file0001742232424The UK economy grew by 0.7 per cent in the second quarter of 2015, and by 2.6 per cent over the past year. The US economy grew at an annualised pace of 2.3 per cent. The media and markets greeted the figures with relief, but they were wrong.

To understand why, first consider what things were like in the first quarter of this year. The UK grew by 0.4 per cent, that’s quarter on quarter, and the US grew by 0.6 per cent– annualised. Actually, the data for Q2 had been revised upwards, so the markets had a kind of double celebration. They were chuffed by the okay figures for Q2, and even more chuffed by the upwards revision for Q1. Even so, bear in mind that in the latest quarter both the UK and US economies grew at a rate that was still way below average. As for Q1, the data may say that the US grew by 0.6 per cent annualised in Q1, but frankly that is a pretty awful performance. It’s just not as awful as the figures originally suggested. It is like coming last in a race, and then celebrating because the judges discovered they had made a mistake and in fact you only came second from last.

History tells us that economies tend to enjoy a period of above average growth when coming out of recession. History tells us that when an economy suffers a one off shock, which is supposed to have been what happened in Q1 of this year, then the following quarter should expand at a faster than normal pace to make up for the lost production of the previous quarter.

We are told that poor figures on the first quarter were down to a shockingly bad winter in the northeast corner of the US. This even affected US imports to the UK, knocking the UK economy. If that is so, however, shouldn’t the second quarter have seen unusually fast expansion, making up for lost ground?

In the US, the Federal Reserve is losing patience, it will be a big surprise if US interest rates don’t go up very soon, September most likely. Rates will be rising in the UK soon too, probably January.

Once again, consider the lesson of history. The Fed increased rates in 1994, after a period in which they had been at 3 per cent for 18 months or so. A year and a half later, US interest rates were at 6 per cent. Crisis soon followed, however. The global economy had got used to low US interest rates, when they rose capital left developing markets and headed west. We had the Asian crisis of 1997 and the Russian crisis of 1998. The global banking system tottered.

A similar story occurred all over again the following decade. This time though, US rates were cut to 1 per cent, stayed there for about a year, and then gradually began to rise. Within a year or two, come 2008, the global banking system did more than totter, it fell over. We all know how nasty that was.

This time US rates have been at near zero per cent for almost seven years. As they rise, the shockwaves across the world will be nasty.

The problem is compounded. Critics of the Fed say that by cutting interest rate to near zero, it has nothing left to give in the event things make a turn for the worse. The snag with that is that if the Fed hadn’t cut rates so low its economy may have suffered an even more nasty turnaround. It is like a runner in a race, holding back for a sprint finish. But if the race leader sets a fast pace, and our runner goes with the leader and has the sprint run out of him, or indeed her. You can’t criticise the runner for going too fast, there was no choice.

In short, rates are low because they had to be, now they are rising because they have to. Neither the US or UK economy are strong though, indeed they are more like a wheezy athlete, about to start a long uphill climb.

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There is a university, its location is not well known, maybe you travel there from platform nine and three quarters at King Cross, but it is called the School of Technology Phobia.   While we don’t know the location, it does seem likely that the University of Luddites is nearby. Graduates from the former of these institutions have been busy during the last few days, pouring their scholarly ideas across the ether. As a result, shares in Apple look like they are on helter-skelter, hurtling towards the earth.

That may be little unkind. That is to say unkind on Apple. It remains the world’s largest company and its shares did not so much as tumble, as reverse some of the stellar gains seen in recent months. But for the ladies and gentlemen whose cynicism led to the shares falls, the words are not all unkind at all.

Shares in Apple fell, and they fell quite sharply this week, as the company revealed truly stunning results. Revenue was up 112 per cent, sales into China doubled.  If the Apple share price falls after results like that, one wonders what might happen if it had an normal set of results

Apple’s problem is that it is the world’s biggest company by market cap. When you are that big it is hard to grow. Apple needs products that command high retail prices and it needs to sell them in droves. That’s why some think it will be turning to cars next, or even into the world of energy generation and storage.  The iPhone did alright in Apple’s latest quarter, in fact sales were up 35 per cent. According to the school of thought most people sign-up to, a 35 per cent rise in sales of any product is considered pretty exceptional. It is just that when it comes to Apple, it seems many analysts and investors went to a different school, the one mentioned above.

