Archive for the ‘International’ Category

file0001108787681

By one very important measure, stocks are set to crash. This will not be any old crash, but a really major one – as significant as 1929, 1987 or what we saw in 2000 and 2008. And the measure that tells us this is not some obscure ratio, familiar only to academics locked away in ivory towers; it is the ratio that many of the world’s top investors say is the single most important ratio they use to judge whether or not stocks are overvalued. Yet despite this very powerful evidence to say we are set to see a crash, many say that this time it is different. Are they right this time?

The measure that looks so dangerously elevated is called the CAPE – or the cyclically adjusted price earnings ratio. It is calculated by taking the current capitalisation of stocks, and comparing it with average earnings over the last ten years.

For US stocks right now the CAPE is 23.8. The long term average is 16.5. Ergo US stocks are overvalued. And although stocks listed in London are not as expensive, the markets across the world tend to follow the US. If US stocks crash, others will follow, regardless of fundamentals.

Bullish defenders of US stocks are saying: “This time it is different.” And they are greeted with derision. There is one golden rule in investing. When people say: “this time it is different,” sell.

It is just that when you think about it, of course, US earnings over the last ten years have been low; the US economy has suffered a very nasty recession. The CAPE, they say, is distorted by the unique, and never to be repeated experience of 2008.

Besides, add the bulls, the CAPE is not the only measure. Look at current PE ratios, look at stock values to net assets, look at a myriad of other measures, and stocks don’t look that expensive at all. They can even turn the “this time it is different” argument back on their critics, and say: “but by a long list of measures stocks are not expensive, why do you think they will crash?” To the bears they might say: ”Are you saying this time it is different?”

But then we get a counter argument. Sure, the US has suffered one mother of a recession, but corporate profits did surprisingly well. The truth is that corporate profits to GDP are close to an all-time high. The argument continues, if the ratio returns to its historic average, earnings will fall, even if GDP rises.

And finally just to retort to that argument about profits to GDP being high and thus they will fall, some might say: “Yes it is true that profits to GDP are exceptionally high, but this has been a bad thing, and it may have been a factor that triggered the crisis of 2008.” To explain this argument, see it this way: the economy needs demand to rise for growth to occur. If profits to GDP are rising and wages to GDP are falling, demand can only occur if people borrow more. Hence high levels of debt were a symptom of rising profits squeezing wages. If we see the ratio return to average, that will be good for the economy, and in the long run, what is good for the economy is good for company profits.

So where does that leave us? If profits to GDP fall, that may be negative for stocks in the short term, but positive in the long term. If profits to GDP stay where they are, that may lead to earnings rising with the economic recovery, justifying stock valuations, but this may not be so good in the long run.

© Investment & Business News 2013

3290

It has been a drip drip of okay news on Spain. There’s nothing sensational; nothing yet to quieten the euro-sceptics, but enough to offer some hope.

The latest PMI for Spanish manufacturing from Markit hit 50 in June, which is the highest reading in 26 months, and suggests the sector is no longer contracting; rather it is now flat. Spain posted its first trade surplus ever in March, with exports rising 2.7 per cent, and finally Spanish unemployment fell in May, with 98,286 joining the Spanish work-force.

Okay, none of this data provides a reason for the bulls of the investment world to start charging all over the market bull rings. A reading of 50 for the PMI still suggests the economy was flat, ie not growing. Sure the balance of trade went positive, but the main reason for this was falling imports, and Spanish unemployment remains at frightening levels.

But then this week (July 23 to be precise) the latest figures on Spanish GDP were out and they gave some reason for cheer.

In Q2 the Spanish economy contracted by 0.1 per cent, after contracting 0.5 per cent in Q1 and by 0.8 per cent in Q4 last year. Year on year growth was minus 1.8 per cent.

So Spain is still in recession, but it needs only a very modest improvement to leave recession and that surely has to be celebrated.

Ben May, European economist from Capital Economics, is not so sure, however. He said: “We expect weak demand in Spain’s major export destinations to mean that the boost from the external sector will fade over the coming quarters. And with the fiscal squeeze, housing slump and private sector deleveraging set to continue for some time to come, domestic demand is likely to contract significantly further.

Based on this, we still expect GDP to fall pretty sharply next year, perhaps by as much as 1.5 per cent.” If Capital Economics is right, and the recent good(ish) news proves to be a one-off, then expect another bond crisis, and more calls for help in 2014-15.

© Investment & Business News 2013

It often seems that views on the economy fall into two camps. There are those who say we are doomed; that the Earth’s finite resources are just about all used up. You could say this is the Malthusian view of the world. Furthermore, they say, the growth we have enjoyed over the last 200 years or so was based on unsustainable credit – we borrowed from Mother Earth and from future generations by doing something called ‘burning fossil fuels’, and in the process built-up debt that can never be paid back.

