Archive for January, 2013

Kurzarbeit achieved where Blitzkrieg failed!

All Bow to the Conquering Germans.

I wrote in June last year `The Elephant in the Room` which called for GERPEL (Germany to be Expelled). Of course this was just my silly acronym to counter GREXIT (Greek Exit). Why am I writing today? Germany has released its January employment data which shows unemployment has fallen to its lowest level in 20 years or since the Euro was formed. Now look at the rest of Europe. French unemployment is at a 15 year high and going higher rapidly. Southern Europe all time highs. Holland is at an all time high. The official number of unemployed in the EU is around 19 million people with a whole generation of young without a job and little if any prospects of getting one. Except that is, for the youth of Germany where the unemployment rate is astonishingly low. Let me give you two reasons why I think this has happened. First, KURZARBEIT, a reference to a system whereby German companies can temporarily lay off, idle or part-time use, at the expense of the Government. During the 2008/9 financial crash, 1.4 million workers were kept employed on this temporary basis (costing the Government Eur 5.1bn in 2009 alone) allowing German companies to cut costs dramatically but retain a skilled labour force. Stupid countries like the UK have never done such a thing (Nationalisation does not count), instead relying on fair play and economics to play there role allowing companies to go bust. Hence we have lost most of our manufacturing capability over the last 50 years. Admittedly, unions and poor management have played there role too. Nevertheless, during the recent downturn, the UK pledged support for the economy by doing such crass things as Cash for Clunkers. As most of our cars were imported, who benefited most from that policy? Leave it with you. We pledged billions of pounds on green projects making the UK the biggest global player in wind turbines (55% of the Worlds Capacity see `City of London Rapes Pensioners` for details) who do you think supplied most of them? Yes, you guessed it! Our attempts to reflate the economy during the crisis cost us dear but did no real good. Germany on the other hand, benefited from the collapse of the Euro. This helped keep there place at the top table of world exporters and subsequently lead to the re-employment of sheltered workers.

Now you would think that with this ultra low unemployment consumer activity would be growing dramatically. This would hopefully imply that Germany would be coming to the aid of its the struggling EU partners by importing vast quantities of goods. Wrong!!! German Retail Sales for December were also released today and they could not have been worse. Down 1.7% vs November, Down 4.7% vs December 2011 (although 2 less days) and 2012 was down 0.3% on 2011. Germany has no intention of helping the industrial capabilities of the rest of Europe, only itself! Its recent decision to exempt 1550 large industrial companies from the Green energy surcharge other countries are imposing, especially the UK, and put all the cost onto the public and small domestic economy focus companies, gives you one idea how they strengthen their export focused industry and restrain disposable incomes.

Japan has now decided that it wants to export more to the rest of the world whilst not encouraging consumption. In fact the finances are in such a mess that consumption is the last thing that is going to happen in Japan. The budget proposals which will raise spending via public works and corporate tax brakes, lowers welfare spending and raises taxes for the rich in both income and inheritance. With little oil reserves of its own, the near 20% fall in the Yen (since November) will have a huge impact on consumer activity. With Zero wage growth and a budget designed to raise the tax take, lets face it they need to, disposable incomes are going to be squeezed. Of course, we should not forget, Japan has its own cliff. The Consumer Cliff. From 2014 consumer taxes are due to rise by 100% (in two stages). The good news just keeps on coming. The World is in just too much debt and all the Central Bank hype in the world cannot change that. The risk is just shifting from the people via Government Debt to the people via Central Bank balance sheets.

For the next blog I am thinking of Sweden which I believe is extremely exposed to global industrial competition in its very narrowly focused exports. I started thinking more cautiously about this country, which incidentally I love with a passion, back in September Swedish Macinery. Even earlier and since proved totally correct `Hazard Warning Lights for Volvo, Scania and Man`. I will be arguing for Volvo, (who did, as I said they would, a deal in China last week to cement there global leadership) to spin off the Industrial/construction machinery division and merge it with Atlas Copco. Or just buy Atlas Copco and spin the division into it. More later

 

 

 

 

 

Thursday, January 31st, 2013 Euro, Predictions, Yen 2 Comments

GDP Decline vs Employment Growth

Journalist Conundrum.

