, GBP, GDP, National Debt, QE, UK No Comments

Cyprus vs Rhode Island, New England.

Arthur (aka the late great Dudley Moore) said `Rhode Island could beat the crap out of it in a fight and it is so small they recently had the whole Island carpeted`

Now of course he was not talking about Cyprus but he could well of. In economic terms, Cyprus is a pimple on the arse of the world.

However, it speaks volumes about how Europe is run. Politicians and unelected officials revelling in spending the electorates money on ever grander, wilder uneconomic schemes. Building up debts for future generations without concern whilst drawing magnificent rewards for them and their families. If you want to look at some of these projects, look no further than the new airports in Spain which have never been used. Or, the Harbour in Madeira ( Marina do Lugar de Baixo) which was built on the most exposed Atlantic coast which has now been abandoned, after three attempts to repair it,  having been crushed by the huge waves so popular with local surfers. In fact Madeira is a far better example of the EU crazy wasteful system. It has a population of 250,000 but with encouragement from the EU and its Portuguese parent, they now have EU 6,000,000,000 DEBT. yes EU6bn for just 250,000 people. Not bad for an Island of only 309 square miles.

Lets look at the wider issue. The real anger of UKIP voting people in the UK is why we should be paying so much into this corrupt financial and economic  system (EU). Vast amounts of money have been spent giving villages lavish civic buildings and grand sports facilities whilst employing vast swathes of the local population from the public purse. This was not spending along the German lines, which is focused on expanding the export potential of the country. A lesson we in the UK need to emulate.

Rhode Island, which some believe was named after the Greek island, has a similar population (1.1m ish) to Cyprus but has only one third of the land mass (1,214 sqr miles vs 3,572 sqr miles). On that smaller land mass they generate double the GDP of Cyprus and has managed on a debt to GDP of slightly less than 50%. The debt of Cyprus is of course, when banks bad debt taken into account,  completely out of sync with economic reality.

The EU has not had its accounts signed off by accountants for as long as I can recall. All because the level of fraud and corruption is too big to quantify. Why then should we allow these thieves to pick our pockets day in and day out. We give around £45 million per day to the EU. On top of that we gave Ireland £8bn to help its bailout. The sad truth of the matter is, we need revolution. People need to revolt and who is more revolting that the French. Sadly, they are taking soo much money out of our pockets with the Common Agricultural Policy (CAP) they are reluctant to do what they are famous for.

I would love to stand for UKIP at the next election. I did stand as an Independent in the 2010 General Election. I believe they will win as people have had enough of the main political parties.

On another issue. The Central Banks which have employed QE so aggressively, to help governments carry on running large annual budget deficits, should now demand far more fiscal prudence from those governments before any further monetary stimulus is applied. At the moment they are just helping them add to what is already a frightening level of state debt. Japan, USA and Europe are all in that boat. Yes, the adjustment will be painful, but how painful will it be when this mad experiment with excessive QE finally unravels.

YOU HAVE BEEN WARNED.

I still think the only way out of this mess is GERPEL see Kurzarbeit achieved where Blitzkrieg failed!

 

 

 

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Monday, March 18th, 2013 Debt, Euro, National Debt, Predictions, UK No Comments

UK Trade Figures Shine Poor Light On Ireland.

UK Trade Volumes are shrinking.

Whilst the trade balance, either positive or negative is of extreme importance, the total volume of Imports and Exports can be far more important on certain occasions. Given recent trends I think this is now worth looking at.

Overall trade shrunk in January 2013 vs Jan. 2012. Exports down 4.98% and Imports down 3.58%. Of course one has to look beyond Oil and Erratics to get a clear picture. But even excluding these it is still contracting. -1.8% and -1.6% .  Overall 2012 saw a growth in trade with Imports up 1.87% and Exports up 0.46%. However, this was a significant slowdown from the 2011 performance which saw double digit growth in trade. As the year  (2012) progressed the positive start turned weaker. Q1 2012 vs 2011 saw growth in both Imports 5.7% and Exports 3.94%. By Q4 both had turned negative, Imports -0.46% and Exports -3.60% (ex-Oil and erratics -1.01% and -2.40% respectively) .

If the current scenario continues, 2013 GDP could turn very ugly. The contraction in trade will financially impact two main areas, corporate profitability and Government revenues. So lets not get carried away with a shrinking trade deficit. Growth in trade begets compound growth. Contraction, if sustained, can do like wise.

