Iron Ore

Lucky Lord Jim O`Neill..Baron of Gately

Yes, I am back…sadly, not by popular demand…So, lucky Lord Jim gets a knighthood for being totally wrong…what do I get for being totally right?

I know I have been away for a long time but I am busy trying to help my constituents in what is the most deprived ward of my London Borough. I do get the time to tweet and quite frankly, if I do say myself, there is some interesting twitshit going down. I will start again at some point when my workload calms down. TO FOLLOW GO #financereaper…

Anyone who has read my blog for a while will know that I have had a downer on Lucky Lord Jim`s BRICs for about two years. I identified the fault with his reasoning and started warning of the BRICs impending doom. Today, Goldman Sachs have affectively closed their once famous BRIC fund. It has lost 88% of its value since 2010. In the last two years, I have warned that all the main winners in the BRIC argument would eventually fall from grace. BHP Billiton, one of my regular posts (bear ideas) of the past, has hit a seven year low. Steel companies are in the depths of despair. Coal was a big subject matter and I even wrote about the history of a little town in the USA called Jim Thorpe. Well, the Coal industry continues to slump and now Chinese mining company Longmay mining is laying off 100,000 employees. In fact, as many as are employed in the entire US coal industry…of course, US employees with their modern machinery investment and methods are 20 times more productive…oh, and they don’t live on a bowl of rice a week…Iron Ore will not rally as many expect. Oil will not rally as many expect. In fact, we could see new lows. Machinery manufacturers have also come into my spot light and I have continually warned of the fragility of their earnings…just look at companies like Joy Global, mentioned here many times…I have been totally right and I will continue to be so. QE is the primary reason. Central Banks have not used this tool wisely. Instead of extracting hard and fast commitments from politicians to cut spending and put in place debt reduction plans, they have worked hand in hand to raise still further the levels of debt to GDP ratios. Since the crash, global government indebtedness has risen 30%…

QE has led to over capacity. Yes, hundreds of millions of Chinese have come from the paddy fields to industrial towns and cities but it was all too quick. The cheap money has allowed huge capital spending of productive industries but at a cost to employment in developed nations. As one million extremely poorly paid manufacturing workers in China start work, jobs of very high equivalent salary workers are lost. The net result is a loss of demand. Whilst the infrastructure explosion, which took over ten years, was in full swing, all well and good…that is now past its peak, the Chinese economy has to focus more on exports than ever before. If it was to keep those hundreds of millions poor people working…they needed to export or die…that is exactly what they are doing. The 2015 trade surplus is up 75% to date. The real worry for the west is that in reality profitability is of little consideration compared to keeping people working . Therefore, the response of other developed and even developing nation’s is fairly limited.

Smoot-Hawley…lets not hope that the only way out it is trade barriers, however, currently there are 30 trade sanctions being drawn up against Chinese Steel dumping. Their are many other areas where dumping is evident. This will not end well.

 

 

 

 

is of little interest.

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Monday, November 9th, 2015 BRICs, China, Consumer Debt, Debt, GDP, Japan, National Debt, QE, Steel No Comments

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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UKIP or Marie Antoinette (Madame Déficit as she was known)

HOW ON EARTH CAN IT BE RIGHT FOR US TO ORDER CAVIAR OR FOIE GRAS AND HAND THE BILL TO PEOPLE WHO HAVE NOT YET BEEN BORN?  OH YES, I KNOW, LET THEM EAT CAKE.

It will take a bit of reading to get at the headline above but stay with it.

 Commodities News…  Smaller less profitable (higher production cost) Iron Ore miners in Australia are cutting management jobs/ wages and are applying to the government for a reduction in state royalty payments. Large exporters of Coal eg Indonesia and Columbia have announced higher 2015 production /export production targets to make up the governments revenue shortfall from weaker prices. These are two examples I have been expecting and helps prove why this is an economic turning point see BRICs..The Future Looks Cabbage Like.. and others including Chinese Deflation Cancer Spreads. Oil is mentioned later.
Social Unrest… Worldwide anti-government protests, which I foretold in Global Dissatisfaction with Governments Can Only Spread…are on the increase but for some reason the BBC ( and the wider media) seem reluctant to publicise.  As I talked about in Profound inequality in America…Time To Act!… the depth of disparity between haves and have nots is now  close to breaking point. The reasons for disruption differ but the catalyst is truly born out of a sense of injustice. The political landscape, like commodities, is getting closer to a once in a lifetime earth quake. UKIP along with anti conformist EU parties are well and truly on the march. France, Germany, Greece, Sweden, Spain are all experiencing the movement. Globally, protests  in many countries are aimed at bringing down failing and corrupt governments. Others are based on religious grounds. The significant loss of revenue commodity rich economies will experience in 2015 will not allow corrupt governments  continuity in bribing the electorate. Whilst, as mentioned earlier, they will attempt to expand export volumes, the overall economic reality is they will cut spending or in some cases huge energy subsidies thus exposing the core failure of the global economy. It is built on wasteful unsustainable  government spending.  This is either financed by over valued commodities, due to excessive QE (numerous blogs on the subject starting with Quantitative Easing …April 2013)… Or mammoth government spending/debt which is only allowed to exist because of??… Yes you guess it excessive non debt reduction linked    QE.
This story does not end well. Be afraid, be very afraid. I only hope my allegance to UKIP is not misplaced and they remain an un-whipped political party where their elected officials are allowed to vote with their conscience and in line with the wishes of their respective  electorates.

Due to the weakness of commodity revenue, Australia is cutting overseas aid, civil servants and departments…tomorrow they will announce the extent to which the commodity crash has raised its budget deficit. The current deterioration in its global trade position is the biggest since records began in 1959. It is interesting the measures this realistic government is taking in view of the deficit escalation it faces, as opposed to those by the Coalition in the UK.  This sensible approach, whilst short term negative for all concerned is better in the long term. Unlike of course, the UK and for that matter many other nations in huge debt, who have chosen to spend and borrow even more to plaster over the cracks on their watch. This gives them immediate credibility eg George Osbrown (Osborne/Brown)  but just lumbers future generations with the liability. HOW ON EARTH CAN IT BE RIGHT FOR US TO ORDER CAVIAR or FOISGRAS AND HAND THE BILL TO PEOPLE WHO HAVE NOT YET BEEN BORN. OH YES, I KNOW, LET THEM EAT CAKE!…see we got there in the end. Remember, this was the start of the French Revoloution…Hopefully, Farrage, I and my colleagues will do like wise but in the whole of Europe.

