Mortgage

Size Is Not Always Everything…Economically Speaking

The UK is one giant PONZI scheme….STERLING WILL RE-TEST £/$ 1.08….ITS HISTORIC LOW.

I have been considering this post for a long while. I have written on many occasions how the political leaders of this once great nation have systematically, over the last 40 years, dismantled our strong financial position. Making short term decisions which resonated with the electorate have caused the very fibre of society to be diminished. I will attempt to keep this as short as possible but as you can imagine, calling the destruction of the once biggest manufacturing nation in the world cannot be just a few lines.

First up, consistency. I am not like all those highly paid economists in the City. I have a long term interpretation of economics and stick to it. In January 2015 I wrote “Sterling Crisis Looms” …The post examined the history of our trade relationship with the world. It is easy to see that even with a strong economy and a positive trading balance  it was still possible to have a currency weakening against another. In 1948 we had a trade surplus of 10% of GDP. This was no match for the soon to be biggest economy in the world. The management of our finances over the last 20 years has been nothing short of a disaster (see second chart)…this coupled with our ever growing trade deficit in goods and you get the picture as to why I still believe that Sterling is heading down. Overseas investors have been happy to buy UK assets to park money in a supposedly safe haven. Chinese, Russian, Greek…you name it they have all been desperate to get money out of their own countries.

As you can see. The trajectory of our debt profile has taken on an ugly look. Admittedly, very high inflation following the Middle East Oil shock of the 1970s did not help. Nevertheless, the picture is grim…what’s more, where the chart below finished in 2010/11…..

This one picks up the pace somewhat. You can see that austerity is just a figment of George Osborne’s imagination. The annual deficit for fiscal 2015/16 will come in around £75-80bn. That’s quite a staggering sum in itself despite Mr Osborne claiming he has done much to get it down from the staggering deficits post the financial crash. A more sobering thought might be to consider that the TOTAL DEBT ACCUMALATED by this country from the birth of the Bank of England (1694) to the turn of the 21st century was around £350bn..not bad…In 15 years the UK has borrowed, during a low inflation period, around 350% of the previous 306 years…ok, inflation has greatly exaggerated the maths but you need to be shocked to understand.

 

The UK debt growth does not stand out as particularly different to many developed nations. Indeed, the USA has similar profile of state debt to GDP from the 1960s. Its what has been done to both undermine our countries underlying value and to quantify its quality of service now. Lets break those three things down. First, our underlying value as a nation. Think of the UK as a company balance sheet. Our assets, from the Thatcher era onwards have been stripped and continue to be stripped. Once publicly owned assets such as Energy Retail (Gas/Elec.), Post Office (incl. BT), Water, Banks/Savings, Housing (Social), Energy Wholesale, Transport (Rail/Busses), Land…the list is endless both here in the UK but also overseas (assets). These would normally be found on the assets page of our balance sheet. Not any more. The selling of assets is continuing with this government. Basically, if its not nailed down, its got to be considered. Now look back at the second chart and ask why has debt ballooned so much whilst our governments have been harvesting billions from the sale of public assets. THATS not even the finish of it…no, there is one more important fact that we must not overlook. Since North Sea Oil started flowing in the early 1970s governments have enjoyed a bounty of riches, both direct (tax) and indirect (jobs, investment) of around £ 1 TRILLION…that’s my estimate. Now that the oil is rapidly running out and our kitty of assets to sell easily is wearing thin. How can any government continue to run our economy without a serious change in our overall spending.

Economists will say that the important thing is to look at overall debt to GDP and the governments spending as a % of GDP. Yes, they are right…to a degree. But, what if that GDP number were not a true reflection of a nations long term output potential? I will explain why that is exactly the case later.

