Greece

Geman Engineering.

I have been asked to explain why I believe Germany should leave the Euro…A quick note ahead of the ECB QE announcement.

It all started with the re-unification of East and West Germany…at the time, many were flabbergasted at the very generous offer by West Germany of currency conversion terms. The Ost Mark was converted at parity with the Deutsch Mark for the first 4000 marks and at 2:1 for other legitimate savings. This was seen at the time, as a very, very, generous offer and one that seemed economic suicide by the rest of the world. So, Germany was now lumbered with a country full of globally uncompetitive industries in the East. It needed to expand its output and export potential very quickly if this seemingly stupid offer was to succeed. Lets have a currency union with the basket cases of Europe who had traditionally relied on currency devaluation to allow them to continue their imprudent economic models. Of course, these poor economic models had always led to high structural interest rates which had been an impediment to consumer and in most cases government debt. Along comes the Euro. Suddenly, Germany is in bed with these lou lous and the currency falls dramatically. From its launch in 1999, the Euro lost 25% during the first three year’s. Great for Germany trying to re-capitalise an entire country. Around this time, mega investment was taking shape in the Mediterranean Counties. Low interest rates were spurring massive consumption and the big gainer in all this economic activity was construction. For instance, prior to the crash, Spain was the second biggest influence in global growth behind China. Of course, who was the biggest beneficiary of all this debt fuelled consumption and investment…come on you can guess….YES! Well done…Germany. Now, with the Eurozone credit cards maxed out, what does the worlds most prolific exporter need to do…Correct again. Encourage a weak Euro so as to sell its exports under the veil of a tin pot currency. All the prevarication since the crisis began has done little to install confidence in the Eurozone.

So, if Germany were outside the Euro, two things would happen. Firstly, a German currency would be in great demand. I believe vs the Dollar it would be 25% higher than the Euro today. Remember, Germany is in rude economic health. Like Switzerland, only possibly more so, it would have significantly negative interest rates. Secondly, the Euro without Germany would be 25% lower vs the Dollar than it is now. This would allow the strict austerity measures, strongly encouraged by the Germans, to be adhered to whilst giving a dramatic to boost to the industrial potential. It would reverse the deflationary pressures currently exhibited. Yes, interest rates would rise but investment would flow providing this ejection of Germany was linked to not only a continuation of strict austerity but also a complete overhaul of restrictive work practises as seen in places like France. OK, bond holders would get burnt but surely the people of Europe have suffered enough whilst bankers and financiers have grown fat on the spoils of a ridiculous situation.

 

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Thursday, January 22nd, 2015 Consumer Debt, Debt, Euro, National Debt, Predictions, USD No Comments

Greece Has Trump Card…USE IT!!!

Germany, as I have stated on many occasions, starting with  =”The Elephant in the Room.”  (June 2012) and again in =”Kurzarbeit achieved where Blitzkrieg failed!”  (January 2013)… is hiding in a weak economic zone to conquer the export world with an unfair advantage.

Heads up to IGINDEX and other Spread betting companies….trading idea : Short EURO notes with the GREEK suffix of Y  vs  Long EURO notes suffix X (Germany)…just an idea in the run up to 25th Jan election….I digress, back to GERPEL…

Todays move by the Swiss National Bank just reinforces just how important it is to the German economy to be linked with basket cases such as Greece. To put it mildly, Germany is a parasite of Europe. Its fortunes in economic terms are going from strength to strength. The weaker the Euro gets, the better its globally dominant export industry gets. So, Greece has a chance to play dare with Germany. As I write, the DAX is nearing 10,000 which is not far from an all time high. If the Greek elections go according to the polls and we have a new government hell bent on refusing to play by the debt rules set out by the Troika ..EU..IMF…ECB… it will lead to a Mexican Standoff between Greece the EU and Germany (not the IMF). The EU has stated that it will not renegotiate the terms of the bailout, primarily due to the snowball effect of demands from Spain, Portugal and Ireland should it do so. If Greece decides to leave the EURO as a result, the economic implications for Spain and Portugal, would be significant as they share similar economic profiles.

