Rail freight

Global Economic Roundup

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

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

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

 

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

Coal and Steel currently at six year lows.

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

 

 

 

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Monday, August 25th, 2014 BNSF, China, GBP, Predictions, Steel, USD, Yen No Comments

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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Is Stephen King a plagiarist?

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

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

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

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

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

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

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

Global Economy Update 

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

UK

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

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

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

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

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

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

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

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

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

5) Corporation tax cut to 12%.

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

ps

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

 

 

 

 

 

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Confusing!

China New Year Calender Change or Just Lies?

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

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

Chart 1

Chart 2

Chart 3

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

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

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

Chart 4

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

 

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

Am I Right to Be Bearish

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

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

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

 

 

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

 

Secondly, the traffic growth in either direction.

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

 

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

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

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

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What is the Fiscal Cliff made of?

Answer. Iron Ore.

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

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

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

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

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

Economic Seismic Shift.

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

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

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

 

Economics in pictures.

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

Click on charts to expand

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

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

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

Chart 5

Chart 6 

 

 

Borrowing by governments is the drug that fuels Equity performance.

 

Chart 7

Chart 8

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

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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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US Economic update

BNSF Weekly rail shipments.

Regular readers will know that I have relied on this data to give a view of the economy. Transportation is the most important bellweather for economic activity. New readers might want to view an earlier blog The Perfect Storm for an overview. The updated chart (click to enlarge) does not really add much to last update in early May. Motor vehicles continue the trend but  metals growth is weaken as imported vehicles improve market share. Lumber confirms the stronger demand from the housing sector. Total freight shows no sighs of altering its lacklustre, low growth position. The significant year on year decline in coal movement is coming to an end as this was driven by both lower gas prices and warm winter weather. The rest of the year should stabilise at lower levels but not adversely affect Total Freight as in Q1 and 2. I have talked about my Jim Thorpe concerns for the coal industry and its suppliers on several occasions so it was interesting to see Caterpillar mention (this week) the slowdown in demand from that segment of their business. Sadly things will get far worse. If you look at the inventory build up in the worlds biggest coal user (China) you will understand why I am so negative. It is not only coal that is piling up, the products that need huge energy imput to produce are also building. Steel production will have to be cut drastically in the Q3 if a price implosion is to be avoided. This may support steel prices but the knock on affects to Coal, Iron Ore and many other commodities (not to mention Shipping) will be significant. Interestingly, new car inventory at Chinese dealerships is building rapidly. Sales data are registered when delivered to the dealer, so, with inventory as high as 60 days sales on the forecourt, the only response will be heavy discounting. Going forward this will weaken demand.

Shipping is never far from my blogs so I will not disappoint. Europe/Asia container route pricing by the World Container Index has fallen for each of the last five weeks and is eroding the rate increases forced through by the big carriers. The weakening Baltic Index is confirming the growing level of inventory of dry bulk commodities. I hope to have an update on the regular Suez Canal data next week, that is if I can get a good Internet signal in Tenerife. Happy days!

 

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Friday, June 8th, 2012 BNSF, China, GDP, Predictions, Shipping, Steel, US Economy No Comments

US Economy

BNSF Rail freight update.

Regular readers will be familiar with this chart. Updated to end April. Points of interest. Vehicles are still going gangbuster! However, as you can see, Metals and Metallic Ores have started a downward trend in the last few weeks. Housing materials have seen an uptick over the same period. Food, having been growing at an annual rate of 4% earlier in the year, has turned negative year on year. The total volume (black dotted line) year on year rate has declined from its spring peak every week since March 10th. Interestingly, Food has a good correlation with total volume. All in all, to my mind, this chart confirms my continued belief that the record warm winter America breaks records…Swinter in USA drew demand forward. If economic expansion is to be resumed, car sales will have to be maintained at the current strong pace and housing starts will need to grow further. I have mentioned on many occasions that with the US budget deficit growing at an unsustainable pace the tailwind of government debt growth will turn to be a significant headwind. If you want to see what that turnaround looks like, you need look no further than Europe.