Within today’s figures was a rather remarkable and altogether worrying development for Ireland and its European partners who are bailing it out. In the last 3 months to January, imports from Ireland have shrunk 19%. This is an acceleration from the 4Q 2012 contraction of 13% vs 4Q 2011.

Why is this important?

The UK is Irealnd`s biggest trading partner and accounts for 31% of its Imports and 15% of its Exports (in 2012).  On the other hand Ireland is also important to the UK being its 5th largest export destination (5.8% of total) and its 9th biggest supplier (3.2% of total). If Ireland cannot arrest this fall in trade, two things will happen. Firstly, it will see its already huge budget deficit start to grow again …see IRELAND… Never Was a Silk Purse!.. bringing about a second crisis, and Secondly, a sharp reduction in the demand for British goods. Hey ho…

Sterling is not helping and the decline in its value is becoming more pronounced see Sterling Looks over its Own Cliff. Other countries seen weakening exports to the UK were Belgium, Italy, Holland, Spain and Sweden. I am growing increasingly concerned with Sweden’s very narrow focus of exports and how the weakness of Sterling and more importantly the Yen (major competitors in its industry focus) will weaken its economy sharply.

I am waiting until the next UK Government Borrowing figures ahead of next weeks budget to update…

 

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Tuesday, March 12th, 2013 GBP, GDP, National Debt, Predictions, UK No Comments

GDP Decline vs Employment Growth

Journalist Conundrum.

I am at a loss as to what all the Financial Journalists do all day. I have read so many articles recently perplexing over the disconnect between employment growth and GDP weakness. Perhaps if they looked at the data they could start to understand what is going on. Admittedly, I am applying my own reasoning to come up with my conclusion but it is still better than just scratching your head as these hacks are doing. Almost to a man they are all saying that GDP must be understated. I of course have my own idea.

Between September 2012 and September 2011 542,000 employees have joined the nations payroll which now totals 31.946m. As you can see from the chart below Income Tax paid to the revenue over the last year has barely changed. Adjusted for wage growth, it has not changed since 2010. Interestingly despite record numbers in work and total hours close to record, national output has barely changed since 2010.

 

I believe two things are at play. One, many of those joining employment from the unemployed register, were already working. Secondly, and as I first warned of in February 2012, the quality of jobs being created is very poor. As you can see form the comparison from September last year, employment has been primarily in the service sector. Wholesale/Retail jobs have blossomed but Coffee shops an economy do not make. I am aware that many large retailers are favouring employing workers on 20 hour weeks. This gives the employee far less rights and in most cases keeps the employees salary below the tax threshold. So, two poor quality jobs (c £7.50 per hour) are created for every position, neither of them pay tax but will still be needing social support. The rise in transport/storage probably relates to the growth in Internet shopping.

The primary reason for me being very negative about the UK Budget Deficit and my three month warning to George Osborne (blog 23 December 2012) is clearly identified in the data box at the foot of the page. Since 1997 there has been a structural change to the UK economy. We have an additional 1.7m Public Servants (Health 1.1m Education 0.65m) but Manufacturing has 1.674m less employees. The gain in Admin/Support worries me that Red tape has created many of these posts. All in all, the Blair/Brown years were really a massive shift in the dynamism of the UK economy. Public Servants now account for 26% of the workforce as opposed to 17% in 1997. The reality is that this figure when compared to points in history is much higher. Over the last 20 years Central and Local Government have been outsourcing many tasks. The growth in Admin/Support and Professional advisers is no doubt influenced by this process. With that in mind, I guess the Public Sector activities account for over 30% of the economy. Go back even further prior to the Privatisation of Utilities, Telecoms etc and the the comparisons are even worse. If you throw in all those working on Government Infrastructure projects, it is possible to say that over half the working population are paid from the Public purse. Whilst the Property/Debt boom were in full swing, tax revenues were growing rapidly. Now that bubble has burst, the only way this Public Sector involvement is achieved, given our low level of real private sector output, is to borrow more money. This cannot go on forever. Spending has to be cut drastically.

George Osborne pledged to get the economy back on a more balanced footing. Sadly, he has wasted the first two (and most important) years in office. Last year Public Servants only declined by 0.61% (51,000). Meanwhile, very highly paid jobs in the Finance sector (which helped finance this crazy shift in employment) have been dropping sharply for 12 months. With bonus payments being slashed or deferred via a greater proportion of share payout, the January tax hump may be very disappointing.The Budget Deficit has grown in fiscal 2012/13 (to date) and sadly is getting no help from the employment figures.