One day, but we have no idea when, smart phones will stop selling. Maybe it will occur when Moore’s Law runs out of puff, maybe it will occur when smart phones are replaced by chips that sit inside our heads. So while Apple enjoyed revenue topping £13.2 billion in its latest quarter, and its valuation to projected earnings is nothing alarming, cynics fret that one day it will run out of road.  Contrast that with Exxon Mobil, Apple’s main rival for the tile world’s largest company, it specialises in a product that the world will always want, namely oil, or so goes the argument.

As it happens, with technology advances in renewables, energy storage and synthetic oil there is no guarantee the world will always want Exxon Mobil’s core product. Apple, however, has another advantage. To explain why we need to look at psychology.

When it comes to paying for stuff, our purchases are likely to be greater if there is distance.  It also helps if things are easier.

If you were to tuck into pizza at the local Pizza café, and you were charged by the bite, you might soon get fed up. Setting aside the inconvenience, with each bite you will be thinking about the cost. So you pick you your fork, move the pizza to your mouth, and quickly tap in your pin number authorising another 30 pence. As you munch away, you will be thinking about the cost. Dan Ariely prosed the pizza idea to explain the concept of the ‘pain of paying’.

Other research shows that people who live in apartments in New York spend more on their laundry if they pay by tokens than by coins. The same psychology explains why casinos provide customers with chips – They spend more money that way.

For similar reasons, we spend more when we use a credit card than when we use cash. The lower the ‘pain of paying’, it appears the more we pay.

Now consider Apple Pay. It will be to the ‘pain of paying’, what morphine is to a headache. Apple Pay will make money for retailers, and Apple will be paid handsomely for this by them in return.

Now consider the Apple watch. It’s odd, isn’t it? When was the last time you used a pocket watch.  Wrist watches replaced pocket watches because they were more convenient. Odd then, that critics of the Apple Watch, which is after-all— a computer to sit on your wrist, don’t get why it is had advantages over a pocket smart phone. There is another benefit. As Daniel Kahneman illustrated in his book Thinking Fast and Slow, we can be quite impulsive. If spending money involves touching our wrist, and if that money is then distanced from our bank account by Apple Pay, we are likely to spend more

It is just another reason why we need to listen to graduates from the schools of technology not, technology phobia.

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It was November 2012 when Jens Weidmann, President of the Bundesbank, likened quantitative easing, or QE, to a Faustian pact with the devil.  But it was even earlier, back in 2010, when Brazil’s finance minister talked about currency wars.

It was during that era that QE was seen as leading a kind of race to the bottom, as countries fell over themselves to try and achieve a cheaper currency.  It didn’t work out like that, of course. It is no more possible for every country to have a cheaper currency then it is for every Premiership football team to win on the same day.

The critics of QE were legion. They said QE was behind currency wars, and that the inevitable result would be hyperinflation. And they saw the words of Jens Weidmann as a kind of official endorsement of that view.

It was in this environment that the buy gold bandwagon got moving. BUY GOLD, they said. It was the only safe refuge in a world gone mad under QE.

They overlooked that across the world there was a chronic shortage of demand, a savings glut and that the west was suffering from a balance sheet recession.

There are lots of things wrong with QE, the main critique might be that it is a blunt weapon. But it was never likely to lead to hyperinflation, not in a world starved of demand.

But what it did do was lead to a cheaper dollar. And when the dollar fell, so gold rose.

Back in 1999, when UK chancellor Gordon Brown sold the UK government’s gold supply, the yellow metal was trading at less than $300 an ounce. In the summer of 2009 it was trading at just shy of $900. Those two years stood either end of the great gold market, when it rose in value by around 300 per cent.

Gold continued to rise in the aftermath of the crisis of 2008. In September 2009 it was trading at $1,000 and in August 2011 it finally passed $1,900. That was when the gold hype was at its peak.

But in 2015, currency wars has turned to currency normality and inflation stands at close to zero across the developed world. QE didn’t create hyperinflation, it was not even enough to fight the threat of deflation.

In 2015 the US economy began to improve, the Fed made noises about increasing interest rates, the dollar rose, the euro fell, and gold went out of fashion.

As of this moment (21 July 2015) it is trading at $1,108 an ounce.

Why didn’t gold rise above $2,000, or even $3,000 as was once predicted? The reason is simple. QE was the not the devil’s tool it was made out to be, the global economy suffered from lack of demand.  The risk of hyperinflation was built upon a myth.

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In their new book entitled iDisrupted by John Straw and Michael Baxter, the two co-authors claim that only 19 of the world’s 100 largest companies in 2012 will still be in that list in 2042. However, it says that even this bold claim may be understating how things will pan out.