I am at a loss as to what all the Financial Journalists do all day. I have read so many articles recently perplexing over the disconnect between employment growth and GDP weakness. Perhaps if they looked at the data they could start to understand what is going on. Admittedly, I am applying my own reasoning to come up with my conclusion but it is still better than just scratching your head as these hacks are doing. Almost to a man they are all saying that GDP must be understated. I of course have my own idea.

Between September 2012 and September 2011 542,000 employees have joined the nations payroll which now totals 31.946m. As you can see from the chart below Income Tax paid to the revenue over the last year has barely changed. Adjusted for wage growth, it has not changed since 2010. Interestingly despite record numbers in work and total hours close to record, national output has barely changed since 2010.

 

I believe two things are at play. One, many of those joining employment from the unemployed register, were already working. Secondly, and as I first warned of in February 2012, the quality of jobs being created is very poor. As you can see form the comparison from September last year, employment has been primarily in the service sector. Wholesale/Retail jobs have blossomed but Coffee shops an economy do not make. I am aware that many large retailers are favouring employing workers on 20 hour weeks. This gives the employee far less rights and in most cases keeps the employees salary below the tax threshold. So, two poor quality jobs (c £7.50 per hour) are created for every position, neither of them pay tax but will still be needing social support. The rise in transport/storage probably relates to the growth in Internet shopping.

The primary reason for me being very negative about the UK Budget Deficit and my three month warning to George Osborne (blog 23 December 2012) is clearly identified in the data box at the foot of the page. Since 1997 there has been a structural change to the UK economy. We have an additional 1.7m Public Servants (Health 1.1m Education 0.65m) but Manufacturing has 1.674m less employees. The gain in Admin/Support worries me that Red tape has created many of these posts. All in all, the Blair/Brown years were really a massive shift in the dynamism of the UK economy. Public Servants now account for 26% of the workforce as opposed to 17% in 1997. The reality is that this figure when compared to points in history is much higher. Over the last 20 years Central and Local Government have been outsourcing many tasks. The growth in Admin/Support and Professional advisers is no doubt influenced by this process. With that in mind, I guess the Public Sector activities account for over 30% of the economy. Go back even further prior to the Privatisation of Utilities, Telecoms etc and the the comparisons are even worse. If you throw in all those working on Government Infrastructure projects, it is possible to say that over half the working population are paid from the Public purse. Whilst the Property/Debt boom were in full swing, tax revenues were growing rapidly. Now that bubble has burst, the only way this Public Sector involvement is achieved, given our low level of real private sector output, is to borrow more money. This cannot go on forever. Spending has to be cut drastically.

George Osborne pledged to get the economy back on a more balanced footing. Sadly, he has wasted the first two (and most important) years in office. Last year Public Servants only declined by 0.61% (51,000). Meanwhile, very highly paid jobs in the Finance sector (which helped finance this crazy shift in employment) have been dropping sharply for 12 months. With bonus payments being slashed or deferred via a greater proportion of share payout, the January tax hump may be very disappointing.The Budget Deficit has grown in fiscal 2012/13 (to date) and sadly is getting no help from the employment figures.

The UK Office for National Statistics breaks down employment into two categories. Services and Productive.  It is then broken down into 19 sub sections which includes three for public services which I have combined. To try and get a handle on why Income Tax paid to the Treasury is not keeping pace with employment and earnings growth we have to look at the data in detail. The latest data available is to September 2012. Below is the change in percentage terms and actual numbers since September 2011

Productive (6 sub sections  As a group, this category is down 10,000 employees. …Agriculture/Fisheries -9.21% -39.000. Mining/Quarrying +19.67% +12,000.  Manufacturing +2.98% +75,000. Electric/Gas Supply -5.75%  -8,000. Water/Sewerage +7.98% +15,000. Construction -3.21% -66,000.