The mere hint of the basket cases leaving the Euro would, potentially, imply that a REVALUATION of the Euro could take place. This could result in a 30% appreciation once the anchors are removed from the economic group remaining. Excluding Greece, Portugal, Spain, Cyprus, Malta and possibly Ireland the focus would be squarely on a more solid economic footing. Sadly, such a currency move would prove fatal to the newer members situated in Eastern Europe and they would need to think seriously about membership of a club which is dominated by the German export machine.

So, Greece really has the entire German economic testicles in its hand. If they look squarely in Angela Dorothea Merkels eyes and say goodbye! The DAX would fall dramatically and all hell would be let loose. France would fall into a steep recession and Italy would itself consider bringing back the Lira as unemployment would be out of control. Interestingly, German bonds would be very volatile. Who knows where investors would go to find sanctuary. Negative interest rates in the EURO region could be the norm. Bonds markets would be in disarray as no one would know how to value. Shares, Property and other assets, in the countries leaving the Euro, would be bid up. Greek ship owners would repatriate the huge hoards of money they transferred to Northern European banks at the outset of the Greek crisis.

Currency printers like DeLaRue could make a fortune if national printers could not cope. It currently prints for UK, Finland, Portugal, Holland and Ireland (Not Greece). There is around 16bn banknotes in Euorland worth around Eur 1 trillion…

With reference to the various banknotes in the EURO: Y= Greece, M=Portugal, V=Spain. I have no idea what would happen to the value if a country left the EURO block but I would rather not have Y denominated Euros just in case….The country letter is part of the 12 digit code NOT the six digit code which just identifies who printed it.

 

 

 

 

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Thursday, January 15th, 2015 Euro, Predictions No Comments

Chinese Deflation Cancer Spreads

OK here I go. This blog has been building in my head for a long while. It will tie in with my record of forecast since I started a few years ago. The economic world is close to a catastrophic collapse. Yes, I know, I have been concerned about the world since I started. I am firmly of the belief that QE has not only just delayed the inevitable collapse of the global economy, it has made the impending scenario much worse. In fact, it has taken it from a situation that was manageable, with old fashioned crash, burn and re-build, to a situation where the fallout will make the 1930`s look like a walk in the park. The central pillar of my argument is the significant positive impact QE has had on asset prices is mirrored by the equally significant negative impact on inequality in the developed world. This is mainly due to the tsunami of cheap finance which has swept the developing world and spawned huge production potential.

Yes, bond and equity prices have risen significantly. And why shouldn’t they. With QE pumping so much money into the hands of the people who created the 2007 crash, what else would they do with it. As I have written before, lower bond yields have helped governments continue priming economies through direct state spending (debt) or policies which have encouraged significant new consumer debt. The problem is, whilst the central banks of the G7 were sleeping, China changed. It is no longer the worlds growth engine due to internal demand. It is a cancer on the supply demand curve.

Let me expand on my theory of why China will be the catalyst that sparks this almighty upheaval. BRICs have been a constant theme in the history of this blog. Iron Ore is the prime reason. They all have it. The growth in China over the last 20 years was centred around Housing, Railways and Heavy Industry. The problem is, as I explained in China and its Export Claim, the supply curve within all these aspects of growth had become overstretched. In normal developed economies, this would have sparked a flight to quality as earnings concerns came to the fore. Of course, as I have pointed out many times, return on capital is not a primary concern of state industry dominated China. Employment of the masses is the ONLY concern. I have a back of the fag packet calculation. For every 20 million Chinese workers employed, 5 million employed people in the developed world become superfluous in the current demand cycle. Now, I am not saying these people will be unemployed, just that there well paid manufacturing jobs will be replaced by low paid service jobs. That is why, over the last thirty years, inequality has been taking a hold. I explained this in Profound Inequality in America.

