China

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.

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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

 

 

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

Yen Has 10% Further To Fall.

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

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

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

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

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

 

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

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

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

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Italy Could Beat UKIP To Braking The EU

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

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

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

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

GLOBAL UPDATE…

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

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

 

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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…

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Friday, October 10th, 2014 BRICs, China, Steel No Comments

Roosting Chickens….

Not got much time so how about a quickie…

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

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

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

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

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

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

 

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

Global Economic Roundup

USA…An interesting development from a barometer (BNSF) that I followed very closely up until early 2013 ,when the data became polluted with Petroleum distortions. This is now largely working out of the system and it once again is worth a look.

BNSF weekly railway stats show that upto the halfway point in the third quarter 2014, the economy seems to have changed down a gear. The series of quarterly volume flows are always fairly consistent with the underlying GDP data. The halfway point so far indicates a decline, which would be odd.

In Q3 and 4 2013, BNSF volume grew around 5% and GDP averaged 4%…In Q1, when a poor winter saw GDP declined 2%, rail volume barely grew and would have fallen had it not been for Coal demand. Q2 saw a 5% rebound in rail volume and the GDP data came in at 4%…So as you can see, there is a strong correlation. So what has happened to 3Q rail volume with BNSF?  currently, total volumes have contracted 1.16%. Without the significant influence of Coal, the numbers would have been unchanged. It is likely that industrial action at some ports may have affected container traffic but this does not explain the sharp reversal from the second quarter recovery. Unless there is a sudden pick up, the GDP outlook for Q3 is at best unchanged. That is certainly below all forecasts of around 2.5 – 3.0 %…hey ho, just saying

 

China…How low can the coal price go?  Currently, around 30% of global coal miners are losing money and 70%, yes,70% of Chinese miners losing money. The interesting thing is, China is slowing imports to support its own production. SOUND FAMILIAL? First half 2014 imports of coaking coal (used for Steel production) were down 12%. Overall coal imports, including thermal for energy production, is down slightly. The China coal authorities have called on domestic producers to cut production by 10% in the second half. The shift to sustainable energy appears to be paying off with the first decline in overall demand this century. Australia, USA and Canada are the biggest shippers and are currently suffering with mine closures on the agenda…If China sticks to the cut, maybe prices can stabilise. I would not hold your breath.

Coal and Steel currently at six year lows.

Sterling…I got a little impatient with my $/£ options and decided to book the 100% profit available late last week. I still feel Sterling is flawed, its just time was running out with a September expiry. The $/Yen has started to move and a break of Y105.30 would see it on its way to the first stop of Y110

 

 

 

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Monday, August 25th, 2014 BNSF, China, GBP, Predictions, Steel, USD, Yen No Comments

Chinese Deflation Cancer Spreads

OK here I go. This blog has been building in my head for a long while. It will tie in with my record of forecast since I started a few years ago. The economic world is close to a catastrophic collapse. Yes, I know, I have been concerned about the world since I started. I am firmly of the belief that QE has not only just delayed the inevitable collapse of the global economy, it has made the impending scenario much worse. In fact, it has taken it from a situation that was manageable, with old fashioned crash, burn and re-build, to a situation where the fallout will make the 1930`s look like a walk in the park. The central pillar of my argument is the significant positive impact QE has had on asset prices is mirrored by the equally significant negative impact on inequality in the developed world. This is mainly due to the tsunami of cheap finance which has swept the developing world and spawned huge production potential.

Yes, bond and equity prices have risen significantly. And why shouldn’t they. With QE pumping so much money into the hands of the people who created the 2007 crash, what else would they do with it. As I have written before, lower bond yields have helped governments continue priming economies through direct state spending (debt) or policies which have encouraged significant new consumer debt. The problem is, whilst the central banks of the G7 were sleeping, China changed. It is no longer the worlds growth engine due to internal demand. It is a cancer on the supply demand curve.

Let me expand on my theory of why China will be the catalyst that sparks this almighty upheaval. BRICs have been a constant theme in the history of this blog. Iron Ore is the prime reason. They all have it. The growth in China over the last 20 years was centred around Housing, Railways and Heavy Industry. The problem is, as I explained in China and its Export Claim, the supply curve within all these aspects of growth had become overstretched. In normal developed economies, this would have sparked a flight to quality as earnings concerns came to the fore. Of course, as I have pointed out many times, return on capital is not a primary concern of state industry dominated China. Employment of the masses is the ONLY concern. I have a back of the fag packet calculation. For every 20 million Chinese workers employed, 5 million employed people in the developed world become superfluous in the current demand cycle. Now, I am not saying these people will be unemployed, just that there well paid manufacturing jobs will be replaced by low paid service jobs. That is why, over the last thirty years, inequality has been taking a hold. I explained this in Profound Inequality in America.

