QE

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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Geman Engineering.

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

Issues for future blogs

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

 

 

 

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

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

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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Gold and Equities

I have been asked to explain two elements of the previous blog.

  1. Why did I take a negative view of Gold last year and warn in January this year that it will test $1,000 before it sees $2,000
  2. Why did I state that QE includes buying Equities.

Gold (chart in Sterling). Firstly, lets not forget that it is just a lump of metal, shiny I grant you but never the less nothing more. Three main features stand out in the above chart. Central Banks are now net buyers, Investors have raised participation greatly and last but by no means least, Jewelry demand has fallen. In January I highlighted a visit to a local jeweler who informed me that he now takes in more gold for smelting and pawn than he sells new. This finally made me take a more negative stance. I reasoned that supply is no longer mine production but also the selling of old gold was supplying to no small extent a large proportion of jewelry demand. The higher the Gold price went jewelry demand waned. Clearly, in these austere times Gold above $1800 was having a very negative impact. Investors in a metal which unlike a company, pay no dividend, will not invent a new technology nor be subject to a hostile takeover bid, need to have positive momentum to maintain optimism. Clearly, as was seen in the recent collapse, the bubble has burst. I am beginning to think this move in Gold may be replicated in other commodities. My guess is Oil is ripe for a major downward shift. Perhaps to $60. This would have some huge implications for stocks and Governments. More of that in a later blog.

Equities. I included Equities in the classification of assets being purchased under the umbrella of QE. A recent study highlighted that many Central Banks have started buying equities because bond yields have been driven so low by QE that they can no longer find sufficient return. Out of the three big QE countries USA, UK and Japan, only the latter is buying equities. However, the huge scale of QE by the three has indirectly driven others to the equity table. That worries me. If you look at the Gold chart again, can you see something about Central Banks investment timing? At the lower levels of Gold they were net sellers and at its peak they were net buyers. What worries me more is that Jim O`Neill (or lucky Jim as I first referred to him in BRICs and Steel) has given the go ahead by stating

“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it?”  “To help their future returns for their citizens, why would they not invest in equity?”

Well Jim, the main reason that the Bank of England was known as the lender of last resort was because it had reserves in the most liquid format. To suggest otherwise just turns them into state investment trusts. Remember, in equities,  we are talking about a finite investment. If Central Banks invest on mass, equities will be driven (higher)  to levels where the yield will be not much more than that of bonds. QE is clearly giving supposedly sound individuals some absurd ideas.

 

 

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Quantitative Easing (QE)

What is QE?

Printing or creating vast quantities of paper or electronic money by supposedly intelligent people (Central Bankers) on behalf of the population of a country to

Allow Compliment Condone Encourage supposedly intelligent people (Politicians) to borrow and spend vast sums of money on behalf of the population of a country.

Q: What has been done with the QE proceeds?

A: Buy Assets

Q: What Assets?

A: Firstly Government Bonds, then lesser quality bonds and fixed income securities…and now Equities.

Q: What is the impact on these assets?

A: Given they all have, to varying degrees, a finite supply, they have all gained substantially in value, driving interest rates and future returns on investment much lower.

Q: Who has benefited from QE?

A: Generally the wealthiest 10% of society who tend to have savings ex pension in these assets

Q: Who suffers?

A: Generally speaking, the poor and the majority of pensioners who have little more than the basic defined contribution pensions.

Q:Why them?

A: The excess of cheap money is primarily channeled into balance sheet repair for banks and low cost speculation investment in commodities etc which has kept inflation stubbornly high whilst annuity rates have imploded with lower bond yields.

Q: Why has demand not rocketed with the record low interest rates that have resulted in QE?

A: Since the 1960`s politicians have used the magic wand of increased debt to buy their way out of economic downturns (see Economic Seismic Shift)  but debt, both private and public in most major economies is past being able to grow as before. Additionally, commodity inflation has lead to a fall in disposable incomes.

The long term implications are as yet unknown but a quick reflection on what forms an asset valuation. When assets are exchanged in a trade, an assumption is made by both parties about the current and future value of those assets. For instance, when the Native Indians sold Manhattan in 1626 to the Dutch both parties were happy with the trade. Of course the shiny trinkets given to the Indians indicate just how badly valuations of assets can be perceived in the future. History might be as equally harsh when it looks back on QE. Asset valuation is based on two important factors. Supply and Demand. Look at the difference in valuation of a Van Gogh masterpiece and a Zimbabwe 100 trillion dollar note. Whilst masterpieces of this quality have a very finite supply, awful political and economic policy of the Zimbabwe government lead to a supply of untold magnitude. Sound familiar?

