Demographics

Yen Has 10% Further To Fall.

OK…This could be the end of me…However, I feel it is worth the effort. Since I posted Nippon soon to Nip Off  and A Yen For Your Faults (Nov 2013) which recommended option trades to short the Yen, the currency has faltered. However, my first recommendation to sell the Yen was in Be Prepared For A Wedgefest  (Oct 2012) when it stood at $77.50…

Following the announcement of a significant increase in money printing (QE) by the Japanese authorities this week, I am now convinced more than ever that the Yen has further to fall. My best guess is for it to retrace to $123.5 which would of course really put the cat among the pigeons. The previous blogs went into detail of the debt burden but lets look at few stats to update. The Central Bank has now cut its growth forecast again, this time by 50% to 0.5%. The QE programme is now increased to Yen80 trillion or 16% of GDP where as the US never exceeded 5.5%. The asset mix being purchased has been altered. Purchases of local bonds will only make up 35% of the enlarged intervention vs 60%. Local equities will rise to 25% vs 12% whilst overseas assets are included at 25% equities and 15% bonds.

Whilst the government continues to spend wildly the consumer is still not convinced. Average household spending fell an annual 5.6% in September which is not surprising when incomes fell 6% year on year. With the nations debt to GDP ratio nearing 250% its once envied savings ratio is falling rapidly. The demographic time bomb has exploded and this can only maintain that decline. The weak Yen has seen food prices rise rapidly along with fuel costs. Remember Japan has little if no natural energy resources. If I am right and the Yen continues lower, their will be two main consequences. Continued consumer weakness due to imported inflation and most importantly GLOBAL DEFLATION EXPORT. Yes…I know, a common theme of mine.

Its worth noting which countries are the winners and losers in this potential move. Winners (Biggest net importers from Japan)…US, HK, Sth Korea, Singapore and Thailand. Losers (ex energy)…China, Australia, Western Europe. These represent the biggest net exporters too Japan. Of course, the winners might not be happy about this surge of additional low priced competition. Given that Japan will likely ramp up heavy industry exports, its more than likely that (import) duties may well become a hot topic. The machinery sector will become very price driven, especially given the downdraft of mining exploration budgets, and big producers in the US (eg Joy Global) and the Swedish/Finnish economies in general, will suffer. I have been very negative about Sweden this year and that has been confirmed by its currency slump to a six year low.

Its difficult to see Japanese bonds being a sort after investment when they yield virtually nothing. This is not helped by the state pension fund reducing its portfolio exposure in domestic bonds from 60% to 35%. I must be the only person to think that  Japanese Government Bonds  are worth not much more than the paper they are printed on. Perhaps they could put them on a roll with perforations every six inches or so…just in case

 

NEXT BLOG…WHY! Since the birth of QE has the number of Billionaires doubled but the disposable income for the majority (developed world) , slipped back to levels not seen since the turn of the century. Indeed, figures out this week highlight the number of people in Italy dependant on food aid has doubled to 4 million…WELL FUNKING DONE CENTRAL BONKERS…

Then I will review companies like BHP and Volvo which I havhttp://www.redbridge.ukipbranch.org/e written extensively about..It might be time to think about Steel stocks…Crazy eh!

DONT MISS MY PICTURE ON THIS SITE…http://www.redbridge.ukipbranch.org/

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Profound Inequality in America…Time to Act!

I have been spurred to write today following yesterdays speech by President Obama in which he called for action to alleviate the `Profound Inequality in America`…I make no apology in re-publishing my blog AMERICA: THE HOME OF THE FREE?…NO,THE HOME OF THE FOOL!  repeated at the end of blog.

 

HORAY…At last the problem is starting to get recognised as significant for the majority of the population. Whilst Wall Street grows ever richer on the generosity of the wider populace (Bank bailouts and QE) the majority are facing a bleak future. I believe the end is nigh for the Dollar as the Global Reserve Currency. If not, it will end up like the British Pound at the end of its dominant period. The adjustment after that was very painful. China, as I have stated in the past, is an economic cancer on the rest of the world. I have said on many occasions that the level of productive investment in China is driven by need to employ (people) not the need to employ capital for profit. Regular readers will know that this has been one of my reasons to expect Global Deflation and just out of interest, todays article in the Daily Telegraph highlights some of my concerns.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10495902/Europe-repeating-all-the-errors-of-Japan-as-deflation-draws-closer.html

Unemployment figures are being heralded by Wall Street as signs of growing prosperity. As I have pointed out on several occasions, poor quality jobs with low pay will not cure Americas ills (nor the UK for that matter) The recent data on spending (to date) in the festive season highlights that employment growth is not the focus. The real focus should be on the Participation Rate (which stands at a the lowest percentage of population since before Ronald Regan)  and the GINI COEFFICIENT.