EU… So, we are being asked to pay more into the budget pot whilst France gets the lions share of our additional contribution. This is justified due to their weaker economic performance… well bear this in mind.

A 2013 global study of working hours revealed the French worked the fewest hours of any country in the world. The report by Swiss bank UBS found the French graft for just 1,480 hours a year, with 27 days annual holiday.Britons work 1,782 hours a year – 301 more than the French – and have 20 days holiday a year… still happy to work your socks off to stay in Europe?… I could go on and tell you about the extent of black market activities in many EU countries which lowers their official GDP thus reducing the amount they pay…but I wont.

OIL   A quick update on a topical issue. Below is an extract from a recent press article (Daily Telegraph)

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry.The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.This is a major departure from historical trends. Such a shortfall typically happens only in or just after recessions. For it to occur five years into an economic expansion points to a deep structural malaise.The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.The EIA said the shortfall between cash earnings from operations and expenditure — mostly CAPEX and dividends — has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.

When analysts talk of the big boon to consumption from lower Oil prices, bear in mind four things. Global Annual Investment in fossil fuels is $1 trillion most currently based on $80 brake even. Companies have been encouraged by Investment Banks to buy back large swathes of share capital (Very good in expansion…possibly fatal in contraction) Governments are spending revenues which at current $60 price, do not exist. Consumers (and Governments) are burdened  with huge debts.

Sadly, todays article front page of the business section Telegraph` £55bn of Oil projects face axe (North Sea)` fails in the most important issue. Namely that the UK Treasury takes around a third of the profits made by companies in the UK Continental Shelf. I suggest they read my last blog Sterling…Beware The Reaper!!!  Lets not forget the GREENS. Last year 62% of all money invested in UK Enterprise Investment Schemes (EIS) were made in Renewable Energy…MY GUESS…They all need Oil above $100 to be viable…All this leads me to my favourite Warren Buffett saying…

“When the tide goes out you can see who is swimming without trunks” Ladies, be prepared to avert your gaze!

Issues for future blogs

Is Globalisation or EU causing depopulation of rural areas eg Spain has one area twice the land mass of Belgium that is almost deserted. French villages shrinking (FT Weekend)…Deflation tsunami on the way?..Summer 2015 very bad for European and North African holiday resorts as Russian holidaymakers disappear…Why is UK  paying more into EU pot than countries that spend far more as a percentage of income on pensioners?

 

 

 

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Sunday, December 14th, 2014 Consumer Debt, Debt, GDP, Japan, National Debt, Oil, Predictions, QE No Comments

Sterling…Beware the Reaper!!!!

Just a quick note on the seismic change going on in the world. Oil has now hit my target set over a year ago. This could be the big move I have been talking about for a long while. The chart below highlights how governments have ramped up spending along with the increase in Oil prices. If todays move to $70 is maintained or even moves lower, huge budget/spending cuts by these governments will follow at some time. Of course, prudent governments will have sufficient reserves to wait and watch for six months, beyond that, they have no option. If you read my thread on commodities and deflation you will find I talk about the potential collapse of Bonds backed by energy companies. To highlight that, Energy bonds make up 15.7 per cent of the $1.3tn junk bond market, according to Barclays data – compared with 4.3 per cent a decade ago. In the not too distant future, screams of anguish will be heard from investors.

My reason for this article, and I have not got much time, is the currency market. The move in Oil prices has lead to weakness in (Oil producing currencies) the Norwegian Krone. Yes, they have a lot of Oil but if this rout in commodities in general continues, I can assure you, the Norwegian Krone is where you want to be. I have said on many occasions that the fiscal approach of saving a large percentage of their oil income will make them the ultimate safe haven if the going gets as bad as I have constantly warned about. To my absolute disbelief, STERLING, has not moved. I know that our revenue (from Oil) has declined significantly. I have attached a copy of a recent government report. Nevertheless, the important fact to remember is how expensive it has become to extract the oil from beneath the North Sea. I believe the current costing is between $55-60. If oil were to fall below that, our entire energy sector would be in turmoil. Scotland would see mass unemployment on the east coast. The £7-8bn direct revenue would be in jeopardy and investment would collapse. These might not sound like big numbers but with a  deficit growing day by day, the implications for the whole of the UK are catastrophic. I reiterate my long term forecast for Sterling/dollar (Cable) to retest its all time low at $1.08…worrying stuff

Iron Ore is getting close to the 50% decline I have warned of…regular readers will know how and why this is occurring…all is not well in the world. I have said that equities are constantly supported by direct Central Bank purchases. Company Buy Backs and Sovereign Wealth Funds. The time may be upon us where even that support will not be enough. I will suggest a deep out of the money PUT OPTION in my next blog. Sorry, I have to dash…politics awaits..

