Archive for February, 2014

Nothing Sucks Like An Electrolux!

This blog is by no way a swipe at Electrolux or the wonderful people of Poland and Croatia. I feel the story highlights some of my favourite themes of late which are global demand and the EU.

Late last month, Lux dropped a bombshell on the 5000 employees it has in Italy. The company has insisted that wage costs must come down significantly. The benchmark they set was the level of pay in Poland. The company claim that the wage cut would be in the region of 15% over the next three years. Of course, they are being economical with the reality (as pointed out by the unions) and if you factor in a reduction of shift hours (plus some fringe benefits) the monthly take home pay could fall by 40%. This move by Lux is nothing new and quite frankly quite understandable in this current economic climate. In 2006 they closed a German plant and in 2012 announced a French plant closure. The biggest shock came last year when they announced the closure of their Australian facility in Orange NSW. Nearly 5% of the town is employed one way or another and has been the largest employer since 1946. The local council did offer to wave taxes for 10 years but when you consider the wage differential (80% cheaper) in Thailand where production is shifting they were never going to reverse the decision.

The chances are that the Italian closure will go ahead despite serious political pressure and promises of tax brakes. So here we are. Poland gets into the European Union. It then gets significant aid of which it spends around $80 billion (last 6 years) upgrading its transport infrastructure. This helps bring inward investment and why not. Wages in Poland are around 1/3 of Germany and even less compared to Italy where the tax system adds an extra 10% to employers contributions verses the EU average.

The EU

The whole idea of a system where new countries are welcome into a trading bloc, given massive aid (to improve the potential living standards of its inhabitants) is a wonderful concept. Much like Communism, the EU is a complete folly. The unemployment rate in Italy is currently 12.7% (with youth unemployment at 40%) the highest rate since modern record started 40 years ago. The debt to GDP is around 132% which is the highest since 1925. GDP is likely to fall for the third year and drop to 2001 levels. But lets all rejoice, Poland has been voted (in a recent Bloomberg poll) the best place to do business amongst its Eastern European and Central Asian partners. Why has Italy fallen so drastically? Because the EU system is not fit for purpose. How can countries which share a common currency allow wage costs diverge so badly. Since 2000 Italian labour costs grew by 36% whilst Germany grew by 11%. If Italy were a small player joining, maybe that would be understandable. However, Italy accounts for around 16% of the EU pie and is a G7 nation. At least it was, at this rate it might just get into the G20 in a few years.

The misery now being inflicted on Italy is no different to that on all the Mediterranean members where unemployment is causing complete despair. But lets all rejoice, living standards are rising fast in Poland. Given further expansion of the EU in recent years, this process of driving down wages for blue collar workers can only continue. It is not only shifting manufacturing that is causing the problem. Migration, as seen by the recent uproar over mobility given to Bulgarians and Romanians, is also driving wage growth down. But lets rejoice, Poles can now afford to holiday in the sun. In my opinion, the only way to save the EU (AND I WOULD NOT) is Gerpell! …Germany to be expelled from the Euro. I first hinted at this in The Elephant in the Room (June 2012) and again in Kurzarbeit achieved where Blitzkrieg Failed (January 2013)…basically Germany is hiding in a weak economic zone to conquer the export world with an unfair advantage.

This argument can only drive further the wedge of inequality. Those that own companies or generally in the elite, can drive down the costs of doing business helping to raise or maintain profitability. The more people (admitted) from greater poverty levels than the core, the worse it becomes. So, all the people in the EU paying taxes to Brussels ( indirect via state tax) are watching the MEPs give ever larger monies to people who will ultimately keep them in poverty. An example of this is the newest member Croatia. Unemployment is over 20% and the economy has contracted for 5 years. The EU has just announced that the youth unemployment scheme will give Croatia EUR128 million. The result of all this re-distribution of manufacturing cost is the potential to re-distribute  (or devalue society) in the wealthier areas. This bodes very badly for Italian infrastruc/Housing values if they stay in the Euro.

Demand

My recent blog hinted that demand globally could be the driving force behind further unrest. This move by Electrolux is just another example of how I believe the end game will play out. Whilst relocating production to cheaper countries is nothing new, after all China was born on the idea, the previous 50 years have seen the developed world substitute manufacturing job losses with service or more commonly Government jobs. For example, in the UK, 1.5 million jobs lost in the last twenty years were offset by state employment rising by over a million. All this was fine whilst debt was not a dirty word and austerity not even mentioned in the corridors of power. All that has changed. When Australian jobs paying around $25 (hourly) are substituted with Thai at $3 the net loss of demand is palpable.

 

 

 

 

 

Monday, February 10th, 2014 Predictions 1 Comment

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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