QE

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

The Future

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

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

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

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

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

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

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

You have been warned..again…

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Issues for future blogs

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

 

 

 

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

BRICs…Future Looks Cabbage Like…

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

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

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

 

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

Consequences of the above

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

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

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

 

 

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

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

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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Nippon soon to Nip Off.

Japan and Yen update.

Regular readers will know I have been negative on Japan for a long time. Having called the Yen decline in September 2012, I now believe the second and more meaningful breakdown of the currency is around the corner. The first chart highlights the narrowing pattern developed since the mid 2013 low point (high for $) of £/Y 103.7. The breakout of the higher or lower lines could lead to a significant shift. If 97 is broken on the downside, against my expectation, a return to significant Yen strength would see the Nikkei equity index fall sharply. If, as I expect, 99 is broken on the upside (Yen weakness) the second long term chart comes into play. The $/Yen would likely test the May high of 103.7 which if breached would lead to a move to the 1998 downtrend. This is where I will try and explain why I think that will be breached and the Yen will fall by a further 10% from there. To try and capture this movement the $/Yen 102 calls which expire December 18th are worth a look. They are currently trading around 20 pips. If the move does not occur you loose 20 pips. If it does, you are in for the ride at 102.20.

Chart A) Short Term $/Yen Sept 2012-Nov 2013

Chart 2) Long Term $/Yen 1996-2013

Why so negative?

I believe the ratings agencies may downgrade the nations debt before the end of the year. The planned tax hike due to be implemented in April 2014 will weigh very heavily on what is a weak consumer backdrop. I still believe this (tax) will not go ahead as planned. To sweeten the passage of this tax, which is expected to raise an extra Y8 Trillion, the government has announced a Y5 Trillion stimulus to help the economy. The debt profile of Japan is well known. It makes Greece look well run!

Lets remind ourselves of the position:

  • Total Debt is 500% vs 370% in USA
  • By 2018 gross debt will be 295% of GDP (higher than the UK crisis peak of 250% in 1815 and 1945)
  • Net debt will be 190%
  • 50% of total spending is borrowed new money

 

25% of tax revenues go to debt interest with rates at near zero

  • 25% of all bank assets are in government bonds (JGBs)
  • equals 900% of tier 1 capital vs 25% UK banks (Gilts) and 100% US banks (Treasuries)

I have highlighted above, a very important fact. With interest rates at near zero, the government is funding at very attractive rates. However, with debt still growing rapidly (c 8-10%GDP) the fact that a quarter of tax revenue is spent on interest, it is not difficult to imagine how, with rates near zero, a higher rate scenario could completely overwhelm the countries finances. Of course, current QE will not let that happen. The 20% devaluation of the Yen in the past twelve months has helped the economic backdrop. Exports up 11.5% in September was the recent headline. Look a little closer and you will find that yes, in value terms they were up. However, in volume terms, they were down 4.4%.

The return to wage growth ( September 2013 vs 2012) was seen as significant. I cant help but feel that the 0.1% increase will do little to offset the sharp increase in energy related costs being heaped on the consumer because of the Yen decline. With continued declines in disposable incomes, the proposed tax increase will be a bitter pill for consumption to swallow. Exports are the only straw that Japan can cling too. Recent export figures from the continent (Asia) are not promising. China exports to SE Asia are at a 17 month low whilst Taiwan and Korea are reporting declines. The Japan time bomb is ticking!!

Coming Soon……Update on my call for Global Deflation  and A review of my bearish 18 month stance on Volvo and other Scandi plays

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Friday, November 1st, 2013 Debt, Japan, National Debt, Predictions, QE, Yen 1 Comment

Osborne Good Fortune Financed by Pensioners and Savers.

Osborne Good Fortune Financed by Pensioners and Savers.

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

Lets look at some facts;

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

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

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

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

Chart 1

Chart 2

Chart 3

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

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

Gold and Equities

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

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

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

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

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

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

 

 

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Quantitative Easing (QE)

What is QE?

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

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

Q: What has been done with the QE proceeds?

A: Buy Assets

Q: What Assets?

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

Q: What is the impact on these assets?

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

Q: Who has benefited from QE?

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

Q: Who suffers?

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

Q:Why them?

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

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

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

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

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

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

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

Other very apt Churchill quotes:

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

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

 

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

Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

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

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

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

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

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

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

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

 

 

 

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

UK Budget…2013 Review

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

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

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

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

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

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

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

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

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

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

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

 

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

So, the way Osborne Austerity works is this.

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

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

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

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

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

A Quickie for Christmas

Xmas makes us all test our Capacity.

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

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

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

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

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

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

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

 

 

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

Am I Right to Be Bearish

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

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

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

 

 

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

 

Secondly, the traffic growth in either direction.

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

 

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

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

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

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Is Global Trade Growing?

Suez Canal update.

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

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

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

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

 

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

Look beyond the noise.

US Economic expansion.

Last week was all about the US employment report for March. The focus was so sharp that little else seemed to get much scrutiny. Given the frequency of revisions, one month is never enough to base sound long term opinions on, so I wont. There is a school of thought in the cynical blogosphere that weaker numbers were engineered lower thus giving the Fed justification for Q3. Given the proximity of the election when the decision is due, they will need all the help they can for justification without attracting Republican ire.