 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323371/140620_UK_oil_and_gas_tables_for_publication_in_June_2014.pdf

 

 

Oil price graphic

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Thursday, November 27th, 2014 Norway, Oil, USD 1 Comment

BRICs…Future Looks Cabbage Like…

The significant fall in major industrial commodities is, as I have said for so long, a result of massive QE. The unprecedented level of cash injection by the worlds major powers, has driven investment far beyond economic reality. Let me explain. The quest for investment returns of this avalanche of money, first drove assets widely construed as safe investments. Government Bonds and Good Quality Equities. Once these had been driven hard, investors slowly moved along the risk curve with Commodities being swept along on the near zero cost of finance. This boom in commodity prices was followed by a dramatic pick up in capital investment by mining and exploration companies. Once again, with the aid of near zero finance costs. With the BRIC block being major beneficiaries of this boom, Emerging Markets (EM) became the place to be. The economies of these countries plus other EMs were also swept along with employment and consumption creating a belief that this bounty will last forever. This positive atmosphere drove huge infrastructure projects on two fronts. Firstly, to enable the vast quantities of commodities being mined and transported and, secondly, in response to the consumption this investment boom employment created. The problem with all this wonderful economic activity was that the demand was not as a result of genuine global investment. The developed world is mired in both personal and government debt to an extent that the future course of debt fuelled consumption has hit a brick wall… see Profound Inequality In America…Time To Act!  So with that in mind, where was all this productive capacity going to go. Well, I have talked about that crazy problem over many past blogs. It is the backbone of my belief that Deflation can be the only result and to that end I have penned many related articles since mid 2013.

So how far have commodities fallen…Iron Ore -44% @ $75 and getting closer to my forecast of $60 when it was nearer $140…Citibank have this week dropped their forecast in line with mine. Albeit nearly 18mths later. Oil -40% @$80 and getting closer to my forecast of $70 when it was nearer $120…Coal -30%…I never forecast a price just that it would fall dramatically. this industry is in a total mess…other metals are falling as are softs such as foods and rubber…interesting data points to the first decline in shale oil/gas wells in America down 1%, this could be the start of bigger declines. Remember, as stated in Chinese Deflation Cancer Spreads, the shale industry is at the heart of the economic expansion in America…see this web site below for graphical confirmation. Data of Chinese export expectations, the main growth in a lacklustre Chinese output picture, fell 50% this month. If confirmed, 2015 output projections will need to be cut dramatically.

The Geography of Employment: Mapping the Recovery [INFOGRAPHIC]

 

The regular readers would have spotted the three main ingredients of Steel which itself is now cheaper by the ton in China than Cabbage. Over investment, thus creating mass employment, driven by cheap money is now backfiring. The recent move by major commodity countries and producers to continue production but lower price is a real inflection point in global economics and the death knell of QE. Low cost producers are so heavily invested in full and growing production that they cannot afford to loose market share. The high cost producers are more likely, although not all, to be state producers and the politicians are very,  very reluctant to cut. Losses are now the norm for a myriad of commodity producers. The pressure to cut costs is gaining momentum and will intensify further. Wages and capital investment (see numerous blogs on the subject) will be two areas where costs are cut. For the state or semi state companies, taxation sweeteners will become common place. This will lead to a race to the bottom with massive amounts of commodity related bonds defaulting.

Consequences of the above

At the outset of 2014 I wrote an article entitled…Global Dissatisfaction With Governments Can Only Spread…I think this is becoming a worrying prophecy…A lot of unrest is going on around the world but there seems too be little mainstream reporting. I guess that several large flashpoints are taking all the headlines. However, European unrest is certainly growing and with the planned austerity for the next fiscal, that can only grow. Recent disturbances throughout Italy, in Belgium, France and soon I expect, Sweden. South America is in a very precarious place. Argentina, Venezuela are basket cases with huge unrest. Brazil is looking very unstable and smaller commodity reliant countries like will Chile will suffer.

Hey ho…over the last 2 years I have talked of the Equity Markets being propped by Company Buyback and Central Banks buying…I am beginning to think it may be time to buy a deep out of the money PUT OPTION…Just thinking at the mo..

Yen..Falling like a stone…any major sell off in Equities will halt it temporarily…talk now of a snap election. Who knows if they will go ahead with the Consumption Tax increase next year. One thing is for sure, it will hit the economy hard just like the last one…BASKET CASE

 

 

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Wednesday, November 12th, 2014 BRICs, China, Consumer Debt, Debt, Japan, National Debt, Predictions, QE, Steel, Yen 1 Comment

Italy Could Beat UKIP To Braking The EU

Finally, the good ship Gravy Train is taking on water below the water line. Comments by Beppe Grillo, leader of the 5 Star political movement, will send a shudder down the necks of the overpaid numties dictating how Europeans should go about their daily lives with little concern for the misery they are causing.

“We must leave the Euro as soon as possible” said the learder of a party that polled 21.5% in the recent European Elections…This will be, if it becomes reality, a hammer blow to the German economy. No self respecting politician in the Mediterranean Countries would be able to stay if it happened and Germany would be uncovered as the worlds biggest exporter hiding in a weak currency. Of course, this is only one voice in the Italian political arena but Beppe has a soild following and the black hole of debt that is facing the government will only force voters into his clutches.

This is what I wrote in February this year in my Article Nothing Sucks Like an Electrolux …I still believe the simple solution is GERPELLED …Germany Expelled

….Germany to be expelled from the Euro. I first hinted at this in The Elephant in the Room (June 2012) and again in Kurzarbeit achieved where Blitzkrieg Failed (January 2013)…basically Germany is hiding in a weak economic zone to conquer the export world with an unfair advantage.

GLOBAL UPDATE…

China.. Sales of excavators fell in September by 33% versus 2012…This is an acceleration of the 15% decline seen during the first nine months. Regular readers will know how important construction in China is to the Economy.,..If the Chinese economy is expanding anywhere near the 7.5% it states…You can call me Waung Kin Phil!!!

Slowing House sales means slowing Excavator sales which means slower Steel sales which means slower Iron Ore/Coal sales which means slower Shipping traffic which means slower ship sales which means slower Steel sales whi…you get the point I guess…

 

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China and the Broken BRICs

Off to Birmingham in an hour but I have had a request to clarify my statement on Middle East Oil producers budgets. I said in the last blog that they are spending wildly on social and infrastructure programmes, thus they need Oil at or above $90 to gain sufficient revenue. Well, here is a brief breakdown…Saudi Arabia brakes even at $88…UAE at $67 and Iraq at $93. Whilst this fall in Oil to approx. $87 may only be temporary, It will make them look at the level of spending. Just for information on the last time the US became a large Oil/Gas producer in the early to mid 80`s, the Oil price fell from $33 in 87 to $10 in 86…it did not regain its higher price for nearly 15 years. Think on!