So how is China accelerating this process in the current environment? An example is Steel (So many blogs on the subject I cant note them all). This one vital element has been the growth engine which has sustained this process of converting rural peasant into semi-skilled townies. To produce steel, you need two primary elements, Iron Ore and Energy. In Chinas case, energy has been via Coal. Together, these three elements are all required in huge bulk, so we must include transportation into the mix

As inventory of housing has built to an unsustainable level, prices are starting to drop. Sales in the first half of 2014 are down sharply on last year. This still does not explain my theory. If China cannot consume all it produces, what can it do? Export. To this end it has done several things outside its recent state induced currency weakness. Firstly, export the raw material. Globally, these are running 30% higher than 2013.  South American countries have seen (China imports) rises of around 90%. Of course, the ire of western producers have raised the spectre of further import duties. So, this leads to the second point. Cheap exports to fellow Asian economies eg Sth. Korea, forces them to export themselves. Couple this with import restrictions on Taiwan’s exports to China and it becomes evident this is a way round tariffs from Europe and America. Thirdly, and a little more opportunistic. Export of ships, Rigs etc. Since the financial crash, shipbuilding finance from dominant European banks became scarce. This lead China to flex its mussels. It has lent, via state banks, billions of dollars to mainly Greek ship owners (I have many blogs on the subject) in exchange for the orders to be placed with Chinese yards. This has allowed China to wrestle the mantle of dominant player from Sth. Korea and Japan. The problem is, this cheap finance is creating a bubble in supply of vessels. All this at a time when the Baltic Freight Index is once aging flagging concern. Of course, the Bulk Carriers which are supplying the low cost Iron Ore from the likes of Australia and Brazil are benefiting.

Many economic forecasters are pinning their hope on China becoming a consumer society in order to create growth globally. This is a faint hope at best. For now they are flooding the world with low cost products which is leading to one main import from the developed world, Jobs. This leads me to the main crux of my argument. Demand.

I have written about a demand shortfall verses the supply boom and its resulting Deflation before. I have stated that wage growth will decline and turn negative. I am writing now as this is all becoming a reality. Wages in the UK and Australia have already registered there first ever declines. Elsewhere the downward pressure is building. Since 2008, American wages for the bottom 20% of earners has declined. The web site below gives a good view of how growth has  been distorted towards shale gas and not industrial important manufacturing:

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

With employment in poorly paid service jobs being the illusion that has driven low unemployment in the USA and UK, income tax receipts are not dampening the budget deficits. Yes, the USA has a smaller perceived deficit but strip out income from the Federal Reserve (QE gains) and things are not so rosy. Both have adopted policies which have driven property prices to pre-recession peaks. The problem is, the China affect on wages has just made the valuation to income ratio stretched beyond affordability. Now that the boom in speculative demand is turning to net sellers, the future is not so promising.

Outcomes of my theory:

CHINA…Will try and maintain the illusion of 7.5% economic growth via internal demand acceleration. This is an illusion. Just yesterday they announced significant cuts to pay of higher paid state employees. With Iron Ore production costs double of Australia, they will probably reduce the tax disadvantage to protect this mass employer. The coal industry is losing demand and will have to make big cuts. Housing will continue to slow and eventually lead to huge bond default. Steel production will collapse and with it Iron Ore demand. Hence Coal and Oil price decline. Recent trade figures confirmed export growth and import contraction

Australia (BRICs)…The significant decline in Iron Ore price in 2014 has slowed investment but a second leg down in price (around $50-60) will put a big downer on the economy. The currency will retreat still further. Once again, housing demand will implode. High paid jobs in mining will be a big loser. Wage deflation will halt demand.

Japan…Sadly, they are likely to be the hardest hit from this China export drive. The economy will continue to struggle until eventually the currency has to give. They will have to return to nuclear power to reduce the huge energy import costs. This will slam the builders and operators of natural gas ships. Demand is going to contract still further as the Yen has its second currency decline to around Y125, the 2007 low. This will spread the deflation spores even more aggressively. I know most people take flight to the Yen during periods of uncertainty so my prediction seems odd to most. Over the last 5 years, significant moves, up and down, have been followed by stable periods of between 6-8 months before going again. Given the last significant decline bottomed in January, the next big move is just round the corner. First stop Y110 then on to 125. If you have to own equities, currency hedged Japanese are the ones.

