Commercial Property

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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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

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

The Mayans might be wrong but for George Osborne..Time is up!

The UK has got 3 months. Then time is up!

Back in December last year I started a series of UK blogs explaining why George Osborne will be in a worse financial position by now than he and the overpaid city analysts expected. Yes, sadly to say all the factors I alluded to are coming home to roost. Going forward they are going to get a lot worse, very rapidly. Following data released by Revenue and Customs on Thursday, it is clear that more is less when it comes to employment in this current environment. Tax paid by the highest earners is declining in both total and as a percentage of revenue. With last weeks Government budget data for November, it is clear the deterioration in finances is becoming apparent to all those who have been backing Mr Osborne`s policy of wishy washy austerity.

In the fiscal year to date Government receipts are £339.0bn down 0.1% on November 2011 (£339.3bn) and expenditure is £419bn up 2.7% (£408bn Nov 2011). This growth in expenditure would have been significantly higher if interest rates for Gilts were not so low. The interest bill this year is likely to be the same (£44bn) as in 2010/2011. The difference being, total outstanding Gilts then was £918bn where as it is now £1.113 Trillion. Whilst this is great for the government, it does show that spending excluding interest is way above expectations. Of course, this is a back door tax on pensioners who have been crucified by lower annuity rates as a result of lower bond yields. God forbid should/when interest rates ever go up again.

Chart One shows Government Income

whilst chart two shows expenditure.

More importantly, the third chart shows expenditure excluding interest.

The significance of the obvious but subtle difference between the second and third chart is lower interest spending this year (£31.6bn year to date vs £33.7bn) is masking even greater structural spending which will be all the more difficult to reverse when interest rates go up. Where are tax revenues heading? Well, as I have said on many occasions, total income tax take is not growing despite a higher level of employment. The low quality job growth is reducing higher tax, no income support families, as a percentage of the workforce. This, coupled with higher taxation, both direct and in-direct, have had a downward affect on VAT receipts. Of course, annual salary increases lower than inflation impact still further. Consumption in the UK and wider Europe will fall this year as further tax hikes bite. see previous blogs on Shipping and Trucks…remember 90% all goods have been or have components, that have been, shipped.

The chart below highlights the plight of the consumer. It shows the Total Volume Growth of UK Retail Sales this millennium.

The lack of consumption in volume terms highlights why high street retailers are disappearing. The growing market share of Internet sales explains how the volume being sold on the high street is being funneled into large retailers who can afford rents in high footfall shopping centers. All this will eventually confirm my view that law changes will be put in place to allow vacant Retail/ Industrial/Office space to be converted into residential, thus being the supply element which will lower house prices 20%.

Be aware that the January 2013 Government Borrowing data (released 3rd week in Feb) is likely to be shocking. This is traditionally the biggest revenue month of the year. Advance and Final Income tax Payments swell the months (Income Tax) take to around £25bn with Corporation and Petroleum throwing in another £9bn. It is my belief that the shortfall will be in the region of ten percent. This will put the final nail in the coffin of wishy washy austerity and put the UK in direct conflict with the markets which have been very patient. I believe Sterling will bear the brunt.

see RIP George Osborne for my way out……..plus many previous blogs under the UK section of the menu highlighting my thoughts which have been consistent since the blog started.

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Sunday, December 23rd, 2012 Consumer Debt, GDP, National Debt, Predictions, Shipping, UK 1 Comment

RIP George Osborne

The UK Chancellor has failed to implement austerity deep enough to make a difference to the overall debt momentum and now risks a total collapse in confidence. He has squandered the Countries and the Conservatives future.

When this government came to power in 2010 they had a chance of changing the UK debt profile whilst all the blame would have fallen on the out going administration. Sadly that chance was missed so I believe the next two years will be very painful to watch as George Osborne pays the price of trying to keep his coalition partners happy whilst believing in his own rosy economic outlook. Recently, George made much of his backing for gay marriage, a subject in which he has shown very little interest in the past. Is he trying to deflect future economic commentary?

The UK budget deficit is growing, not contracting, as is claimed. Two one off gains (Post Office £28bn BofE £2.3bn) were given to the government in April of this year totalling £30.3bn. These are accounting entries and should not cloud the overall problem so I wont let it. The real deficit in this fiscal is £5bn higher than 2011/12 putting it in line with 2010/11. If my concerns below are correct, then the deficit, net of the chancellors windfalls from the post office and the proposed BofE QE payment, could be as high as the 2009/10 deficit.

