October 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

In the days when Europe was divided by a curtain made from iron, they used to say that the Soviet Union would never allow a united Germany. It was terrified of the idea, and yet, since 1989, the impossible has happened: a united Germany, rather than becoming the economic heavy many expected, had become relegated to the slow lane of Europe, a kind of economic autobahn with a 30-kilometre speed limit.

In a way, Germany was Europe’s answer to Japan; economic powerhouse for decades, reduced to jumping from one recession to the next. Earlier this decade, for example, it suffered from two recessions.

And yet of late, things have changed.

In 2006 the economy grew by 3.1 per cent, outpacing even the UK. And in recent years, a time when global trade has changed so dramatically, it is one of the few developed countries that has managed to maintain its share of world trade.

To an extent, it’s all been down to hard work. Average earnings increased by 0.2 per cent in 2004 and then again in 2005, while unemployment fell, from 9.5 per cent in 2005 to 6.6 per cent today.

And here is another success. Earlier this year the country was able to turn in the first surplus in public finances since re-unification. The National Institute of Economics and Social Research (NIESR) predicts a government surplus worth 0.3 per cent of GDP this year, and that it will stay there in positive for the next few years. In fact, of the G7, Germany is unique in boasting a a positive balance of government borrowing for this year. Although, Spain does have an even bigger surplus.

As for total government debt, or net debt as a percentage of GDP, by the end of this year this is expected to be around 64.5 per cent, a little higher than in the US, but a lot smaller than the level currently seen in Italy and Japan. But the point is, the NIESR expects this debt to fall so that by 2009 it will be down to 52.1 per cent.

As for trade, the surplus with Germany’s current account by the end of this year is expected to be 5.1 per cent of GDP, compared to a deficit of 5.9 per cent of GDP in the US and a 3.1 per cent deficit in the UK. Mind you, as far as trade is concerned, Spain takes the biscuit. NIESR expects the current account balance in Spain to be 10.2 per cent of GDP by the end of this year.

In many ways, Germany has taken the opposite approach of the UK and US. It focused on trade, consumer spending has been low and despite the enormous costs of unification, government debt is now falling so that net debt is fast becoming quite manageable. Maybe it’s time to put the no-speed-limit signs back on the autobahn. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Back in the early 1970s, oil shot up in price, inflation followed and the economies on both sides of the Atlantic suffered. In 1974, UK inflation hit 16 per cent, the following year it rose to 24.2 per cent, and stayed in double figures for the following two years.

In 1981 oil hit a new all-time high: a new inflation-adjusted all-time high that is, and yet by 1982, inflation was down to 8.6 per cent.

Back then, it was argued that in the longer-term, demand for oil was not that price-inelastic, which means this. To begin with, oil went up in price, demand was barely affected and we were all a lot worse off. But then measures were taken to make cut-backs. The driving speed limit was cut in the US, for example, and so the 1980s higher oil did not matter so much.

Now forward wind the clock to today. Today the black stuff is important, but not like it used to be.

According to the Energy Information Administration, in 2006, energy took a 9 per cent bite out of GDP in the US, but in 1981, energy took up 14 per cent of GDP. And according to David Wyss, chief economist at Standard Poor’s, in 1980, the average American had to work 105 hours to pay for enough oil to travel 100 miles. By 2006, he only had to work for 52 minutes.

It was almost two years ago now, when George W talked about how the US was addicted to oil. Normally, shaking off a habit is quite painful, but this time around the cold turkey experience of shaking off the addiction to oil has been quite mild. The likes of GM and Ford have suffered, but the US consumer has bought more fuel-efficient cars, while farmers have raked in the bucks after finding corn could power cars, and they could grow fuel in the ground.

This time around, that oil is high is down to good news. It’s largely been surging demand and rapid growth of the global economy that have pushed oil up. So high oil is a price we pay for success.

So yes, it’s bad that oil is high, but it’s not that bad. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

So the dollar fell to its lowest level against the pound in 26 years yesterday. On face value, that’s good news for US exporters and British tourists in Florida, but it’s bad news for US tourists, and British exporters. But, then again, maybe there is a bit more to it than that.

