Kicked To The Curb

To put the bins out I have to take 52 steps down from my back door to the front gate. Our rubbish has to be ‘protected’ in big, black, seagull-proof, hessian sacks. Inevitably, despite an almost religious adherence to the local recycling rules, I still have to carry down three of these capacious bags. The last trip saw me carrying two and dragging the third one.

Arriving at the gate, there was a self- congratulatory moment that lasted no more than a glance, a backward glance up the steps I had just come down. There, on each step, was some bit of rubbish. Out of the top of the one sack I was dragging had come the entire contents of one of the black plastic bags it held, which must have split.

I looked back and concluded that my self-congratulatory thoughts of a job well done had lasted only a nano-second, and that this must be how government minsters and bureaucrats must feel. The actions they take are often well intentioned but, when completed and viewed by looking back, have unintended and adverse consequences.

Right now, David Cameron must feel like he spilt the rubbish by calling a referendum. Prime minister May must also feel her Chequers plan has left a lot of detritus behind her.

Chancellor Merkel must feel the same when she supported and approved of the handling of the EU’s problem children, particularly Greece, and now more importantly Italy. Each of these elected statesmen took the action they thought would clear up a problem. Action that would quell debate and deal with an issue. However, unlike my problem, which was to pick up dry, non-recyclable packaging, these government ministers have wet, sticky, smelly problems to pick up and put back in a bag. It is proving too difficult a task. They don’t have the power; they can’t get hold of the problem and worse still, the bag into which they need to put the rubbish has been taken miles down the road and they can’t reach it.

For Merkel, Italy and its debt problem is one of the biggest pieces of rubbish that needs to be put back in the sack. Over the summer the economy has slowed dramatically. The value of Italian debt versus the same 10-year maturity German debt has fallen. This is measured in basis points (one 100th of a percent) and the difference is called a spread. The spread reached a five-year high of 290 at the beginning of September. It indicates that money is flowing out of Italy and away from the risk.

Italy’s ratio of debt to GDP is 132 per cent, though high, is something that a buoyant Italian economy can manage. However, as I have mentioned in the past, there is an intractable amount of bad debt and now, on top of that, a requirement for big infrastructure spending, which has been sadly and graphically illustrated by the bridge collapse in Genoa. Layered on top of demand for spending and bad debt write-off is the new Italian government’s call for huge deficit spending for tax cuts and welfare.

While trying to deal with the problem left on steps, the bin man has taken the black bags and moved them down the street. The biggest buyer of Italian debt, the European Central Bank, is winding down its debt buying (quantitative easing) programme to zero by the end of 2018. This is occurring at a time when a large amount of Italian debt needs to be recycled and deficit spending financed.

” Prime Minister May must feel her Chequers plan has left a lot of detritus behind her “

Merkel and the EU do not want to have to bail Italy out, but it is something they will have to do unless the Italian economy picks up and the Liga- Five Star government can be persuaded to drop its promised move away from austerity. Italy is the biggest threat to the EU and to the euro. You can monitor the situation by watching the ‘spread’ (difference) against German 10-year debt of Italian bonds – just Google Italian bond spread.

If it passes 400 (four per cent), be prepared for a very volatile euro against a strong US dollar. I don’t think this piece of rubbish can ever be put back in the bag but it is only a question of time before a collapse/default causes the Italian problem to be addressed by some form of bail-out. With rising US interest rates, falling growth rates in China, Germany and France, the problem is just getting worse. As a major supplier country to the gun trade, Italy’s problem is worthy of close attention.

But it is not alone with its problems. Economic mismanagement and non-membership of a trading bloc currency like the euro has created problems elsewhere, mostly notably in Turkey. The Turkish Lira is now worth 16 cents; five years ago it was worth 50 cents. This is a symptom rather than the disease but following the consolidation of power by President Erdogan, Turkey, like Italy, is a problem to which no solution presents itself currently.

The downward trend in its currency looks set to continue. Arguments with the US, moves towards a closer link to Russian and an Islamic culture in government make dealing with Turkish suppliers a potential cheap source of product as the lira falls, but the likelihood of administrative problems, supplier credit risk and travel/security problems must make Turkey suppliers a deep concern. Buying Turkish goods with payment on receipt must be a sensible proposition, and not linking your future as a distributor to the coat tails of Turkish manufacture a prudent move.

To pour oil on the worrying outlook in the supply markets, let’s take a look at demand. In past articles I have outlined that the demand for certain minerals can help us see how world economic growth may fare in the future. Copper, with its extensive use in the communications and computing segment of the world economy, has long been accepted as a reliable indicator.

The chart, from NASDAQ, shows the declining price in the commodity futures market and in part it suggests that the declining price of copper is likely to continue. Growth in our world markets in aggregate is slowing. The exception to this less than attractive picture is the US. Here, President Trump’s tax reform and revitalisation of US core production seems to be working.

The US programme to combat unfair trade practices has received scathing criticism in the media. However, I believe it has shown seeds of being successful and certainly in the short term has had none of the adverse impacts so gleefully predicted by most economic analysts. Trump’s weaponisation of the dollar is hurting worldwide. Nearly every emerging economy is feeling the pain and it only adds to the myriad of problems confronting the EU.

There is not a period in world economic history when the world’s economy was so interconnected. We have entered yet another period of accelerated change. The first industrial revolution was steam, the second semi-conductors and telecommunications. This one is artificial intelligence and it is already revolutionising work and jobs and transportation, among nearly every other sphere of human activity.

Our problem is running a business which is impacted by global economic changes in product supply. It is compounded because we are selling to consumers principally in a country that is the seat of global financial trading, the UK. The country is trying to leave and change its relationship with a fundamentally damaged, bureaucratic political union and protectionist trading bloc while the country is run by an ex-corporate secretary. It is, frankly, a load of rubbish.

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