Japan

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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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

Yen Has 10% Further To Fall.

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

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

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

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

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

 

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

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

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

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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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Profound Inequality in America…Time to Act!

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

 

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

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

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

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

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

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

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

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

YOU HAVE BEEN WARNED!

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

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

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

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

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

Item 1)

Item 2)

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

Item 3)

 

 

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

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

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

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

 

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

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

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

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

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

Amongst its Economic peers the USA (x China)

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

Amongst OECD members

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

also

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

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

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

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

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

 

 

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Nippon soon to Nip Off.

Japan and Yen update.

Regular readers will know I have been negative on Japan for a long time. Having called the Yen decline in September 2012, I now believe the second and more meaningful breakdown of the currency is around the corner. The first chart highlights the narrowing pattern developed since the mid 2013 low point (high for $) of £/Y 103.7. The breakout of the higher or lower lines could lead to a significant shift. If 97 is broken on the downside, against my expectation, a return to significant Yen strength would see the Nikkei equity index fall sharply. If, as I expect, 99 is broken on the upside (Yen weakness) the second long term chart comes into play. The $/Yen would likely test the May high of 103.7 which if breached would lead to a move to the 1998 downtrend. This is where I will try and explain why I think that will be breached and the Yen will fall by a further 10% from there. To try and capture this movement the $/Yen 102 calls which expire December 18th are worth a look. They are currently trading around 20 pips. If the move does not occur you loose 20 pips. If it does, you are in for the ride at 102.20.

Chart A) Short Term $/Yen Sept 2012-Nov 2013

Chart 2) Long Term $/Yen 1996-2013

Why so negative?

I believe the ratings agencies may downgrade the nations debt before the end of the year. The planned tax hike due to be implemented in April 2014 will weigh very heavily on what is a weak consumer backdrop. I still believe this (tax) will not go ahead as planned. To sweeten the passage of this tax, which is expected to raise an extra Y8 Trillion, the government has announced a Y5 Trillion stimulus to help the economy. The debt profile of Japan is well known. It makes Greece look well run!

Lets remind ourselves of the position:

  • Total Debt is 500% vs 370% in USA
  • By 2018 gross debt will be 295% of GDP (higher than the UK crisis peak of 250% in 1815 and 1945)
  • Net debt will be 190%
  • 50% of total spending is borrowed new money

 

25% of tax revenues go to debt interest with rates at near zero

  • 25% of all bank assets are in government bonds (JGBs)
  • equals 900% of tier 1 capital vs 25% UK banks (Gilts) and 100% US banks (Treasuries)

I have highlighted above, a very important fact. With interest rates at near zero, the government is funding at very attractive rates. However, with debt still growing rapidly (c 8-10%GDP) the fact that a quarter of tax revenue is spent on interest, it is not difficult to imagine how, with rates near zero, a higher rate scenario could completely overwhelm the countries finances. Of course, current QE will not let that happen. The 20% devaluation of the Yen in the past twelve months has helped the economic backdrop. Exports up 11.5% in September was the recent headline. Look a little closer and you will find that yes, in value terms they were up. However, in volume terms, they were down 4.4%.

The return to wage growth ( September 2013 vs 2012) was seen as significant. I cant help but feel that the 0.1% increase will do little to offset the sharp increase in energy related costs being heaped on the consumer because of the Yen decline. With continued declines in disposable incomes, the proposed tax increase will be a bitter pill for consumption to swallow. Exports are the only straw that Japan can cling too. Recent export figures from the continent (Asia) are not promising. China exports to SE Asia are at a 17 month low whilst Taiwan and Korea are reporting declines. The Japan time bomb is ticking!!

Coming Soon……Update on my call for Global Deflation  and A review of my bearish 18 month stance on Volvo and other Scandi plays

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Friday, November 1st, 2013 Debt, Japan, National Debt, Predictions, QE, Yen 1 Comment

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

Is Stephen King a plagiarist?

No! not that Stephen King… although the book he claims inspired him to write has a very apt title for this blog. It was The Lurker in the Shadows.

I refer to the author of When the Money Runs Out  Stephen King (HSBC Global Economist). Having read an interview with him in last sundays Daily Telegraph, it became clear that many of his fears and ideas have been the central thread running through my blog for a long time. I will not bore you with the content just highlight two comments. Firstly, QE has acted like a regressive tax, punishing the poor and enriching the wealthy see Quantitative Easing and secondly, Stimulus policies have allowed politicians to live in a fantasy world which is financed by excessively high debt.