Lets look at the government receipts year to date (April-Sept) of £255.5bn. These are up £2bn on last year equivalent period. Within that gain is an increase of £2bn in VAT and an increase of £2bn in Nat. Ins. Contributions (NIC). However, taxes on Income and Wealth were down £2.4bn. Breaking down the Income and Wealth, Income tax is down £0.6bn in the six month period but more importantly £2.4bn in 2012 thus far versus the 2011 period. Many economists have been confused at the positive unemployment data whilst GDP is so weak. As I stated in several blogs on the UK earlier this year (See UK blogs) employment creation is of poor quality whilst job losses are of many high earners. This is clearly borne out in the NIC receipts vs Income tax receipts. This tells me that disposable incomes are falling much faster than is currently implied by inflation rate (c 3%) minus  wage growth (c 2%). The only way consumption is holding on to current levels (apart from lower mortgage rates) is the creative ways consumers are raising money. Equity Release, Pawn Brokers, Jewelry Sales, Payday Loans etc. With net Income falling and the government needing to raise more taxes, this bodes very badly for the high street and commercial property prices, as I have mentioned before. The biggest hit to the tax take will come in the January harvest which is the biggest single month for tax payment. This year will be a disaster. High income earners in the city have shrunk in number with a majority of those left seeing a further 20-40% reduction in total compensation. I expect this will contribute to a reduction in the tax take by £3-4bn in January alone. Windfall taxes (from Banking) experienced by the outgoing Labour government may never be repeated. Consumption will be focused into a shrinking band of strong retailers with the pound shops also seeing positive growth.

Lets look at the government expenditure year to date (Apr-Sept) of £313bn. These are up £6.5bn on last year equivalent period. A couple of items stick out. An increase of £5bn in benefit payments hardly indicates employment is strong. It just makes me believe even more that the jobs being created are little better than minimum wage hence still in the social benefit net but not earning sufficient to generate much tax. Interest payments on the accumulated debt are actually lower than last year which indicates just how much QE is helping the government. This debt servicing benefit comes at a price. The elderly who rely on savings or annuity rates to generate an income are blown away. So I class QE as just another hidden tax. Of course, if Sterling collapses as I expect, interest rates may well rise pushing the debt servicing bill much higher.

One million interest only mortgages expire by 2020 which will put a burden on many who have no credible repayment plan. Changes to the Income Drawing Pensions of 400,000 pensioners will greatly reduce their disposable income over the next year or so as 10,000 a month face a re-calculation of payouts. Tax increases both planned and proposed will drain the consumption potential of the populous still further. Can you honestly think that toying with austerity is going to work. The option of spending more to reflate as proposed by the stupid Mr Balls, will not work either. As I have explained in recent blogs, spending on infrastructure, benefits mainly the overseas manufacturers of machinery and immigrant workers who will work for far less than the indigenous population can afford to take.

The only way forward is to put our hands up and say we fluffed it. The Gilts held by the BofE (approx 30% of debt) should be cancelled. As this would quite rightly horrify the markets, a few provisos need to be applied with the intention of shrinking government significantly. So much discretionary spending exists that radical changes be forced on government to cut all but essential spending. This will make the first few years of adjustment very painful. It is imperative to point out that during the massive build up of government debt, the only group of society to have made gains are the wealthy who have seen a massive increase in net worth. The poor have by and large remained poor. The middle class have just been saddled with an almighty level of debt. A degree of balance is required in the fortunes of the UK population.

1)  Government debt must never go above the new lower Debt to GDP ratio (following the 30% write off)

2) Budget deficits are never to be above 2% of GDP  whilst ensuring the above is adhered to (excluding War of course)

Several aggressive changes need to be made to fiscal policy. I have a complete array of ideas but below are just a few.

1) Public sector wages to be cut 30%. No bonuses ever to be paid in Public Sector.

2 )Tax free earnings threshold doubled to £16,000

3) A 90% Tax on earnings/compensation above 30x the average earnings in a company. This tax is waived if 51% of shareholders vote in favour of an employee receiving such a payout. Owners of private companies should have no problems being majority shareholders.

4) No benefits of any kind paid to families with £40,000 income (combined or otherwise)

5) Corporation tax cut to 12%.

