Money Talk: It’s not over yet

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Governments and the media may be painting a rosier picture of the economy, but don’t be fooled, says Roger Williams – many are looking at the wrong indicators.

It’s hard to be a Jonah. You lose friends. Nobody wants to know that the England rugby team is overrated, that Arsenal are doomed until David Dein is re-hired or replaced, or that the recovery shown by government statistics is not supported by the numbers in the market.

The US dollar is up. At $1.50 to the pound, it’s at a 12-month high and very close to its high against the yen. Its move against the pound seems over, at least short-term. Brent crude is down from its high, though it is still $22 above its 12-month low. Stock markets (outside the PIGS) are up and gold is down.

These factors seem to indicate that the ability of high oil prices to choke off recovery is spent. The dollar has not lost its appeal. Investors are more optimistic, and earnings of major companies are recovering. The fear of calamity is receding, and with it the price of gold.

In the UK, the statistics, we’re told, were wrong and we didn’t really experience a double dip. China is recovering, its hard landing averted.

I have bad news for all of you: it’s not over. The fat lady has not sung. What makes me think this? The markets. Firstly and most importantly, copper is down from a year ago by almost 10 per cent. Look at the chart on the right. Our advanced economies are not recovering if they are not using copper. We aren’t building enough homes, we’re not renewing our infrastructure and utilities, and we aren’t investing sufficiently in the productive capacity to drag us out of our slump.

COPPER

COPPER

If we were really on the road to recovery, we would be demanding and consuming more commodities. We are not. Commodity prices in general are moving sideways. Let’s look at the CRB Index. This tracks the movement of prices of basic raw materials like copper, but also crude oil, natural gas, gold, sugar, cotton and nickel. In early 2005 the CRB Index was 300, and despite substantial volatility, today the CRB index is still 300.

Sure, house building is up and on both sides of the Atlantic and we’re buying more cars. The stock-market advance brings some feel-good factor too. I think some of this is a dead-cat bounce, some of it caused by the weight of cash and savings but little caused by the real recovery of demand and none of it because we have dealt with the fundamental causes of our problems – too much debt.

Secondly, look at China. The bloom is off its rose too. The key confidence indices remain positive but are at a four-month low: the China Manufacturing PMI index was 52.3 in January and is now at 50.4. The same trend is shown in output, with China’s Output Index at 50.9 down from 53.1, another four-month low.

Analysts comment that although these indices are falling, they remain over 50 per cent and that indicates strength. I’m not sure. I worry about the fact that credit has been exploding in China: just recently it broke all records with $400 billion of bank lending and non-bank financial institutions’ credit. It seems reckless. I don’t understand how you square China’s position as having some of the highest property prices in the world with its low-cost manufacturing position. I suspect these properties are over-valued. I think the related debt is probably worth much less than its face value. If I am right, the Chinese banks have got problems.

Long term

I’m a USA taxpayer, and the following statistic really brings home to me the size of the problem: US debt is over $20 trillion. Let me put that in perspective: that’s $175,000 per taxpayer. This in a country where 10 per cent of the US population is relied on to repay most of this debt by paying taxes.

The scale of debt that will never be repaid worldwide has not fallen since I’ve been writing this column. It continues to climb. Despite the austerity here in the UK, our national debt continues to climb – only its rate of growth has declined. The proportion of government spending on ‘entitlements’ continues to rise along with the UK’s debt burden. From a worldwide view, this is not because of the benefit cheats or long-term unemployed – it’s because of people ageing. This is producing an irresistible wave of need and an ever-reducing ability to deal with it.

Our own cleverness is the genesis of the problem. We keep finding ways of extending people’s lives. This is brilliant from an individual’s standpoint – show me the man who wouldn’t like a few more years. He will be as rare as an atheist on the battlefield. But for society it is the biggest problem of our age.

Life expectancy has been growing steadily for 50 years. In the UK, it has now reached a point where there are more pensioners than children. When I was born, a man aged 65 had a life expectancy of 76.1 Today average male life expectancy is 87.1 By 2050 it is estimated that it will reach 91.1 By 2020 it is projected that people over 50 will be 32 per cent of the work force and almost half the population.2 The US has a similar problem. In the 2010 US Census there were 40 million people 65 years old or older. It is estimated that by 2020 that number will grow to 55 million.3 In 2011, Social Security, Medicaid and Medicare accounted for 44 per cent of the US government’s $3.7 trillion in expenditures, an increase of 34 per cent in 10 years.3 The US will not be able to begin starting to tackle its debt load without a fundamental change in Social Security and Medicare, categories of expenditure that will continue to exhibit increasing need.

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For those of you who have read previous articles, you know China has a bigger problem of ageing than either the UK or the US. Encouraged by its one-child policy, Chinese women are having fewer children. This has produced, and is producing, a smaller generation following a boom generation. Combined with longer life expectancies this means that by 2050, it is expected that for every 100 people aged 20-64, there will be 45 people aged over 65, compared with about 15 today. This will mean that those working will potentially have to support both parents and grandparents (who will be alive as well as their children).

This tends to be less of a problem when the economy has grown fast enough to make the younger working people wealthy. It is a bigger problem in countries like China where most are not wealthy. Moreover, there are currently 980 million people in the active labour force in China. According to Professor Zhen Binwen of Chinese Academy of Social Sciences, this number will reach its peak in 2015, but then start to decrease dramatically. China’s problems increase each year thereafter.

Conclusions

Current expectation that the worst of the global re-balancing is behind us is going to be shattered. The process of global debt reduction and attempts to re-balance the books of major economies has only just begun. The problems are so large that from time to time they will be ignored, pushed to the back of our minds. However, like the structural imbalances within the Euro region, they will not go away.

For our industry, I think in the short term the dollar will maintain its strength. In the much longer term it could become even stronger and tend towards parity with the pound. Now is a good time to be in the manufacturing business as US demand continues to be strong. In the UK, increasing retail prices and higher manufacturing costs in Europe will make it more difficult to sell to an ageing, retiring consumer group. Look closely at the airsoft market, where a younger consumer can be serviced by a fast-growing, efficient production base.

1 Office of Work and Pensions

2 Office for National Statistics

3 US Bureau of Economic Analysis

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