BRICs

Lucky Lord Jim O`Neill..Baron of Gately

Yes, I am back…sadly, not by popular demand…So, lucky Lord Jim gets a knighthood for being totally wrong…what do I get for being totally right?

I know I have been away for a long time but I am busy trying to help my constituents in what is the most deprived ward of my London Borough. I do get the time to tweet and quite frankly, if I do say myself, there is some interesting twitshit going down. I will start again at some point when my workload calms down. TO FOLLOW GO #financereaper…

Anyone who has read my blog for a while will know that I have had a downer on Lucky Lord Jim`s BRICs for about two years. I identified the fault with his reasoning and started warning of the BRICs impending doom. Today, Goldman Sachs have affectively closed their once famous BRIC fund. It has lost 88% of its value since 2010. In the last two years, I have warned that all the main winners in the BRIC argument would eventually fall from grace. BHP Billiton, one of my regular posts (bear ideas) of the past, has hit a seven year low. Steel companies are in the depths of despair. Coal was a big subject matter and I even wrote about the history of a little town in the USA called Jim Thorpe. Well, the Coal industry continues to slump and now Chinese mining company Longmay mining is laying off 100,000 employees. In fact, as many as are employed in the entire US coal industry…of course, US employees with their modern machinery investment and methods are 20 times more productive…oh, and they don’t live on a bowl of rice a week…Iron Ore will not rally as many expect. Oil will not rally as many expect. In fact, we could see new lows. Machinery manufacturers have also come into my spot light and I have continually warned of the fragility of their earnings…just look at companies like Joy Global, mentioned here many times…I have been totally right and I will continue to be so. QE is the primary reason. Central Banks have not used this tool wisely. Instead of extracting hard and fast commitments from politicians to cut spending and put in place debt reduction plans, they have worked hand in hand to raise still further the levels of debt to GDP ratios. Since the crash, global government indebtedness has risen 30%…

QE has led to over capacity. Yes, hundreds of millions of Chinese have come from the paddy fields to industrial towns and cities but it was all too quick. The cheap money has allowed huge capital spending of productive industries but at a cost to employment in developed nations. As one million extremely poorly paid manufacturing workers in China start work, jobs of very high equivalent salary workers are lost. The net result is a loss of demand. Whilst the infrastructure explosion, which took over ten years, was in full swing, all well and good…that is now past its peak, the Chinese economy has to focus more on exports than ever before. If it was to keep those hundreds of millions poor people working…they needed to export or die…that is exactly what they are doing. The 2015 trade surplus is up 75% to date. The real worry for the west is that in reality profitability is of little consideration compared to keeping people working . Therefore, the response of other developed and even developing nation’s is fairly limited.

Smoot-Hawley…lets not hope that the only way out it is trade barriers, however, currently there are 30 trade sanctions being drawn up against Chinese Steel dumping. Their are many other areas where dumping is evident. This will not end well.

 

 

 

 

is of little interest.

Tags: , , , , , , , , ,

Monday, November 9th, 2015 BRICs, China, Consumer Debt, Debt, GDP, Japan, National Debt, QE, Steel No Comments

BRICs…Future Looks Cabbage Like…

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

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

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

 

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

Consequences of the above

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

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

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

 

 

Tags: , , , , , ,

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

China and the Broken BRICs

Off to Birmingham in an hour but I have had a request to clarify my statement on Middle East Oil producers budgets. I said in the last blog that they are spending wildly on social and infrastructure programmes, thus they need Oil at or above $90 to gain sufficient revenue. Well, here is a brief breakdown…Saudi Arabia brakes even at $88…UAE at $67 and Iraq at $93. Whilst this fall in Oil to approx. $87 may only be temporary, It will make them look at the level of spending. Just for information on the last time the US became a large Oil/Gas producer in the early to mid 80`s, the Oil price fell from $33 in 87 to $10 in 86…it did not regain its higher price for nearly 15 years. Think on!

Whilst I have you on the line…I stated in Chinese Deflation Cancer Spreads that China will start by slowing production at its Iron Ore and Coal mines but when push came to shove, employment is far more important than profit. I concluded that they will use tax advantages to protect its domestic miners…well, China has announced the re-implementation of import tariffs on Coal, having been suspended for ten years. This has sent miners in Australia on a downward path this morning. Whitehaven Coal for instance is 9% lower…Expect some movement on internal taxation of Iron Ore if prices remain weak. I have, on many occasions, highlighted the implications for mining equipment suppliers in the US and Sweden. This is not good news. I still think Jim O`Neill of Goldman Sachs was just lucky with the BRICs…And poor old Jim Thorpe would be turning in his grave…

TTFN…

Tags: , , , ,

Friday, October 10th, 2014 BRICs, China, Steel 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…

 

 

 

 

 

 

Tags: , , , , , , , , , ,

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.