The US economy, just like the UK economy is out of balance. For too long the economies of these two countries have been kept going through consumer borrowing, with savings actually negative in the US and UK of late. A falling dollar could right that, it could cede new power to US exports and reduce the importance of the consumer. But, to believe this transition can occur without considerable pain en route seems at best na#239;ve. At worst, it’s hopelessly optimistic.

In any case, a falling currency is no panacea to a balance of payment deficit. Just think of Harold Wilson, our Labour Prime Minister during much of the 1960s and 1970s had his own balance of payments crisis. It was big news back then, for that was in the days when it was considered to matter if a country was spending more money than it was earning. So, in 1967, the pipe-smoking premier devalued the pound, and famously said, “It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” And yet, Harold was wrong: the pound in the pocket could buy a lot less, and purses needed to be filled with a lot more money too before it was enough. Why? Because the benefits of a lower pound were cancelled out by inflation.

Some say a falling dollar won’t lead to inflation, although the US has already lost out through rising oil prices as a partial consequence of a lower dollar, but it seems inevitable that this optimistic prognosis will be proven wrong. It’s been cheap import prices that have helped keep US inflation so low, but at the same time made it hard for US exports to compete. So, conversely, more-expensive import prices might help exporters, but will also make prices higher.

Just at a time when the US consumer is feeling the pinch, the dollar plummets, making goods more expensive. Of course, this will hurt, and at least some of the benefits of falling interest rates will be cancelled out by more expensive goods imported from abroad.

In Europe and the UK we worry about the falling dollar. There is no doubt this will hit our economic growth, but it is worth remembering that the real problem Stateside is consumer borrowing. Whether the cost of unsustainable US borrowing is paid for by Europe in the form of cheaper dollars or just low demand from the US, it will make little difference.

The bottom line is that the US-led consumer boom could not possibly last.

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October 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Today’s the day. The Fed will be choosing the rate of interest this evening. Across the US, traders, analysts and economists are hoping, they are praying and they are willing the Fed to lower interest rates. A quarter of a per cent drop would be nice, a half a per cent fall would have them singing out in praise, but no change at all and some will want to see the Fed’s chairman Ben Bernanke sacrificed on the altar of Wall Street.

There seems to be a growing feeling that if the Fed chooses to do nothing and keeps rates at 4.75 per cent, then the good ship US will not be able to recover from the sub-prime iceberg it smashed into this year, and will experience recession.

Earlier this week we told how bad things are with the US housing market, with data from the National Association of Realtors revealing that median house prices across the US have fallen by 7.64 per cent from the June peak to September.

Yesterday, it was the Conference Board’s turn to put the fear of God up analysts, when it revealed yet another fall in its Consumer Conference Index. Actually, it was an odd kind of fall. Statisticians can be the bane of our lives, and yesterday they lived up to form when it was announced that the consumer index fell by rising. Yes, that’s right. It fell by rising. In fact the index moved from 99.5 in September, to 99.6 in October. So why do we say it fell. Statisticians, you see, have this unfortunate habit of changing their minds. The index score for October, announced yesterday, was lower than the September score announced four weeks ago. It’s just that yesterday, the Conference Board lowered its figures for September too. No doubt, they will lower the October reading again in four weeks’ time.

But what does the latest consumer confidence score mean? Well, if you ignore the fact that the index is now recorded as being higher than September’s reading, October saw the lowest score in two years. Look#133;just forget the numbers, the point is, the index has fallen rapidly since July.

But the snag is that a cut in interest rates, even a half a per cent cut, may not be enough. For one thing it takes time for the effect of an interest rate cut to be felt, time which the US economy does not have. For another thing, a lot of these sub-prime loans that were offered a few years ago, were made available at such a cut-price introductory offer that rates would have to fall a lot more rapidly and significantly than the Fed would dare contemplate to make a difference.