Whilst I have you on the line…I stated in Chinese Deflation Cancer Spreads that China will start by slowing production at its Iron Ore and Coal mines but when push came to shove, employment is far more important than profit. I concluded that they will use tax advantages to protect its domestic miners…well, China has announced the re-implementation of import tariffs on Coal, having been suspended for ten years. This has sent miners in Australia on a downward path this morning. Whitehaven Coal for instance is 9% lower…Expect some movement on internal taxation of Iron Ore if prices remain weak. I have, on many occasions, highlighted the implications for mining equipment suppliers in the US and Sweden. This is not good news. I still think Jim O`Neill of Goldman Sachs was just lucky with the BRICs…And poor old Jim Thorpe would be turning in his grave…

TTFN…

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Friday, October 10th, 2014 BRICs, China, Steel No Comments

Global Economic Roundup

USA…An interesting development from a barometer (BNSF) that I followed very closely up until early 2013 ,when the data became polluted with Petroleum distortions. This is now largely working out of the system and it once again is worth a look.

BNSF weekly railway stats show that upto the halfway point in the third quarter 2014, the economy seems to have changed down a gear. The series of quarterly volume flows are always fairly consistent with the underlying GDP data. The halfway point so far indicates a decline, which would be odd.

In Q3 and 4 2013, BNSF volume grew around 5% and GDP averaged 4%…In Q1, when a poor winter saw GDP declined 2%, rail volume barely grew and would have fallen had it not been for Coal demand. Q2 saw a 5% rebound in rail volume and the GDP data came in at 4%…So as you can see, there is a strong correlation. So what has happened to 3Q rail volume with BNSF?  currently, total volumes have contracted 1.16%. Without the significant influence of Coal, the numbers would have been unchanged. It is likely that industrial action at some ports may have affected container traffic but this does not explain the sharp reversal from the second quarter recovery. Unless there is a sudden pick up, the GDP outlook for Q3 is at best unchanged. That is certainly below all forecasts of around 2.5 – 3.0 %…hey ho, just saying

 

China…How low can the coal price go?  Currently, around 30% of global coal miners are losing money and 70%, yes,70% of Chinese miners losing money. The interesting thing is, China is slowing imports to support its own production. SOUND FAMILIAL? First half 2014 imports of coaking coal (used for Steel production) were down 12%. Overall coal imports, including thermal for energy production, is down slightly. The China coal authorities have called on domestic producers to cut production by 10% in the second half. The shift to sustainable energy appears to be paying off with the first decline in overall demand this century. Australia, USA and Canada are the biggest shippers and are currently suffering with mine closures on the agenda…If China sticks to the cut, maybe prices can stabilise. I would not hold your breath.

Coal and Steel currently at six year lows.

Sterling…I got a little impatient with my $/£ options and decided to book the 100% profit available late last week. I still feel Sterling is flawed, its just time was running out with a September expiry. The $/Yen has started to move and a break of Y105.30 would see it on its way to the first stop of Y110

 

 

 

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Monday, August 25th, 2014 BNSF, China, GBP, Predictions, Steel, USD, Yen 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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Global Dissatisifaction With Governments Can Only Spread

Hi all. I am back with my first blog of 2014. No charts in this one as it is just a thought provoking piece.

The recent turmoil in global asset markets could be just the beginning of a more significant shift in the way the world is run. If a fairer, more just and balanced society is to endure, the immediate road ahead is likely to be bumpy.The unrest in Thailand, Turkey, Ukraine, Argentina, Brazil and Venezuela (TTUABV) are all linked to corruption and inequality. People are no longer prepared to stand by and watch the ruling elite grow ever richer and more powerful whilst the majority get little by way of a better life.The peasants have always revolted before so why should this not be just another short term blip? The answer could be debt—

Over the past 50 years governments have been allowed to raise the level of overall debt to astonishing levels. This debt has been used to prop up the world economy, whilst just enough of this money went to the masses ( to quell their rage) the bulk went to the small minority at the top. Well, I feel the show is nearly over and the accumulated debt level is at a stage where it can be raised no more.The USA, Japan, UK and France are a few of the developed economies who have plans to curtail spending further in the coming years. This is the complete opposite to the profligate abuse of public funds previously. This will not be the catalyst for change only another link in the chain of events.

Since 2012 I have written extensively on the subject of China and the other BRIC economies. My concerns about this group of countries which have been the primary drivers of the world economy in the 21st century, have been well founded. I have said it before and I will say it again `China is a cancer on the world economy`. Just ask yourself why we trust a country that tells you what its GDP will be in advance. It then uses one of two means (or a combination) to achieve that goal. Firstly it uses statistics which are doctored to tell investors what they want to hear. Secondly, to make sure growth is achieved they will build a few extra thousand miles of railway or build a few million additional houses. These investments would not be a problem if they were driven by demand and paid homage to a return on investment. Sadly that is not the case. Both railways and housing are so overdeveloped that empty trains and platforms abound and tens of millions of homes are unsold or just uninhabited. As finance becomes less abundant, driven by tapering of QE and concerns on Chinese debt quality, this oversupply will cripple construction, steel, Iron Ore and transportation etc etc. Despite all this, China and the BRICs are once again just further links in the chain. My real concerns for 2014 surround my old favourite Japan and a new one for me, the Middle Eastern Oil producers.

We are on the cusp of Japans big fiscal tightening. Consumer taxes will increase in April from 5% to 8% in the first step towards 10% in 2015. This might not seem too onerous but in an economy that has only seen deflation over the past two decades (coupled with negative wage growth) believe me, this will stifle consumption… I have highlighted a myriad of interesting facts on Japanese debt and society over the past two years. Go to the categories filter to read.