 

 

 

 

Tags: , , , , , , ,

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

 

 

 

 

 

 

 

 

 

Tags: , , , , , , ,

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

Iron Ore, China and Steel

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

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

 

 

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

 

 

 

 

 

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

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

 

Quantitative Easing (QE)

What is QE?

Printing or creating vast quantities of paper or electronic money by supposedly intelligent people (Central Bankers) on behalf of the population of a country to

Allow Compliment Condone Encourage supposedly intelligent people (Politicians) to borrow and spend vast sums of money on behalf of the population of a country.

Q: What has been done with the QE proceeds?

A: Buy Assets

Q: What Assets?

A: Firstly Government Bonds, then lesser quality bonds and fixed income securities…and now Equities.

Q: What is the impact on these assets?

A: Given they all have, to varying degrees, a finite supply, they have all gained substantially in value, driving interest rates and future returns on investment much lower.

Q: Who has benefited from QE?

A: Generally the wealthiest 10% of society who tend to have savings ex pension in these assets

Q: Who suffers?

A: Generally speaking, the poor and the majority of pensioners who have little more than the basic defined contribution pensions.

Q:Why them?

A: The excess of cheap money is primarily channeled into balance sheet repair for banks and low cost speculation investment in commodities etc which has kept inflation stubbornly high whilst annuity rates have imploded with lower bond yields.

Q: Why has demand not rocketed with the record low interest rates that have resulted in QE?

A: Since the 1960`s politicians have used the magic wand of increased debt to buy their way out of economic downturns (see Economic Seismic Shift)  but debt, both private and public in most major economies is past being able to grow as before. Additionally, commodity inflation has lead to a fall in disposable incomes.

The long term implications are as yet unknown but a quick reflection on what forms an asset valuation. When assets are exchanged in a trade, an assumption is made by both parties about the current and future value of those assets. For instance, when the Native Indians sold Manhattan in 1626 to the Dutch both parties were happy with the trade. Of course the shiny trinkets given to the Indians indicate just how badly valuations of assets can be perceived in the future. History might be as equally harsh when it looks back on QE. Asset valuation is based on two important factors. Supply and Demand. Look at the difference in valuation of a Van Gogh masterpiece and a Zimbabwe 100 trillion dollar note. Whilst masterpieces of this quality have a very finite supply, awful political and economic policy of the Zimbabwe government lead to a supply of untold magnitude. Sound familiar?

Currently, the levels of debt being amassed by some (most) developed economies are approaching a point of no return. Of course some lesser countries have already cir cum to reality. The debt has been grown in the compost of progress and society. It was thought to have been used to build a better life for today and tomorrow. Whilst it has to be said life for many has been greatly improved that cant be said for all. Whats more, it has only improved life for the yesterday and today. The tomorrow has been totally forgotten. Sadly, vast political and government empires have flourished.

I am firmly in the camp that believes we must face our demons and cut government spending drastically. Yes this will cause significant economic hardship, but it will be a hardship more even than QE. Commodity prices will get crushed and allow us to rebuild a fairer society in the future. Of course, the wealthy will be screaming from the rooftops 1930`s style. It has come to pass that I must quote Churchill in his first speech to the House of Commons after being made Prime Minister during the first and worst year of WW11.

“I have nothing to offer but blood, toil, tears, and sweat,” He knew that when faced with adversity a country has to dig deep together in order to move forward. QE is just delaying the inevitable at the expense of all in society who will be made to pick up the bill whilst in the meantime, only a small proportion enjoy the riches it bestowes.

Other very apt Churchill quotes:

  • There is no such thing as a good tax.
  • If you are going to go through hell, keep going.
  • We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
  • Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon
  • You can always count on Americans to do the right thing—after they’ve tried everything else.

Next blog topics….I am watching the hefty falls in the Shanghai Container Index with interest. …Japan consumption will implode over the next 12 months as food prices jump 10-15% in Q1 and the 2014 consumption tax arrives….BRICs are still a target of mine and going to suffer…Gold, I forecast in January that it will hit $1,000 before $2,000. Looking good.

 

Tags: ,

Saturday, April 27th, 2013 BRICs, Consumer Debt, Debt, National Debt, Predictions, QE 4 Comments

Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

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

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

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

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

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

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

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

 

 

 

Tags: , , , , , , , ,

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

Confusing!

