India faces hard economic times with Gold and Liquor

Early this morning we got news on a topic we have been pursuing for several years now and as has become familiar it showed quite an economic slow down.

At 27.4 in April, the seasonally adjusted IHS Markit India
Manufacturing PMI® fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.

It caught my eye also because it was the lowest of the manufacturing PMI series this morning. Although some care is needed as the decimal point is laughable and the 7 is likely to be unreliable as well. But the theme is clear I think. Of course much of this is deliberate policy.

The decline in operating conditions was partially driven by
an unprecedented contraction in output. Panellists often
attributed lower production to temporary factory closures that were triggered by restrictive measures to limit the spread of COVID-19.

So that deals with supply and here is demand.

Amid widespread business closures, demand conditions were severely hampered in April. New orders fell for the first time in two-and-a-half years and at the sharpest rate in the survey’s history, far outpacing that seen during the global financial crisis.

So there was something of a race between the two and of course external demand was heading south as well.

Total new business received little support from international markets in April, as new export orders tumbled. Following the first reduction since October 2017 during March, foreign sales fell at a quicker rate in the latest survey period. In fact, the rate of decline accelerated to the fastest since the series began over 15 years ago.

The plunges above sadly have had an inevitable impact on the labour market as well.

Deteriorating demand conditions saw manufacturers drastically cut back staff numbers in April. The reduction in employment was the quickest in the survey’s history. There was a similar trend in purchasing activity, with firms cutting input buying at a record pace.

Background and Context

We learn from noting what had already been happening in India.

Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in the year 2019-20 is estimated to attain a level of ₹ 146.84 lakh crore, as against the First Revised Estimate of GDP for the year 2018-19 of ₹ 139.81 lakh crore, released on 31st January 2020. The growth in GDP during 2019-20 is estimated at 5.0 percent as compared to 6.1 percent in 2018-19. ( MOSPI )

Things had been slip-sliding away since the recent peak of 7.7% back around the opening of 2018. So without the Covid-19 pandemic we would have seen falls below 5%. In response to that the Reserve Bank of India had been cutting interest-rates. I would have in the past have typed slashed but for these times four cuts of 0.25% and one of 0.35% in 2019 do not qualify for such a description.

Before that was the Demonetisation episode of 2016 where the Indian government created a cash crunch but withdrawing 500 and 1000 Rupee notes. This was ostensibly to reduce financial crime but also created quite a bit of hardship. Later as so much of the money returned to the system it transpired that the gains were much smaller than the hardship created.

For newer readers you can find more details on these issues in my back catalogue on here.

Looking Ahead

On April 17th the Governor of the RBI tried his best to be upbeat.

 India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies………For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22.

He was of course running a risk by listening to the IMF and ignoring what the trade date was already signalling.

In the external sector, the contraction in exports in March 2020 at (-) 34.6 per cent has turned out to be much more severe than during the global financial crisis. Barring iron ore, all exporting sectors showed a decline in outbound shipments. Merchandise imports also fell by 28.7 per cent in March across the board, barring transport equipment.

On Friday the Business Standard was reporting on expectations much more in line with the trade data.

While acknowledging some downside risks from a lockdown extension in urban areas beyond 6 June, we maintain our GDP projection of 0% GDP growth for CY2020, and 0.8% for FY21,” wrote Rahul Bajoria of Barclaysin a report.

If we stay with that source then we get another hint from what caused the drop in share prices for car manufacturers today.

Shares of automobile companies declined on Monday as many firms reported nil sales in the month of April after a nationwide lockdown kept factories and showrooms shut.

At 10:11 AM, the Nifty Auto index was down 7.33 per cent as compared to 5.1 per cent decline in the Nifty50 index.

Monetary Policy

You will not be surprised to learn that the RBI acted again as the policy Repo Rate is now 4.4% and the Governor gave a summary of other actions in the speech referred to above.

 In my statement of March 27, I had indicated that together with the measures announced on March 27, the RBI’s liquidity injection was about 3.2 per cent of GDP since the February 2020 MPC meeting.