UK…The chancellor has completely ruined the UK. I thought no one could have topped the incompetence of Gordon Braffoon. But George Osborne has done just that. Many recent posts will explain my reasoning, but put simply, he has borrowed and wasted more money than people who should know better are prepared to acknowledge. Its a bit like the Kings Clothes…George is parading naked as a Jaybird but no one has the balls to state the obvious. Let me give you a microcosm of a looming disaster. The Local Authority I have the honour to represent, has a pension shortfall of four times the income from rates. Every 0.5% move in bond yields makes a shift of around £70m. If I am right, and deflation takes hold, government bond yields could go to zero. Couple this with a decline in the underlying portfolio, which currently stands at £500m, and the shortfall could double. If you take this a fairly typical local authority, the time bomb is ticking loud and clear. Sadly, I am the only one who can hear it. I still think Sterling will test its all time dollar low of $1.08.

Sweden (Finland)…As I have stated in previous blogs, I love the Sweeds, sadly however, the writing is firmly on the wall. The primary reason is the importance of the mining sector on its industrial heritage. My scenario would see exports implode as mining companies cut still further the budget for new investment. The usual housing boom appears here and will come to an abrupt end. The currency will decline still further and the globally important companies will be snapped up by American players. Or, as I have stated in the past, a Swedish solution is forthcoming and many internal mergers take place.

USA…Here, more than any country, inequality abounds. As per my post of December last year. This will lead to significant social unrest.

EQUITIES…..I have said in the past that they cannot go down significantly at the moment as demand from Central Banks and Company buy backs is reducing supply. I have explained the role QE plays in this before. Considering the global unrest, markets during my city career of 28 years, would be significantly lower than they are now. This just highlights the influence these QE induced buyers have on prices. But what about the future? Quite frankly, I am unsure. What is clear, if prices continue to defy gravity, volume will continue to decline. Not wanting to short markets during these difficult times, because bears have been massacred since 2008, means individual stock prices will only move when poor results are released. Then the declines will be eye watering. Shrinking capital bases (due to buybacks) will make these moves more aggressive. For now, equities are an unknown beast for those of us who were brought up in a world of boom, bust, re-build economics. Not the QE induced ether they are fuelled by currently.

Bonds…I do not want to bore you all too much so that’s the end for now. Plus, my wife is giving me grief as I have chores to do. Mainly, putting a new Cedar shingle roof on our summer house…

 

 

 

 

 

 

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Shanghai to Europe Rate Drop Questions Chinese Export Claim.

Shanghai Containerised Freight Index (SCFI)…(An indication of the shipping cost of a 20ft Container)

It appears all is not what it seems in trade. Over the past six weeks, the SCFI (Shanghai to Northern Europe component) has fallen 36% (10%last week) and is now 21% below the corresponding period in 2012. The Mediterranean Ports have not faired any better with a 33% six week and 19% year on year, decline.

 

The same applies to the USA. Shanghai to the West Coast is 30% below 2012 with the East Coast down 16%.

 

Now of course this is a complex issue. The glut of vessels is nothing new and something I have written about on many occasions. It cannot only be an oversupply of transport, volume must come into the equation somewhere. I get a sneaky feeling that the forth quarter may be an interesting one when it comes to earnings. For now, this decline in demand for transportation has to ring some alarm bells. China is using its financial mussel in order to secure new shipbuilding orders for its vastly oversized industry. Whilst they mutter about merging some yards and maybe shutting others, the plain fact is (just as in the other heavy industries in China. Aluminium, Steel etc) the overwhelming urge to keep the people in work has drowned out any commercial economic considerations.

China raised its capital spending dramatically in June and July with house building and railway lines seeing significant investment. For now, it has reduced the huge industrial material inventory which was building beyond sustainable levels. Steel production was maintained or even increased by some allowing Iron Ore to rally. These investments are reducing the raw material inventory but  increasing the stock of un-sold real estate (most of which is priced at 20 times annual earnings…very rough guide) and in totally under used rail infrastructure. Eventually something will have to give. Wage growth of 20% per annum has underpinned the valuation of real estate. Wages going forward, in my opinion, will start to reflect the weakening profit picture in China. Tens of millions of un-sold overpriced property could spell disaster if they fail to keep all the balls in the air. I cannot help but think this is just another piece in my Global Deflation theory that I started in June.