China New Year Calender Change or Just Lies?

China became the worlds biggest trading nation in 2012 taking over from the postwar dominance of the USA. That being said, the USA is still the biggest importer. The markets were given a lift last week when this Goliath of a trader released January Import/Export data. Year on Year Exports were up 25% and Imports were up 28.8%. Wow! That is impressive. Of course, if that were the case, its trading partners would be reflecting this surge in their own trade figures. Lets look at the biggest economies in the world as it is only they who could have enough capacity in production and demand to facilitate this huge surge. The USA December, Year on Year, trade data showed a 1.18%% decline in imports (Oil a factor) and a 4% gain in Exports. January has not shown signs of exploding into activity with Inter modal Freight costs weaker and only a 1.97% increase in BNSF freight traffic. Japan has released data for the first 20 days of January showing a 0.57% decline in Year on Year trade. South Korea did eventually report a stronger January trade picture (contrary to the first 20 days decline) but this was only around 10%. February will see a big contraction as the extra working days in January will be lost in the February holiday this year.

Whilst the USA is still by far the biggest nation economy at nearly twice that of its nearest rival China, the European Union in its entirety is the bigger still. If trade with the worlds biggest nations is at best +1-2% in January, then to reconcile China’s huge surge in activity, Europe must be off to a fly-er in 2013! Well, to confirm my expectations for  Suez Canal trade in China is Ly`ing blog, total cargo (x energy) through the canal was down 10.64% vs January 2012. That’s a very large decline in historic terms as can be seen in Chart 2. Whats more, the fall in Southbound (Mainly to Asia) cargo was more pronounced at 15.7%. How on earth can China have such a huge surge in international economic activity when the largest trading nations say otherwise. One must not forget that the Canal data is volume not value of goods, nether the less I am sure even in value terms trade is weaker.

Chart 1

Chart 2

Chart 3

Shows the volume growth/Decline in Container traffic. The January decline (Southbound) is the fourth in a row, the first time this has happened since the trade collapse of 2008/9. Whats more staggering is the extent of the decline at 12.3%. As I have stated in previous blogs, Containers tend to more indicative of finished good and therefore consumer activity.

Given all this evidence, how on earth can the official Chinese data be correct. Lets not forget the implications on the Transportation sector. Both by Sea and Land, this fall in volume has a significant affect capacity utilisation. Bigger ships are exacerbating the overcapacity of ships with total shipping volume through the canal falling quicker than cargo volume. As for land transportation, I did roughly calculate the decline in truck loads hauled but I have lost the fag packet. I know it was 100,000`s. Regular readers will know I have been negative on the truck industry for all 2012. Given the recent warnings from the two big players Daimler/Man/Scania and Volvo my concerns are bearing fruit. I believe that the industry still has far too much production capacity and further painful cuts will come.

Volvo needs to split itself into two or three global business groups. With Caterpillar (Construction machinery)  diversifying into mining machinery with fresh acquisitions, Volvo`s own construction machinery business looks under resourced and uncompetitive. Volvo needs to merge its construction machinery business with Atlas Copco and perhaps its Marine business with Wartsila of Finland.

Chart 4

I guess its about time I updated the story on AP Moeller-Maersk and the shipping industry as a whole. The Baltic Freight Index is continuing to wallow at historic lows leaving the shipping industry with a revenue shortfall which cannot last much longer. With new build prices being quoted significantly lower it is possible second hand values may themselves plumb new depths. Any further decline in the pricing structure would significantly reduce the valuations of the big fleet owners, unless of course, you believe that the world economy is on the verge of a significant upswing. Almost to a man the big investment banks have recently upgraded APM-Maersk so I guess I am a fool.

 

Tags: , , , ,

Monday, February 11th, 2013 BNSF, BRICs, China, Japan, Predictions, Shipping, US Economy 1 Comment

China is Ly`ing

First of all…Can you trust a country that restricts its citizens to one child per couple. Openly supports oppressive regimes against the wishes of the UN. Suppresses political opposition. Controls the media both web and hard copy. Restricts access to the the World Wide Web. Allows political leaders to amass great wealth whilst claiming no such wealth exists…OK That’s cleared that up.

Having come to the conclusion that it is a corrupt institution, it is right to question anything they say. Hence, I am questioning the December trade figures which they released on the 10th January. The Year on Year growth of 14.1% was substantially above forecast of 4.6%. Such a disparity is very rare. So, why do I think they have cooked the books in order to meet export targets.