I have many social ideas which I proposed in my manifesto for the 2010 General Election including school class sizes based upon the surrounding density of population (with a maximum of 15 for the densest inner city areas) in order to give teachers a chance. A unique Foreign Aid package based on the Ark Royal painted in the Union Jack staffed with x-service personnel and furnished with all the equipment to build schools, hospitals etc which of course would be supplied by UK companies. It would sail the world doing great things and loved wherever it goes with a fleet of UK built support ships. If you would like to see a full read of my policies on Government, Europe, Immigration, Health, Transport, Banking/Savings, Economy and Defence please contact me via this site and I will forward a copy.

 

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Tuesday, November 20th, 2012 Consumer Debt, Debt, GBP, National Debt, Predictions, UK 2 Comments

John `Bernanke` Wayne Rides to the Rescue. Too Late??

Hazard Warning Lights for Volvo, Scania and MAN (April 2012)… I wrote (back then and since) about my serious concern for the heavy truck industry at a time when the industry was talking of great things ahead in terms of sales. Just this week Paccar announced it expects third quarter (3Q) production to be 15-20% lower than the 2Q which is double the decline previously expected. August heavy truck sales in North America continued to indicate demand below total production. This leads me to a concern I raised back in March that at some point US inventory build would become a problem. The most recent data on Wholesale inventories confirms just that. The Inventory to Sales ratio is beginning to increase and of course with the fiscal cliff approaching this is not an ideal situation to be in. Overall industrial inventory data for last month is due soon. I believe this is becoming a global problem as consumption continues to struggle. Car dealers in China now have over 2 months of inventory on the forecourts vs half that last year. Hitachi Construction Machinery (Worlds 3rd biggest) announced that it will idle production at its China plant due to excessive inventory. This follows production cuts by  Caterpillar and Komatsu in the region. Everywhere you look in the heavy industry world, production is above demand. This is leading to the cancelling of upstream investment programmes as seen by the mining companies. Inventory of finished steel products at Chinese manufacturers is up to 12 days or +35% on 2011. This is on top of wholesale and final sale inventory outlets. The use of pre-registration cars to shift production is leading to a build up of nearly new cars in Europe too. With sales falling dramatically in the region as a whole, further production cuts will be forthcoming on top of Opel in Germany and the French manufacturers. The tonnage of ships being laid up is growing by the day and the Baltic Freight Index is now lower than the depths of 2008 and getting close to the all time low set in 1986.

In May I wrote Is Global Trade Growing? with the now familiar chart of trade flow via the Suez Canal. Below is an update which although on the face of it looks slightly more positive for Southbound (China) traffic, it is worth bearing in mind that total volume has fallen in the last quarter vs the corresponding year for the first time since late 2009.  The port of Shanghai handled 8% fewer Containers month on month in August which was down 7% year on year. Total cargo handled was down 15%. The southbound traffic data were influenced by a 100% uptick in fuel/energy products which masked a 50% month on month decline in the growth rate of containers, to only 2% (lowest growth rate since April)

 click on charts to expand

UK Commercial Property. I have been negative on this sector for the whole year. It was interesting to read the recent sector update by Savills highlighting the sector weakness in August. This is the forth month in a row of contracting activity and was the biggest monthly decline (-14.8%) since December 2011.

Japan. I am still short the Yen but my resolve was surely tested last night when it traded at 77.13 after the FED QE3 announcement. If it trades below 77.00 I am out and feeling considerably poorer and mighty stupid. I am still strongly of the opinion that it will suffer a fiscal cliff of its own. See my many previous blogs on the subject. The chart below gives the short term prospective but for a 40 year chart showing the Yen at 360 to the dollar in the 1970s, see my blog  January 25th  this year. I believe this could be the start of a 25% decline in the Yens fortune. Today the Finace Minister warned of headwinds for the economy and that the strong Yen was doing harm. You are not kidding!

Sterling. I still believe it is only a matter of time before the markets realise that the UK is a busted flush. Once the Olympic dust has settled, unemployment will rise once again putting yet more upward pressure on the budget deficit. The UK Government must realise this softly softly approach to deficit reduction will not work in an environment of global austerity. Urgent action is needed to cut government spending circa 30% and reduce the corporate tax and red tape burden. If the narrowing band, which has been in place since 2009, should break 1.64. I will have egg on my face. Should it break 1.54 on the downside, I will be on the right path.