The UK Office for National Statistics breaks down employment into two categories. Services and Productive.  It is then broken down into 19 sub sections which includes three for public services which I have combined. To try and get a handle on why Income Tax paid to the Treasury is not keeping pace with employment and earnings growth we have to look at the data in detail. The latest data available is to September 2012. Below is the change in percentage terms and actual numbers since September 2011

Productive (6 sub sections  As a group, this category is down 10,000 employees. …Agriculture/Fisheries -9.21% -39.000. Mining/Quarrying +19.67% +12,000.  Manufacturing +2.98% +75,000. Electric/Gas Supply -5.75%  -8,000. Water/Sewerage +7.98% +15,000. Construction -3.21% -66,000.

Services (11 sub sections)..As a group, this category is up 532,000 employees Wholesale/Retail +1.40% +67,000. Transport/Storage +4.30% +63,000. Hotels/Catering +6.48% +130,000. Information/Comms +4.90% +60,000. Finance/Insurance +0.27% +3,000. Real Estate +7.71% +32,000.  Prof/Tech/Scientific +5.38% +131,000. Admin/Support Services +5.92 +145,000. Arts/ Entertainment n/c. Other Service -4.17% -38,000. Public Services -0.61% -51,000.

Employment in the biggest sectors.

 

 

 

 

 

 

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Tuesday, January 29th, 2013 Debt, GBP, GDP, National Debt, Predictions, UK No Comments

Sterling Looks over its own Cliff

Sterling/ Dollar.

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

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

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Friday, January 25th, 2013 GBP, Predictions, UK No Comments

UK Debt

I was going to study  yesterdays December Public Finance data before writing but having read an article by Alister Heath (Telegraph) I wanted to share. He highlights a recent OECD report on UK borrowing. As I have been saying since late 2011, George Osborne has failed to stem spending. In my most recent UK blog (23/12/12) I gave the UK 3 months before the markets see through his cloak of invisibility. I have forecast in the past that Sterling will test its all time low vs the Dollar of $1.08. Gilt Yield will rise much further than already seen in 2013. You can read the Telegraph article online.

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Wednesday, January 23rd, 2013 Consumer Debt, Debt, GBP, National Debt, UK, USD No Comments

UK Retail Revoloution

UK The clock is ticking!

In my blog of 23rd December I gave George Osborne 3 moths before the proverbial hits the fan. Today’s release of the December Retail Sales data gives me comfort that my prediction is on track. I have broken down the various components of retail activity giving the year on year growth /decline and in some case, commentary. I have been firmly of the opinion for a long time that conversion (into residential) of the wasteland that is vacant retail space will be the catalyst for a much weaker pricing of the residential property market. The process of conversion has taken hold in Germany but as yet is only talked about on the fringes of UK politics. To give you an idea of the glut in UK retail space,  a recent study highlighted that the UK has 0.36 sq. mtrs. of (retail) floor space per head of population vs 0.21 in Italy and 0.14 in West Germany. Of course, the UK has (had) a more aggressive consumer culture which, as I have talked about in previous blogs, was as a result of the excessive growth in (privately owned) property prices which lead to an approx. 20% uplift in disposable income over 15 years prior to 2008. However, having recently surveyed my local high street I am beginning to think another potential outcome may be possible. The fifty or so outlets are all owned by our local London council. The vacancy rate has increased by another six outlets over the last six months. This puts the vacancy rate at around 20%. These six most recent closures resulted in a loss of income (for the Council) of around £150,000 per annum. I guess this picture is being played out up and down the country. Add this revenue shortfall to the governments cut in payments (to councils) from the central tax pool and one of the biggest employers in the country will have a strong negative affect on 2013 GDP.

So what is the revolution? As we are all aware, the large out of town retail parks have been the catalyst for the high street downturn. However, it is the decline in retail volume growth see The Mayans might be wrong but for George Osborne..time is up and the Internet revolution that has been the executioner. Given that no conversion to residential is forthcoming, we are getting close to the point where the level of vacancies will trigger a significant downward re-rating of high street rents. This adjustment could be in the magnitude of 25-35% for busier environments and 50-60% for the all too familiar ghost areas. This revolution will deal a big blow to the large supermarkets and owners of shopping malls. As you will see below, fuel consumption is falling so any regeneration of the high street (within walking distance) will be greeted with open arms.

December Retail Sales Data Year on year (+0.3) volume grew at the weakest since 1998 excluding the horrendous winter storm ravaged Dec 2010. Over the last six years, volume has grown 4% which given the huge immigration influx, just matches population growth. The figures below are December year on year comparisons for some of the interesting sectors.