Recent volatility in the markets has spawned a great deal of commentary questioning the whole concept of such huge monetary intervention. The short term benefits for a specific element of society are without question a nightmare waiting to happen. Bernanke, King and Abe consider themselves the John Coffey (Green Mile) of the worlds fiscal ills. Instead I believe they will more likely resemble Jack Torrance (The Shining). I just prey that one day that politicians will govern with the following proverb in mind

“A society grows great when old men plant trees whose shade they know they shall never sit in”

We must look to the future whilst reflecting on the past, this leads us to remember that the best time to plant a tree (cut debt) was 20 years ago, the second best time is now.

I must at this point issue a warning to Goldman Sachs and all the other investment banks around the world. If you continue to encourage the Central Banks, by not shouting STOP, to printing more money. Then equity holdings (as I mentioned in the last blog) will be raised further. This will continue to impair, or even decline further, equity trading from the current lows. The likelihood is that when purchased, the stock will not see the light of day till hell freezes over.

Two of my big calls in early 2012 were regarding Japan. I said that the Nikkei would be higher than the Dow in 2013…so shoot me for being 5 months late on a seismic shift. I cant remember anybody making that call. What’s more I highlighted almost to the day, the right time to put the trade on see Be Prepared for a Wedgefest! The Dow was at a premium of 4,660 to the Nikkei on the day of publication. The Nikkei did close above the Dow earlier this week. In the same article I said the Dollar/Yen would go above 100, again an out on its own forecast. Yes last week that happened. I have to admit that my 2012 forecasts were all expecting the economic reality to create lower equity markets but I did not foresee open ended QE.

Global Economy Update 

Regular readers will have watched my series of data on the Suez Canal (shipping) and BNSF (USA rail) volumes with interest (or not). I have not published either recently due to irregularities. For BNSF it is just the case that significant changes to the transport of Oil (products) and Coal have rendered the barometer useless for the moment. If I had the time to strip energy out, may be, but I do not. As for the Suez Canal, I believe something very sinister is at work. Ever since time began they have produced monthly stats. This year things have changed and I believe it is a ploy to delay knowledge on the significant slowdown in trade between Europe and Asia, being highlighted. Over the last two months freight rates have collapsed on some important trade routes. This is completely overlooked by the markets. My focus on the importance of shipping activity (Finance, Trade, Building etc) has become boring to most but it will prove to be a correct focus, I am sure.

UK

Recent data on the economy has proved to be a small fillip for Mr Osborne the chancellor. All is not as it seems. Q1 2013 GDP was not revised down as I thought they would be but boy was the component breakdown very negative. Substantial Inventory growth and services (lions share of the economy) held it together. I have written extensively about why I feel services have grown recently and the short term nature of that growth. The April monthly budget numbers saw higher tax paid, what a surprise given the changes to the way companies have to pay income tax at the point of salary payment. The deficit is still out of control and will eventually leads us into full blown depression. Unless of course…Below is an extract from my blog in November 2012 entitled RIP George Osborne

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

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

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

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

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

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

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

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

5) Corporation tax cut to 12%.

Yes, I have some very difficult to swallow ideas but as the proverb in the beginning quite clearly points out. It is our children who really matter. For it is their future that is important. If all generations work on the principal that the actions they take will only enhance the next generation in our society, then we can look forward to a forest of trees to give us shade from the unknown difficulties that may come our way. Borrowing ever larger amounts builds not a sustainable future but a divided one with even greater inequalities.

ps

China and Sweden… I have said in many blogs that China is lying about its economic output and performance. It appears many economists now share that opinion. The build up of productive capacity will end up being a cancer on the world (see my many blogs under China)…I have stated several times how I thought Sweden was one of the best places I had the pleasure in visiting and doing business in. However, I have warned on several occasions recently that they face a grim future. The narrow focus of the very important export segment of the economy will suffer from two very painful headwinds. The mining and energy exploration industries scaling down of investment coupled with the huge devaluation of the Yen, will cause a very chilly wind. The slowdown they have experienced to date is only the beginning. The strength of the Swedish Krona will have to be reversed dramatically.

 

 

 

 

 

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Amazing Performance: Part 1

Nine Year lows for Steel companies!!!

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

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

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

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

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

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

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

 

 

 

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

Confusing!

China New Year Calender Change or Just Lies?