 

 US Car Sales. I have been sceptical about the significant growth of sales which has been somewhat at odds with the lacklustre employment data. Having read a blog by James Quinn (senior Director of planning at a major University, he claims) some light has been shed on the matter. Sadly, his explanation is all rather familiar, sub-prime lending is now accountable for 45% of all car loans. As 77% of all new cars are financed it shows the quality of the customer. Loan duration is being extended ( beyond 5 years) and loan to value is rising reaching 110% on new cars and 127% on used. Not only that but 10% of all loans are categorized as `Deep Sub-Prime` eg a credit score requirement akin to that of Yogi Bear..OK BOO BOO faster than the average bear! Worryingly, consumer credit is back (net of the banking write offs) to an all time high. Has the FED really learnt no lessons. Pumping cheap money into banks who lend with no real concern. All this on top of the US Governments deficit which yesterday showed an $191bn August shortfall taking the 11 months of 2012 to $1.16 Trillion not far short of last year and around 7.2% of GDP. Some social spending was brought forward from next month so September should not be such a big surprise. Of course, when the government brings forward social spending it is just helping the retail data for that month to the detriment of the next. The cliff is getting nearer. Can you hear the waves yet?

 

 

 

 

 

 

 

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Consumption vs Transportation.

Where is the global economy going?

I refer to previous blogs which were negative on Truck Makers, Shipping and Commercial Property

Today’s release by Markit Economics on August Eurozone retail activity helps paint a picture of global activity. A statement from the research company sums up Europe ` The current ten months of declines in Eurozone sales (to August) is the second longest in the surveys history behind that of the 2008/9 crisis`. I urge you to think of the world as a whole and gauge where total demand is heading. Lets start with Europe, retail activity is falling for now but where is it heading? Well, it is not difficult to understand that the austerity measures having and due to be implemented, will drain demand still further. Sadly, inflation is not helping anyone. It is constantly just above the anemic wage growth leading to a contraction in disposable income. Interest rates are at rock bottom so no matter how they try, central bankers cant get money into consumers pockets. Banks are all but defunct with untold losses in real estate and shipping, to name but a few areas. Now the second biggest global economy, China. Who knows where consumption is heading but yesterdays article in the Telegraph of business collapse and bad debts really only starts to open the can of worms of bad debts. With real estate (and other asset) profits having driven a tsunami of consumer growth over the last ten years, it is difficult to see how they can repeat the massive boost to the world economy they achieved in 2009. With house price to wages (ratio) the highest in the world can they really afford to re-ignite that inflationary spiral. They will continue to ease monetary policy at a pace which suits them not the rest of the world as in 2009. Now the third biggest economy Japan. Having written several blogs on their impending doom, today’s weak retail sales data were no surprise to me and  I feel herald a consumption contraction which will last for many years. The 230% of debt to GDP the government carries will make it very difficult to stimulate growth. The shift in the workforce over the last ten years tells me thay have the western disease. Manufacturing jobs have declined by around 1,500,000 to the lowest percentage of the workforce since 1953 whilst their has been an explosion of around 2,000,000 people in social services and healthcare. This is not a recipe for long term growth as these new jobs carry a greater likely hood of lower earning potential. Now the big daddy, USA. Ask yourself a question `Do you trust politicians?`OK thats was a resounding answer. In which case the fiscal cliff is a real danger. With an annual budget deficit of over $1 Trillion for the whole of the  Obama presidency, it is little wonder that the economy has managed some growth. Of course it needed extra help from the Federal Reserve. All that has to stop and at the end of 2012 the Bush/Obama tax cuts are due to expire. Where do you think consumption will be when they finally bite the bullet?

So that’s the biggest economies of the world taken care of. I think we should look at the BRICs. I have written many blogs on the subject mainly due to my concerns (dating back to January) for Iron Ore. The dynamic growth of these countries was centred around the explosive growth in commodity prices and hence the unbelievable investment that followed. Just bear in mind, Iron Ore, started the millenium below $20 per tonne and reached $200 two years ago. I believe they have a chill wind of reality blowing there way which will see a dramatic reversal in inward investment resulting in lower consumption.

Can you imagine what it is like living with me? A bundle of fun for Mrs H!

ps The landscaping business is very poor so would love to hear from anyone who wants to employ a crazy bear with 28 years experience in the City.

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Thursday, August 30th, 2012 BRICs, China, Debt, GDP, Japan, Shipping, UK, US Economy No Comments

IRELAND…Never was a silk purse!

Happy 2012 and good riddance to 2011. That seems to be the consensus of most economic journalists. The consensus seems to be that yes things will get worse in the first half but light can clearly be seen and by the latter stages of this new year, all will be fine and dandy.