But for a third thing, there is a chance a new problem is emerging. A new crisis could be about to hit the buffers, that will be just as serious as US sub-prime, and worryingly, the men and women of Wall Street are dismissing this as a danger for all the wrong reasons.

Consider this. US banks and other lenders were far too rash with their lending decisions relating to sub-prime. It seems unlikely anyone would disagree with that statement. If they were far too complacent with mortgage lending, is it not logical to assume those same lax attitudes permeate through the banking sectors and apply to, say, credit card lending too?

And in this respect, US analysts may have made a massive mistake. Right now, missed credit card payments in the US are at a historical low, and many conclude for this fact that credit card debt is fine, and that it’s not about to blow. But these comments miss the point.

In the US, just like the UK, people are using the rising value of their property to pay off credit card debt; surely that’s the reason whey the credit card market appeared to be so healthy. It seems likely that falling US house prices could have a catastrophic effect on the US credit card market. And consider this, it’s estimated that the US credit card market has around $900 billion in securitised debt, that’s to say, debt that has been sliced up and sold. Strangely enough, the extent of securitised US sub-prime debt was at a similar level.

If that wasn’t all bad enough, there’s oil too. It has fallen by a few dollars over the last few days, but it is still higher than the inflation-adjusted level in the early 1980s.

But that doesn’t mean there is no hope, and on this occasion hope comes in the shape of a falling dollar, while many believe that this time around, the high price of oil does not matter so much. To find out why, read on.

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October 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Have you noticed a new word has crept into the English language? Sky Plus. “Did you watch that TV programme on#133;?” “No, but I Sky Plus-ed it.”

Mind you, maybe the Internet could make Sky Plus technology superfluous. Who needs to record a programme when you can download it?

Not that BSkyB are likely to be much bothered by that. Apparently, the company now has one million broadband users. It took the company just 14 months to rattle up that number, making it the fastest growing broadband supplier in the UK.

The company has a dominant position in the TV industry, but in the communication business it’s an ‘also ran’ and yet, right now, the communications industry is around three times bigger than the TV business.

Then again, moving forward, the two will become one and the same. The advertising model that has funded so much of TV appears to be set to become the new way of doing things in telecommunications too.

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October 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Up to now we have had it too easy. In the UK we have been busy investing overseas, no doubt with the expectation of big rewards, while we borrow from abroad at rock bottom interest rates.

In short, we have been using cheap credit to buy ourselves some tasty investments. This strategy has helped keep the pound up and has kept the UK economy afloat, when under normal circumstances we would have been suffocated by our debt.

According to the National Institute of Economics and Social Research, by the end of this year our balance of payments deficit will be 3.1 per cent of GDP, and will be even worse next year. But our clever use of money, the way we have picked up overseas investments offering good returns (in part through using cheap credit from abroad) has helped keep the balance of payments deficit down.

If foreigners were as good at extracting value out of their UK investments, as we are at making the most of our overseas investments, then the deficit would be a lot higher and the pound would be under an awful lot of pressure to shadow the dollar downwards.

And right now, it appears it’s changing. China wants more for its money. It is no longer content with a return of a fistful of dollars on its investments. It wants a few dollars more than that. This is good for China and some of our companies, but for our balance of payments, things might get bad. Maybe downright ugly.

China has already invested in Barclays, and if the UK bank’s bid for ABM Amro had gone ahead, would have pumped in a lot more.

Now, evidence has emerged from the US that China’s social security fund is mooting investing into US private equity giants Carlyle, KKR and TPG.

The FT quoted Isaac Meng, an analyst with BNP Paribas in Beijing, as saying, “The Chinese government is hoping to do a better job in exporting its capital than the Japanese did in the 1980s.”

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October 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

At the moment, whenever data on the housing market is released, you just know it’s going to be bad. No surprise then to hear that the number of mortgages approved for home purchase have fallen by 20 per cent since last year, and are now to the lowest level in over two years.

Maybe the only surprise in that data is that it was even worse two years ago.

And yet, look at remortgages, and the market is still quite brisk. In September the value of remortgages was £12.9 billion, a little above the six-month average.