The participation rate, or the percentage of people actively in employment, peaked at the beginning of the millennium and then began its fall. The decline accelerated following the financial crash and has not stopped. Several factors are at play here. The most important being the loss of manufacturing jobs. Then Demographics, with the baby boomers coming of age (retirement that is) and lets not forget Disability. This group of people now stands at 8.8 million which has curiously doubled since 1995.

I will not go on about Gini Coefficient suffice to say it is a globally recognised barometer of the distribution of wealth…America sucks! All Americans (the poorer majority that is) should go to their elected official (who will be wearing a great suit and probably an expensive watch) and demand to know what he doing about the GINI! He will be too busy counting his money to give a damn about you.

It is clear that QE has done nothing other than put more money in the hands of the wealthy. The real problem for America is having the Chinese currency loosely pegged to the Dollar. How can a mature economic country with massive financial and trade imbalances expect to keep pace with a dynamic (and second biggest in the world) economy growing at around 8%. The answer is it cant.

If this nose dive is to be reversed it is not via a hike in minimum wage, that will make it worse, it needs to be fed by America making more of what it uses eg shrinking its trade deficit. This way jobs will become more abundant and wages will rise accordingly. YES!…That means upsetting the Chineseand maybe the Germans for that matter but see my next blog which will expand on Kurzarbeit achieved where Blitzkrieg Failed and The Elephant in the Room (2 earlier blogs)

WHY!!! Should ordinary Americans see their living standards fall back to the 1970`s just to let China move 20 million people (a year) out of the paddy fields into new apartments. It seems crazy to me. The simple truth is that China is growing far faster than its restricted currency is implying. A realignment is required where by the Yuan would appreciate rapidly. Whilst the implications in the financial markets might be adverse in the initial stages (slower Chinese growth) longer term it would help to balance prosperity. The world has too much cheap capital as a result of QE. This has lead to far too much output capacity investment which will eventually lead to Global Deflation. We need to bite the bullet now and re-balance the worlds economy at a lower level that today but one that is fair to all. Otherwise, the simple truth is that history will repeat itself and the disaffected will take matters into their own hands…

YOU HAVE BEEN WARNED!

BELOW IS REPEAT OF EARLIER BLOG…………………………………………

I am very sorry if this headline has upset my American friends and relatives. Having worked for many US companies (Conti-Commodities, Refco, Merrill Lynch, Chase Manhattan and Lehman Bros.) I can safely say I have had the pleasure of working with and meeting many wonderful people. That will not, however, stop me from saying:

YOU STUPID AMERICANS!……..At least 80% of you.

Of course the headline is a bit sensational but I feel the majority of Americans really do need to wake up and smell the coffee.

I will start with the visuals, then explain. Firstly, a chart of US Govt. debt build from 1942 used in blog Economic Seismic Shift, November 2012. Secondly, a link which has some revealing information on the US economic data. Third, inflation adjusted version of the first chart, and finally, the wonderfully visual and informative US Debt Clock.

Item 1)

Item 2)

http://xkcd.com/980/huge/#x=-6416&y=-8544&z=2

Item 3)

 

 

Item 4)  http://www.usdebtclock.org/index.html

So, why such a downer on Americans. I have been involved in American Economics (not professionally) since the 1970`s.  I first travelled (on business) to New York and Chicago in  1982 when poverty was evident.  I cant help but feel “That the actions taken in the name of the American people by the American people on behalf of the American people, have only benefitted a few American people”

So this report of Lincolns Gettysburg Address (yes, sorry but its from Wickedpedia) is at the heart of my argument.

Abraham Lincoln’s carefully crafted address, secondary to other presentations that day, came to be regarded as one of the greatest speeches in American history. In just over two minutes, Lincoln reiterated the principles of human equality espoused by the  Declaration of Independence and proclaimed the Civil War as a struggle for the preservation of the Union sundered by the secession crisis with a new birth of freedom that would bring true equality to all of its citizens. Lincoln also redefined the Civil War as a struggle not just for the union, but also for the principle of human equality.