With the aid of a wider angle lens, I was not distracted by the unemployment numbers. I chose instead to focus on the nuts and bolts of the economy. Early last month I wrote about Class 8 truck demand Quiet in Class!..[ This continues a theme of mine centered on transportation of goods. Most recently that has been with reviews of BNSF rail freight volumes but earlier postings have been on the shipping industry The Perfect Storm and The Plimsoll line is clearly visible! ]… Last week saw the release of preliminary sales data for March Class 8 truck sales for North America. With the benefit of 3 months data for 2012, my earlier concerns for the economy can have some justification.  January 24,000 February 22,366 and March 19,682 against the 4Q 2011 average of 26,000. The preliminary number for March is 32% below March 2011. Why is that important? At the beginning of the year, the two main bodies for the truck industry were upgrading their forecasts for 2012. They centered around an annual expectation of 295,000 sales, well ahead of 200,000 needed to replace retiring vehicles and up 10%ish on 2011. March and April are normally the two most important months for sales as they herald the start of the haulage season fan-fared with the new year models, which normally carry a higher price tag. If April does not spring into life with renewed vigour, the order backlog (currently strong due to the ordering peak around December) will falter and the inventory level ( 62 days versus 52 in 2011) will rise. This, in the worst case scenario, could lead to awkward production gluts. In the third of my blogs on rail freight USA Freight Volumes I did suggest that the rise in container volumes (via rail) could be attributed to the sharp rise in diesel costs. This may have some correlation with the first decline in trucking jobs (0.1%) since July 2011 as seen in last weeks employment data.

US Government Debt

On Thursday we will see the release of the Monthly Budget Statement. I have seen one estimate so far ($203bn). If this is confirmed, it will be the first back to back $200bn plus months that I can remember. It would lead to a Q1 deficit slightly up on last year and close to the record set in 2009.  Since the depths of the recession in Q1 2009 the economy has recorded positive GDP and unemployment has (headline rate) dropped significantly. Why then is the deficit still growing at such an alarming and unsustainable rate? Easy, the government are buying growth. As I highlighted in America breaks records…Swiner in USA the end of 2012 brings about some major problems for the newly elected government. It is impossible to think that by then the economy will have garnered enough momentum to overcome the fiscal drag which will inevitably follow.

CHINA.

The latest inflation data will not rest easy on the authorities who made much of last months significant decline. They have blamed the unexpectedly sharp increase (3.6%) on poor weather in the fresh food producing areas. This has lead to overall food costs rising 7.5% year on year. This, however, masks far more important moves in two important staples. Vegetables are up 20% year on year with Meat/Eggs 11%. The recent significant fuel price hike had little influence on the rate as it has a small weighting within the index. Presumably it will show up in later months as products are priced to contain additional transport costs. It is clear that inflation will continue to be a drag on any monetary easing the authorities have planned. To continue my transportation theme (and remember 90% of goods travel at some point by sea) Chinese shipbuilding orders are down 40% on the first two months of 2011.

Last week also saw the release of the Purchasing Managers reports for March. Whilst the state version showed continued strength at 53.1, the independent HSBC report fell to 48.2. Why? Well the state report by the Federal Logistics and Purchasing department is heavily influenced by state and large companies in its sample of 800, whilst the HSBC has 400 mainly small and medium sized companies. These smaller companies are much more focused on the world economy. Weaker overseas demand has been a drag on growth but finance, or lack of it, has also played a part in the current weakness. The authorities started a pilot scheme in Wenzhou last week aimed at relieving some of the well documented problems of underground financing.

 

 

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Monday, April 9th, 2012 BNSF, China, Debt, National Debt, PMI, QE, Shipping, US Economy, USD 1 Comment

The Perfect Storm

Or is it just a `Storm in a Greek earn?`

If there is one industry group which reflects supply and demand most accurately, it would be shipping. I look at the world as a body. The shipping lanes or seabourn trading routes being the arteries. The ships plus cargo are the life blood supplying the three major continents, being organs. The heart I feel is money supply and importantly the  velocity of money.  Changes in money can quicken or slow the demand cycle which in turn is reflected in the fortunes of the shipping industry. This is where problems can occur. Changes to money supply can develop very rapidly whilst shipping on the other hand cannot be so nimble. Lead times for ship delivery is 2-4 years. The reason for writing today is due to a potentially disastrous imbalance in the worlds health.

I wrote last week about the decline in the Baltic shipping indices. Since then the barometer of daily charter rates have fallen another 20%. Why do I feel the need to update, given, as I explained then that it was a volatile animal? The levels now being indicated would imply income generated will not cover operating costs. This time last year the Index declined to around 1450 from a 2010 range of 4200 to 2000. This lead to many articles fretting about the future of the industry. Whilst they proved true in a sense, the problems of 2011 were not significant. Now however, the index is another 28% lower than then. Adding to this poor outlook is the pricing of the single most important industry cost, Bunker fuel. Over the last 12 months it is up 30%.  . Being a derivative of oil it rightly tracks that commodity. A factor which has exacerbated the pricing is that refineries have invested in improved cracking capabilities, enabling far greater proportion of distillates into more profitable lighter products. As a guide Bunker fuel averaged $100 per ton in the 1990`s and is now around $700.