If the oversupply builds to a point where finally common sense is applied, the consequences would be catastrophic for some industries and countries. Over the last two years I have berated Lucky Jim O`Niell and the BRIC economies. Given the huge decline in their fortunes over that period you might begin to think that the recent emerging markets rally has legs. One of the major consequences of any pullback would be a collapse in the Iron Ore price to around $40…yes $40, below even the cheapest of suppliers production cost. Previous blogs have given the price charts going back many years together with the countries and companies who have gained the most. Briefly though, Austarlia and Brazil would implode. Shipping companies (Maersk is the biggest but Greeks big in Iron Ore) would collapse wholesale and a few Scandi, German and British Banks would need major help not to mention problems for the largest shipping builders China, Sth Korea and Japan. Steel companies are already priced at 20 year lows so some may survive. Global Deflation would follow with Oil at $30-40. The suppliers to the Mining/Drilling Industry, mentioned all too frequently in my blogs, would have to be rescued. Sweden, which has a massive exposure to this field would be in a mess. As for Green Industries, made to look very expensive. British Government, well they have ben making fools of them and us for so long it would probably go un-noticed (Green Policy).

The problems some companies would face will be greatly exaggerated because the Investment Bonkers have encouraged them to shrink their balance sheet (capital) via share buy backs. Great for the Bankers income but when losses for companies start to accrue, the loss per share from such a big business with a shrunken capital base, will be startling. Share prices for all will collapse but more so for the biggest buy back companies. Deflation will be the result…hey ho…Its being so happy that keeps me going.

Below, me and the `Old Duchess` all dressed up to celebrate our 29th Wedding Anniversary

 

 

Tomorrow morning, off to the Olympic White Water course with my old pal Barry…who is not as good as me…he he he he

 

 

 

 

 

 

 

 

 

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Saturday, September 14th, 2013 BRICs, China, Japan, Oil, Predictions, Shipping, Steel, UK, US Economy 1 Comment

Cyprus vs Rhode Island, New England.

Arthur (aka the late great Dudley Moore) said `Rhode Island could beat the crap out of it in a fight and it is so small they recently had the whole Island carpeted`

Now of course he was not talking about Cyprus but he could well of. In economic terms, Cyprus is a pimple on the arse of the world.

However, it speaks volumes about how Europe is run. Politicians and unelected officials revelling in spending the electorates money on ever grander, wilder uneconomic schemes. Building up debts for future generations without concern whilst drawing magnificent rewards for them and their families. If you want to look at some of these projects, look no further than the new airports in Spain which have never been used. Or, the Harbour in Madeira ( Marina do Lugar de Baixo) which was built on the most exposed Atlantic coast which has now been abandoned, after three attempts to repair it,  having been crushed by the huge waves so popular with local surfers. In fact Madeira is a far better example of the EU crazy wasteful system. It has a population of 250,000 but with encouragement from the EU and its Portuguese parent, they now have EU 6,000,000,000 DEBT. yes EU6bn for just 250,000 people. Not bad for an Island of only 309 square miles.

Lets look at the wider issue. The real anger of UKIP voting people in the UK is why we should be paying so much into this corrupt financial and economic  system (EU). Vast amounts of money have been spent giving villages lavish civic buildings and grand sports facilities whilst employing vast swathes of the local population from the public purse. This was not spending along the German lines, which is focused on expanding the export potential of the country. A lesson we in the UK need to emulate.

Rhode Island, which some believe was named after the Greek island, has a similar population (1.1m ish) to Cyprus but has only one third of the land mass (1,214 sqr miles vs 3,572 sqr miles). On that smaller land mass they generate double the GDP of Cyprus and has managed on a debt to GDP of slightly less than 50%. The debt of Cyprus is of course, when banks bad debt taken into account,  completely out of sync with economic reality.

The EU has not had its accounts signed off by accountants for as long as I can recall. All because the level of fraud and corruption is too big to quantify. Why then should we allow these thieves to pick our pockets day in and day out. We give around £45 million per day to the EU. On top of that we gave Ireland £8bn to help its bailout. The sad truth of the matter is, we need revolution. People need to revolt and who is more revolting that the French. Sadly, they are taking soo much money out of our pockets with the Common Agricultural Policy (CAP) they are reluctant to do what they are famous for.

I would love to stand for UKIP at the next election. I did stand as an Independent in the 2010 General Election. I believe they will win as people have had enough of the main political parties.