As for consumer credit, September saw the highest growth rate in two years.

Total debt, by the way, is now running at £1.379 trillion. Funny, it only seems like five minutes ago when debt broke through the £1 trillion mark. The National Institute of Economics and Social Research now estimates that debt-to-income in the household sector is now 1.66, the highest ratio ever recorded by the Office for National Statistics.

But, take a step back, and we see a different picture emerge. Mortgages for house purchase are falling, but borrowing for other purposes is still rising. It’s this borrowing that is helping to prop up the economy.

The Council of Mortgage Lenders (CML) also revealed a new report yesterday. It released its latest projections. It reckons house prices will rise by 7 per cent this year and 1 per cent next. But the real headline making predictions relates to affordable debt.

CML reckons the number of repossessions taken by first-charge mortgage lenders will rise from 22,700 last year to 30,000 this year, and to 45,000 in 2008. This will be the highest level of repossessions since the mid-1990s.

But don’t panic yet. To put the CML projections on repossessions into context, back in the early 1990s, repossessions went close to 80,000 in a year, and were higher than the level predicted for the following year for four years in succession.

There is a snag with these projections, however. Analysts often seem to ignore the ability of borrowers to borrow more money to pay off debt. Surely one of the reasons why rates of top-up mortgages are so high is because consumers need the money to be able to pay off debt. They are borrowing to fund borrowing.

There is a real danger that in the months ahead, the combination of tighter credit and lower house price inflation will remove the option of being able to borrow to pay off borrowings. This danger has, in our view, been underestimated by most economists.

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October 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

The world has gone mad. Everywhere you look you see valuations that suggest insanity has become endemic amongst the world’s traders. Whether it’s oil, property or shares, prices just seem to keep going through the roof. And, as every investor will tell you, what goes up must come down, so presumably it will all go pop.

Take the US. Of late, the country’s biggest export seems to have become woe, and yet markets continue to flirt with all-time highs.

Take China. Shares in the economy behind the Great Wall have surged faster than a Rover leaving one of its factories. The CSI 300 Index has risen 170 per cent this year, and valuations are typically running at around 50-times earnings.

Take India. In that country, the leading stock market index is referred to as the Sensex, and it too has enjoyed a breathless ride. Yesterday, the index passed yet another high, and is now a stunning 42 per cent up on the lows seen in August. Over the last 20 months the index has doubled. And what about the score that counts? Well, right now, the overall valuation of the Sensex index is around 26 times earnings. Okay, that’s half the level seen in China, but way too high, surely.

Or is it? Think about it. If the index has doubled in 20 months, and is worth 26 times earnings, this means that 20 months ago, the index was actually trading at around 13 times earnings, 20 months into the future. Normally, when analysts calculate p/e ratios, they compare value with projected earnings. Sure, they only look 12 months ahead, not 20 months, but even so, you should have got the picture by now. Maybe Indian stocks are not quite as expensive as they first seem.

In a way, it’s a tad ironic. Foreigners are not allowed to invest in stocks listed on the Chinese market, so shares in the country rely on internal investment, and valuations leap to levels that have the most bullish freely using words like ‘bubble’.

In India, much of the surge in equity prices has been prompted by overseas investment. Foreigners have been allowed to buy shares listed in India since 1993, and according to The Times of India, $66.2 billion of foreign money has found its way in, with a third of this total coming since the start of 2002.

India often seems the forgotten superpower of economic growth. We talk about China and Russia, and yet India too is growing at a phenomenal rate. The IMF expects India to grow by 8.9 per cent this year and 8.4 per cent next, only just behind China, which is expected to grow by 11.5 and 10 per cent this year and next.

But then again, the Indian stock market is not unique in displaying bubble-like growth, while still maintaining a semblance of logic to valuations.

Yesterday, we told how the Hang Seng has surged 52 per cent this year, but that the valuations to earnings ratio is 19.2. Markets in Hong Kong have been boosted since the Chinese government announced last summer that some Chinese investors will soon be allowed to invest in shares listed on the Hong Kong stock exchange.