Throughout history, new technologies have had a disruptive effect on businesses and the economy, proving fatal to some well-known companies. In the new book, iDisrupted, the authors claim that the rate of fatality is set to increase.

Of the top 100 global companies identified in 1912, 29 companies had experienced bankruptcy or similar; and 48 had disappeared by 1995. Eastman Kodak was one of just 19 companies that stayed in the list during these years, yet at the start of the 21st century, with the onset of digital cameras, home printing and photo sharing websites, it too fell victim to the rise of new technologies.

In iDisrupted, co-authors John Straw and Michael Baxter claim that many of the industries we currently see as strong, such as oil, car manufacturers, banks and energy companies, could also be heading for the corporate graveyard within the next few decades.  They say that only 19 of the world’s 100 largest companies in 2012 will be in that list in 2042. However, even this may be an understatement.

Straw states: “The big corporate success story of the 20 century related to oil companies, but  just because they flourished in the 20th century, this does not necessarily mean they will flourish in the 21st century.” The rise in electric cars, self-driving cars and advances in solar power and energy storage, will all play a part in the energy industry as we currently understand it

Baxter, aka The Money Spy adds: “In our book, we try to explain why it is that technology is set to change the world like it has never been changed before. This is exciting, but it is also scary. There will be winners and losers, and some of the world’s largest companies will be amongst the losers.”

iDisrupted is a book about disruptive technology, how it will affect business, jobs, the economy and even what it is to be human.

iDisrupted –  Disruptive technology: changing the human race forever – will be available in all good bookshops and online from November 2014 or visit www.idisrupted.com for more details.

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A new book entitled iDisrupted: Disruptive technology, changing the human race forever looks at how technology will change the economy, business and even the human race. One of the technologies it cites that will have a huge impact on the world is Virtual Reality. Despite it first appearing in the 1980s, we are now on the cusp of seeing Virtual Reality’s existence and use in our daily lives in a way that will change us forever.

Hype has been building about Virtual Reality since its conception, but with high prices, small screens, cumbersome technology, and initial disappointment in the technology, many individuals have had their doubts about its impact. However, a new book written by John Straw and Michael Baxter, iDisrupted claims that, thanks to recent evolution in this technology, we will soon be holding face-to-face meetings in Virtual Reality as well as viewing holiday destinations, carrying out online shopping, and watching movies, and of course playing video games.

Combine the improvements in video, sound and computer graphics  with other advances, such as Leap Motion, which enables users to control their computers by the wave of their hand, with technologies that can fool our brains into perceiving smell, touch and taste, and the original dream of Virtual Reality is set to become reality.

Co-author Baxter, aka The Money Spy, says: “In our view, there are three stages in the story of new technology and how it is received by the market. There is the hype phase, the sceptical phase (as we react to what appear to have been unrealistic promises of the previous phase), and then the transformational phase, as previous innovations converge, create wealth, and – in the case of the period we are set to enter – lead to an acceleration in innovation. We are poised to enter the greatest transformational phase ever.”

John Straw added: “With the massive changes in technology that are about to occur, iDisrupted is a book that seeks to open a debate on what is surely the most important topic of the age, but which is barely discussed. Technology threatens society, but could be hugely beneficial. It is time we laid down plans to ensure it affects us in a positive way.”

Now available to purchase via Amazon, iDisrupted is a book about disruptive technology, how it will affect business, jobs, the economy, and even what it is to be human.

For more information about iDisrupted visit www.idisrupted.com

The world had de-coupled, we were told. Time was, that when the US consumer sneezed, the rest of the world got a cold.

Then in 2008, the US consumer was sent to bed, with a thermometer in his/her mouth, and the rest of the world was in agony.

Then something odd happened. After a few months, in which everyone suffered, the emerging world did okay. China did more than okay, it boomed.  The BRICs, or if you want to include South Africa in that illustrious group, the BRICS, took the baton of growth from the US.

Sure there was talk of currency wars, sure the UK limped along like a cripple on broken crutches, but the global economy did well. It had de-coupled we were told.

Or did it? There are time lags in these things.

Now things seem to have gone into reverse. Sure China is still growing, but it is struggling to change from export to consumer led growth. India is picking up, Brazil looks dire, Russia looks worse, and if you want to make the small ‘s’ at the end of BRICS into a big “S” South Africa  is struggling.

There are signs Japan may be recovering, more of that in another article, the Eurozone is well and truly stuck in a very low gear, or even reverse, but the UK and US are the new stars.