Regular readers will know that 90% of goods are transported (or have components) by sea at some stage in their life. Hence I take a big interest in the flow of goods around the world. As I explained in a previous blog, the continents are the worlds organs which require the life blood of trade to survive. The specific maritime trade routes are the arteries which carry that life blood. Just as in a animals, certain pinch point exist which allow us to take a reading of that flow rate (pulse). 

I have  been writing about the Suez Canal for a long time so regular readers will be familiar with the charts below. If we are to believe the Chines data we must look into the data. They claimed that strong exports to the USA (+10.3%) and a rebound into the EU (2.3%) were behind the out performance. I will deal with the EU first. Below are the regular charts showing flow through the Suez Canal. Chart 1 just gives an overview of total trade. As you can see net tonnage flowing through the canal is 5% below December 2011.

More importantly, the trend in trade is negative. Chart two gives the percentage year on year change in volume broken down into the two trade routes, North and South. As you can see the total volume of goods (x energy) going North in December was down 2.8% vs 2011. It was also down 2.13% vs November. Given that the vast majority of the Northbound traffic ends up in Europe (10% to the USA) it  appears that something is afoot.

If you think that a good percentage of that trade from China is finished goods, then you would expect it to be transported by Container. Chart three shows the pure Container element of flow through the canal. As you can see, Northbound flow has been negative for the past six months. December was 4.3% lower vs 2011 and down 2.57% on November. Yet more cause for concern.

Just as a point of interest to my various blogs on the shipping industry and its further downfall. Chart four shows the growth/decline rate of ships transiting on a monthly basis. We are now in a double digit percentage decline (November and December) with 1399 ships in December vs 1574 in December. I will blog about the implications next week, but with so many modern, bigger ships being delivered, the decline in voyages is far outstripping the decline in tonnage. Currently, preliminary data for January is also running 10% below Jan 2012. Volume ahead of the Chinese new year normally expand. So far this year that is not happening!

So lets look at the USA element of these figures. Up 10.3%. I have looked at several factors to help illuminate the situation. Firstly, my weekly BNSF data that was last published in `Am I Right to be Bearish` Chart two breaks down the two primary forms of traffic.  Both of these were on a weakening path at the end of November and that trend was indeed continued through out December  (Update in next blog). The impact of the weak weekly numbers forced the year on year growth rate (black dotted line in chart one) down below 2% for the first time since July. If we look further afield, economies that you would expect to have shared in this bonanza, do not show the same excessive pattern. Yes Taiwan had good December export numbers but Singapore saw an 8% decline and Shanghai throughput was down 0.44%. Chinese order books in the autumn were weak which flies in the face of the December outcome. The USA west coast port strike between the end of November and December 5th will have backed up and delayed imports.

What is abundantly clear is that China, as I stated in  `A Quickie for Christmas` is not investing for profit, it is investing to keep the migrating peasants in jobs. 21 million people moved to cities in 2011 and 2012. If China is to keep all the plates spinning, they need to export. The trade surplus in 2012 grew by 48% to $231bn. Sadly, the global consumption position is not one of growth. The significantly weaker Yen will help Japan compete more aggressively in the export market. Europe is implementing deeper austerity measures and the USA will have to bite the bullet on spending cuts sooner rather than later. If you are making investment decisions based upon China and its fantastic economic growth potential, caution should be your watchword.

Future blogs:

Iron Ore rally is built on sand. How can a steel glut (in China) suddenly disappear, especially during the worst winter in 30 years…more smoke and mirrors

How the world is copying Germany and not making people redundant…the KURZURBEIT system.

Today’s UK Government debt figures reviewed.

 

Tags: ,

Tuesday, January 22nd, 2013 BNSF, BRICs, China, Debt, Japan, Predictions, QE, Shipping, US Economy 2 Comments

A Quickie for Christmas

Xmas makes us all test our Capacity.

I know some of you have been pulling right little crackers while others have been enjoying spending time with a lovely game bird, but Finance-Reaper is always on the look out for interesting stories. Two that caught my eye last week provide fuel for my argument, regularly argued in this blog, that global over capacity in heavy industry will weigh on investment and growth for many years to come.

A Bloomberg story on the 21st…highlighted the growing problem in China of Digger Capacity. Companies involved from overseas include Caterpillar, Volvo and Komatsu.