You will be familiar with those four letters BRIC: they stand for Brazil, Russia, India and China. Apparently, shares in Brazil are also valued at around 26 times earnings, while in Russia, valuations to earnings are a mere 13.

The IMF expects growth of 4.4 per cent in Brazil this year and 7 per cent in Russia. As for next year, it is projecting 4 per cent in Brazil and 7 per cent in Russia.

So you see, there are lots of bubbles there, but on closer inspection it is just possible that some are rockets on course for permanent orbit.

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October 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Oil at $100 a barrel is unthinkable - that has been the wisdom for the last few years. And if it did hit that level, then economic crisis would follow as surely as night follows day.

And yet, oil is now closing in on that “unthinkable” level - and as of yet, the roof hasn’t caved in.

This morning, oil was priced at over $93 on the New York Mercantile Exchange. To put that in context, back in January it was trading at just over $50. At the time many were saying “told you so”, and said oil would start to fall back, it always does. Well, their smugness should well and truly be off their faces now.

The recent rises in oil have been put down to increased tensions between Turkey and Iraq, and storms in the Gulf of Mexico. Supply from Mexico has already been cut by 20 per cent, and now there are fears US facilities could be affected.

Recently, a major landmark was passed, with barely a whimper. For some time, many optimists have dismissed the effect of rising oil, saying that if you allow for inflation, it was much higher in the early 1980s. Well, the inflation adjusted record has gone now, too. In 1981, oil was trading at $37.48, and after allowing for inflation, that’s the equivalent of $84.73.

Mind you, the falling dollar has exacerbated the problem. Interestingly, however, back in 1981 when Iran cut oil exports, and oil was at its previous inflation adjusted high, there were 2.028 dollars to the pound. So actually, in sterling, after allowing for inflation, the price of oil relative to back then is even higher now than it is in dollars.

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October 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Shares surged again in Hong Kong yesterday. The Hang Seng is now 52.3 per cent up on the start-of-year position and 49.1 per cent up on the lows seen in August. And this morning it passed yet another all-time high. The index is now valued at 19.2 times earnings - that’s the kind of p/e ratio market crashes are made of. But, maybe this time things will be different.

There is one major reason for the surging index. Recently, the Chinese government announced it was relaxing rules on Chinese investors and that some will soon be able to invest in companies listed in Hong Kong.

Now in China, company valuations really are stretched: around three times the p/e ratios seen in Hong Kong, and the reason is this. Chinese savings are massive, while in the US and UK savings rates have been falling, with the savings ratio negative in the US. As for the UK, according to the National Institute of Economic and Social Research, the savings ratio, excluding change in net equity of households and pension funds, has been negative for two quarters in a row. But in China, savings are typically running at about 25 per cent of income.

The question is, what do the Chinese do with their savings? Until recently, the rate of interest was actually lower than inflation, so there was no incentive to put savings in the bank. Since then, interest rates in China have shot up, but so has inflation, so there is still little incentive to save. And so, the Chinese put their money on the stock market. Sure, valuations reached heady levels - now around 50 times earnings, but for a nation that has never been afraid to gamble, these highs are not enough to scare investors off.

Of course shares in China are overpriced. It reminds us a little of dotcoms in the late 1990s. The Internet was a good idea, with lots of growth potential, but markets got ahead of themselves. It’s like that in China now.

But, Hong Kong is a whole lot cheaper than China, and while p/e ratios might be at the level that would normally spark a crash when you consider the economy of China is growing at over 10 per cent a year, suddenly the valuation of Chinese companies listed in Hong Kong doesn’t seem quite so scary.

But here is an oddity. There are now 45 companies listed in both Hong Kong and China. And in China, shares in the same companies listed in Hong Kong are typically 35 per cent more expensive.

But then again, if you cast your eyes further afield, Chinese companies listed in Singapore are even cheaper. And then it becomes a political call. Do you think that, eventually, the Chinese government will let its investors invest in companies listed in Singapore too? If so, then it seems a fair bet this market#133;well you work it out. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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