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Friday, May 4th, 2012 BNSF, US Economy No Comments

US Economic health check

Lie on your side…breath in…this wont hurt…Not the words you want to hear from a burly, rugby playing Australian doctor wearing extra large sterile gloves.

Sorry, I was thinking of the time I had my Appendix out. All in all not a great experience.

It is that time again. An update of the BNSF rail freight data. Only this time it is much more exciting! I have added two addition components of the Freight Wagon (Carload) segment. They are Sand/Gravel and Lumber/Wood. Given the importance of the construction industry and its widely forecast recovery (from what is presumed to be the bottom of the cycle) these two new sub-components should pick up any trends. If you click on the first box, you will see the updated and improved data. The second box will reveal a chart showing the 2012 growth or contraction rate (%) versus 2011.  I am unsure how much of an effect the earlier Easter has had on the figures but it is interesting how weak the two construction components have been over the last two weeks. Still too early to call. Given the tail wind of the warm winter it is only now that the true picture of the economy is emerging. The next update will be very interesting (to me at least). It is clear that without the light vehicle demand, Uncle Sam would be in a pretty dire shape. It could be very interesting if the explosion at the main resin supplier (to the auto industry) leads to production halts. Inventory for Cars has fallen to 44 days in April versus 48 in March. This is below normal levels. Production is up 17% this year with an additional 570,000 vehicles in Q1. Truck inventory, another regular theme, is stable at 66 days

 

 

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Friday, April 20th, 2012 BNSF, GDP, US Economy No Comments

Look beyond the noise.

US Economic expansion.

Last week was all about the US employment report for March. The focus was so sharp that little else seemed to get much scrutiny. Given the frequency of revisions, one month is never enough to base sound long term opinions on, so I wont. There is a school of thought in the cynical blogosphere that weaker numbers were engineered lower thus giving the Fed justification for Q3. Given the proximity of the election when the decision is due, they will need all the help they can for justification without attracting Republican ire.

With the aid of a wider angle lens, I was not distracted by the unemployment numbers. I chose instead to focus on the nuts and bolts of the economy. Early last month I wrote about Class 8 truck demand Quiet in Class!..[ This continues a theme of mine centered on transportation of goods. Most recently that has been with reviews of BNSF rail freight volumes but earlier postings have been on the shipping industry The Perfect Storm and The Plimsoll line is clearly visible! ]… Last week saw the release of preliminary sales data for March Class 8 truck sales for North America. With the benefit of 3 months data for 2012, my earlier concerns for the economy can have some justification.  January 24,000 February 22,366 and March 19,682 against the 4Q 2011 average of 26,000. The preliminary number for March is 32% below March 2011. Why is that important? At the beginning of the year, the two main bodies for the truck industry were upgrading their forecasts for 2012. They centered around an annual expectation of 295,000 sales, well ahead of 200,000 needed to replace retiring vehicles and up 10%ish on 2011. March and April are normally the two most important months for sales as they herald the start of the haulage season fan-fared with the new year models, which normally carry a higher price tag. If April does not spring into life with renewed vigour, the order backlog (currently strong due to the ordering peak around December) will falter and the inventory level ( 62 days versus 52 in 2011) will rise. This, in the worst case scenario, could lead to awkward production gluts. In the third of my blogs on rail freight USA Freight Volumes I did suggest that the rise in container volumes (via rail) could be attributed to the sharp rise in diesel costs. This may have some correlation with the first decline in trucking jobs (0.1%) since July 2011 as seen in last weeks employment data.

US Government Debt

On Thursday we will see the release of the Monthly Budget Statement. I have seen one estimate so far ($203bn). If this is confirmed, it will be the first back to back $200bn plus months that I can remember. It would lead to a Q1 deficit slightly up on last year and close to the record set in 2009.  Since the depths of the recession in Q1 2009 the economy has recorded positive GDP and unemployment has (headline rate) dropped significantly. Why then is the deficit still growing at such an alarming and unsustainable rate? Easy, the government are buying growth. As I highlighted in America breaks records…Swiner in USA the end of 2012 brings about some major problems for the newly elected government. It is impossible to think that by then the economy will have garnered enough momentum to overcome the fiscal drag which will inevitably follow.