Then there are the optimists – those who believe in technology. It is a shame the debate is often so polarised, because the truth is that both sides have legitimate points. In today’s piece, the focus is on technology, and something rather miraculous that is appearing in our midst, and which – by the way – is largely being ignored by economists, and those who like to debate economics.

The truth is that progress – if you want to call it progress – is accelerating. And it has been accelerating for several billion years at that. For the majority of time that life has existed on this planet it was simple, very simple, and indeed for much of the history of the world, life consisted of single celled organisms. Then half a billion years or so ago, the Cambrian revolution occurred and a blink in the eye – evolutionally speaking that is – things changed incredibly quickly.

From the evolution of dinosaurs, mammals, primates, bipedal primates and early humans, the pace of change just got quicker. And once Homo Sapiens discovered agriculture we saw another acceleration in change, and an acceleration again upon the invention of writing, and then again with the printing press and the industrial revolution.

In the 20th century too, we have witnessed it. It used to take decades for new technology to gain mass market acceptance, but now it can take a mere hand full of years.

With the Internet this process has accelerated again and now – thanks to digital technology – it is no longer true to say that technological progress is merely accelerating. Rather, it is accelerating at an accelerating rate.

Now McKinsey has highlighted what it sees as 12 disruptive technologies that it estimates will collectively have an economic impact in the year 2025 of between $15 and $25 trillion. Note that the report is talking about that one year: 2025. Presumably the impact of disruptive technologies will grow from there. Just bear in mind, by the way, that global GDP in 2012 was around $72 trillion. US GDP is around $15 trillion, so by 2025 these new technologies, based on McKinsey’s analysis, will have an impact on the world either equal to or greater than the entire GDP of the United States.

The technologies and their estimated economic impact in 2025 are:

Mobile Internet. Impact: between £3.7 and $10.8 trillion. McKinsey says it estimates: “10 to 20 per cent cost saving on the treatment of chronic diseases via the ability to remotely monitor health.”

Automation of knowledge work. Impact: 5.2 to $6.7 trillion. The report says: “Advances in additional labour productivity would be equal to the output of 110 to 140 million workers.”

Internet of things. This means billions of devices, such as sensors, some very small, and which are connected. Impact: $2.7 to $6.2 trillion.

Cloud computing. Impact: $1.7 to $6.2 trillion.

Advanced robotics. Impact: $1.7 to $4.5 trillion.

Autonomous or near autonomous vehicles. Impact: $0.2 to $1.9 trillion.

Next generation genomics. Impact: $0.7 to $1.6 trillion.

Energy storage. Impact: $0.1 to $0.6 trillion.

3D printing. Impact: $0.2 to $0.6 trillion.

Advanced materials (such as Graphene, carbon nanotubes and nanoparticles). Impact: $0.2 to $0.5 trillion.

Advanced oil and gas exploitation. Impact: $0.1 to $0.5 trillion.

Renewable electricity from wind and solar. Impact: $0.2 to $0.3 trillion.

Okay, McKinsey does not really know. Is it estimating or guessing? Its guesstimate for 3D printing seems on the low side, and why aren’t vertical farms in the top 12? But it’s an interesting list and one worth keeping a record of.

But what are the implications for the economy, for unemployment, distribution of income, education, and indeed for business and investors?

These disruptive technologies could have the effect of greatly increasing GDP, so why is there a preoccupation with austerity? Debt does not really matter if your percentage growth in income is greater than the interest on your debt. We should either be preparing for, or at least discussing these great changes?

The real point, however, is that the disruptive technologies in the pipeline are stunning and, for better or worse, they will change our way of life and drastically alter the economy very soon. This is exciting and also frightening. How often do you hear this topic discussed? We are simply ill prepared.

For the McKinsey report, see: Disruptive technologies: Advances that will transform life, business, and the global economy 

© Investment & Business News 2013

301

During the height of the euro crisis, politicians in Europe, and indeed central bankers, blamed the markets and credit ratings agencies. Yesterday an official at the Fed followed that tactic too.

Richard Fisher, president of the Dallas Federal Reserve, told the ‘FT’: “I do believe that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they go after it.”

He also took the opportunity of being interviewed by the ‘FT’ to remind us all about George Soros – the man who shorted sterling in 1992, beat the Bank of England and hastened the UK’s departure from the ERM. He likened today’s feral hogs to Mr Soros, but is that right?

Being a messenger is never a good place to be, not if you bring bad news anyway. When Eurozone politicians blamed credit ratings agencies, and what they called bond vigilantes for the woes in Europe, they were surely deluding themselves. They had fooled themselves into thinking the crisis was less serious than it was, and they thought they could talk until the cows came home. The markets went some way towards correcting their complacency.

By hastening the UK’s departure from the ERM, George Soros probably did the UK a favour.