Finally we get to the catalyst of what I believe will bring about the end of borrow and binge politics. Demand…Global demand or consumption and its growth/decline is how governments and central banks keep the world turning. Every economic crisis in the last 50 years has ultimately been resolved with debt and or cheaper borrowing costs. So, back to the unrest in the TTUABV bloc. The resulting currency declines by all will lead to a contraction of overseas demand due to import price inflation. In many cases government finances will have to be re-balanced so past demand becomes future austerity. Taken solely as a group the world economy would only hiccup. But, add in further austerity by developed nations and world demand looks very fragile. China can no longer come to the rescue as it did in 2009 (with a massive investment programme) as it now has debt problems of its own.

So demand could fall globally. What then? Russia and the Middle Eastern Oil producers become the final catalyst. Lower demand will weaken commodity prices and unlike previous economic declines this is where it all unravels. Because commodity rich countries have grown so rapidly on the strength of the commodity revenues their production costs have grown sharply. The production costs are not just the extraction element but the debt and annual deficits required to run  infrastructure, social spending and corruption wastage. Saudi Arabia, I am led to believe, needs $100 per barrel to maintain its budget. A far cry from previous economic crises where producers would simply cut supply and wait for prices to stabilise (maybe spending a little less in the casino’s of London etc). Not any more. This time round they too would be caught up in the financial meltdown and have to cut spending aggressively. This in turn will lead to yet more government dissatisfaction. Iron Ore will fall below all but the cheapest producers causing further pain to the BRIC and other suppliers who have ramped up production and with it costs.Whilst all this sounds dire. It could lead to (further) widespread buying of equities by Central Banks… see Gold and Equities April 2013 and Olympic legacy for the Finance-reaper August 2013 for comments previously…and maybe one last ditch effort by the elite of the banking world which would help the politicians carry on spending for another few years. It would be a simple plan. Just write off the government debt held by central banks. Of course. this would lead a move by every country (other than the EU which has no mandate) to print money buy their own bonds and spend spend spend. Inflation would rocket and unrest would ensue…

HAPPY 2014!!!!!!!!!!

PS I have been pestering Nigel Farage (via his office) to meet me for lunch and discuss a new political approach for the UK. Sadly he is far too busy. I will continue as I would love to change the way politics are done, not only in the UK but globally.

 

 

 

 

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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

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

What have Spanish Villas and Ships got in Common?

We are getting awfully close to a Banking Crisis!  German Banking System in Crisis

This week saw another piece in the jig saw of collapse that I have been warning of for nearly 18 months.  The ClarkSea Index (see below for details) has just registered its lowest level in its 23 year history. Although its weekly decline of $223 (3.04%) to $7,111 per/day charter rate, is a far cry from the record $5,000 (12%) drop in the 2008 crash, it has to be put in perspective that the daily rate fell from $43,000 per/day at that time.

Why is all this so important?

With an estimated 60% of shipping loans now in the `not performing` bracket  it is important to bear in mind the attitude of the lenders. The biggest lenders won’t foreclose even if ships are worth less than the outstanding debt and owners can’t meet repayments. They would much rather restructure with the belief that valuations will rise following an expected pick up in overall shipping activity. This process of protecting ship valuations (by not foreclosing) helps the lenders to make provisions rather than crystallising losses. Perfect sense in normal business cycles and has indeed paid off in previous shipping downturns. I believe this time things are different. (see my many blogs on the subject) This years 20% decline (in the ClarkSea Index) to the all time low, makes the process of restructuring more difficult. We are now close to a point where new restructuring deals will be impossible to stack up economically. The additional debt being laid at the feet of borrowers is futile. Additionally, previously restructured deals must now be looking shaky. All this looks remarkably like the Spanish Banking crisis which I predicted in some of my blogs at the birth of Finance-Reaper. Two/Three years ago Spanish banks refused to sell off foreclosed property which was piling up on their books. Instead they were offering special zero rate mortgages to buyers  (at book price of the asset). The rest is history. This prolonged the process of restructuring and even allowed some developments to carry on adding to the surplus supply. With 2013 seeing a further surge in new ships hurtling off the slipways of Korea, China, Japan et all, supply is growing. Yes, I hear you, older ships are being scrapped at the fastest pace in many a year, still not enough to change my opinion. Meanwhile, I believe world trade is contracting. Yes, I hear you, I am crazy! But I do not believe a word China says. I have written many articles on the Steel industry as a bellwether for China producing at a loss just to maintain employment. This is true of many industries in that country. Chinese steel inventories are mounting, now reaching 9 year highs. The EU is now threatening to impose further trade dumping duties of steep pipes from China. All non- Chinese steel companies share prices are close to 15 year lows with the likelihood of further production closures to come. All this whilst China is hitting all time high production output. IRON ORE will retrace the losses seen late last year when common sense prevails. Problem is, with 20 million farm hands joining the urban sprawl per annum, they need to have jobs. China needs to keep production of basic material like Steel and Aluminium at full tilt as they are such big employers. The longer the excess production goes on the bigger the downturn when it comes. All this is alarming for those bankers who are sitting on shipping loans with the hope of a significant pick up in trade. Confusing!

ClarkSea Index (Compiled by the worlds leading ship broker, Clarkson PLC)

A weighted average index of earnings for the main vessel types where the weighting is based on the number of vessels in each fleet sector.

UK…I will follow up on my many recent warnings about the economy and Sterling. The January Public Sector Accounts were on the face of it better. Believe me, they were not! I will review them next week.

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Sunday, March 3rd, 2013 China, Debt, Shipping, Steel No Comments

A Quickie for Christmas

Xmas makes us all test our Capacity.

I know some of you have been pulling right little crackers while others have been enjoying spending time with a lovely game bird, but Finance-Reaper is always on the look out for interesting stories. Two that caught my eye last week provide fuel for my argument, regularly argued in this blog, that global over capacity in heavy industry will weigh on investment and growth for many years to come.

A Bloomberg story on the 21st…highlighted the growing problem in China of Digger Capacity. Companies involved from overseas include Caterpillar, Volvo and Komatsu.