If this level of the Index were to continue, the implication would be catastrophic! Hence, I have put together some important industry facts.

Greece along with Japan are the largest merchant ship owning nations in the world. For Greece, shipping is second only to Tourism. Thus it is a large employer. That fact has obvious implication given the bleak economic prospects they face. When it comes to financing that fleet the largest player with nearly 20% of the total debt of $66bn is RBS. Way down in % exposure come Commerzbank and Cr. Suisse. The Chinese have used their financial muscle since the financial crash to offer huge financing for new ships built in their yards. The Greek fleet has benefited from the cheap money bonanza pre-crash and has reduced the average fleet age from 23 years in 2005 to 15.9 years in 2011, whilst slightly growing tonnage.

Financing the global fleet is in the hands of only a select band of players (appro.39). Six banks account for around 40% of total debt. HSH Nordbanken (majority owned by 2 German federal states + 11% JC Flowers) $50bn. Commerzbank (via subsid.) $33bn, Dnb $28bn, RBS $23bn, Nordea $18.4bn. BNP $18bn. Interestingly Lloyds and Unicredit are well involved.

The Scandinavian banks have the largest exposure in balance sheet terms and therefore have the most to lose.

The largest corporate owners of ships are AP Moeller Maersk (840) COSCO Group (725), Nippon Yusen 554, Mitsui OSK 509 and China Shipping Group 482. The share prices of the Japanese and Danish companies have reflected weakness in new charter rates up to a point but still trade with an element of optimism that the global economy will grow around 4% this year. If the Index continues to portray significant weakness and pricing does not improve, I can see the like of AP Moeller trading 20% lower to its September 2011 low. Should my worst fears for the global economy be borne out, the 13 year head and shoulder formation would imply something far more unimaginable, so lets not go there.

Given the implications this index decline throws up, it is worth knowing the exposure companies have. It could just be that the Chinese new year or Cyclone Heidi has distorted the picture. Either way, the problems being faced by Greece would be amplified should any of this happen. The potential for China to cut interest rates or Germany to give approval for the ECB to officially commence QE would give expectations a short term lift. Unfortunately, the significant rise in oil (Bunker fuel) that it would lead to would be an offset for the ship operators. The real problem of global debt will not go away easily.

 

CAUTION: Compiling data in this sector can be difficult and I have relied on the Internet to be correct. You are all aware that is a dangerous strategy. Most of the data is 6-12 months old.

 

 

 

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Monday, January 16th, 2012 China, Debt, GDP, Money Supply, Norway, Predictions, QE, Shipping 5 Comments

Never, have so many, owed so much, because so few, did so little.

Well done to all politicians.. “Never, have so many, owed so much, because so few, did so little”…to paraphrase the great Winston Churchill.

 

Things on the horizon

At the end of September 2011 the US Postal service is due to pay $6bn to its health fund. It has not got it. The implication of this is talk of 120,000 job losses.

At the end of 2011 the US Unemployment benefit extension comes to an end for several million people who have maxed out (e.g. over 99 weeks) – An extension to this benefit lead to a political log jam last year.

2012 Sees the peak of the baby boom tsunami. Due to Japans poor demographics, its average population is ageing rapidly. From 2012 huge numbers reach 65 in this and the subsequent ten years. The state pension fund is the biggest owner of JGB’s. They will see an increasing demand on funds under management as the proportion of retired members jumps rapidly.

If Japanese bond yields go up 250bp’s (2.5%) the govt will be unable to pay the interest without substantial consumption taxes.

The Government debt is close to one quadrillion Yen, yes, ¥1,000,000,000,000,000 – equivalent to $100,000 per person and double the US and 4 times the UK!

2011/2012 Greece banned real estate foreclosures for 2011. If not extended into 2012, and I cannot see how it can’t be, 2012 could see some interesting opportunities

Luxury goods

As seen recently in Germany, Greece and rumblings of in China. When the masses think they have been subjected to poverty due to a few corrupt capitalist businessmen or politicians, they seek revenge. Luxury goods companies have reported sound sales figures in the face of the crisis so far. This may be something to watch if it austerity becomes a fashion item. Japan is a huge market for luxury, should the Yen collapse and consumption taxes be imposed…. Hmmmmm….

Tesco is losing out. I’ve visited local ‘pound shops’ and watched the queue length, demographics and class of the people shopping. The queues are getting longer, and clearly middle-class people are visiting. Tesco beware, these shops have low fixed costs.

Expect many more Europe wide wage deals like the one done by Greek Telecom OTE. Effectively an 11% wage cut. Disposable wage declines lead to lower property values. The UK has the most to lose with average house price being around 7 times average salary versus the norm of around 4 times. I think 20% down in 2012 – Deflation may still be lurking

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Thursday, November 10th, 2011 Consumer Debt, Debt, GBP, Money Supply, National Debt, Predictions, QE, UK 1 Comment
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