1) Domestic and overseas players have built enough capacity (600,000) in China to supply nearly double the WORLDS annual demand (300,000). Whats more, inventories are enough to satisfy the entire 2013 domestic demand in China of 100,000 units. November saw the 19th straight decline in monthly sales. It is expected that incredible incentives currently being offered, together with the additional government spending on infrastructure, will halt this slide. Not, I expect, enough to alter the supply/demand dynamics that much. Most of this millennium has seen annual domestic sales growth of 25%. All that has changed this year and is unlikely to be seen again. Whilst it is a vast country and becoming a vast economy, I believe its dynamism is in the past. Wage growth, corruption and demographics, have put paid to that.

2) The Sec. General of the China Iron and Steel Association spoke at a conference last week and stated that the industry is facing an increasingly difficult time and capacity is increasing. No shit Sherlock! He went on the say that sales margins are -0.18% in 2012 and this is not helped by a further $65bn of fresh capital (+3.9% yoy) injected into the mainly state controlled sector this year. Whilst 2012 Steel output is expected to be 723million tonnes (+3% vs 2011) consumption will only be 679million tonnes (+1.8% vs 2012).

I cant help thinking that far from being the main driver of world demand and growth, it could actually become a festering sore. Throwing ever more capital into already over sized industries will only drive the need to export more. Recent statements from global steel companies bear this out. Jobs in the west are going to be cut still further. If China can produce twice the world demand for diggers, what will happen to other countries production facilities and profit margins. It is clear that Chinese investment is not based on return. It is driven by the need to get the peasants off the farms and into industrial production. This is not good in a world saddled with enormous state and private debt. Consumption cannot be driven fast enough to meet that supply. With interest rates at near zero and QE to the the left of me and QE to the right of me, well, here I am, stuck in the middle with you!

One other little indication of how China intends to deal with a glut of domestic production. 2013 will see the scrapping of the 40% export tax on Metallurgical coal (used in Steel making). This should allow them to regain their global dominance (in supply terms) which the tax, implemented in 2008 took away. Other main suppliers are Japan, Russia and the Ukraine.

Hope you are all enjoying the seasons festivities and that this little seasonal quickie has not given you indigestion. Remember, always look on the bright side of life. On that note I would remind you that the shortest daylight hour day is behind us and we are now on our way to a bright sunny spring. YYYEEEHHAAAA

 

 

Tags: , , ,

Wednesday, December 26th, 2012 BRICs, China, Predictions, QE, Shipping, Steel 1 Comment

What is the Fiscal Cliff made of?

Answer. Iron Ore.

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

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

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

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

Tags: , , , , ,

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

Economic Seismic Shift.

I am becoming more concerned that economic activity throughout the world is slowing so rapidly that a global meltdown could be around the corner. My worry for equity markets is that the last seismic shift that occurred between 1958 and 1960 is about to be reversed. In 1958, equity dividend yields were around 7.1% and the Price Earnings Ratio (PE) was 5.6. During the next two years the market rose 122% and the first reverse yield gap appeared (Aug 1959 when equity yields @ 4.76%  dropped below gilts,2 1/2% Consols @4.77%) and it stayed with us until 2008 when central banks initiated QE. The inspiration for this seismic shift was a reassessment of the belief that equities were not safe investments for pension funds and should not make up a large part of any portfolio. A speech by George Ross Goobey in 1956 put the cat amongst the pigeons but it was not until the Manchester Corporation lead the charge (into Equities) did the earthquake really hit. It is interesting to note that for the first time since that shift, UK Pension funds have raised the Bond holdings in their porfolios (43%) above that of Equities (38%).

Why has this obsession with Equities been so compelling for the last 60+ years? My answer is very simple. Governments have become increasingly short term in their outlook. Politicians, along with Central Bank Governors, have been increasingly happy to borrow out of trouble, a policy which up until a few tears ago worked remarkably well for them. The problem is at some point the music has to stop. If you take a look at Charts 5 and 6, you will see the rise of the US and UK debt pile. Whilst these charts do not take into account inflation, they do illustrate very graphically, how the stakes have got ever bigger. Chart 7 just shows how each of the most recent US Presidents have raised borrowing. Mr Obama made many pledges when he first came to office. If he had said that he was going to spend $4 Trillion more than tax receipts trying to implement them, he would have been hounded out of town. Chart 8 shows just how sad this whole process has become. It is the simple cost of servicing (interest) the near 230% of Debt to GDP that Japan has accumulated. It indicates that the lion share of tax revenue is being spent on paying for all that previous spending. I have written several blogs on the imminent demise of that country.