Services (11 sub sections)..As a group, this category is up 532,000 employees Wholesale/Retail +1.40% +67,000. Transport/Storage +4.30% +63,000. Hotels/Catering +6.48% +130,000. Information/Comms +4.90% +60,000. Finance/Insurance +0.27% +3,000. Real Estate +7.71% +32,000.  Prof/Tech/Scientific +5.38% +131,000. Admin/Support Services +5.92 +145,000. Arts/ Entertainment n/c. Other Service -4.17% -38,000. Public Services -0.61% -51,000.

Employment in the biggest sectors.

 

 

 

 

 

 

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Tuesday, January 29th, 2013 Debt, GBP, GDP, National Debt, Predictions, UK No Comments

Sterling Looks over its own Cliff

Sterling/ Dollar.

Regular readers will know that I believe Sterling will follow the fortunes of the UK`s financial position which is down. In my blog `Be prepared for a Wedgefest` I highlighted the charts of Sterling and Yen. Following the recent December budget deficit and today’s GDP data, the bottom trend line, which is in its fifth year of obedience, is getting awfully close. A close below $1.57 will see it on its way down. I have said before that I can see it testing its all time low of $1.08 at some point in the distant future. In the mean time, lets all focus on the inflationary affect any downward move has. Today newspapers are warning of a 4p per litre rise in fuel costs. With salaries entering a fourth year of below inflation increase, consumer activity will be challenged further see UK Retail Revolution as the latest blog (of many) on the subject. If Sterling does not break down just yet, the final nail will come following the publication of the January budget data in February see The Mayans might be Wrong but for George Osborne… Time is Up

The FTSE which is over populated with global Dollar earning companies will not reflect the severity of the situation. Not yet at least.

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Friday, January 25th, 2013 GBP, Predictions, UK No Comments

Global Economy…The Canary in the Coalmine

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

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

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

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

 

 

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

UK Debt

I was going to study  yesterdays December Public Finance data before writing but having read an article by Alister Heath (Telegraph) I wanted to share. He highlights a recent OECD report on UK borrowing. As I have been saying since late 2011, George Osborne has failed to stem spending. In my most recent UK blog (23/12/12) I gave the UK 3 months before the markets see through his cloak of invisibility. I have forecast in the past that Sterling will test its all time low vs the Dollar of $1.08. Gilt Yield will rise much further than already seen in 2013. You can read the Telegraph article online.

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Wednesday, January 23rd, 2013 Consumer Debt, Debt, GBP, National Debt, UK, USD 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

Clash of the Titans…Land Rover Defeneder vs Range Rover Sport

Yesterday, I was going to sit in the warm and write the next blog…Unluckily for me a quick trip down the road saw me off to the local hospital instead. My Land Rover Defender was hit by a snarling Range Rover Sport. Of course, the Defender is more likely to perform in these conditions as owners are generally happy to put up with the additional noise of all terrain tyres. The Range Rover on the other hand, as is standard, was fitted with the school run specials. So, you spend twice the money on a 4 x 4 but put on the equivalent to racing slicks. The Range Rover came round the corner only to slide onto my side of the road and hit me head on.

One negative for the Defender is the lack of an airbag. Not helpful with a head on. However,`I love my BF Goodrich Mud Terrain tyres` plus the Defender is constant four wheel drive.

Normal service will be resumed and the `China is Lying` blog is on its way.

click to enlarge

My Land Rover Defender vs Range Rover Sport

 

 

Monday, January 21st, 2013 Predictions 1 Comment

UK Retail Revoloution

UK The clock is ticking!