1) Domestic and overseas players have built enough capacity (600,000) in China to supply nearly double the WORLDS annual demand (300,000). Whats more, inventories are enough to satisfy the entire 2013 domestic demand in China of 100,000 units. November saw the 19th straight decline in monthly sales. It is expected that incredible incentives currently being offered, together with the additional government spending on infrastructure, will halt this slide. Not, I expect, enough to alter the supply/demand dynamics that much. Most of this millennium has seen annual domestic sales growth of 25%. All that has changed this year and is unlikely to be seen again. Whilst it is a vast country and becoming a vast economy, I believe its dynamism is in the past. Wage growth, corruption and demographics, have put paid to that.

2) The Sec. General of the China Iron and Steel Association spoke at a conference last week and stated that the industry is facing an increasingly difficult time and capacity is increasing. No shit Sherlock! He went on the say that sales margins are -0.18% in 2012 and this is not helped by a further $65bn of fresh capital (+3.9% yoy) injected into the mainly state controlled sector this year. Whilst 2012 Steel output is expected to be 723million tonnes (+3% vs 2011) consumption will only be 679million tonnes (+1.8% vs 2012).

I cant help thinking that far from being the main driver of world demand and growth, it could actually become a festering sore. Throwing ever more capital into already over sized industries will only drive the need to export more. Recent statements from global steel companies bear this out. Jobs in the west are going to be cut still further. If China can produce twice the world demand for diggers, what will happen to other countries production facilities and profit margins. It is clear that Chinese investment is not based on return. It is driven by the need to get the peasants off the farms and into industrial production. This is not good in a world saddled with enormous state and private debt. Consumption cannot be driven fast enough to meet that supply. With interest rates at near zero and QE to the the left of me and QE to the right of me, well, here I am, stuck in the middle with you!

One other little indication of how China intends to deal with a glut of domestic production. 2013 will see the scrapping of the 40% export tax on Metallurgical coal (used in Steel making). This should allow them to regain their global dominance (in supply terms) which the tax, implemented in 2008 took away. Other main suppliers are Japan, Russia and the Ukraine.

Hope you are all enjoying the seasons festivities and that this little seasonal quickie has not given you indigestion. Remember, always look on the bright side of life. On that note I would remind you that the shortest daylight hour day is behind us and we are now on our way to a bright sunny spring. YYYEEEHHAAAA

 

 

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Wednesday, December 26th, 2012 BRICs, China, Predictions, QE, Shipping, Steel 1 Comment

What is the Fiscal Cliff made of?

Answer. Iron Ore.

A theme has run through my blog this year. It includes Steel, Iron Ore, Transport (Shipping/Trucks), Machinery and Global Economic growth.

I have written many blogs on the worlds second most traded commodity (behind Oil) as I believe it held the key to the BRICs rise onto everyone’s investment radar. My expectation earlier in the year for a significantly weaker price were all too evident yesterday when the largest US miner of the Ore fell significantly following a negative note from Goldman Sachs. The company is mothballing some output and reducing cap-ex. Cliffs Natural Resources have now fallen around 60% since earlier in the year. Other high cost producers have fallen across the board around 30-40%. I say higher cost producers as this is very important. The difference between the low cost producers like BHP (c.$40 per ton.) and the higher cost (c.$80 per ton) producers makes for interesting commentary. Yes, Goldman downgraded Cliffs yesterday helping the stock to fall 13%. However, something more interesting may have been giving a helping hand. China (consumer of 2/3s of the worlds seabourn Iron Ore) are very concerned that when Ore fell 50% to its low point ($85 per ton) a few months ago, its mines had to significantly reduce production and in many cases stop all together. Average Chinese production costs are around $85 per ton. They have now proposed measures to help them compete with the likes of BHP, these include cutting taxation by up to 50%. It is clear that they intend to keep the economy from weakening further in certain areas. To this end, the government is adding to the already high levels of industrial inventories (of raw material and finished goods) by purchasing Steel, Aluminium, Rare Eath, Copper etc. Add to this the significant increase in Oil and Coal reserves (this year) and you can see that although they are not reflating the economy as they did in 2009, they are quietly trying to support some of the high labour intense industries. It will all end in tears.

At some stage, the low cost producers ( Iron Ore) will fall fowl of this policy of holding up what are mainly state run industries. Global trade (consumption) is contracting! I think the next update of my Suez Canal data will give a much clearer confirmation of this. As high and low cost producers reduce output and cap-ex still further, the transport and machinery sectors will have another leg down. Shipping (a regular theme with me) is falling apart with billions of Dollars of losses yet to be taken by the banks. Several more companies have recently filed Chapter 11 (and the like) with several more of the German consortium shippers on the brink. AP Moeller (regularly mentioned here) have shifted their investment programme away from shipping to focus more on Oil production and port handling facilities. Not good (short term) from the worlds biggest shipper who has just sold a small fleet of Gas ships and idled another two VLCC`s. Container volumes to Europe were down around 15% in the third quarter.

BHP and APMoeller being leaders in their fields have yet to perform as the smaller players. I forecast some months ago that they would and I still fell very strongly that significant downside to their share prices will happen. The Swedish economy is very dependant on the industrial transport and mining industries accounting for around 40% of trade. Incoming orders have declined over the last two months and further significant declines may well be on the cards. I have talked about a few of the players before… Volvo, Sandvik and Atlas Copco. We must not forget the likes of Joy Global and Caterpillar, also mentioned several times before.

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Wednesday, November 21st, 2012 BRICs, China, Oil, Predictions, Shipping, Steel No Comments

Swedish Machinery

Transportation and Steel

Today’s release of the Swedish Purchasing Managers Report for August shows a really significant drop in one of the components. The New Orders element dropped from 51.2 in July to 41.1 in August. Why is this significant? Well, the economy in Sweden is very focused. Machinery,Transport and Equipment make up 44% of Exports and 40% of Imports. As transportation is a leading barometer of economic activity it is important to watch this sector closely when the global economy is so finely balanced. I have blogged several times about my concerns for Volvo and this most recent data, whilst not suggesting transportation was to blame for the decline, can only reflect badly on the sector due to its high proportion of GDP.