If the global planned austerity measures for 2013/14 are implemented, tax take by governments will rise dramatically. Disposable income will be the main looser,NO! Sorry, the main loser will be company profits. One of the most commonly used reasons to buy Equities is that they are cheap according to the current multiple or PE vs the average of the past twenty years or so. What if the economic conditions that lead to the market being cheap in 1958 are no longer applicable to the future. Governments must reduce the level of debt or the cost of servicing will engulf tax revenues and disaster will ensue. Indeed, we may already be close to that point. It is not a fiscal cliff the world faces but a fiscal earthquake. As disposable incomes decline, company earnings will become far more unpredictable. This should demand a far lower PE (higher yield) than the previous 20 or 30 years. Whilst a return to 1958 levels is a bit outrageous, a rebasing to around 8 or 9 appears more apt. This would imply equities 30% lower. Commodity markets will feel the full force of this consumption decline thus putting the BRICs squarely back into lesser developed catergory. Gold will not be the place to put your money but more of that in my next blog

 

Economics in pictures.

I have updated some data which will be familiar to regular readers. First up, the Suez Canal transit data. This shows monthly cargo volumes passing through the canal. I have written about why I feel this is an important gauge on several occasions. Primarily, it is the fact that 90% of goods that you purchase have, or have components that have, travelled by sea. Pinch points like the canal act as a pulse reading. As you can see from the first chart, growth is going nowhere. In fact the total number of ships passing through has fallen each month since March vs 2011 (yes, new ships are bigger). Another note of interest, is the explosive growth  of  Crude transiting southbound. I guess the Arab Spring and the Iranian embargo will have some distorting affect but I am more inclined to believe it is the build up of Chinese strategic reserve. This volume is likely to slow dramatically in 2013 as storage facilities are at capacity. LNG has slowed significantly which is why the gap between the two sets of data has not grown more.

Click on charts to expand

Next up is the direction of traffic through the canal. No prizes for this one. As you can see, Northbound (90% Europe and 8% USA) is contracting. The January 2012 spike (southbound) was caused by an enormous inventory build ahead of the Chinese new year. Products such as Cereal and Coal jumped significantly but it was Iron Ore which had a big impact. I wrote several times in the spring regarding inventory levels and predicted correctly a large fall in the Ore price. The seasonal build will occur as usual prior to the next new year but I fear it will be more reserved than 2012. This will have a distorting negative impact on the year on year data.

Within the traffic data is a breakdown of particular ship cargoes. Containers are always interesting as they drown out the noise of the volatile commodities which transit in huge volume. More finished goods and components travel this way so it can be a good handle on consumer demand or at least confidence in the inventory level of consumer products. The chart starts just after the Chinese injected $586bn to reflate the economy alongside the first US QE (see above chart for full impact of these two measures). As expected, it balloooooned. Of course, this year the authorities have been more concerned with inflation and a housing bubble. Thus, the rate of growth has slowed and in fact turned negative last month. When the new leaders are announced this week, it will be interesting to see if they start with a big bang of reflationary policies. The outgoing regime have recently raised road, rail, sewer and port infrastructure spending, so little scope exists for a big whammy.

USA. I have updated this regular feature. It shows the traffic flows on Warren Buffet`s BNSF railroad. The Total Freight annual growth rate peaked eight weeks ago and has declined each week since. This somewhat confirms the recent picture being painted by corporate America during the current earnings season. As you can see the Housing materials appear to be in fine shape but the rest are starting to slow. In fact the star of the year has been containers which have been up around 7% all year, last week however, the weekly number was negative for the first time in 2012. The lower diesel price may have had an influence as it helps trucking with competitiveness. I will eat my hat if housing continues its uplift in 2013.

Chart 5

Chart 6 

 

 

Borrowing by governments is the drug that fuels Equity performance.

 

Chart 7

Chart 8

My next blog will be an attack on George Osbourne`s inability to make a real difference. The UK is damned by his torpor!

Tags: , , , ,

Swedish Machinery

Transportation and Steel

Today’s release of the Swedish Purchasing Managers Report for August shows a really significant drop in one of the components. The New Orders element dropped from 51.2 in July to 41.1 in August. Why is this significant? Well, the economy in Sweden is very focused. Machinery,Transport and Equipment make up 44% of Exports and 40% of Imports. As transportation is a leading barometer of economic activity it is important to watch this sector closely when the global economy is so finely balanced. I have blogged several times about my concerns for Volvo and this most recent data, whilst not suggesting transportation was to blame for the decline, can only reflect badly on the sector due to its high proportion of GDP.