In my blog of 23rd December I gave George Osborne 3 moths before the proverbial hits the fan. Today’s release of the December Retail Sales data gives me comfort that my prediction is on track. I have broken down the various components of retail activity giving the year on year growth /decline and in some case, commentary. I have been firmly of the opinion for a long time that conversion (into residential) of the wasteland that is vacant retail space will be the catalyst for a much weaker pricing of the residential property market. The process of conversion has taken hold in Germany but as yet is only talked about on the fringes of UK politics. To give you an idea of the glut in UK retail space,  a recent study highlighted that the UK has 0.36 sq. mtrs. of (retail) floor space per head of population vs 0.21 in Italy and 0.14 in West Germany. Of course, the UK has (had) a more aggressive consumer culture which, as I have talked about in previous blogs, was as a result of the excessive growth in (privately owned) property prices which lead to an approx. 20% uplift in disposable income over 15 years prior to 2008. However, having recently surveyed my local high street I am beginning to think another potential outcome may be possible. The fifty or so outlets are all owned by our local London council. The vacancy rate has increased by another six outlets over the last six months. This puts the vacancy rate at around 20%. These six most recent closures resulted in a loss of income (for the Council) of around £150,000 per annum. I guess this picture is being played out up and down the country. Add this revenue shortfall to the governments cut in payments (to councils) from the central tax pool and one of the biggest employers in the country will have a strong negative affect on 2013 GDP.

So what is the revolution? As we are all aware, the large out of town retail parks have been the catalyst for the high street downturn. However, it is the decline in retail volume growth see The Mayans might be wrong but for George Osborne..time is up and the Internet revolution that has been the executioner. Given that no conversion to residential is forthcoming, we are getting close to the point where the level of vacancies will trigger a significant downward re-rating of high street rents. This adjustment could be in the magnitude of 25-35% for busier environments and 50-60% for the all too familiar ghost areas. This revolution will deal a big blow to the large supermarkets and owners of shopping malls. As you will see below, fuel consumption is falling so any regeneration of the high street (within walking distance) will be greeted with open arms.

December Retail Sales Data Year on year (+0.3) volume grew at the weakest since 1998 excluding the horrendous winter storm ravaged Dec 2010. Over the last six years, volume has grown 4% which given the huge immigration influx, just matches population growth. The figures below are December year on year comparisons for some of the interesting sectors.

Tobacco,Alcohol and other beverages  -37.2% (The volume has fallen every year this millennium and is down 60% in ten years. Supermarkets have taken the trade!)…Floor Coverings + 25% (I presumed it was flooding that helped and indeed in this historically wet year 2012 as a total (+22.3%) reverses the 50% decline in volume over the previous 4 years…Mail Order +13.8% (Credit!)…Textiles (x clothing) -11.6%Cosmetics +9.5% (Clearly just a seasonal favourite as 2012 as a whole is only + 2.3%)…Music, Videos recordings and equipment -7.3% (HMV AND Blockbuster)… Books, Periodicals and Newspapers – 7.3%Flowers, Plants, Seeds, Ferts and pet food +7% ( Strange one, probably warm weather and seasonal) …Furniture +6% (Possibly flooding related as only + 2.7% in 2012 as a whole)…Computers and Telco equip +4%Watches/Jewelry -1.5% (Volume fell every single month (vs 2011) in 2012 and overall were down 7.8%. Our local jeweler is taking in more gold for melting down than he is selling new or second hand. I have been a bear of Gold all year and believe it will touch $1000 long before $2000)…DIY -0.5% (Seeing xmas more seasonal activity at the likes of B &Q but 2012 overall was down 7.1% and is down 26% over 5 years (property market). With the revolution, it may be that small hardware shops with knowledgeable craftsman will make a comeback)

In 2012 the 500 biggest and busiest retail locations saw 2000 (net) outlets fall vacant. A recent survey puts that at 4000 for 2013. Remember these are the busy areas where volume is polarising. Think what will happen in the vast majority of smaller locations. VIVA LA REVOLUTION!

Next blog…CHINA IS LYING!  is on hold awaiting the release of some December data which I believe will confirm my view. It relates to the recent December trade figures.

ps Happy New Year!

 

 

 

 

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Friday, January 18th, 2013 China, Consumer Debt, Debt, GBP, GDP, National Debt, Predictions, UK 1 Comment
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