China became the worlds biggest trading nation in 2012 taking over from the postwar dominance of the USA. That being said, the USA is still the biggest importer. The markets were given a lift last week when this Goliath of a trader released January Import/Export data. Year on Year Exports were up 25% and Imports were up 28.8%. Wow! That is impressive. Of course, if that were the case, its trading partners would be reflecting this surge in their own trade figures. Lets look at the biggest economies in the world as it is only they who could have enough capacity in production and demand to facilitate this huge surge. The USA December, Year on Year, trade data showed a 1.18%% decline in imports (Oil a factor) and a 4% gain in Exports. January has not shown signs of exploding into activity with Inter modal Freight costs weaker and only a 1.97% increase in BNSF freight traffic. Japan has released data for the first 20 days of January showing a 0.57% decline in Year on Year trade. South Korea did eventually report a stronger January trade picture (contrary to the first 20 days decline) but this was only around 10%. February will see a big contraction as the extra working days in January will be lost in the February holiday this year.

Whilst the USA is still by far the biggest nation economy at nearly twice that of its nearest rival China, the European Union in its entirety is the bigger still. If trade with the worlds biggest nations is at best +1-2% in January, then to reconcile China’s huge surge in activity, Europe must be off to a fly-er in 2013! Well, to confirm my expectations for  Suez Canal trade in China is Ly`ing blog, total cargo (x energy) through the canal was down 10.64% vs January 2012. That’s a very large decline in historic terms as can be seen in Chart 2. Whats more, the fall in Southbound (Mainly to Asia) cargo was more pronounced at 15.7%. How on earth can China have such a huge surge in international economic activity when the largest trading nations say otherwise. One must not forget that the Canal data is volume not value of goods, nether the less I am sure even in value terms trade is weaker.

Chart 1

Chart 2

Chart 3

Shows the volume growth/Decline in Container traffic. The January decline (Southbound) is the fourth in a row, the first time this has happened since the trade collapse of 2008/9. Whats more staggering is the extent of the decline at 12.3%. As I have stated in previous blogs, Containers tend to more indicative of finished good and therefore consumer activity.

Given all this evidence, how on earth can the official Chinese data be correct. Lets not forget the implications on the Transportation sector. Both by Sea and Land, this fall in volume has a significant affect capacity utilisation. Bigger ships are exacerbating the overcapacity of ships with total shipping volume through the canal falling quicker than cargo volume. As for land transportation, I did roughly calculate the decline in truck loads hauled but I have lost the fag packet. I know it was 100,000`s. Regular readers will know I have been negative on the truck industry for all 2012. Given the recent warnings from the two big players Daimler/Man/Scania and Volvo my concerns are bearing fruit. I believe that the industry still has far too much production capacity and further painful cuts will come.

Volvo needs to split itself into two or three global business groups. With Caterpillar (Construction machinery)  diversifying into mining machinery with fresh acquisitions, Volvo`s own construction machinery business looks under resourced and uncompetitive. Volvo needs to merge its construction machinery business with Atlas Copco and perhaps its Marine business with Wartsila of Finland.

Chart 4

I guess its about time I updated the story on AP Moeller-Maersk and the shipping industry as a whole. The Baltic Freight Index is continuing to wallow at historic lows leaving the shipping industry with a revenue shortfall which cannot last much longer. With new build prices being quoted significantly lower it is possible second hand values may themselves plumb new depths. Any further decline in the pricing structure would significantly reduce the valuations of the big fleet owners, unless of course, you believe that the world economy is on the verge of a significant upswing. Almost to a man the big investment banks have recently upgraded APM-Maersk so I guess I am a fool.

 

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Monday, February 11th, 2013 BNSF, BRICs, China, Japan, Predictions, Shipping, US Economy 1 Comment

Am I Right to Be Bearish

I have been Bearish since 1999. How do I know that. It was then that I was the only employee of Lehman Brothers to opt out of the generous Direct Benefit Pension into a Direct Contribution pot of money under my control. I still have that pot which has had a positive return every year since. All those who remained were trampled on by the companies collapse. I had taken a negative stance on the management style but more importantly on the global economy which was being increasingly driven by government spending and loose monetary policy. None of that has changed. The four big Economies of the world (USA/Europe/China/Japan) are being held up by massive government spending. The level of spending above tax receipts is shocking and cannot continue. Three of those economies (x China) have existing Debt to GDP ratios which are unsustainable. So, to continue to stimulate consumption by spending more is not an option.

It is becoming clear that the global economy cannot consume at a rate which would help drive tax revenues for those governments to meet their future commitments. Central Banks have been using every trick in the book to help those politicians keep the debt illusion alive. They are all complicit in treating the electorate of those countries like fools. For it is they and their offspring who will have to meet the ever growing burden of this debt. The politicians  have ingratitude themselves with vast riches and on the whole do not live in the real world. This vast state sponsored global economy has to be drastically changed, sadly to do that, great pain will have to be felt by all.

