Archive for November, 2011

Where is all this money coming from?!

I awoke this morning thinking that my ability to perform simply schoolboy maths had left me. I read in the Telegraph that disposable income had dropped 8.4% since last year – no surprise there!

It goes on to state that consumer credit has contracted in four of the last five months, again no real surprise. It then says that consumer savings ratio has climbed to 7.4% versus 5.9% at the beginning of the year, so out of the average salary people have a significantly less to spend in volume terms and are actually repaying debt.

How then were the September 2011 retail sales figs up 0.6% in volume terms and 5.4% in value terms over the same period in 2010? It just doesn’t add up.

There are only three explanations I can think of (aside from slightly lower mortgage rates), which are:

1) Is there a spending element of the average salary that is not accounted for in the Retail Sales numbers and spending on this is being diverted to an area captured by the figures?

I doubt it very much

2) Maybe the Black Market in the UK is growing rapidly, e.g. people paying cash for work. UK and Germany are calculated to have the lowest Black Market in the Euro zone at around 13% of GDP while Greece is estimated to have the largest at 27% (now you can see why Greece gets so little tax revenue!) – I guess this has grown but it is difficult to estimate….

Or

3) Homeowners switching to interest only mortgages. There is significant evidence of this; it is estimated that 330,000 mortgages have been switched in this way over the last 3 years with an estimated value of £66bn. I estimate that this adds around £125m (prior to velocity*) to retail sales per month. Not much in the scheme of things considering £32bn-ish as a monthly total. It does however help to explain the shift in spending patterns. This money is significant to a vast proportion of the population. On average it adds around 15% to the after-tax net take home pay. Hence we see a positive impact on food and low cost purchases together with the necessity of fuel (see below).

Year on Year VALUE change

Food only stores +5.7%

Non-store sales e.g. Markets and Catalogue +15.6%

Auto Fuel +20% (down in volume terms)

All this coupled with the fact that Internet Retail Sales in September grew at a faster rate (25% 2010-2011 versus 20% 2010-2009), and now nearly 10% of all non-fuel sales. The high street is likely to continue to contract with Commercial property prices falling further with rents

finally….

The Economy and why the central banks should be worried about huge bank recapitalisation

*I mentioned Velocity above. This is important as it is a measure of the circulation of money (how many times money changes hands). As you can imagine, an extra £125m in consumer’s hands will allow a proportion to circulate several times in a month thus having a far greater impact.

Important to know a simple equation P=MV or Nominal GDP=Money Supply x Velocity

Simple Terms

During a recession Velocity normally falls hence central banks try and inflate money supply to maintain GDP. Money supply has continued to fall despite B of E intervention (QE etc). The bounce in GDP earlier this year has been put down to a rise in velocity following many govt sponsored stimuli.

Velocity has risen sharply due in part to financial innovation by banks: including securitisations and CDO’s (Mauldin March 2010: The Velocity of Money). As the banks pull in their horns on exotic products Velocity will fall. It is still above trend and way above lows of last 100 years.

Money Supply will come under significant downward pressure should banks be forced to re-capitalise due to Euro debt problems

If GDP is a direct result of Money and its Velocity, all looks very grim. I could imagine another 5% drop in UK GDP unless Sterling drops dramatically.

With personal and public debt still at near record and growing (public) levels, inflation is the only way out. Will that happen, who knows….

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Saturday, November 26th, 2011 Consumer Debt, GBP, Money Supply, Predictions, UK 2 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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