Currently, the levels of debt being amassed by some (most) developed economies are approaching a point of no return. Of course some lesser countries have already cir cum to reality. The debt has been grown in the compost of progress and society. It was thought to have been used to build a better life for today and tomorrow. Whilst it has to be said life for many has been greatly improved that cant be said for all. Whats more, it has only improved life for the yesterday and today. The tomorrow has been totally forgotten. Sadly, vast political and government empires have flourished.

I am firmly in the camp that believes we must face our demons and cut government spending drastically. Yes this will cause significant economic hardship, but it will be a hardship more even than QE. Commodity prices will get crushed and allow us to rebuild a fairer society in the future. Of course, the wealthy will be screaming from the rooftops 1930`s style. It has come to pass that I must quote Churchill in his first speech to the House of Commons after being made Prime Minister during the first and worst year of WW11.

“I have nothing to offer but blood, toil, tears, and sweat,” He knew that when faced with adversity a country has to dig deep together in order to move forward. QE is just delaying the inevitable at the expense of all in society who will be made to pick up the bill whilst in the meantime, only a small proportion enjoy the riches it bestowes.

Other very apt Churchill quotes:

  • There is no such thing as a good tax.
  • If you are going to go through hell, keep going.
  • We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
  • Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon
  • You can always count on Americans to do the right thing—after they’ve tried everything else.

Next blog topics….I am watching the hefty falls in the Shanghai Container Index with interest. …Japan consumption will implode over the next 12 months as food prices jump 10-15% in Q1 and the 2014 consumption tax arrives….BRICs are still a target of mine and going to suffer…Gold, I forecast in January that it will hit $1,000 before $2,000. Looking good.

 

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Saturday, April 27th, 2013 BRICs, Consumer Debt, Debt, National Debt, Predictions, QE 4 Comments

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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Never, have so many, owed so much, because so few, did so little.

Well done to all politicians.. “Never, have so many, owed so much, because so few, did so little”…to paraphrase the great Winston Churchill.

 

Things on the horizon

At the end of September 2011 the US Postal service is due to pay $6bn to its health fund. It has not got it. The implication of this is talk of 120,000 job losses.

At the end of 2011 the US Unemployment benefit extension comes to an end for several million people who have maxed out (e.g. over 99 weeks) – An extension to this benefit lead to a political log jam last year.

2012 Sees the peak of the baby boom tsunami. Due to Japans poor demographics, its average population is ageing rapidly. From 2012 huge numbers reach 65 in this and the subsequent ten years. The state pension fund is the biggest owner of JGB’s. They will see an increasing demand on funds under management as the proportion of retired members jumps rapidly.

If Japanese bond yields go up 250bp’s (2.5%) the govt will be unable to pay the interest without substantial consumption taxes.

The Government debt is close to one quadrillion Yen, yes, ¥1,000,000,000,000,000 – equivalent to $100,000 per person and double the US and 4 times the UK!

2011/2012 Greece banned real estate foreclosures for 2011. If not extended into 2012, and I cannot see how it can’t be, 2012 could see some interesting opportunities

Luxury goods

As seen recently in Germany, Greece and rumblings of in China. When the masses think they have been subjected to poverty due to a few corrupt capitalist businessmen or politicians, they seek revenge. Luxury goods companies have reported sound sales figures in the face of the crisis so far. This may be something to watch if it austerity becomes a fashion item. Japan is a huge market for luxury, should the Yen collapse and consumption taxes be imposed…. Hmmmmm….

Tesco is losing out. I’ve visited local ‘pound shops’ and watched the queue length, demographics and class of the people shopping. The queues are getting longer, and clearly middle-class people are visiting. Tesco beware, these shops have low fixed costs.

Expect many more Europe wide wage deals like the one done by Greek Telecom OTE. Effectively an 11% wage cut. Disposable wage declines lead to lower property values. The UK has the most to lose with average house price being around 7 times average salary versus the norm of around 4 times. I think 20% down in 2012 – Deflation may still be lurking

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Thursday, November 10th, 2011 Consumer Debt, Debt, GBP, Money Supply, National Debt, Predictions, QE, UK 1 Comment
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