So how is China accelerating this process in the current environment? An example is Steel (So many blogs on the subject I cant note them all). This one vital element has been the growth engine which has sustained this process of converting rural peasant into semi-skilled townies. To produce steel, you need two primary elements, Iron Ore and Energy. In Chinas case, energy has been via Coal. Together, these three elements are all required in huge bulk, so we must include transportation into the mix

As inventory of housing has built to an unsustainable level, prices are starting to drop. Sales in the first half of 2014 are down sharply on last year. This still does not explain my theory. If China cannot consume all it produces, what can it do? Export. To this end it has done several things outside its recent state induced currency weakness. Firstly, export the raw material. Globally, these are running 30% higher than 2013.  South American countries have seen (China imports) rises of around 90%. Of course, the ire of western producers have raised the spectre of further import duties. So, this leads to the second point. Cheap exports to fellow Asian economies eg Sth. Korea, forces them to export themselves. Couple this with import restrictions on Taiwan’s exports to China and it becomes evident this is a way round tariffs from Europe and America. Thirdly, and a little more opportunistic. Export of ships, Rigs etc. Since the financial crash, shipbuilding finance from dominant European banks became scarce. This lead China to flex its mussels. It has lent, via state banks, billions of dollars to mainly Greek ship owners (I have many blogs on the subject) in exchange for the orders to be placed with Chinese yards. This has allowed China to wrestle the mantle of dominant player from Sth. Korea and Japan. The problem is, this cheap finance is creating a bubble in supply of vessels. All this at a time when the Baltic Freight Index is once aging flagging concern. Of course, the Bulk Carriers which are supplying the low cost Iron Ore from the likes of Australia and Brazil are benefiting.

Many economic forecasters are pinning their hope on China becoming a consumer society in order to create growth globally. This is a faint hope at best. For now they are flooding the world with low cost products which is leading to one main import from the developed world, Jobs. This leads me to the main crux of my argument. Demand.

I have written about a demand shortfall verses the supply boom and its resulting Deflation before. I have stated that wage growth will decline and turn negative. I am writing now as this is all becoming a reality. Wages in the UK and Australia have already registered there first ever declines. Elsewhere the downward pressure is building. Since 2008, American wages for the bottom 20% of earners has declined. The web site below gives a good view of how growth has  been distorted towards shale gas and not industrial important manufacturing:

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

With employment in poorly paid service jobs being the illusion that has driven low unemployment in the USA and UK, income tax receipts are not dampening the budget deficits. Yes, the USA has a smaller perceived deficit but strip out income from the Federal Reserve (QE gains) and things are not so rosy. Both have adopted policies which have driven property prices to pre-recession peaks. The problem is, the China affect on wages has just made the valuation to income ratio stretched beyond affordability. Now that the boom in speculative demand is turning to net sellers, the future is not so promising.

Outcomes of my theory:

CHINA…Will try and maintain the illusion of 7.5% economic growth via internal demand acceleration. This is an illusion. Just yesterday they announced significant cuts to pay of higher paid state employees. With Iron Ore production costs double of Australia, they will probably reduce the tax disadvantage to protect this mass employer. The coal industry is losing demand and will have to make big cuts. Housing will continue to slow and eventually lead to huge bond default. Steel production will collapse and with it Iron Ore demand. Hence Coal and Oil price decline. Recent trade figures confirmed export growth and import contraction

Australia (BRICs)…The significant decline in Iron Ore price in 2014 has slowed investment but a second leg down in price (around $50-60) will put a big downer on the economy. The currency will retreat still further. Once again, housing demand will implode. High paid jobs in mining will be a big loser. Wage deflation will halt demand.

Japan…Sadly, they are likely to be the hardest hit from this China export drive. The economy will continue to struggle until eventually the currency has to give. They will have to return to nuclear power to reduce the huge energy import costs. This will slam the builders and operators of natural gas ships. Demand is going to contract still further as the Yen has its second currency decline to around Y125, the 2007 low. This will spread the deflation spores even more aggressively. I know most people take flight to the Yen during periods of uncertainty so my prediction seems odd to most. Over the last 5 years, significant moves, up and down, have been followed by stable periods of between 6-8 months before going again. Given the last significant decline bottomed in January, the next big move is just round the corner. First stop Y110 then on to 125. If you have to own equities, currency hedged Japanese are the ones.

