Archive for December, 2011

Broken China..Minging!

`In China, every province is a Greece`

A couple of small European newspapers are highlighting the story of a speech given in October by Larry Lang chair professor of Finance at the Chinese University of Hong Kong. Some points made were:

  • inflation was 16% not the official 6.2% back then.
  • It has $5.6 tr of debt
  • 9% GDP growth is fabricated with 70% of GDP infrastructure
  • In China, every province is a Greece

This may be an old story to you,
if so, sorry.



Monday, December 19th, 2011 GDP, Uncategorized No Comments

A butterfly flaps its wing…


Most people talk of Copper being the barometer of choice when testing the global economy. I agree it has a significant importance as was shown following the great depression. It moved ahead sharply and helped indicate great demand. Sadly the bulk of that demand originated in German armaments factories, hey ho.

Difficult to follow but nevertheless of interest is Jute (Burlap/Hessian). Being the second most important agri commodity behind cotton, with 75% of the total output used in packaging, stories of supply/demand can be of great interest.

The Indian Jute Products Importers Ass has decided to stop the import of Bangladeshi jute yarn from tomorrow 20/12/11. This ban is a direct result of an import tariff imposed by India in October. It’s a complicated story but basically the issue of low prices was raised in the Indian parliament earlier this month highlighting the concern for local producers due to low pricing.

Where packaging material goes, so do shipping/transport and manufacturing. Global consumption is the prime factor (x crop failure) behind pricing. Raw jute was $700 per ton last year and is around $450 now.

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Monday, December 19th, 2011 Uncategorized No Comments

Will the next ITALY step forward…Darn those frogs!

UK Government debt may become no better than Italy.

How strange that from the jaws of desperation and defeat some of the best decisions are made. It was just such a defeat suffered by the Royal Navy at the hands of the French in 1690, that lead to the formation of The Bank of England.

Who would of thought that the Battle of Beachy Head would lead to domination of the worlds seas for the next 300 years.

The Bank of England was formed to allow the government to borrow money. Half of the proceeds went straight into ship building. The debt of both Government and the private sector went through peaks and trough caused by  boom bust and wars and up until 1997 was perfectly manageable. However, over the next decade both forms of debt tripled.  This remarkable accretion of debt was not purely a UK phenomenon. Some argue that the UK debt to GDP ratio has been higher in the past and will not lead to a catastrophe this time. Sadly things are totally different this time round. We are no longer a global powerhouse of manufacturing and production with a large trade surplus. Our Education system is no longer the envy of the world and the most dominant empire in history is no longer.

The true picture of the governments liabilities is unknown. Losses on bank holdings, crazy PFI costs, pension time-bomb and a rapidly aging population to name but a few.

2012 will see consumption decline year on year in value terms (retail sales are virtually unchanged in volume terms over the past 3 years) reducing the VAT take. Already vacant high streets will fail at an alarming rate. The change to the payment of rates on vacant properties in the last budget will eventually drive the value of commercial properties much lower. 2012 sees massive debt rollovers by industrial property companies who will struggle to meet the old banking covenants let alone the more stringent demands the banks are likely to make.

Corporation tax in general will come under pressure with the added problem of the Banking sector not repeating the many billions paid during the good times.

Income tax receipts will struggle as salaries come under further pressure coupled with bonuses (in the city alone) likely to be billions down on last year. Unemployment will continue to rise with all the associated costs to the social security budget.

The debt of the private sector was supported by the meteoric rise in property prices and is still the supporting factor. Arguments that immigration (supply/demand) and low interest rates (affordability) will help support prices is hard to accept if the economy deteriorates still further. Buy to let activity has been a supportive factor in a low turnover environment.
However, rent arrears are soaring and the seemingly attractive yields will take a back seat when prices decline 20%.

The government will adopt a more relaxed attitude towards Retail and general commercial property being converted into residential supply.

As banks collapse their balance sheets and divest of the Investment banking activities which got them into this mess, money supply will shrink at the very time the Beach Head mob will be pumping ever more on the QE lever to inflate.

Velocity (see earlier article) will come under pressure causing a double whammy to the economy.

What, I hear you say of Sterling.
It has enjoyed its little holiday in the glow of European fires. The truth about our fiscal predicament will put it under renewed pressure. Whilst it is at the low of its trading range a break of £/$ 1.5350 will lead to a test of the 2000 and 2008 lows of £/$ 1.40. Holding inflation above earnings much longer than we would like.

2012 Will be the UK`s Beachy Head moment. The dark days ahead will lead to a cancelling of our EU membership. Out of the gloom will be a realisation that our social experiment with Liberalism has failed miserably. Yes, it is going to be very difficult and will bring a lot of pain. Hopefully a new breed of Great Britain’s will be thrust on the stage to lead us out of the
carnage which lies ahead.


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Sunday, December 18th, 2011 Debt, GBP, Money Supply, National Debt, UK 2 Comments

Economageddon..The end is near..Thank goodness!

