Real growth, false growth

CONTAINER INDEX: Not following the recovery trajectory we’d hoped for

CONTAINER INDEX: Not following the recovery trajectory we’d hoped for

Here comes the sun, say financial analysts – and it’s ok for some, says Roger Williams, but the UK might not be among them

Janet Yellen has been appointed chair of the US Federal Reserve. Nothing matches this in importance this month, perhaps even this year. Unless she has been extremely misjudged, she will keep interest low for longer than most can imagine, and prolong the asset bubble created by Bernanke. The stock market will find its next leg and continue its bull market phase, US housing will continue on its positive trend and, despite the Tea Party’s attempts to derail proceedings, the world’s greatest engine will perform, providing growth in many industries and some economies.

That’s the good news. The bad news is that the USA, the largest debtor nation, will get deeper and deeper into debt. It will continue printing money to pay its debts. To 30 September, US money in circulation rose by $3trn in 2013. To put this into a wider context, the global money supply is now over $66trn. It’s growing at an annual rate of over 6 per cent, and the USA is certainly making its contribution. With this sort of growth, asset prices will climb and inflation will return with a vengeance. House prices are already back to 2004 levels in 20 cities in the USA, and this trend will continue[1].

But there’s more good news: new car registrations in France, Germany and Spain all rose in October. Registrations in France rose on the back of an 11 per cent increase by Peugeot, a 5.8 per cent increase at Renault and a near 10 per cent increase at Dacia, more than offsetting the 3 per cent decline at Citroen[2]. In Germany, registrations increased by 2 per cent compared to the same month in 2012 and Volkswagen reported a monthly gain of just under 2 per cent, Skoda 37 per cent, Porsche 24 per cent and Opel 12 per cent[2].

JANET YELLEN: Good news for economic growth?

JANET YELLEN: Good news for economic growth?

Copper, our major leading indicator, shows a few positive signs. Copper started the year at around $8,250 a tonne. By June it hit a low of $6,600; today it is back up to around $7,255[3]. A recovery seems in progress. Certainly a man who should know, Richard C Adkerson, CEO of Freeport-McMoRan Copper & Gold Inc, was reported to state: “The [copper] demand in China this year has been stronger than many people had expected… and we’re seeing some initial signs of improvement in Europe… in the longer run, the delay in projects with companies cutting back capital [spending] points to a supportive copper supply situation.” To translate: supply is not over-expanding, and demand is better than we thought.

Measured against all of this, container rates from Shanghai to the east and west coasts of America continue in the downward trend established in February and March this year. With lacklustre copper and no real rate recovery in containers to the US, we must remain less than confident of the world global recovery.

The reasons behind this are simple. The recovery is patchy, and although established in the USA and in some form in the UK, it is a slow recovery as illustrated by employment in the USA. In all but two of the past US recessions, the jobs lost from peak employment were regained in about 30 months3. It has already been 70 months since the most recent recession, and the USA is still not back to zero loss (see graph below).

In the USA, this is seen as a failure to close the gap between current performance and the perceived potential performance of the US economy, a GDP gap reflecting an economy operating at less than capacity. I am not sure this is the case. Such is the speed of technological change, the perceived potential GDP gap does not necessarily equal jobs lost to be taken up in the future.

It may well represent, at least in part, a structural change. You just don’t need as many people in an Amazon-structured retail delivery system as you did before, when shops sold those goods. Nowhere, I would suggest, is it illustrated as well as in the UK. I cannot prove it yet, but I’m sure the improvement in the unemployment figures in the UK is principally because of restructuring so a previously full-time job becomes part-time. Yes, we have more people employed than a year ago, but I doubt their aggregate wages equal what those employed a year ago equalled.

THE AMAZON MODEL: Has Amazon delivered a restructuring of our labour market?

THE AMAZON MODEL: Has Amazon delivered a restructuring of our labour market?

Anecdotal evidence is provided by my friend, Steve, whose online business is expanding at a rapid rate. He has taken on four more employees: two full-time, under the government’s apprentice initiative, and two part-time. If you added all four salaries together you don’t even get to £20,000. At this rate full employment demand will not be different to the trough of some past recessions.

What does this mean for you? Do not be fooled: there is a recovery in the UK, but it is not well-founded and not sustainable without continued money-printing. The US recovery reflects not just current conditions but also internal restructuring around the continued progress to export energy status and self-sufficiency. Although the renminbi appears seriously undervalued against the US dollar, China is still in turmoil economically. Europe will remain the long-recovering sick man. Be prudent. Do not spend on the basis of expected increased demand, as it may not arrive.

1    Daily Wealth, October 2013
2    Society of Motor Manufacturers
   London Metal Exchange

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