But what about this time?

Markets are selling because there are fears that interest rates are set to rise. The Fed has said as much, and even in China there are signs of monetary tightening.

But don’t forget that the news out of the US has been good of late. To remind you of two of the highlights: US banks’ profits were at an all-time high in Q1, and US households have cut debt substantially since 2007.

As things stand, the Dow remains substantially up on its start of year position as does the Nikkei 225 in Japan. And that makes sense.

Markets probably overdid their exuberance in May, but both the US and Japan are in a better place now than they were at the beginning of the year.

As far as equities are concerned, in addition to fears about the Fed tightening monetary policy, some are nervous about the possibility that US profits to GDP are set to fall. But in the long run, profits to GDP falling and wages to GDP rising is surely good thing.
Even higher interest rates are a good thing, if higher rates are symptomatic of the economy returning to normal.

But higher interest rates will be bad news for those with high debts, and for that reason the UK and – more so – the Eurozone may lose out.

The FTSE 100 has not performed as well as US markets this year. Unlike the Dow, it never did pass its all-time high. And unlike the Dow, the FTSE 100 has now fallen to within a whisker of its start of year price. That is probably about right.

But at least the UK has its own central bank, free to print money and buy bonds via quantitative easing.

The countries of the indebted Eurozone do not have such a luxury, which is why Europe may yet be the biggest loser.

Image: Pig In Pen by Kim Newberg

© Investment & Business News 2013

“The existence of tax havens, coupled with high mobility of capital, means governments are constrained in the tax rates they could otherwise apply – crucial for both wealth and job creation,” or so says the Institute of Economic Affairs.

These are brave words, given the current climate.

The Institute also said: “Without tax havens, big businesses would move away from the UK. If tax havens could not be used by multinational corporations in the UK, then a single rate of corporate tax would have to be set. If set too low, then corporations’ contribution to the overall tax take would fall. If too high, then business would move overseas, damaging the overall economy.”

And: “without tax havens, many innovative products would be stifled by punitive tax regimes. Offshore tax havens allow the UK to make the most of its comparative advantage in financial services and avoid potentially damaging double or triple taxation on investment returns.”

Maybe so, but remember corporate profits to GDP have hit an all-time high. You can’t blame companies for trying to squeeze wages, but when they all try to do that, the result is less demand across the economy, which in turn is bad for corporate profits in the long term.

Surely, we need higher corporate taxes across the world, not lower ones. Tax havens, however, are a distraction from the bigger issues. What we really need is for some kind of international agreement that any country wishing to participate in global trade to be required to sign up to a minimum level of corporate tax.

© Investment & Business News 2013

In 1994, the US Federal Reserve increased interest rates. The eventual effect of this was the Asian crisis of 1997, then the Russian crisis of 1998 and the collapse of LTCM.

History does not repeat itself, once said Mark Twain, but it does rhyme.

Did you hear that? It is the markets rhyming again.

This week the OECD said: “In East Asia…combined nonfinancial corporate and household debt has increased in several countries, reaching 130 per cent of GDP in China and Malaysia in 2012. For the East Asia region as a whole, private debt has increased by 19 percentage points of GDP since 2007, while in Latin America it has increased by 9 percentage points.

Household debt (only by deposit-taking corporations) in Thailand has risen 15 percentage points since 2007 and now stands at 63.4 per cent of GDP. Total household debt is estimated to be about 77 per cent of GDP in Thailand and almost 80 per cent of GDP in Malaysia.”

Countries across the emerging world where private debt is either around 100 per cent of GDP or even greater than this amount – and listed in order of size of debt to GDP – include: Thailand, Panama, St Lucia, Vietnam, Malaysia, South Africa and China.

Three countries stand out with excessive level of foreign debt. They are Papua New Guinea, Latvia and the Seychelles.

The World Bank said: “Public debt levels are high and proving difficult to manage in countries such as Cape Verde, Egypt, Eritrea, Jamaica, Jordan, Lebanon, Pakistan, and Sudan.”

But as markets panic, and emerging market debt becomes the thing they fear most, expect fundamentally strong economies to be punished too. The markets are like that. In times of either euphoria or panic they don’t tend to discriminate between sectors or regions.

That means opportunities may emerge. Watch out for the countries that make up the Pacific Alliance Trade Bloc, some countries within South East Asia, and the so-called TIMPs – Turkey, Indonesia, Mexico, and the Philippines – in particular.

© Investment & Business News 2013

282

Shale gas and oil – -it is everywhere, or at least if feels that way. It is in Russia, and the US, China, Argentina, Venezuela, Brazil and Mexico. It is in Libya and Algeria, Pakistan and Indonesia. It is in Australia and South Africa, and, at the other end of the world, it is in Canada.