 

If you look at Item 1, you will see that since the mid-late 1970`s government spending has grown dramatically. Yes, inflation at that time was an influence (Oil crisis) but the seed was set for ever grater peaks. More Importantly Item 3 shows how debt has risen dramatically inflation adjusted. Between 1947 and 1979 the top 1% earners accounted for 7.3% of total national income. From 1979 to 2006 the rate rose to 13.6% (of total national income).Today, it is believed that figure is closer to 25%. I am making a direct link between earnings growth of the top people in America and the acceleration of nation debt. When you bear in mind that the people making the decisions,  both politically and economically, to raise debt aggressively, are (most probably) in that top 1% then it starts to look wrong. Consider these facts:

  • 1% of Americans own 40% of overall wealth and 50% of all Equity, Bond and Mutual Fund Assets.
  • 400 Richest people have more than the combined wealth of the poorest 50% see Quantitative Easing
  • The poorest 40% have no discernible wealth.
  • 80% of the population only accounts for 7% of total wealth.
  • In 1965 the average hourly earnings (inflation adjusted) of a production worker was $19.61 and today the  rate is only $19.71.
  • In 1965 the average hourly earnings (inflation adjusted) of a CEO was $490.31 and today the rate is $ 5,419.97

The last two points are taken from Item 2. If you click on the link and zoom you can navigate around finding these facts in the dark green section. I have no reason to doubt the author as it has a comprehensive reference.

In the name of the population, America has now borrowed $17.1 Trillion. That is now $53,000 per citizen. Of course both those numbers are increasing rapidly, see Item 4. To highlight significant growth in debt per citizen, in 2000 it was only $20,000. So the top 1% hit the credit card of all Americans to the tune of $53,000. The trouble is, the bottom 40% have never really benefitted from that spending. 125 million people have no wealth but are on the hook for $7.2 Trillion. The next 40% up the wealth league are not much better off and collectively they owe $14.4 Trillion.

What has all this debt bought the American citizens as a whole. That is forgetting massive wealth for the few.

Amongst its Economic peers the USA (x China)

  • has the lowest life expectancy
  • highest infant mortality
  • spends highest % of GDP on healthcare
  • is the only country not to have Universal Health Care (pre Obamacare??)

Amongst OECD members

  • highest income inequality
  • highest poverty
  • child poverty twice the average

also

  • 17th in Education table of 40 most developed countries
  • down 10 places in 30 years
  • only 6% performed at advanced level placing it 31st out of 56 nations
  • annual investment differential (per pupil) between most and least selective colleges in 1967 $13,500 (adjusted) and today it is $80,000
  • wealthy students outperformance over poorest is the highest in the developed world
  • Food stamps are now used by 48,000,000 vs 28,000,000 in 2008.
  • Since 1965, employer benefits most notably in Health and Pension have been significantly eroded.
  • for a brief moment in 1928 inequality was higher…hhhmmmnnn

I know it sounds offensive and it is not meant that way but…if the wealthy put chains around the ankles of the poorest 40% and taught them the words to old man river. They could sing it whilst they were contemplating just what Abraham Lincoln meant when he claimed victory brought a new birth of freedom that would bring true equality to all of its citizens. Maybe the real losers in the Civil War were the slaves. At least they could dream one day that rightful freedom would be granted. What dreams have the poor Americans got today. Not only have they poor education and health but they are also being used to borrow money to benefit the rich. The Federal reserve should all be taken out and put against a wall. They above all in the financial world have been responsible for allowing this unfair system to go on. QE as I have highlighted before, is passing more wealth to the few. These people are likely to bid up Art and other assets which help show off the individuals ranking in the top tier. It does not transfer directly to consumption for all. Politicians of all sides of the spectrum should hang their collective heads in shame. Whilst they have grown fat on the corn of increased spending, they have allowed jobs of the working class to be shipped to China (etc) so that the owners and senior employees can share in the bottom line profit improvements it allowed. The big mistake (yes, with hindsight) was to not invest heavily in the wider nations education, allowing people who would normally have aspired to a full time blue collar job, be more in tune with the modern world. Instead, politicians, influenced heavily by industry, kept the consumer stuffed with borrowed dollars so he could keep the profits rolling. If this borrowing was kept in check (the world over) people would not have become so throw away, growth would have been much slower and more importantly, balanced.

I can only refer to this shift in wealth as theft. Probably the greatest Sting of all time. How will it all end?

“America will never be destroyed from the outside. If we falter and lose our freedoms, it will be  because we destroyed ourselves” Abraham Lincoln

http://www.upworthy.com/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact-2?g=6

 

 

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Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

As an update to my big calls in 2012 I am going to start with the subject which has taken up most of my verbiage, STEEL. I am so pleased with the results that you could say I am;

Inebriated with the exuberance of my own verbosity. I first heard this phrase as a child quoted by my amazing aunt Nancy who is still with us today and rapidly approaching 100! Of course, the 19th century British Prime Minister, Benjamin Disraeli, is credited with it first.