If you listen to any socialist, they will tell you that Mrs Thatcher killed manufacturing in the UK. OK, maybe she did allow many basket case, poorly run, investment starved big companies go to the wall but you can see from the chart above things got worse after Blair 1997. The Labour government saw manufacturing jobs of around 1.5 million disappear whilst adding roughly that number to our public services. This reminds me of a fantastic TV interview by Sir Kenneth Cork (world renown insolvency accountant who formed Cork Gully…now Coopers and Lybrand) with Harold Macmillan. I remember it to this day. I was only a young man but both men were so full of wisdom the memory is fresh with me. Macmillan was asked to explain the success and subsequent fall of the British economy. He put up his ten fingers on the grainy black and white TV. He said that in a strong economy, seven people must have a productive influence whilst it leaves the remaining three to service the country. He went on to explain that the balance had shifted whereby the percentage of the population involved in servicing the needs of our people had risen far to high and our trade balance and hence wealth, were starting to deteriorate. Since then it has been easier for politicians to spend found money (Oil or Assets) to keep the country moving rather than concerning themselves with Macmillan’s simple but honest explanation. manufacturing accounts for 11% of our economy today vs 25% in 1980.

The chart above shows how the trade picture is not improving globally but interestingly, the EU is the main problem. This is because Germany HIDES IN THE WEAK CURRENCY in order to be the worlds greatest exporter. It knew that re-unification (with East Germany) was going to be painful. Not least with a strong Deutsche Mark. So being in a currency with a basket of economically corrupt countries suits them just fine. The chart below highlights just how important the UK is to industrial production in the EU. The recent Deutsche Bank report stating that Europe would suffer badly if the UK pulled out, is spot on. To further exacerbate my concern, our deficit in Oil trade has remained remarkably stable at around £750m per month. I worry that the high cost of production in the north sea will see that deficit begin to increase if oil prices remain below $40. The chart below highlights our ten biggest trade partners performance (Deficit/Surplus) in the 3 months to November 2015.

None of that explains completely why I believe the UK is a Ponzi or why I expect £/$ to re-test its all time low of 1.08. The real explanation is quality of quantity. I refer to the economy. Yes, growth during the Osborne years has been good. Unemployment has shocked many commentators with its significant decline. Despite all that, I still believe our economy is based on unsound foundations. Just like the Gordon Brown, Mr Osborne continually looks for ways of bringing forward taxes or cash flows whilst delaying costs. The PFI debacle is just one example. I will not elaborate as it is a well documented disaster. Changes to pension laws is one way of bringing forward consumption (taxes). Allowing people over the age of 55 to release pensions… was sold as giving people more flexibility. Total hogwash. It was so the government could continue with the consumer economy. By inflating the housing market, just as previous chancellors, the ball continues to roll. Only, we are now getting close to a point where the whole basis of our economy is so overpriced that it will become out of reach for an entire generation, as the chart below shows.

 

regional-house-prices-ratio

 

But this does not reflect the whole story. For it is not the ratio of prices to earnings which is the primary importance. It is the level of disposable income. Whilst the ratio of the governments tax take to GDP has not exploded, the demands of households has materialised in other ways. I f we were to take a ratio of disposable earnings to house prices, things would look a far lot worse.

Whilst the tax take ratios have not been pushed too high. You need to look at the fact that the government is doing less and less, for free, than it did in the past, hence, far more services are requiring a fee. The quality of the services they do provide has deteriorated beyond all recognition. For instance, the elderly. The state had significant institutions to house our elderly. They would receive round the clock supervision and care. The problem is, the local authorities could not afford the £32 per hour cost of staffing our the upkeep of the buildings. Once again, we saw a harvest of assets by selling off the building to developers whilst farming our elderly out to the private sector. The problem is, the authorities are only prepared to pay around £16 per hour and hence the private companies are increasingly relying on cheap overseas labour. This is a total dis-service to our elderly but reduces the cost to the state. This has happened in all public services. Police/Fire stations have been closed wholesale. Hospitals and care facilities (mental health etc) have reduced significantly. One only needs to look at the size of our Navy to recognise that, yes, we are still taxng our people but they are getting less and less for that money. So many previously free services are now subject to fees. Additionally, councils are encouraged to raise money by any means which has seen regressive cuts to disposable incomes such as parking costs. The list is endless. This government is aware more than any about the importance of the LAFFER CURVE. That is why, rather than tax at a higher ratio of GDP, they just keep reducing what they give in return for taxation and make you pay out of your disposable or post tax monies.