As you might have guessed I beg to differ. 2011 as for several years prior, saw a 10% increase in global public debt. Various estimates put it at around $54 trillion. The thing to remember is that this has grown from around $20 trillion in 2000. There can be only one response to that degree of debt build up, GROWTH. And by George did we get it in the bucket load. To highlight just what happened on a more macro scale I am highlighting a small country which benefited significantly and in turn helped drive the world economy even faster.

IRELAND (Rep. of) It could be in worse than Greece.

Widely regarded as an economic miracle back in 2007, it is still a miracle. A miracle that people in power both political and business could be so stupid. The story started so well and with very good economic management following a crazy spend too much and then tax too much period (1977-81 debt binge 1981-1986 tax binge). Following a currency devaluation (ERM terms) in 1986 (Mainly due to the weakness of Sterling, Ireland’s biggest trading partner)  tough spending restraint was implemented to bring down borrowing. A wage/tax agreement meant wage growth stabilized. All this was agreed whilst the UK boosted consumption with heavy tax cutting. The real growth in the economy did not appear however, until 1993. Following a stormy entry and subsequent exit of the ERM by Sterling, Ireland needed another devaluation in 1993. From then on its economic performance was on a meteoric path. The large sums being donated by the European Structural Fund equivalent to 3% of GDP were helping to vastly improve infrastructure. Unemployment went from 16% to 4% by 2000. As the decade progressed and the 1999 EMU launch looked more certain, overseas investment piled into the high interest rate countries, Ireland Spain etc. Given that real interest rates in Ireland averaged 7% prior to the EURO and minus 1% from 1999 to 2007 you can see why. Government spending doubled between 1995 and 2007. GDP grew by 10%+ between 1995 and 2000, averaging 6% 1993 to 2007. Perhaps the most important change was in migration. Long known for high emigration and population decline the economic miracle drove the population higher via immigration, both returning migrants and overseas workers.

All this was of course great news to the Irish Exchequer. Tax revenue soared helping to fuel the machine. Sadly, this is where one of the early mistakes was made. The huge rise in cyclical tax revenue, stamp duty rose 1300% from 1993 to 2007, was seen as structural and its abundance was used as an excuse to reduce real structural taxes eg Income related. Housing starts went from 30,000 in 1995 to 93,000 in 2006. House price inflation between 1996 and 2007 was 330%. Car sales from 64,000 in 93  to 186,000 2007.

Sadly that is all in the past. The last few years have been well documented. 2012 could actually be even worse. Fiscal measures for 2012 include a 2% VAT increase. Motor tax rise between 7 & 30%,  a one off 100 euro household tax, Toll road duty up by 10% on many routes. Bus fares up by approx 10%. Additionally many local authority charges are being raised like a 50-100% increase in burial fees (certain areas).

Given the over reliance on cyclical taxes in the past, the likelihood is that these tax changes will only drive revenues lower not higher. Housing starts are likely to be below 1995 for some time due to a glut of unsold properties. House prices have dropped 47% from peak. Car sales could well be lower in 2012. January is responsible for 25% of annual sales and Q1 50%. The second half (traditionally vey low volume) of 2011 saw a 40% decline over 2010. If January continues this trend, expectations could be for a figure close to 2009 when total sales fell below 1993. The various tax increases applicable to motoring coupled with a decline in the Euro (1/3 of sales from US/Asia) could well confirm the worse. Average car age is only just getting close to long term trend (8 1/2 yrs) having been driven lower (5 1/2) during the boom times. Consumption comparisons got a boost in December from last year due to better weather and discounting. This has not stopped further closures in the retail market.

All things being equal the long term trend toward net migration, which has returned, will continue. More importantly, if the EU carries out its plan to change corporation tax rates to point of sale not production, Ireland will once more return to an Agri based economy. Non Agri employment as a % of the workforce went up 50% during the boom.

Why does history keep repeating itself. Ireland has assumed all the debt of its banking industry which centres mostly on the housing bubble. Its debts are unsustainable and as 2012 brings weaker consumption coupled with higher unemployment, the reality will finally dawn…

Warren Buffett once said `Only when the tide goes out can you see who is swimming with no trunks on` …well, until global public debt starts to decline the tide will not go out. So many naked bathers are yet to be discovered. 2012 could well be the year to cover up the eyes of the young and innocent.

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Monday, January 2nd, 2012 Consumer Debt, Debt, Euro, GBP, GDP, National Debt 3 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
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