CHINA.

The latest inflation data will not rest easy on the authorities who made much of last months significant decline. They have blamed the unexpectedly sharp increase (3.6%) on poor weather in the fresh food producing areas. This has lead to overall food costs rising 7.5% year on year. This, however, masks far more important moves in two important staples. Vegetables are up 20% year on year with Meat/Eggs 11%. The recent significant fuel price hike had little influence on the rate as it has a small weighting within the index. Presumably it will show up in later months as products are priced to contain additional transport costs. It is clear that inflation will continue to be a drag on any monetary easing the authorities have planned. To continue my transportation theme (and remember 90% of goods travel at some point by sea) Chinese shipbuilding orders are down 40% on the first two months of 2011.

Last week also saw the release of the Purchasing Managers reports for March. Whilst the state version showed continued strength at 53.1, the independent HSBC report fell to 48.2. Why? Well the state report by the Federal Logistics and Purchasing department is heavily influenced by state and large companies in its sample of 800, whilst the HSBC has 400 mainly small and medium sized companies. These smaller companies are much more focused on the world economy. Weaker overseas demand has been a drag on growth but finance, or lack of it, has also played a part in the current weakness. The authorities started a pilot scheme in Wenzhou last week aimed at relieving some of the well documented problems of underground financing.

 

 

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Monday, April 9th, 2012 BNSF, China, Debt, National Debt, PMI, QE, Shipping, US Economy, USD 1 Comment

USA Freight Volume

Update of BNSF data.

I have now updated the weekly volume data for BNSF, the second largest rail transporter in the USA. See Warren hits the Buffers? for my first posting on this subject. I stated back then that the volume of goods is not showing the same growth as the optimistic economic views would have us believe. I have followed this with volume of freight through the Suez Canal Suez Canal ECG.  This too shows a lack of volume growth. As if to add fuel to the argument, the recent data on Inventory, showed sales growth falling below inventory growth for the first time since the QE fueled boom started in 2009. This may be reversed next month, we will have to wait and see.

Back to the update on rail volume. As you can see, the overall trend is not looking that hot. It is clear that container traffic is holding the company performance together, with March (week 9-12) showing a renewed vigour. It is by no means a coincidence that at the same time, oil prices spiked higher. Rail has an accretive cost advantage over road when diesel prices rise. That is why I highlighted in a recent blog the sales levels of Class 8 lorries Quiet in Class! If I am right, then the economic expansion has come to a halt. It looks increasingly possible that the  unprecedented mild winter has brought forward spring purchases. This is on top of the tax incentive sales frenzy of last year. All this and the budget deficit grows even higher. A day of reckoning will come.

Some thoughts: Coal is the single biggest component of the Freight Wagon division. Its demise must be linked to the natural gas developments of fracking. I guess the warm winter also comes into play. Steel demand seems to have held up with capacity utilization running at 77 vs 73 in Q1 2011 BRICs and Steel. Mining communities and equipment suppliers (great performers of late) will suffer. If the price curve encourages more containers by rail, fuel demand will remain sluggish. Ten four good buddy!

Chart attached.

BNSF 12

 

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Thursday, March 29th, 2012 BNSF No Comments

BNSF Traffic update

I am not going to bore you all with a regular weekly update on BNSF traffic data. I am thinking maybe at the end of each month which will dovetail nicely  with some new data I am compiling on cargo flow through the Suez Canal.

Having said that, I have updated the last posting to give data up to 26th February. It may smell like a bull market, it certainly feels like a bull market but somehow I just cant help disbelieving it. They say Bears are lonely creatures. Given the current level of Equity markets that is just how we bears feel. Still, the latest BNSF weekly freight report gives me a little warm glow. Maybe its just the onset of the mating season. Just click on the box for zoom.

The most recent weeks addition suggests that the economy is not as strong as the anecdotal evidence suggests. Car sales are proving to be more resilient than I had anticipated. The huge uptick in car finance proves that if you keep throwing money at the system it will grow. Eventually debt will have to be addressed. In an election year that becomes a sore subject.

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Friday, March 2nd, 2012 BNSF No Comments
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