Every time the central banks add to previous QE it is further vindication that being bearish on the economy has been correct. Being bearish on equities is another matter. Each bout of QE adds fresh impetus to the camp that says you must be invested because the bankers and politicians will win, eventually. The  charts below are updates of a regular series of data which I have published. My reasoning is well documented in previous blogs. The first chart is the now familiar BNSF traffic flow of various elements of economic activity. As this is the yearly comparison it is difficult to pick up recent trends. Hence chart two which shows the weekly change in volume growth since July for Containers and Freight Wagons. I think the direction speaks volumes. If you are in the camp that the fiscal cliff will be resolved quickly, what shape do you expect it to take. The $1trillion annual budget deficit that existed throughout the first Obama term must be cut. If it is not cut substantially the Debt to GDP and its growing servicing cost will just be kicked down the road until the next time. Whether it is spending cuts or tax increases, it matters not. The net affect will be to reduce economic activity. That would not be a problem if the other big economic powers were in good financial shape, but they are not. It is only a matter of  time before  Japan implodes in a sea of debt whilst Europe is adjusting to a new norm of significantly lower consumer activity.

 

 

To highlight this shift to lower consumption I have regularly updated my Suez Canal data. The first chart is the simple total volume flowing through the canal.

 

Secondly, the traffic growth in either direction.

Finally, the growth in Container traffic. As I explained in previous blogs on the subject, containers tend to reflect the consumer sentiment as it reflects more on finished goods and blocks out the noise from the vast and volatile commodity sector. As you can see, the flow in the direction of China went negative for the first time since the big fiscal stimulus which created the 2009 updraft.

 

2013 will introduce many new austerity programmes apart from the fiscal cliff. In Europe these are just as negative. France will be pushing the boundaries of reality in its attempts to cut its budget deficit back to 3%. The scale of the spending cuts and tax increases will likely cause significant union and social unrest. The French are in a league of their own when it comes to protesting. Greece and Spain are amateurs when pitched against the cake eating peasants. Heavy industrial companies are coming under strong political pressure to protect jobs but in the end reality will prevail. The UK, SUBJECT OF MY NEXT BLOG, will be plunged into chaos as the budget deficit continues to deteriorate.

In this environment, company profits cannot increase. Despite strong balance sheets, the corporate sector has a chilling few years ahead. Most equity fund managers are overweight strong cash flow companies. Pricing power is about to become far weaker as consumers recoil from yet more austerity. Overcapacity is and will continue to be a major problem.

Shipping and Trucking, my two most frequently blogged subjects, will bear the brunt of this slowdown in global trade volume.

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Economic Seismic Shift.

I am becoming more concerned that economic activity throughout the world is slowing so rapidly that a global meltdown could be around the corner. My worry for equity markets is that the last seismic shift that occurred between 1958 and 1960 is about to be reversed. In 1958, equity dividend yields were around 7.1% and the Price Earnings Ratio (PE) was 5.6. During the next two years the market rose 122% and the first reverse yield gap appeared (Aug 1959 when equity yields @ 4.76%  dropped below gilts,2 1/2% Consols @4.77%) and it stayed with us until 2008 when central banks initiated QE. The inspiration for this seismic shift was a reassessment of the belief that equities were not safe investments for pension funds and should not make up a large part of any portfolio. A speech by George Ross Goobey in 1956 put the cat amongst the pigeons but it was not until the Manchester Corporation lead the charge (into Equities) did the earthquake really hit. It is interesting to note that for the first time since that shift, UK Pension funds have raised the Bond holdings in their porfolios (43%) above that of Equities (38%).

Why has this obsession with Equities been so compelling for the last 60+ years? My answer is very simple. Governments have become increasingly short term in their outlook. Politicians, along with Central Bank Governors, have been increasingly happy to borrow out of trouble, a policy which up until a few tears ago worked remarkably well for them. The problem is at some point the music has to stop. If you take a look at Charts 5 and 6, you will see the rise of the US and UK debt pile. Whilst these charts do not take into account inflation, they do illustrate very graphically, how the stakes have got ever bigger. Chart 7 just shows how each of the most recent US Presidents have raised borrowing. Mr Obama made many pledges when he first came to office. If he had said that he was going to spend $4 Trillion more than tax receipts trying to implement them, he would have been hounded out of town. Chart 8 shows just how sad this whole process has become. It is the simple cost of servicing (interest) the near 230% of Debt to GDP that Japan has accumulated. It indicates that the lion share of tax revenue is being spent on paying for all that previous spending. I have written several blogs on the imminent demise of that country.