The economy has grown since the turn of the century but the quality of that growth is very negative for the future. Our ability to supply our own industrial and economic needs has deteriorated. Instead, rising housing prices driven by mass immigration has maintained a level of wealth for most families. As I have suggested, the elasticity of that mirage must be close to breaking point. With official immigration around 350,000 per annum (500,000 unofficially) and personal and public debt expanding sharply, how can an economy not grow. The problem is, sustainability. Within those official population statistics is the sorry tale of professional people eg GPs, leaving in their droves. The really worrying element of Osbornes claim of austerity is central government staff costs. These have grown from £94bn when he first took office but are now £105bn…

If our budget deficit is to be brought under control, surplus, it is the spending side of the equation that needs seriously addressing. Looking at the revenue it is clear the intention to bring in more from indirect tax as early as the radical changes of 1979. VAT was doubled to 15% in order to reduce direct income tax rates, both basic and top end. The problem is, whilst indirect taxes have kept coming, VAT now 20% Air Travel and Insurance Premiums 1994, Landfill 1996, Climate 2001, Aggregates 2002 etc the real position of Income tax has become more onerous. Whereas in 1979 only 2.6% of workers were paying higher taxation, 16% now pay it. Not because salaries have grown excessively but because of fiscal drag. A measure whereby chancellors do not increase the tax bands as salaries/inflation moves higher. The problem of hiding our taxation by stealth is it is very regressive and affects those that can least afford it. Because we have allowed our Manufacturing/Engineering/Scientific ability to decay, employment is centred around service related sector.  Average take home pay has not kept pace with either house prices or the cost of living in general. To allow this to continue, whilst still harvest taxation, it has been important for the government to give expensive, in work related, tax benefits whilst encouraging the public to join the government in piling on yet more debt. It cannot and will not last. Yes, changes in the form of UNIVERSAL CREDIT are coming but with 5 million people claiming housing benefit, at a cost of around £23bn, it will have repercussions.

The ring-fenced spending by the government will ultimately be where the strain of austerity will fall. Our overseas aid is maintained at 0.7 of GDP whilst our spending on Scientific Research (which is known to repay with economic benefits at around 6 to 1) is nearer 0.4%. The major nations of the world have  overseas aid around 0.4% and Scientific Research close to 0.9%. Spending on the EU has cost us far more than just the annual contributions. Interestingly, we recently had to pay an extra £2.4bn because the calculation by which the EU gauges the size of your economy, VAT receipts, showed we were far stronger than our counterparts. I have a real problem with this primarily as it is well known that the black economy of some countries, especially Mediterranean, can be as high as 50%.

To sum up..our tax revenue is far too focused on the house price/Debt timebomb…Fuel Duty at the pump £27bn….Housing Stamp Duty £11bn…VAT £130bn…Whilst our spending on services is being cut to the bone. The chancellor has been the primary beneficiary of low interest rates with our national debt costing less (£45bn in interest) now at £1.5trn  than it did when it was £1trn. Of course, offsetting that is the savings of the thrifty who now get next to nothing but more importantly, the pension industry. The current deficit of the public sector pension scheme is estimated to be around £1.6trn. We pay out around £10bn in pensions each year more than we receive in contributions.

If you add our recognised government debt and then add all the other liabilities eg PFI, Pensions etc…our economy has been living on borrowed time and money for far too long. The Oil is nearly gone (x fracking) the low hanging fruit of assets have been sold…our services are crumbling…THE FUTURE IS VERY BLEAK…Brexit!

 

 

 

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Monday, February 1st, 2016 Consumer Debt, Debt, GBP, GDP, National Debt, Oil, Predictions, USD 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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Sterling Crisis Looms.