On another issue. The Central Banks which have employed QE so aggressively, to help governments carry on running large annual budget deficits, should now demand far more fiscal prudence from those governments before any further monetary stimulus is applied. At the moment they are just helping them add to what is already a frightening level of state debt. Japan, USA and Europe are all in that boat. Yes, the adjustment will be painful, but how painful will it be when this mad experiment with excessive QE finally unravels.

YOU HAVE BEEN WARNED.

I still think the only way out of this mess is GERPEL see Kurzarbeit achieved where Blitzkrieg failed!

 

 

 

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Monday, March 18th, 2013 Debt, Euro, National Debt, Predictions, UK No Comments

Chart Updates

Below is an update of some of the charts I have highlighted in the past.

Sterling/ Dollar has bounced off its major support. I remain convinced that Sterling will collapse once its true financial picture (see previous blogs UK economy) becomes apparent to the markets. If so, $1.08 all time low could be tested.

AP Moeller-Maersk, the largest shipping company in the world, has come in for attention on many occasions and I still believe the 16 year head and shoulders is in play. With ship yards offering huge discounts on new ships and freight rates falling once again, the gloom continues.

 

BHP. With Iron Ore prices falling, it is only a matter of time before the head and shoulder neck line is broken with little technical support for a long way down.

US Steel and Arcelor-Mittal. As with BHP above, see Are Steel Producers a Buy? in which I asked exactly that question. My conclusion is that the support lines would not hold. Since then they have all fallen. BHP 15% US Steel 25% and Arcelor 10%

 

 

Europe. It is interesting to look at the wide array of economic statistics (released today) from many European countries. It all makes for very disappointing reading. Except that is, for Iceland, who had Q1 GDP growth of 2.4% and 4.5% year on year growth. Well done! Maybe defaulting on your debt is not the end of the world. ARE YOU LISTENING GREECE!

 

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Friday, June 8th, 2012 GBP, Shipping, UK, USD No Comments

Global Barometer indicates a possible chill.

Update from the 7th February blog…Iron Ore

I mentioned earlier that I believe Iron Ore is the barometer for global growth. See previous blogs for reasoning. As an update, last week saw the sharpest fall in steel re-bar prices since October last year. Iron Ore traded lower for the eight consecutive day to the lowest level since late December last year. Forward pricing is negative indicating further declines. With volumes low all eyes are on the beginning of the Chinese construction season in March which is hoped will stabilize prices. It is worth noting that if Iron Ore prices do not improve, the 100 million plus tonnes of inventories mentioned in Iron Ore will be throwing up losses of around $5bn for the owners.

Following last weeks warning of a grim outlook (Chinese Commerce Ministry) and falling house prices, the authorities have moved once again this weekend (second time in 3 months) , cutting banks reserve requirements by 50 basis points to 20.50%. We will have to see if this spurs positive price action.

Having been busy this past week with the day job, Landscaping, I have missed the continuation of the great equity bull market. Spurring things on was the positive economic data from USA which helped optimists with the belief that all global debts have been repaid and the US is moving into never never land.

A review of recent posts:

Oil nears all time high 6th February. In Sterling terms, Oil is now making new all time highs so expect another 3-4 pence per litre at the pumps.

Update on recent blogs 25th January. The Yen has started to weaken, I continue to expect further weakness. see chart. AP Moeller short got stopped out but I still fell the stock is not reflecting reality.

Beauty Queen suffers 8th January and Will the next Italy 18th December Both highlight the UK economy and Sterling. I have to admit Sterling has rallied strongly but again I still cannot see anyone wanting to own either Sterling or Gilts once the monthly budget deficit starts reflecting weaker employment and lower tax take overall whilst spending cuts are still just smoke and mirrors.  The Public Sector borrowing figures are released on Tuesday and are possibly the most important of the year. Income taxes peak in January and 2011 saw $33bn vs £27bn in 2010. However, the growth in revenue was halted in the second half of 2011 vs 2010. I would not be surprised to see a below expected figure which will weaken Sterling and Gilts. If this happens, expect even higher prices at the petrol pumps! Happy motoring.