Interestingly, mining machinery manufacturers globally, have warned of slowing sales in the past two weeks. I have been talking of my concerns in this sector many times. Sweden is a leading player in this field Atlas Copco, Sandvik etc. What must not be forgotten of course is that this is the most Steel hungry industry group. Regular readers will know my major concerns in this field. See regular blogs on Iron Ore , Steel and BRICs and Lucky Jim Oneill

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Monday, September 3rd, 2012 BRICs, Euro, Steel No Comments

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

Warning Signs

BHP Billiton and Iron Ore Price.

In a previous blog `Are Steel Producers a Buy? I highlighted my concern for a potential significant decline in Iron Ore prices. Well, last Friday this key ingredient of Steel making, fell below $100 for the first time since its significant climb towards $200 started in early 2009. As you can see from the chart in that earlier blog, this price rise started just above production costs of around $40. So why am I highlighting this fall from grace? Iron Ore is, to me, like a litmus test of how big supply and demand in one of the most important construction materials is heading. This recent slide, from $145 in May, is not good. It has been driven by the significant fall in Steel prices to around $550 per ton. China is the key to all this price movement, firstly to the upside in the big push following the massive stimulus spending in 2009, and secondly, by overproduction now. The total production targets for China (in 2012) is another record at around 720 million tonnes. The problem is, no one seems to care where all this production ends up. Inventory is high in all elements of the production process and finished goods are stacked high around the country. A few drivers of the economy over the past decade are now suffering and they just happen to use a great deal of steel. Ship building (see numerous previous blogs) is imploding and will lose many yards to closure this and next year. Mining is starting to suffer as the raw material (Iron Ore) is of poor quality and cannot compete with overseas quality at this price. Coal is piled to the moon and back. Aluminium (see previous blog). Car inventories are very high at the forecourt with sales incentives getting bigger. The Iron Ore price is telling you that production cuts are around the corner. Interestingly, the lower steel price could have a big impact on countries that do not produce steel. Pakistan and Bangladesh for instance are two of the worlds big 5 players (India,Turkey,China) in ship demolition. The price they pay for an old ship is quoted in $`s per ton for the ships weight. The only reason they have become large players is the cost of labour. Instead of high technology, they use muscle. This is a very slow process. So when you buy a second hand ship and the steel price is stable or rising, all well and good. When it falls however, you are left holding a very expensive piece of rusting junk. As the price for scrapping ships falls with the steel price, more and more shipping companies will go under. The new price for ships is coming down so a vast inventory of ships will need to be revalued on company balance sheets which will frighten the hell out of the banks.

Despite the expectations of further money being thrown around by the global Central Banks, I believe that little things like higher VAT in Spain from September, the end of the Japanese government car scrappage scheme and the Greek pharmacist insisting on cash payments from the government to issue prescription`s from next week will all keep pressure on the bad news. With volume in the equity markets imploding over the summer, investment banking bonus`s will be non-existent. The big loser in that is of course that old whipping boy of my angst. the British government. The large chunk of income tax it receives early each calender year helps pay for some EU contributions or a new mansion for an African dictator. Not next year! The UK as I have said in many blogs, is on the verge of financial collapse. Just like Japan, it is all smoke and mirrors with huge liabilities not being accounted for with a budget shortfall which will grow in this fiscal, not decline as predicted. The government in Japan is expected to announce a reduction in economic expectations tomorrow, which is no surprise to several investment banks which have recently released research indicating they believe Q3 will be the start of another recession there.

So what about BHP? If you take a look at the charts on the blog first mentioned above. You will see the performance of BHP and the Iron Ore price. Whilst BHP mines an array of minerals, Iron Ore is the key to its success. Maybe the Chinese government will come to the rescue with a massive spending package  (driving steel consumption). In the meantime, I believe its share price is ripe for a 30% decline. To be fair I have warned of this before as I felt it would perform more in line with the commodity. The reality now is, it is exposed to a global slowdown. It has invested massive amounts in moving vast quantities of materials and they have to keep that machine running at full pelt. Unlike OPEC they cannot afford to turn the taps off until things settle down.

Is China causing global warming and seismic activity? As a side issue, a very rough estimate of Australia’s exports of commodities in the last decade must be around 10 billion tonnes.  A great deal of which, ended up in China. How much do you have to move from one side of the globe to the other, or from one tectonic plate to another to affect the earths rotation or plate movement?? Just a thought.

BRICs (see numerous previous blogs) of course have been given a big lift by the Iron Ore price in the past. If this current price fall is maintained for some time or weakens again, their economies will be hit very hard as will the mining machinery producers eg Joy Global and Caterpillar, both of whom I have highlighted in the past. I am sorry Jim O`neill but your theory could all be about to be exposed as a short term blip.

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Monday, August 27th, 2012 China, GDP, Japan, National Debt, Predictions, Shipping, Steel, UK No Comments

The Medicine is Not Working.

Finance-Reaper returns..with a warning!

It has been a couple of months since my last blog (holidays and a large landscaping project to occupy me) so I think a refresher as to where we are in the global economy. During my absence the equity market has rallied strongly on the perceived wisdom that the Central Banks of USA, Europe (inc UK), China and Japan will breath new life into a flagging world with yet more monetary stimulus. The problem is, they have done this so many times over the past 30 years that it reminds me of Brazil 20 years ago. They took anti-biotics as a cure for all ills so became immune and many people died when a common illness struck. The repeated intervention of the primary banking authorities has given governments and investors alike, a laisse faire attitude to debt and risk. I believe the time has come, just as it did for the Brazilians, when the world needs to take a different medicine and it wont taste very nice.

Since my last postings several important developments have occurred in the areas I have had great concern about.