The UK economy slowed a bit in Q3, with quarterly growth down to 0.7 per cent, from 0.9 per cent the quarter before. But then the UK’s main trading partner is the Eurozone. At least investment is rising at a very brisk pace, and that gives good reason for cheer.

But there is even more reason to cheer the US.

The year got off to an awful start, with a cold winter and unfortunate timing of the inventory cycle hitting  the economy hard. Was the Q1 contraction a one-off?   Or was it a sign of something more serious?

Well the data on the US economy has been unremittingly good, ever since.  Take for example the latest US consumer Confidence Index from the Conference Board. It hit a new seven year high in October. If you like your numbers, then you may be interested to know the index hit 94.5. The last time it was so high was in October 2007.

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Yet, the global economy still struggles. If it has de-coupled, then right now this is negative thing.

But there is one other issue here.

As the US recovers, the Fed makes noises about upping rates. This is spooking markets, and hitting emerging economies hard.

It is not that the US economy is no longer the lynchpin of the global economy. It still is. It is just that the actions of the Fed seem to count for more than the well-being of the US consumer.

But can the US consumer yet save the day? Only time will tell, but it is surely the case that if US Consumer Confidence continues to grow, then the rest of the world will grow with it – eventually.

p.s. I have been away for a while to complete my new book, called ‘iDisrupted‘ which is available to purchase via Amazon. If you are interested in my thoughts about how the incredible changes in technology are likely to change our world forever then you are invited to buy the book and let me know whether you agree or disagree with my predictions. Further details about the book can be found on www.idisrupted.com

Michael Baxter, The Money Spy

ID-100109044There are two big question marks hovering over the UK economy. The answers  may determine whether the UK is seeing a temporary recovery or something a good deal more real.

First consider the surveys. Every month Markit and CIPS get together to produce Purchasing Managers Indices (PMIs) covering UK manufacturing, construction and services. Then they add them all together and produce a composite index. Over the last few months these indices have been really rather exceptional. A couple of months back the composite PMI hit an all time high. Okay data only goes back to 1998, even so it was impressive stuff.  Since then the PMIs have fallen back a tad, but they still remain way above historic averages.

Some economists reckon that the PMIs are consistent with quarter on quarter growth of around 1.5 per cent. To put that into perspective, there aren’t many emerging markets growing that fast.

But here is the thing, the hard data from the Office of National Statistics (ONS) is not so good. For the third quarter of last  year the ONS had quarter on quarter growth at 0.8 per cent. That growth rate is good, compared to what we have become used to it is marvellous, but it was less than the level the PMIs were indicating.

As for Q4 of last year, the PMIs suggested that was even better than Q3. Alas, not so the data from the ONS, it had the economy growing by 0.7 per cent. Okay, that growth rate may get revised upwards, but it is still way down on what the PMIs suggest.

Drilling down, construction may provide a partial answer. The ONS had this contracting 0.3 per cent in the last quarter of last year, the PMIs had it surging to its highest level in several years. Since then the PMIs tracking construction have got even better. This suggests that the ONS will either revise its estimate of construction’s contribution to UK growth in Q4 upwards, or we will show a marked improvement in Q1.

The latest PMIs also point to the largest backlogs in orders within the services sector since May 2007. That seems to suggest we are either set to see the sector’s output surge, or we may get rising prices instead. Or both.

Then there is business confidence, in the services sector this rose to its highest level since 2012.

These days, it’s popular to talk about that elephant in the living room. You hear the phrase so often, that is a wonder there are any elephants left in the wild, so busy are they filling up our livings rooms. Well apologies for adding to living room congestion, but as far as the UK economy is concerned there are two elephants in the living room

Elephant number one is household debt/house prices. Part of the UK’s recovery is coming on the back of rising house prices, making households feel richer, encouraging them to spend more. This is not new, the idea that the government is repeating the mistakes that led to the finance crisis in the first place is rehearsed most days in the media, and indeed by politicians.  Some deny it of course. But one piece of hard data needs to borne in mind. The fact is in Q3 of last year the savings ratio fell, this was the main contributor to growth. We haven’t got the data for Q4 yet. But given the imminent retirement of the baby boomers, is creating growth via less households savings really a good idea?

The other elephant in the living room is cash sitting on corporate balance sheets. If they could be persuaded to spend it, ideally invest it, the UK economy would boom like it hasn’t done for a very, very long time.

Just to remind you, according to the PMIs work backlogs are soaring, business confidence is rising, might that be enough to get companies spending again?