UK…The chancellor has completely ruined the UK. I thought no one could have topped the incompetence of Gordon Braffoon. But George Osborne has done just that. Many recent posts will explain my reasoning, but put simply, he has borrowed and wasted more money than people who should know better are prepared to acknowledge. Its a bit like the Kings Clothes…George is parading naked as a Jaybird but no one has the balls to state the obvious. Let me give you a microcosm of a looming disaster. The Local Authority I have the honour to represent, has a pension shortfall of four times the income from rates. Every 0.5% move in bond yields makes a shift of around £70m. If I am right, and deflation takes hold, government bond yields could go to zero. Couple this with a decline in the underlying portfolio, which currently stands at £500m, and the shortfall could double. If you take this a fairly typical local authority, the time bomb is ticking loud and clear. Sadly, I am the only one who can hear it. I still think Sterling will test its all time dollar low of $1.08.

Sweden (Finland)…As I have stated in previous blogs, I love the Sweeds, sadly however, the writing is firmly on the wall. The primary reason is the importance of the mining sector on its industrial heritage. My scenario would see exports implode as mining companies cut still further the budget for new investment. The usual housing boom appears here and will come to an abrupt end. The currency will decline still further and the globally important companies will be snapped up by American players. Or, as I have stated in the past, a Swedish solution is forthcoming and many internal mergers take place.

USA…Here, more than any country, inequality abounds. As per my post of December last year. This will lead to significant social unrest.

EQUITIES…..I have said in the past that they cannot go down significantly at the moment as demand from Central Banks and Company buy backs is reducing supply. I have explained the role QE plays in this before. Considering the global unrest, markets during my city career of 28 years, would be significantly lower than they are now. This just highlights the influence these QE induced buyers have on prices. But what about the future? Quite frankly, I am unsure. What is clear, if prices continue to defy gravity, volume will continue to decline. Not wanting to short markets during these difficult times, because bears have been massacred since 2008, means individual stock prices will only move when poor results are released. Then the declines will be eye watering. Shrinking capital bases (due to buybacks) will make these moves more aggressive. For now, equities are an unknown beast for those of us who were brought up in a world of boom, bust, re-build economics. Not the QE induced ether they are fuelled by currently.

Bonds…I do not want to bore you all too much so that’s the end for now. Plus, my wife is giving me grief as I have chores to do. Mainly, putting a new Cedar shingle roof on our summer house…

 

 

 

 

 

 

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Global Dissatisifaction With Governments Can Only Spread

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

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

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

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

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

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

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

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

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

 

 

 

 

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Profound Inequality in America…Time to Act!

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

 

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

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

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

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

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

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

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

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

YOU HAVE BEEN WARNED!

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

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

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

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

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

Item 1)

Item 2)

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

Item 3)

 

 

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

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

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

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

 

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

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

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

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

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

Amongst its Economic peers the USA (x China)

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

Amongst OECD members

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

also

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

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

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

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

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

 

 

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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

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

 

Is Stephen King a plagiarist?

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

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

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

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

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

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

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

Global Economy Update 

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

UK

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

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

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

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

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

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

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

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

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

5) Corporation tax cut to 12%.

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

ps

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

 

 

 

 

 

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Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

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

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

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

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

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

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

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

 

 

 

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

What have Spanish Villas and Ships got in Common?

We are getting awfully close to a Banking Crisis!  German Banking System in Crisis

This week saw another piece in the jig saw of collapse that I have been warning of for nearly 18 months.  The ClarkSea Index (see below for details) has just registered its lowest level in its 23 year history. Although its weekly decline of $223 (3.04%) to $7,111 per/day charter rate, is a far cry from the record $5,000 (12%) drop in the 2008 crash, it has to be put in perspective that the daily rate fell from $43,000 per/day at that time.

Why is all this so important?