If the global planned austerity measures for 2013/14 are implemented, tax take by governments will rise dramatically. Disposable income will be the main looser,NO! Sorry, the main loser will be company profits. One of the most commonly used reasons to buy Equities is that they are cheap according to the current multiple or PE vs the average of the past twenty years or so. What if the economic conditions that lead to the market being cheap in 1958 are no longer applicable to the future. Governments must reduce the level of debt or the cost of servicing will engulf tax revenues and disaster will ensue. Indeed, we may already be close to that point. It is not a fiscal cliff the world faces but a fiscal earthquake. As disposable incomes decline, company earnings will become far more unpredictable. This should demand a far lower PE (higher yield) than the previous 20 or 30 years. Whilst a return to 1958 levels is a bit outrageous, a rebasing to around 8 or 9 appears more apt. This would imply equities 30% lower. Commodity markets will feel the full force of this consumption decline thus putting the BRICs squarely back into lesser developed catergory. Gold will not be the place to put your money but more of that in my next blog

 

Economics in pictures.

I have updated some data which will be familiar to regular readers. First up, the Suez Canal transit data. This shows monthly cargo volumes passing through the canal. I have written about why I feel this is an important gauge on several occasions. Primarily, it is the fact that 90% of goods that you purchase have, or have components that have, travelled by sea. Pinch points like the canal act as a pulse reading. As you can see from the first chart, growth is going nowhere. In fact the total number of ships passing through has fallen each month since March vs 2011 (yes, new ships are bigger). Another note of interest, is the explosive growth  of  Crude transiting southbound. I guess the Arab Spring and the Iranian embargo will have some distorting affect but I am more inclined to believe it is the build up of Chinese strategic reserve. This volume is likely to slow dramatically in 2013 as storage facilities are at capacity. LNG has slowed significantly which is why the gap between the two sets of data has not grown more.

Click on charts to expand

Next up is the direction of traffic through the canal. No prizes for this one. As you can see, Northbound (90% Europe and 8% USA) is contracting. The January 2012 spike (southbound) was caused by an enormous inventory build ahead of the Chinese new year. Products such as Cereal and Coal jumped significantly but it was Iron Ore which had a big impact. I wrote several times in the spring regarding inventory levels and predicted correctly a large fall in the Ore price. The seasonal build will occur as usual prior to the next new year but I fear it will be more reserved than 2012. This will have a distorting negative impact on the year on year data.

Within the traffic data is a breakdown of particular ship cargoes. Containers are always interesting as they drown out the noise of the volatile commodities which transit in huge volume. More finished goods and components travel this way so it can be a good handle on consumer demand or at least confidence in the inventory level of consumer products. The chart starts just after the Chinese injected $586bn to reflate the economy alongside the first US QE (see above chart for full impact of these two measures). As expected, it balloooooned. Of course, this year the authorities have been more concerned with inflation and a housing bubble. Thus, the rate of growth has slowed and in fact turned negative last month. When the new leaders are announced this week, it will be interesting to see if they start with a big bang of reflationary policies. The outgoing regime have recently raised road, rail, sewer and port infrastructure spending, so little scope exists for a big whammy.

USA. I have updated this regular feature. It shows the traffic flows on Warren Buffet`s BNSF railroad. The Total Freight annual growth rate peaked eight weeks ago and has declined each week since. This somewhat confirms the recent picture being painted by corporate America during the current earnings season. As you can see the Housing materials appear to be in fine shape but the rest are starting to slow. In fact the star of the year has been containers which have been up around 7% all year, last week however, the weekly number was negative for the first time in 2012. The lower diesel price may have had an influence as it helps trucking with competitiveness. I will eat my hat if housing continues its uplift in 2013.

Chart 5

Chart 6 

 

 

Borrowing by governments is the drug that fuels Equity performance.

 

Chart 7

Chart 8

My next blog will be an attack on George Osbourne`s inability to make a real difference. The UK is damned by his torpor!

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

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

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

 click on charts to expand

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

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

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

 

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

 

 

 

 

 

 

 

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Consumption vs Transportation.

Where is the global economy going?

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

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

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

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

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

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

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

Japan is all Smoke and Mirrors

From Swan to an Ugly Duckling!

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

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

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

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

Plates of Meat= Cockney for `Feet`

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Wednesday, August 15th, 2012 Debt, Japan, National Debt, Predictions, Yen No Comments

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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The Perfect Storm

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

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

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

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

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

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

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

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

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

 

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

 

 

 

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