 

WALL STREET JOURNAL April 1975…….Headline was ‘Goodbye, Great Britain `

I have been bearish on Sterling for quite a while now. My latest recommendation to trade was in the late June blog UK OK? I Think Not… where I recommended buying Sterling/Dollar (Cable) put options. Luckily, Sterling peaked a week later around £/$ 1.72. I have on several occasions expressed my concern that Cable could retest its all time low of £/$ 1.085. My reasoning has been outlined in many blogs on the subject but the significant fall in Oil is just the catalyst to push on what I believe is an open door. The UK is not likely to reduce its annual budget deficit, which is running around £100bn, anytime soon. The Oil price will, if anything, reduce tax take significantly. With the production cost of North Sea around $55 it is possible that the £8bn direct profits tax take will be eliminated. The significantly lower price at the pumps will reduce the excise duties which as a percentage of price account for a significant slug of the final forecourt retail price. Yes, consumption of other VAT items may see increased demand but this is unlikely to offset fully. Salaries in the energy sector are already being cut this month. With nearly 500,000 workers exposed to this sector, the positives for consumption will be offset. So the budget deficit will continue at vastly elevated levels. On the trade front, the governments focus on reflating the economy by encouraging consumption, is a complete folly which only serves overseas suppliers with a boost to demand. Our previous currency calamities have been focused around poor trade performance. In 1948 a deficit (albeit only 2%) was too much for the government finance and Sterling fell dramatically from £/$ 4.20 to £/$ 2.80….this lead to a revival of manufacturing to its zenith. In the sixties (1967), the Labour government devalued the £ from £/$ 2.80 to £/$ 2.40 due to the drop in exports from a protracted dock strike coupled with middle east tensions. In 1964 when the trade deficit rose unexpectedly the Labour government went cap in hand to the G10 for a loan. Had they acted quicker to rebalance the economy the crisis to follow may have been averted.  In the seventies, the balance of payments were sent into shock by the Oil crisis. Eventually the UK would have to go cap in hand to the IMF for a loan. Prior to the loan £/$ dropped from 2.40 to 1.60. During the eighties, Thatchers battle with the unions lead to a significant fall in industrial activity and economic turmoil. In 1985 the currency hit its all time low of £/$ 1.085. Eventually, her economic formula worked and the economy recovered. It was however, the start of a long terminal decline in our manufacturing capabilities. No government since has taken this sector seriously, instead they have preferred to encourage consumer debt which in turn boosted house prices significantly which in turn drove consumption even higher. Gordon Brown took this to the all time high encouraging consumption as the mainstay of his economic miracle. From around 7.5 million people in the 1930`s, manufacturing is now a small part player in the make up of our total output. Since Thatcher, the UK has sold off a large portion of its assets. Whether it be utility companies or real estate, its been a huge sell off. Couple that with around £1 trillion of Oil taxation (both direct and indirect) and you can see the consumption bloom was finance by various short term cash injections. To make things worse, the financing of long term investments like schools and hospitals were financed off balance sheet via PFI (£240bn) only to cost a fortune over the next 30 years. University reforms have kicked massive liabilities into the future and the public sector pension scheme is in a perilous position with all liabilities also kicked into the future.

In short, the UK has lived off its income from past wealth. It has deferred costs and has mortgaged the future. Below is a chart from my blog in November 2012. We cannot continue to live like this. Employment is not growing in productive industries. The driver of lower unemployment is consumption based service sector. Eventually questions will be asked of our economic performance and the coalition will be found wanting.

This official measure of debt does not include all the off balance sheet funding liabilities which have grown substantially this millennium.

In 1997 Gordon Brown began his consumer lead socialist economy…we have to reverse this decline in our trade balance

 

If Cable breaks the 1.40 support line, the next stop is 1.085…Inflation will become a problem offsetting the strong global deflation winds blowing around.

Click to enlarge…

Post war Cable. Following the 1948 devaluation, exports bloomed and we reached a surplus around 10% of GDP. Since then, the rest of the world has beaten us at the production game. Instead of using design, research and investment  to continue strong manufacturing (like Germany) we have rested on our laurels. This is going to cost us dear as a nation.