With an estimated 60% of shipping loans now in the `not performing` bracket  it is important to bear in mind the attitude of the lenders. The biggest lenders won’t foreclose even if ships are worth less than the outstanding debt and owners can’t meet repayments. They would much rather restructure with the belief that valuations will rise following an expected pick up in overall shipping activity. This process of protecting ship valuations (by not foreclosing) helps the lenders to make provisions rather than crystallising losses. Perfect sense in normal business cycles and has indeed paid off in previous shipping downturns. I believe this time things are different. (see my many blogs on the subject) This years 20% decline (in the ClarkSea Index) to the all time low, makes the process of restructuring more difficult. We are now close to a point where new restructuring deals will be impossible to stack up economically. The additional debt being laid at the feet of borrowers is futile. Additionally, previously restructured deals must now be looking shaky. All this looks remarkably like the Spanish Banking crisis which I predicted in some of my blogs at the birth of Finance-Reaper. Two/Three years ago Spanish banks refused to sell off foreclosed property which was piling up on their books. Instead they were offering special zero rate mortgages to buyers  (at book price of the asset). The rest is history. This prolonged the process of restructuring and even allowed some developments to carry on adding to the surplus supply. With 2013 seeing a further surge in new ships hurtling off the slipways of Korea, China, Japan et all, supply is growing. Yes, I hear you, older ships are being scrapped at the fastest pace in many a year, still not enough to change my opinion. Meanwhile, I believe world trade is contracting. Yes, I hear you, I am crazy! But I do not believe a word China says. I have written many articles on the Steel industry as a bellwether for China producing at a loss just to maintain employment. This is true of many industries in that country. Chinese steel inventories are mounting, now reaching 9 year highs. The EU is now threatening to impose further trade dumping duties of steep pipes from China. All non- Chinese steel companies share prices are close to 15 year lows with the likelihood of further production closures to come. All this whilst China is hitting all time high production output. IRON ORE will retrace the losses seen late last year when common sense prevails. Problem is, with 20 million farm hands joining the urban sprawl per annum, they need to have jobs. China needs to keep production of basic material like Steel and Aluminium at full tilt as they are such big employers. The longer the excess production goes on the bigger the downturn when it comes. All this is alarming for those bankers who are sitting on shipping loans with the hope of a significant pick up in trade. Confusing!

ClarkSea Index (Compiled by the worlds leading ship broker, Clarkson PLC)

A weighted average index of earnings for the main vessel types where the weighting is based on the number of vessels in each fleet sector.

UK…I will follow up on my many recent warnings about the economy and Sterling. The January Public Sector Accounts were on the face of it better. Believe me, they were not! I will review them next week.

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Sunday, March 3rd, 2013 China, Debt, Shipping, Steel 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.

 

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

Global Economy…The Canary in the Coalmine

Goldman Sachs Asset Management… Chairman and Chiel Economist Jim O`Neill

No, this is not about Jim O`Neill it just relates to a report he wrote in May 2012.

The report stated that South Korea is the canary in the coalmine as it not only reports (trade) earliest but has the highest correlation with Asian economies.

In my blog `China is Ly`ing` I highlighted the significant decline in goods transiting the Suez Canal. In fact the decline was somewhat confirmed by the Japanese and South Korean December trade figures which saw exports falls of  5.8% and 5.5% respectively. I mention this because that correlation with Canal traffic is important to establish. South Korean trade for the first 20 days of January 2013 has contracted year on year, significantly. Imports are down 13.2% and Exports are down 9.7%. Meanwhile,vessel  traffic through the Suez Canal is down 16%. A breakdown of the actual net goods transiting will not be available until early February. The vessel decline is far greater than actual goods volume, as I explained in previous blog. Ship volume in December and November declined 11.1% and 9.4% respectively which lead to a corresponding decline of 4.7% and 5.0% in goods transiting. If the January decline continues throughout the month, I expect it to translate into a decline of 7% in goods. These are big numbers but there could be an explanation. Yearly comparisons for Korea and the Suez Canal have come up against last years massive balloon in Chinese imports (in January last year) ahead of the new year ( two week) holidays. Last year this fell on January 23rd. Goods transiting south towards China grew 40% (see chart two in last China blog) in January 2012 vs 2011. Could the significant early January weakness be due to the New Year falling on February 10th this year, pushing that holiday demand back. If so, the next three weeks should see a massive turnround in Korea`s and the Canal`s volume. If that explosion of demand does not occur, we should all be asking what the hell is going on in China final demand. This would be very worrying for the companies that have significant exposure to Chinese consumers.

 

 

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Thursday, January 24th, 2013 China, Japan, Predictions, Shipping No Comments

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.

 

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