Tobacco,Alcohol and other beverages  -37.2% (The volume has fallen every year this millennium and is down 60% in ten years. Supermarkets have taken the trade!)…Floor Coverings + 25% (I presumed it was flooding that helped and indeed in this historically wet year 2012 as a total (+22.3%) reverses the 50% decline in volume over the previous 4 years…Mail Order +13.8% (Credit!)…Textiles (x clothing) -11.6%Cosmetics +9.5% (Clearly just a seasonal favourite as 2012 as a whole is only + 2.3%)…Music, Videos recordings and equipment -7.3% (HMV AND Blockbuster)… Books, Periodicals and Newspapers – 7.3%Flowers, Plants, Seeds, Ferts and pet food +7% ( Strange one, probably warm weather and seasonal) …Furniture +6% (Possibly flooding related as only + 2.7% in 2012 as a whole)…Computers and Telco equip +4%Watches/Jewelry -1.5% (Volume fell every single month (vs 2011) in 2012 and overall were down 7.8%. Our local jeweler is taking in more gold for melting down than he is selling new or second hand. I have been a bear of Gold all year and believe it will touch $1000 long before $2000)…DIY -0.5% (Seeing xmas more seasonal activity at the likes of B &Q but 2012 overall was down 7.1% and is down 26% over 5 years (property market). With the revolution, it may be that small hardware shops with knowledgeable craftsman will make a comeback)

In 2012 the 500 biggest and busiest retail locations saw 2000 (net) outlets fall vacant. A recent survey puts that at 4000 for 2013. Remember these are the busy areas where volume is polarising. Think what will happen in the vast majority of smaller locations. VIVA LA REVOLUTION!

Next blog…CHINA IS LYING!  is on hold awaiting the release of some December data which I believe will confirm my view. It relates to the recent December trade figures.

ps Happy New Year!

 

 

 

 

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Friday, January 18th, 2013 China, Consumer Debt, Debt, GBP, GDP, National Debt, Predictions, UK 1 Comment

The Mayans might be wrong but for George Osborne..Time is up!

The UK has got 3 months. Then time is up!

Back in December last year I started a series of UK blogs explaining why George Osborne will be in a worse financial position by now than he and the overpaid city analysts expected. Yes, sadly to say all the factors I alluded to are coming home to roost. Going forward they are going to get a lot worse, very rapidly. Following data released by Revenue and Customs on Thursday, it is clear that more is less when it comes to employment in this current environment. Tax paid by the highest earners is declining in both total and as a percentage of revenue. With last weeks Government budget data for November, it is clear the deterioration in finances is becoming apparent to all those who have been backing Mr Osborne`s policy of wishy washy austerity.

In the fiscal year to date Government receipts are £339.0bn down 0.1% on November 2011 (£339.3bn) and expenditure is £419bn up 2.7% (£408bn Nov 2011). This growth in expenditure would have been significantly higher if interest rates for Gilts were not so low. The interest bill this year is likely to be the same (£44bn) as in 2010/2011. The difference being, total outstanding Gilts then was £918bn where as it is now £1.113 Trillion. Whilst this is great for the government, it does show that spending excluding interest is way above expectations. Of course, this is a back door tax on pensioners who have been crucified by lower annuity rates as a result of lower bond yields. God forbid should/when interest rates ever go up again.

Chart One shows Government Income

whilst chart two shows expenditure.

More importantly, the third chart shows expenditure excluding interest.

The significance of the obvious but subtle difference between the second and third chart is lower interest spending this year (£31.6bn year to date vs £33.7bn) is masking even greater structural spending which will be all the more difficult to reverse when interest rates go up. Where are tax revenues heading? Well, as I have said on many occasions, total income tax take is not growing despite a higher level of employment. The low quality job growth is reducing higher tax, no income support families, as a percentage of the workforce. This, coupled with higher taxation, both direct and in-direct, have had a downward affect on VAT receipts. Of course, annual salary increases lower than inflation impact still further. Consumption in the UK and wider Europe will fall this year as further tax hikes bite. see previous blogs on Shipping and Trucks…remember 90% all goods have been or have components, that have been, shipped.

The chart below highlights the plight of the consumer. It shows the Total Volume Growth of UK Retail Sales this millennium.

The lack of consumption in volume terms highlights why high street retailers are disappearing. The growing market share of Internet sales explains how the volume being sold on the high street is being funneled into large retailers who can afford rents in high footfall shopping centers. All this will eventually confirm my view that law changes will be put in place to allow vacant Retail/ Industrial/Office space to be converted into residential, thus being the supply element which will lower house prices 20%.