For some more good news, there is some in the UK too, and for the really good news, most of it is up north, so there will be no need to spoil the aesthetic qualities of southern England’s rolling hills with wind farms. Instead all we need to do is dig up the Yorkshire Dales, and other areas that Londoners hardly ever visit.

Here is some bad news. There are also deposits in the south – bring back wind farms.

In all, the Energy Information Administration (EIA) reckons there are 26 trillion cubic feet of shale gas and 0.7 billion barrels of shale oil in the UK. So what does that mean? Well, the UK currently consumes around 3 trillion cubic feet of gas a year, so 26 trillion would last around ten years. Click here .

Actually, compared to some countries the UK is small fry. The EIA reckons that China has over 1,000 trillion cubic feet of shale gas – or a quadrillion, as they also call numbers with nine noughts. The countries that make up the top ten, in terms of reserves of shale gas – with the largest first – are: China, Argentina, Algeria, US, Canada, Mexico, Australia, South Africa, Russia and Brazil. As for shale oil, Russia has 75 billion barrels, followed by the US, China, Argentina, Libya, Venezuela, Mexico, Pakistan, Canada and Indonesia. You may have noticed there is a pretty good correlation with size of country – Venezuela, perhaps, is the exception.

All in all, analysts are talking about there being enough shale gas and oil to feed world demand for ten years. You may have noticed that the global economy slipped into recession just as oil started to approach $150 a barrel. The good news on the US economy went from a trickle to gushing torrent, just as the price of gas fell. The cost of energy matters, and may yet be the key to determining economic strength.

Stop: let’s repeat that STOP. The EIA says its estimates of shale oil and shale gas resources outside the US are highly uncertain and will remain so until they are extensively tested with production wells. As for the UK, the jury is out on how practical it is to access shale gas and oil deposits, and not everyone is all that keen on the idea of digging up Yorkshire, or fracking in a country as small as Britain. Some might choose to switch the r in the word ‘fracking’ to a u and then add the suffix awful.

We keep hearing about how shale is not a global warming gas. Well, maybe that is right, but as this article points out: “Gas fracking involves the release of significant amounts of methane into the atmosphere in the form of ‘fugitive emissions’ – an extremely powerful greenhouse gas (72 times the warming potential of carbon dioxide over 20 years).” See: Gas fracking will cause ‘irreversible’ damage, says Conservation Council of WA 

The clue may be in the name. On the south coast of England there are what the EIA calls Jurassic-age shale formations. We have all heard of the Jurassic-age and know it happened a long time ago. Less of us have heard of the Carboniferous age, which occurred from around 359.2 million years ago, to 299 million years ago. There are reserves of Carboniferous age shale gas in northern England. In other words, we are talking about reserves of shale gas and oil that have been sitting in the ground for a very long time. And in just ten years we are talking about digging up a big chunk of these reserves that have sat in the ground for hundreds of millions of years; that took hundreds of millions of years to form. Does that strike you as a good idea? How do you think future historians, from say 200 years in the future, will respond when they read about all this so-called “good news on shale gas” in 2013?

What we forget is that the Earth’s climate has changed over millions of years, and it changed as carbon dioxide was sucked out of the atmosphere and deposited in the ground. In just a few years we are reversing a process that took place over millions, maybe even a billion years.

Just to play devil’s advocate, here is question for you: what will shale gas exploration do for renewables? Will investment into shale gas and fracking crowd out investment in renewable energies?

Remember Moore’s Law. In its literal sense, this refers to computers doubling in speed every 18 months or so. But use Moore’s law as a metaphor for rapidly increasing technology and maybe it can be applied to renewables.

Where renewable technologies differ from other energy industries and yet are similar to the computer industry is that the generation gap between each stage in their development is quite small. It can take three decades to build a nuclear power plant, months to build wind farms, and just days to install solar panels.

The more we invest in renewables, the cheaper they get, and the progress rate in the efficiency of the technology can be very rapid.

Forward wind the clock 20 years, and assume that in 2013 the world moved away from carbon fuels and instead invested billions, even trillions, in renewables. Is it not possible that by 2033 our energy would be much cheaper than it is today?

James Martin, in his book ‘The Meaning of the 21st Century’, said: “The world’s reserves of oil, not counting the undiscovered ones, have a value of about 60 trillion US dollars… coal reserves have a similarly high value. If humanity set out to save energy and move to non-carbon forms of energy… much of this vast amount of energy would be abandoned. Both oil-rich countries and petroleum companies want to hang on to their potential wealth.”

Apologies if this sounds like a conspiracy theory, which is not something this column tends to support, but why don’t we hear as much hype about renewables as we do about shale gas, when, by the way, surveys show that most people do not think wind farms are aesthetically ugly at all.

For the EIS report, go to Shale oil and shale gas resources are globally abundant 

© Investment & Business News 2013