Interestingly, mining machinery manufacturers globally, have warned of slowing sales in the past two weeks. I have been talking of my concerns in this sector many times. Sweden is a leading player in this field Atlas Copco, Sandvik etc. What must not be forgotten of course is that this is the most Steel hungry industry group. Regular readers will know my major concerns in this field. See regular blogs on Iron Ore , Steel and BRICs and Lucky Jim Oneill

Tags: , ,

Monday, September 3rd, 2012 BRICs, Euro, Steel No Comments

Consumption vs Transportation.

Where is the global economy going?

I refer to previous blogs which were negative on Truck Makers, Shipping and Commercial Property

Today’s release by Markit Economics on August Eurozone retail activity helps paint a picture of global activity. A statement from the research company sums up Europe ` The current ten months of declines in Eurozone sales (to August) is the second longest in the surveys history behind that of the 2008/9 crisis`. I urge you to think of the world as a whole and gauge where total demand is heading. Lets start with Europe, retail activity is falling for now but where is it heading? Well, it is not difficult to understand that the austerity measures having and due to be implemented, will drain demand still further. Sadly, inflation is not helping anyone. It is constantly just above the anemic wage growth leading to a contraction in disposable income. Interest rates are at rock bottom so no matter how they try, central bankers cant get money into consumers pockets. Banks are all but defunct with untold losses in real estate and shipping, to name but a few areas. Now the second biggest global economy, China. Who knows where consumption is heading but yesterdays article in the Telegraph of business collapse and bad debts really only starts to open the can of worms of bad debts. With real estate (and other asset) profits having driven a tsunami of consumer growth over the last ten years, it is difficult to see how they can repeat the massive boost to the world economy they achieved in 2009. With house price to wages (ratio) the highest in the world can they really afford to re-ignite that inflationary spiral. They will continue to ease monetary policy at a pace which suits them not the rest of the world as in 2009. Now the third biggest economy Japan. Having written several blogs on their impending doom, today’s weak retail sales data were no surprise to me and  I feel herald a consumption contraction which will last for many years. The 230% of debt to GDP the government carries will make it very difficult to stimulate growth. The shift in the workforce over the last ten years tells me thay have the western disease. Manufacturing jobs have declined by around 1,500,000 to the lowest percentage of the workforce since 1953 whilst their has been an explosion of around 2,000,000 people in social services and healthcare. This is not a recipe for long term growth as these new jobs carry a greater likely hood of lower earning potential. Now the big daddy, USA. Ask yourself a question `Do you trust politicians?`OK thats was a resounding answer. In which case the fiscal cliff is a real danger. With an annual budget deficit of over $1 Trillion for the whole of the  Obama presidency, it is little wonder that the economy has managed some growth. Of course it needed extra help from the Federal Reserve. All that has to stop and at the end of 2012 the Bush/Obama tax cuts are due to expire. Where do you think consumption will be when they finally bite the bullet?

So that’s the biggest economies of the world taken care of. I think we should look at the BRICs. I have written many blogs on the subject mainly due to my concerns (dating back to January) for Iron Ore. The dynamic growth of these countries was centred around the explosive growth in commodity prices and hence the unbelievable investment that followed. Just bear in mind, Iron Ore, started the millenium below $20 per tonne and reached $200 two years ago. I believe they have a chill wind of reality blowing there way which will see a dramatic reversal in inward investment resulting in lower consumption.

Can you imagine what it is like living with me? A bundle of fun for Mrs H!

ps The landscaping business is very poor so would love to hear from anyone who wants to employ a crazy bear with 28 years experience in the City.

Tags: , , , , , , ,

Thursday, August 30th, 2012 BRICs, China, Debt, GDP, Japan, Shipping, UK, US Economy No Comments

BRICs Steel and the UK (update)