In the words of the late prime minister Harold Macmillan

 `A successful economy must be based on the production of wealth and marketable goods, We must transfer away from an overreliance on services, back to production. We cannot go on borrowing for ever`

During a televised interview at the time. He held up ten fingers stating that at the time of great prosperity in Britain, 7 out of these ten would be concentrating on exactly that (production) and the other 3 would be involved in support roles (National and Local govt) and services. He then stated that currently (1976) 3 people were involved in productive activities and the other 7 were in support roles. Hence, the government finances and social divide were in a mess.

Why is this important? The world is now closing in on the biggest economic catastrophe in history.

Greece will leave the Euro very soon.
Its finances are in exactly the same shape as explained by Macmillan. Prior to the financial collapse 70% of the working population were in the service sector (yes this includes tourism but the large inefficient  public sector is the problem).

The increases in taxation over the last year have made no impact on the annual debt increase. The economy is contracting at a 5-6% rate and has contracted for 4 years. Debt has increased in 2011 by €20.5bn vs €19.5bn in 2010. December will see a further cut in salaries (25%) this time for workers in 11 public sector companies (Electric,Gas,Water,Mining, Port Authorities, Postal and finance).
January 2012
will be the final straw as income tax is being increased and a property tax imposed collected via utility bills and Electricity bills are due to rise by 15%…Merry xmas… 2011 saw a ban on property repossession which is storing up further problems for the banking system. Consumption will implode further along with taxation. The one bright spot is the Black economy. Already estimated to be twice the size of Germany and the UK. This will clearly grow if Greece attempts to stay in the Euro. Thus hampering any further debt collection. Germany is reluctant to allow its default and departure as the repercussions will be vast not least of course in the German banks who have underwritten a large proportion of the Greek Credit Default Swaps (CDS or Debt Insurance to the lay man). Yesterday the IMF representative in Greece claimed further tax increase would be pointless and implied the
further spending cuts would be the best move. The implications on Greek departure are too numerous and best left for another day. However, an interesting thought. If you go and borrow E1million from a Greek bank in Athens, transfer the money to a London bank, would the debt de-value at the same rate as a deposit and become Drachma?


Spain is lying all the way to the ECB. Given that the Spanish banks are being kept afloat by the ECB it is important to feel that the Government and institutions are being honest about the problems they face. Think again, they are Mediterranean. How can you tell if they are lying? Simple, if their lips are moving they are lying! Local authorities have been delaying
paying wages all year eg the beach life guards and fireman in Benidorm (approx €2m) who were not paid in the summer, protested and were finally appeased when promised payment when the winter water rates were paid. Hospitals have a record of not paying Pharma suppliers, some owing several years back payment. Other are cutting off the lights on main roads, selling off fleet vehicles and cutting salaries sharply. A report out today states local authorities have 900,000 too many employees (remember Macmillan!). Although official government
debt is only 50% of that of Greece per capita, the devolved regions cannot be trusted to give a true level of debt. With so many bills going unpaid the debt must be significantly higher. Energy prices are going up 15% in January and several car manufacturers will be mothballing production during the first quarter. Unemployment will go higher from here. During the boom times Spain was building around 800,000 annually. It was importing so much that it was the third biggest driver of Global growth. Now, with 1.5million ish homes for sale
and only 25,000 per month selling rate, it could be prices have another 20% to fall in 2012. This will help to bring the fall in line with Ireland. The Partido Popular has confirmed it will scrap the E210 monthly housing allowance paid to young householders. As a side issue, the EU encouraged and financed some crazy investments in this country not least unwanted airports and approx E500m to refurbish the bullfighting facilities. As in Greece, here too the Black economy is higher than the norm and will only grow as further taxes are imposed. Both
Spain and Ireland are seeing modest but important population declines due to poor employment prospects. This makes the debt turn around all the more difficult.


Japan. The Elephant in the room will soon roar! When
we talk about debt, Japan is the daddy of them all. Nearly Y1 Quadrillion or 200% of GDP. How can they sleep at night! It leaves my ghast well and truly flabbered when I hear people saying that all is ok as they have such a large savings pile via the public’s pension pot. The total population size has stagnated around 127m and is widely forecast to start a gradual downward path. However, the population is only holding steady due to the extended longevity of life. Over 65`s went from 7% in 1970 to 14% in 1994 then 20% in 2006. It took
Sweden 85 years and France 115 years to go from 7% to 14%. This is a double bad whammy. Firstly the economy is not benefiting from growth in numbers but secondly and more importantly, it is ageing rapidly. 2012 sees the start of the peak retirement cycle lasting some 20 years. This is the last thing you need with a massive debt mountain. Politicians have been indecisive and lack public backing. Talk of raising the 5% consumption tax is a hot potato. Salary cuts are being perused by big business, government officials and public service in
general. Consumption is slowing and the strong currency is strangling output. The re-build package is to be funded by a disputed measures of tax increases and disposals of the large Tobacco and Postal stakes. Deflation will become an extreme problem in 2012 which in turn will add to downward pressure on tax revenues.



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Sunday, December 18th, 2011 Debt, Euro, Japan, National Debt, UK, Uncategorized, Yen 5 Comments
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