Finally, good luck to Greece. I have made many happy visits to Greece, most memorably to jointly host a large dinner/reception at Posidoina festivals in the 80`s. I believe a Greece free of the Euro would be able to rebuild itself. A 40% weaker currency (Drachma) would see a flood of investment. The many billions shifted abroad by wealthy Greeks would be sucked back. I only hope they can choose politicians who can be trusted and not just lurch to the left as is possible.

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Sunday, February 19th, 2012 China, Debt, Oil, UK, Yen No Comments

Employment, Quality not Quantity.

US Employment figures.

According to some journalists, last Friday`s release marked the turning point for the economy, putting it on a firm footing towards continued expansion. In the blogosphere however, a very different picture is being painted. A tsunami of wrath has been unleashed over the weekend, claiming that the significant revisions to population and employment have been doctored to give a lift to the current administration. Mistrust of the authorities handling of the data must have some political motivation. There are however, some very articulate, factual articles which do lead one to question the impressive employment growth in January. It is impossible to know from my lowly arena whether there is any foundation in these allegations, but I do have some observations of my own:

  • Since 1976 the net effect on employment (in January) due to adverse weather has been the loss of 424,000 jobs. In January 2012 that number was only 206,000.
  • The proportion of the population in employment is at a 30 year low.
  • Earnings growth is very weak at 1.9%
  • Total income taxation has not improved with the job creation.
  • Part-time employment remains little changed and very high.

The employment gains in January look impressive and well spread throughout the economy. It will take another two months to know exactly what affects the mild winter has had on the seasonal adjustments.

Since the end of the recession job creation has lacked quality. McDonald’s and Starbucks may keep on employing but they do not do much for the long term health or wealth of the economy. Since February 2010 food services have created 487,000 jobs. The sad fact is, disposable incomes are declining. The on-going cull of jobs in the finance industry along with 20-30% compensation cuts for those that remain, will just accentuate this process. According to the Bureau of Labour Statistics, blue collar inflation adjusted incomes fell 12 cents in 2011 (the steepest rate since the stagflation of 1980) with the economy as a whole falling by 16 cents.

US Government debt will grow by another $1 trillion this fiscal year, a level which is unsustainable and needs to be greatly reduced. With the income tax cut and unemployment extensions still to be concluded, the all important austerity discussions are still being kicked down the road. Debt and future medical/social costs are compounding at an alarming rate. The optimists in the investment community are gambling that ever larger quantities of QE will lead the economy into strong tax generation growth mode. If future corporate earnings are to meet their expectations, consumption will need to rise substantially from here. With the spectre of lower disposable incomes that scenario looks increasingly unlikely. Previous recession recoveries of the normal V shape, have been driven by a pick up in the real-estate market which followed the resurgence of industrial production due to restocking. This is a new economy and one that has never been seen before, standard recovery expectations should not be applied. It probably follows that the falling participation rate in the economy (people in registered employment) indicates growth in the black economy. This is a worrying trend and will reduce the governments ability to raise tax revenues significantly.

The UK and Europe were buoyed (last week) by the rebound in the Purchasing Managers Index (PMI) reports. Along with the US data, they helped drive share prices higher. I cant help reflect on this time last year that saw the same indices rally strongly only to fall back for the rest of the year. As we proceed through February we will get a slew of economic data for January. I believe this will be a sobering reminder of the much lower consumer activity. Retail sales are going to drop significantly and unemployment will grow still further from already elevated levels. The UK public debt could become a feature. January is the most important month for income tax collection. Tax on income and wealth in January 2010 was £ 27.347bn… and in January 2011 £ 33.092bn.

Similarly to the US, many poor quality jobs (in tax payment terms)  have been created in 2011 but many very high salary jobs have been lost. Total compensation in the City will be 20-30% lower and historically they have accounted for a large slice of the national income. The honeymoon period could be coming to an end. Government spending is still higher year on year, spending will have to be cut in real terms.

With the highs seen Friday and a low VIX level, it was a good time for me to initiate a PUT option on the FTSE. This will expire March 16th (fingers crossed). The Greek drama may well end in a deal to reduce debt (giving a short term fillip to markets) but it is only likely to result in anarchy. Happy trading!