UK Money Supply…As I mentioned in my earlier blog Where is all this money coming from?  P=MV or Nominal GDP=Money Supply x Velocity. I know the old fashioned M4 data (see below) is no longer favoured by the Bank of England, as it includes too many financial transactions, never the less it has a story to tell. If you innocently take the direction and depth of contraction in Money Supply and couple that with an expression of Velocity, you come to a conclusion where GDP is heading. So the big question is, What is the Velocity of money doing? I have a rather simplistic idea of Velocity. If shop vacancy rates are rising, which they are, it polarises demand into the bigger high street names but is a negative for Velocity. If disposable incomes are falling, which they are, and inflation remains stubbornly high, which it is, then that is a negative for Velocity. If Taxation is rising, which it is, that is a negative. Asset prices are also an important factor. Forget about stock markets as they have gone sideways for the whole of this millennium. The biggest positive influence on Velocity has been Real-Estate (Housing). In my simple world I believe that the increase in house prices (to the owner occupier UK citizen) between the mid 1990`s and 2007, gave him/her an addition 20% annual uplift of disposable spending power during that time. If I am right in thinking house prices will decline by 5% this year, that uplift is reversed and only compounds the contraction to disposable spending mentioned earlier. So, to sum up, Money Supply (old fashioned) is contracting and the influences on Velocity are negative. If I wanted to be outrageous, I would say that this implies a contraction in the UK economy of 3-5% over the next 18 months.  Below is the annual % growth/contraction of M4.

In the words of the late prime minister Harold Macmillan

`A successful economy must be based on the production of wealth and marketable goods, We must transfer away from an over-reliance on services, back to production. We cannot go on borrowing for ever` Economageddon..The end is near

 

BRICs and Steel…I have raised the importance of heavy industries to the world economy many times, generally, with references to the shipping industry (around 90% of goods have had a sea journey).  My concerns have centered on the level of capacity and supply in the worlds biggest market. Recent developments in the Shanghai Steel market  have given me reason to update. Whilst daily steel output is at a record 2 million tonnes per day, consumption is failing to keep up. Spot prices have now fallen back to early March lows. Inventory paydown has been a driving factor. Over the last 5 years, inventory has fallen by 20% during the busy spring period (nine weeks). This year, inventory (which was not low to start with) has only fallen by 10%. This has also lead to a slight decline in Iron Ore prices. We are nearing a very important point in the global economy!!! If China does nothing to ease monetary policy by the end of May, things will turn ugly. Steel companies in China had a disastrous Q1 losing around $1bn. If demand is not stimulated by the state, prices will fall. This is not only a negative for the vastly over supplied steel market but more importantly the BRICs and Australia who have built a large part of their success on the export of Iron Ore. Of course, this scenario would be the straw that broke the camels back for the Shipping Industry. Keep a weather eye on the Baltic Index as it may be an early indicator of weaker demand. I have written extensively on these subjects and just this scenario earlier in the year BRICs and Steel  Iron Ore The Perfect Storm  The Plimsoll line is clearly visible!

 

Tags: , , , ,

Thursday, May 3rd, 2012 BRICs, China, GDP, Shipping, Steel, UK No Comments

BRICs and Steel (update)

BRICs and Steel

As I have said for a while, production capabilities in heavy industries is way above even the most optimistic of consumption demand forecast. So why the update? Well, with Chinese steel mills recording their all time high monthly production in March, it would appear all is rosy and demand must be just dandy. As you can imagine, I see things differently. In the first quarter, steel companies in China lost (estimated) 1 Billion Yuan versus a profit of 25 Billion Yuan Q1 2011. That makes them desperate to meet any demand from the important spring construction season. It is possible that this high level of production will  just end up as expensive inventory. In the last two weeks, volume traded on the Shanghai exchange has been very low. Prices are showing a downward bias. So what is demand upto? In the earlier BRICs and Steel report I highlighted the reduction in railway infrastructure investment for 2012. In February, investment spending (on the railways) hit a multi year low of Yuan 32.6, surpassing the previous low of Yuan 36 Billion immediately following the Zhejiang province disaster. On top of this, other heavy users of steel do not look to be on an upward trajectory. Shipbuilding, a subject I have highlighted so many times even I have become bored with it, will likely see a 50% drop in orders by the time 2012 is out. China took the mantle of worlds biggest builder from South Korea in 2011. As orders from previous years get completed and hopefully delivered (no guarantee as finance for completed delivery is getting scarce) many plants will be idled. The two other main consumers, construction and transportation, are also showing signs of slowing activity. In Q1 total vehicle sales (commercial and private) were down 3.4% on 2011 Q1. Forecast by the industry still point to growth of around 7.5% for the full year but given the shaky start and the two significant increases of state controlled fuel prices, these seem a little ambitious. As for construction, who knows. It is all down to the state as and when they start to loosen monetary policy. For now, the picture is one of much slower building project starts, this of course could change very quickly.

Tags: , ,

Thursday, April 19th, 2012 BRICs, China, GDP, Shipping No Comments
free counters

Search

 

Markets

error : cannot receive stock quote information

Posts by Date

November 2019
M T W T F S S
« Feb    
 123
45678910
11121314151617
18192021222324
252627282930  

Blogroll