Be aware that the January 2013 Government Borrowing data (released 3rd week in Feb) is likely to be shocking. This is traditionally the biggest revenue month of the year. Advance and Final Income tax Payments swell the months (Income Tax) take to around £25bn with Corporation and Petroleum throwing in another £9bn. It is my belief that the shortfall will be in the region of ten percent. This will put the final nail in the coffin of wishy washy austerity and put the UK in direct conflict with the markets which have been very patient. I believe Sterling will bear the brunt.

see RIP George Osborne for my way out……..plus many previous blogs under the UK section of the menu highlighting my thoughts which have been consistent since the blog started.

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Sunday, December 23rd, 2012 Consumer Debt, GDP, National Debt, Predictions, Shipping, UK 1 Comment

Am I Right to Be Bearish

I have been Bearish since 1999. How do I know that. It was then that I was the only employee of Lehman Brothers to opt out of the generous Direct Benefit Pension into a Direct Contribution pot of money under my control. I still have that pot which has had a positive return every year since. All those who remained were trampled on by the companies collapse. I had taken a negative stance on the management style but more importantly on the global economy which was being increasingly driven by government spending and loose monetary policy. None of that has changed. The four big Economies of the world (USA/Europe/China/Japan) are being held up by massive government spending. The level of spending above tax receipts is shocking and cannot continue. Three of those economies (x China) have existing Debt to GDP ratios which are unsustainable. So, to continue to stimulate consumption by spending more is not an option.

It is becoming clear that the global economy cannot consume at a rate which would help drive tax revenues for those governments to meet their future commitments. Central Banks have been using every trick in the book to help those politicians keep the debt illusion alive. They are all complicit in treating the electorate of those countries like fools. For it is they and their offspring who will have to meet the ever growing burden of this debt. The politicians  have ingratitude themselves with vast riches and on the whole do not live in the real world. This vast state sponsored global economy has to be drastically changed, sadly to do that, great pain will have to be felt by all.

Every time the central banks add to previous QE it is further vindication that being bearish on the economy has been correct. Being bearish on equities is another matter. Each bout of QE adds fresh impetus to the camp that says you must be invested because the bankers and politicians will win, eventually. The  charts below are updates of a regular series of data which I have published. My reasoning is well documented in previous blogs. The first chart is the now familiar BNSF traffic flow of various elements of economic activity. As this is the yearly comparison it is difficult to pick up recent trends. Hence chart two which shows the weekly change in volume growth since July for Containers and Freight Wagons. I think the direction speaks volumes. If you are in the camp that the fiscal cliff will be resolved quickly, what shape do you expect it to take. The $1trillion annual budget deficit that existed throughout the first Obama term must be cut. If it is not cut substantially the Debt to GDP and its growing servicing cost will just be kicked down the road until the next time. Whether it is spending cuts or tax increases, it matters not. The net affect will be to reduce economic activity. That would not be a problem if the other big economic powers were in good financial shape, but they are not. It is only a matter of  time before  Japan implodes in a sea of debt whilst Europe is adjusting to a new norm of significantly lower consumer activity.

 

 

To highlight this shift to lower consumption I have regularly updated my Suez Canal data. The first chart is the simple total volume flowing through the canal.

 

Secondly, the traffic growth in either direction.

Finally, the growth in Container traffic. As I explained in previous blogs on the subject, containers tend to reflect the consumer sentiment as it reflects more on finished goods and blocks out the noise from the vast and volatile commodity sector. As you can see, the flow in the direction of China went negative for the first time since the big fiscal stimulus which created the 2009 updraft.

 

2013 will introduce many new austerity programmes apart from the fiscal cliff. In Europe these are just as negative. France will be pushing the boundaries of reality in its attempts to cut its budget deficit back to 3%. The scale of the spending cuts and tax increases will likely cause significant union and social unrest. The French are in a league of their own when it comes to protesting. Greece and Spain are amateurs when pitched against the cake eating peasants. Heavy industrial companies are coming under strong political pressure to protect jobs but in the end reality will prevail. The UK, SUBJECT OF MY NEXT BLOG, will be plunged into chaos as the budget deficit continues to deteriorate.

In this environment, company profits cannot increase. Despite strong balance sheets, the corporate sector has a chilling few years ahead. Most equity fund managers are overweight strong cash flow companies. Pricing power is about to become far weaker as consumers recoil from yet more austerity. Overcapacity is and will continue to be a major problem.

Shipping and Trucking, my two most frequently blogged subjects, will bear the brunt of this slowdown in global trade volume.

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