Steel and Iron Ore are of particular interest. Both have fallen around 25% in the last month and are now at 2 and 2 1/2 year lows respectively. Over production of Steel in China is becoming a real problem which will have repercussions around the world. Inventory of finished material is getting to a point where serious cuts in production will be required. As the main raw material (Iron Ore) is also stockpiled to the roof, it will not take long for further setbacks in the Shipping industry that supplies China (see my numerous blogs on the subject for more info). The main barometer of how this is affecting the shipping industry is the Baltic Freight Index. This has fallen 9% in the last week, 30% since early July and more importantly, is 40% below this time last year. Shipbuilding orders have fallen off a cliff, shipping companies are going broke and mining companies are cutting back on capital expenditure. All things I have warned about. China is now relaxing some high quality steel export duties in order to help the vast production machine from backing up. This, together with encouragement for a weaker Yuan, makes the outlook for the other global players very grim.

As you can see from the chart below, a regular feature, global trade is not growing. If anything it has started to decline. Last months tonnage was down on 2011 and lower than the corresponding period in 2008!

Of course, the primary driver of this weaker picture is Europe as the chart below highlights perfectly. What you have to worry about though, is when will the first and third biggest economies of the world grow up and realise they cannot continue growing the debt pile and calling it economic growth. IT IS NOT!!! USA will register its forth in a row $1 trillion annual budget deficit this year. It has to stop and the fiscal cliff of 2013 is rapidly approaching.   Japan has agreed this week to double VAT to 10% but in two stages and not starting till 2014. I believe Japan is only months away from economic disaster (see previous blogs).

 Europe.

Finished! The recent cuts (to the public sector and spending ) announced by the Italian government were shocking but necessary. They reflect the bloated system of the easy money life encouraged within the Euro arena by the non elected bureaucrats in Brussels. It applies to all the lying, cheating Mediterranean countries. I still believe Germany should be out of the Euro The Elephant in the Room.

UK

Finished! How on earth can the markets not see what is right under their nose. The UK budget deficit is not shrinking! It is getting bigger. Just like the USA and Japan, we are borrowing growth from a future generation with our continual debt build up. You can see from my numerous blogs on the UK that I have warned about Sterling strong vs the Euro and Weak vs the Dollar. As I predicted our trade deficit posted a record deficit in the second quarter. STERLING is doomed. I have predicted a fall vs the $ to the all time low of $1.08 and stand by that. The chart formation from the last blog is still in tact. Should Sterling fall as I have predicted, interest rates will go higher and the stupid banks who are rushing headlong into lending on Buy-to-Let (BTL) mortgages will come a cropper yet again. Just last week saw the release of data showing an alarming growth in repossessions of BTL properties. Property prices are still 10-20% too high.

 

Another issue that worries me is the estimate of UK car sales that are pre-registered. In fact I wrote about this issue in a recent China blog. According to reports, 30% of recent UK car sales are not actually ordered by an end buyer (the same as Germany). They are pre-reg by a dealer in order to secure large volume bonuses. This practice is not new but the scale of this practice is now alarming me. Why? Residual Value. Do any of you remember one of the largest and best known corporate collapses of the 1980`s. British and Commonwealth Holdings was the birth place of such companies as Gartmore and Oppenheimer fund management, Furness Withy and P& O shipping…plus many other big names. It was the biggest financial institution in the UK outside the four banks and was in the FTSE 100. It made one fatal error in the acquisition of Atlantic Computers. The problem of residual value was to be the undoing of B & C. I wont go into the story but if dealers are buying far too many vehicles than they have customers for, they have to sell at a whopping discount in other ways. This tends to be via a lease. Normally, to price a lease you have to make an assumption of residual value. The creation of demand via this process normally creates a wave of second hand cars which will depress prices further. If demand slows as I believe it will, second hand values and therefore residual values will not meet the estimated level when these cars come to an end. A worrying future bill bill for someone.

 USA

Below is my regular chart showing the growth/decline of transported goods on Warren Buffett`s railway BNSF. The Total Freight picture is running at around 2% the highest since the first quarter. Still very anemic and not strong enough to indicate employment growth. The various sectors of interest are Motor Vehicles which have started to decline and the four week moving average (not shown) indicates a rapid fall from current levels. Lumber/Sand/Gravel are positive and reflect optimism in the real estate sector. Coal has rebounded from its winter blues and helped move Freight Wagons into a slight positive. Overall not much to conclude. Steady as she goes for now but wait till we get to the Fiscal Cliff.  I have written about the US sales to inventory ratio and recently it started to rise. This is not a good sign, as I have talked about in March. I have to admit to being wrong about the growth in US car sales. It has turned out to be much stronger that I anticipated. I feel very strongly that this growth is temporary and is driven (excuse the pun) by a desperate urge to cut motoring costs via fuel consumption and is therefore not going to last beyond this year. Last month saw an 89% rise in alternative fuel vehicles. The big US car companies may well be heading back to the doldrums in the second half.

One of my other pet subjects has been in the news lately. The US Postal Service. Its ever growing problems and huge loss profile show just how inept the government are about dealing with real problems. Anyone can spend public money and be triumphant at its impact but no one seems to be able to grasp a nettle. The longer the authorities go on kicking the can the deeper the eventual depression will be.

Stay happy and start making plans for the new world. Hopefully, when we get to the other side of all this we will remember the mistakes of the past. There again why did they repeal the Glass-Steagall Act. Fear and Greed will always rule the world. And we mere mortals will always allow Greedy and Corrupt people to rule us, Why?

BNSF Weekly railway data.

Blogs to follow.

UK Money Supply is still falling, I have reviewed this problem in depth before. UK and US Govt. debt growth. Chart updates of BHP, AP Moeller-Maersk, £/$ rate. Maybe a look at the safest haven for savings in the world, Norway. It has Oil, Fresh Water, Fish and a sensible government policy of saving a portion of its oil wealth for future generations. It may become the lender of last resort should the world go belly up. I have championed this safe haven for a couple of years and I cannot see any reason why that should change. They do have a problem however, of where to put their money. I would offer this once customer of mine some timely advice. In times of trouble IT IS NOT THE RETURN ON YOUR MONEY THAT COUNTS, IT IS THE RETURN OF YOUR MONEY! So do not worry about interest income in this environment. Keep it under your mattress and cuddle up to the nearest blonde. It may be lumpy but it will give you a warm feeling, the mattress that is.

 

 

 

 

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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
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