I digress. Back in May last year I wrote Are Steel Producers a Buy? The share price chart of two steel companies were highlighted. ArcelorMittal and US Steel.  I said then, and still say today, that oversupply in China and a lack of final demand in the world will keep downward pressure on the steel sector. So how have these companies fared since then? ArcelorMittal is 23% lower and US Steel is 34% lower. Lets not forget that the market has risen around 15% since then so the net affect has been very dramatic. Also mentioned negatively in the blog were Joy Global and Caterpillar and they are down 14% and 13% respectively. The truth is I started warning about the Steel sector back in January 2012 with the BRICs and Steel blog. I tied the fortunes of the BRICs to this sector as, in my opinion, it was the demand for the raw material, Iron Ore, that drove the fortunes of the BRIC economies. As I stated then, Jim O`Niell was lucky that when coining this now famous acronym, the Chinese authorities were prepared to spend vast fortunes on infrastructure projects (which are of course steel dominant) and the stupid governments of the west were allowing the finance industry to lend beyond the realms of their normal Avarice. Since January 2012 specialist Iron Ore and Coal producer Cliffs Natural Resources has fallen around 70% but my favourite pick (for a short) in the May blog and since has been BHP. I stated then that I thought it had 30% downside. So far it is down 3% (still not forgetting the market is up 15%). Luckily for me, it has just broken a five year uptrend which points to a decline to the £16.50 triple four year bottom support (-12% from current price).

Chinese inventories of Steel are at an all time high and growing. The authorities, as I have stated many times, are more interested in employing the masses than making a profit. Hence the 98% fall in profit last year. The production capacity is frightening. They are not concerned with the steel companies around the globe. Interestingly, tighter controls by Europe on wider steel pipe imports (from China) were announced and the US Military have just stated that all military supplies must be made from US produced steel. Other countries are doing similar things (Smoot-Hawley anyone).

China is taking a similar of attitude to employment over profit in other industries. Solar panels, Aluminium and more importantly Shipping. In a way it is a grander version of Kurzarbeit see Kurzarbeit achieved where Blitzkrieg failed!.

Amazing Performance: Part 2 Reviews the staggering gains from my recommendations in Be Prepared for a Wedgefest October 2012

MASSIVE Japanese QE. Let me be quite clear. Japan will not, and has no intention of, creating strong domestic demand. With the devaluation of the Yen (Japan has no fossil fuels) and the significant increases in consumer taxes 2014/15, disposable income will be squeezed even further. Yes, I hear you, they have potentially large shale gas reserves but that will take years at those depths. They have only one intention, export and survive. I have written at length about the ills of Japanese government debt and the demographic eruption. If you think this large QE will help global demand, think again. Japan has suffered greatly with the strong Yen. Its traditionally strong heavy industries of Steel and Shipbuilding were decimated. They intend to regain the upper hand. Asian countries are faced with a global exporter (in many fields) which has huge spare capacity and technological know how and they intend to compete.

 

 

 

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Friday, April 5th, 2013 BRICs, China, Debt, Japan, Predictions, QE, Shipping, Steel, Yen No Comments

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

Japan is all Smoke and Mirrors

From Swan to an Ugly Duckling!

I am spellbound by Japan`s ability to create an aura of stability whilst the economic picture deteriorates so rapidly. It reminds me of a swan gliding serenely over the water. Look below and the old `plates of meat` are going two to the dozen. Having read an article by `Yariko Koike` the former Minister of Defence and National Security adviser, I just want to highlight some facts.

  • Japan has $9 Trillion of debt vs $10.5 Tr for the entire 17 Euro-zone nations whilst having only a THIRD of the population.
  • Japan population is ageing rapidly with 23% over 65 vs 13% USA and 16% Europe
  • Japan total taxes accounts for only half of government spending, with tax revenues 30% below 1989 level.
  • Japan government debt is 230% of debt to GDP
  • MOST IMPORTANT OF ALL The newly passed legislation raising the consumer tax by 100% (in two stages) starting in 2014, has been hijacked by a provision that Nominal GDP has to be growing by (or forecast to grow by) 3% in 2015 for the tax to be implemented. They have not managed this in two decades!

I have written several blogs about Japan`s ageing population so I will not revisit. I also know that around 90% of the debt is owned by domestic investors (public and Institutional).

I do believe that the rating agencies will have to act soon to downgrade the debt profile of this beautiful swan to an ugly duckling! Therefore, today, I have sold the Yen and believe it will have to weaken significantly.  SEE `Update on Recent Blogs and Fantasy Finace Prediction` my January blog with a 40 year chart of $/¥ which I believe puts a floor under the short Yen trade with an upside 5 times your risk.

Plates of Meat= Cockney for `Feet`

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Wednesday, August 15th, 2012 Debt, Japan, National Debt, Predictions, Yen 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

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?  http://nationaldebtclocks.com/greece.htm

 

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. http://nationaldebtclocks.com/spain.htm

 

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.

http://nationaldebtclocks.com/japan.htm

 

 

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