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Monday, February 6th, 2012 Debt, GDP, National Debt, PMI, Predictions, UK No Comments

The Perfect Storm

Or is it just a `Storm in a Greek earn?`

If there is one industry group which reflects supply and demand most accurately, it would be shipping. I look at the world as a body. The shipping lanes or seabourn trading routes being the arteries. The ships plus cargo are the life blood supplying the three major continents, being organs. The heart I feel is money supply and importantly the  velocity of money.  Changes in money can quicken or slow the demand cycle which in turn is reflected in the fortunes of the shipping industry. This is where problems can occur. Changes to money supply can develop very rapidly whilst shipping on the other hand cannot be so nimble. Lead times for ship delivery is 2-4 years. The reason for writing today is due to a potentially disastrous imbalance in the worlds health.

I wrote last week about the decline in the Baltic shipping indices. Since then the barometer of daily charter rates have fallen another 20%. Why do I feel the need to update, given, as I explained then that it was a volatile animal? The levels now being indicated would imply income generated will not cover operating costs. This time last year the Index declined to around 1450 from a 2010 range of 4200 to 2000. This lead to many articles fretting about the future of the industry. Whilst they proved true in a sense, the problems of 2011 were not significant. Now however, the index is another 28% lower than then. Adding to this poor outlook is the pricing of the single most important industry cost, Bunker fuel. Over the last 12 months it is up 30%.  . Being a derivative of oil it rightly tracks that commodity. A factor which has exacerbated the pricing is that refineries have invested in improved cracking capabilities, enabling far greater proportion of distillates into more profitable lighter products. As a guide Bunker fuel averaged $100 per ton in the 1990`s and is now around $700.

If this level of the Index were to continue, the implication would be catastrophic! Hence, I have put together some important industry facts.

Greece along with Japan are the largest merchant ship owning nations in the world. For Greece, shipping is second only to Tourism. Thus it is a large employer. That fact has obvious implication given the bleak economic prospects they face. When it comes to financing that fleet the largest player with nearly 20% of the total debt of $66bn is RBS. Way down in % exposure come Commerzbank and Cr. Suisse. The Chinese have used their financial muscle since the financial crash to offer huge financing for new ships built in their yards. The Greek fleet has benefited from the cheap money bonanza pre-crash and has reduced the average fleet age from 23 years in 2005 to 15.9 years in 2011, whilst slightly growing tonnage.

Financing the global fleet is in the hands of only a select band of players (appro.39). Six banks account for around 40% of total debt. HSH Nordbanken (majority owned by 2 German federal states + 11% JC Flowers) $50bn. Commerzbank (via subsid.) $33bn, Dnb $28bn, RBS $23bn, Nordea $18.4bn. BNP $18bn. Interestingly Lloyds and Unicredit are well involved.

The Scandinavian banks have the largest exposure in balance sheet terms and therefore have the most to lose.

The largest corporate owners of ships are AP Moeller Maersk (840) COSCO Group (725), Nippon Yusen 554, Mitsui OSK 509 and China Shipping Group 482. The share prices of the Japanese and Danish companies have reflected weakness in new charter rates up to a point but still trade with an element of optimism that the global economy will grow around 4% this year. If the Index continues to portray significant weakness and pricing does not improve, I can see the like of AP Moeller trading 20% lower to its September 2011 low. Should my worst fears for the global economy be borne out, the 13 year head and shoulder formation would imply something far more unimaginable, so lets not go there.

Given the implications this index decline throws up, it is worth knowing the exposure companies have. It could just be that the Chinese new year or Cyclone Heidi has distorted the picture. Either way, the problems being faced by Greece would be amplified should any of this happen. The potential for China to cut interest rates or Germany to give approval for the ECB to officially commence QE would give expectations a short term lift. Unfortunately, the significant rise in oil (Bunker fuel) that it would lead to would be an offset for the ship operators. The real problem of global debt will not go away easily.

 

CAUTION: Compiling data in this sector can be difficult and I have relied on the Internet to be correct. You are all aware that is a dangerous strategy. Most of the data is 6-12 months old.

 

 

 

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Monday, January 16th, 2012 China, Debt, GDP, Money Supply, Norway, Predictions, QE, Shipping 5 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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