Politicians have taken the easier short term gains and to hell with the future. Our children will inherit a very sad state of affairs.

 

 

 

 

 

 

 

 

 

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Friday, January 2nd, 2015 Consumer Debt, Debt, GBP, National Debt, Predictions, USD 1 Comment

RIP George Osborne

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5) Corporation tax cut to 12%.

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

 

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

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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IRELAND…Never was a silk purse!

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

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

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

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

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

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

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

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

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

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

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

Where is all this money coming from?!

I awoke this morning thinking that my ability to perform simply schoolboy maths had left me. I read in the Telegraph that disposable income had dropped 8.4% since last year – no surprise there!

It goes on to state that consumer credit has contracted in four of the last five months, again no real surprise. It then says that consumer savings ratio has climbed to 7.4% versus 5.9% at the beginning of the year, so out of the average salary people have a significantly less to spend in volume terms and are actually repaying debt.

How then were the September 2011 retail sales figs up 0.6% in volume terms and 5.4% in value terms over the same period in 2010? It just doesn’t add up.

There are only three explanations I can think of (aside from slightly lower mortgage rates), which are:

1) Is there a spending element of the average salary that is not accounted for in the Retail Sales numbers and spending on this is being diverted to an area captured by the figures?

I doubt it very much

2) Maybe the Black Market in the UK is growing rapidly, e.g. people paying cash for work. UK and Germany are calculated to have the lowest Black Market in the Euro zone at around 13% of GDP while Greece is estimated to have the largest at 27% (now you can see why Greece gets so little tax revenue!) – I guess this has grown but it is difficult to estimate….

Or

3) Homeowners switching to interest only mortgages. There is significant evidence of this; it is estimated that 330,000 mortgages have been switched in this way over the last 3 years with an estimated value of £66bn. I estimate that this adds around £125m (prior to velocity*) to retail sales per month. Not much in the scheme of things considering £32bn-ish as a monthly total. It does however help to explain the shift in spending patterns. This money is significant to a vast proportion of the population. On average it adds around 15% to the after-tax net take home pay. Hence we see a positive impact on food and low cost purchases together with the necessity of fuel (see below).

Year on Year VALUE change

Food only stores +5.7%

Non-store sales e.g. Markets and Catalogue +15.6%

Auto Fuel +20% (down in volume terms)

All this coupled with the fact that Internet Retail Sales in September grew at a faster rate (25% 2010-2011 versus 20% 2010-2009), and now nearly 10% of all non-fuel sales. The high street is likely to continue to contract with Commercial property prices falling further with rents

finally….

The Economy and why the central banks should be worried about huge bank recapitalisation

*I mentioned Velocity above. This is important as it is a measure of the circulation of money (how many times money changes hands). As you can imagine, an extra £125m in consumer’s hands will allow a proportion to circulate several times in a month thus having a far greater impact.

Important to know a simple equation P=MV or Nominal GDP=Money Supply x Velocity

Simple Terms

During a recession Velocity normally falls hence central banks try and inflate money supply to maintain GDP. Money supply has continued to fall despite B of E intervention (QE etc). The bounce in GDP earlier this year has been put down to a rise in velocity following many govt sponsored stimuli.

Velocity has risen sharply due in part to financial innovation by banks: including securitisations and CDO’s (Mauldin March 2010: The Velocity of Money). As the banks pull in their horns on exotic products Velocity will fall. It is still above trend and way above lows of last 100 years.

Money Supply will come under significant downward pressure should banks be forced to re-capitalise due to Euro debt problems

If GDP is a direct result of Money and its Velocity, all looks very grim. I could imagine another 5% drop in UK GDP unless Sterling drops dramatically.

With personal and public debt still at near record and growing (public) levels, inflation is the only way out. Will that happen, who knows….

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Saturday, November 26th, 2011 Consumer Debt, GBP, Money Supply, Predictions, UK 2 Comments
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