Those who follow the ECB will note he announced something rather familiar.

 it has been decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes.

Oh and as we are looking at India by ECB I am referring to the central bank and not cricket.

If we switch to the money supply data we see that in the fortnight to April 10th the heat was on as M3 grew by 1.2% raising the annual rate of growth to 10.8%. But there was a counterpoint to this as there were heavy withdrawals of demand deposits with fell by 7.8% in a fortnight. We have looked before at the problems of the Indian banking sector and maybe minds were focused on this as the pandemic hit.

Gold

I am switching to this due to its importance in India and gold bugs there may be having a party as they read the Business Standard.

The sharp rise in the prices of gold —which almost doubled over the past one year —has been the only good for investors at a time when both equities and debt returns have been under pressure.

That price may be a driving factor in this.

India’s demand declined by a staggering 36 per cent during the January-March quarter, to hit the lowest quarterly figure in 11 years due to nationwide that has forced the closure of wholesale and retail showrooms.

Comment

The situation is made worse by the fact that India starts this phase as a poor country. Things are difficult to organise in such a large country as the opening of the Liquor Shops today has shown.

Long queues witnessed outside #LiquorShops in several parts of Chhattisgarh, people defy social distancing norms at many places: Officials ( Press Trust of India)

Also a problem was around before we reached the pandemic phase.

Armies of locusts swarming across continents pose a “severe risk” to India’s agriculture this year, the UN has warned, prompting the authorities to step up vigil, deploy drones to detect their movement and hold talks with Pakistan, the most likely gateway for an invasion by the insects, on ways to minimise the damage. ( Hindustan Times from March)

Now let me give you another Indian spin. The gold issue has several other impacts. No doubt the RBI is calculating the wealth effects from the price gain. However I think of it is another form of money supply as to some extent it has that function there. Also part of the gain is due to another decline in the Rupee which is at 75.6 to the US Dollar. Regular readers will recall it was a symbolic issue when it went through 70. This creates a backwash as it will make people turn to gold even more.

Let me finish with some good news which is that the much lower oil price will be welcome in energy dependent India.

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The Safe Haven Problem

At a time of crisis people look for what are considered to be safe havens. I say considered to be because this subject has been a regular feature on here in the credit crunch era and we have observed some ch-ch-changes in behaviour. For example we have seen investors be willing to take a loss by buying bonds with a negative yield suggesting that fear of losses elsewhere may be so high that a small one is preferable. Or that you expect to gain so much from that particular currency ( Euro, Swiss Franc or Yen) that the yield loss is minor.

Gold

This is a traditional if not the traditional safe haven and in a reversal of the trend above one of the costs of holding it has fallen substantially recently. If we look at it in terms of the world’s main currency the US Dollar the interest-rate cost has fallen to nearly 0%. The effective Federal Funds rate if 0.05%. Of course some currencies via negative interest-rates have for this area meant that you get a small annual gain from holding Gold although of course there are other costs.

That leaves gold, the traditional safe haven, whose supply is largely fixed, with annual production a modest proportion of the infinitely durable stock. Gold production in 2019 fell slightly to 3,464 metric tonnes, the first fall in 10 years according to the World Gold Council, as ore grades in the world’s major mines declined and mining costs rose. The year’s higher prices increased recycling, so total supply increased, but only modestly, by 2%.

That was from Reuters Breaking Views at the end of March and leaves us with a view of something with a fixed supply. There is a shuffle there from a fixed stock which does not get a mention although maybe the supply could change.

A major and prolonged price rise would increase production, but with mines having a high capital cost and a four or five year lead time, this would not happen quickly. Ultra-low interest rates, yet more global liquidity and fewer opportunities elsewhere should thus lead to a surge in investment demand and prices. Already, the price of Comex near-term futures has risen one-quarter in a year, to around $1,620 an ounce. The equivalent in today’s dollars of the January 1980 peak, though, is $2,826. There is further to go.

There has been a change since because as I type this the price of the June future is US $1770 per ounce. According to economo.co.uk there is a fair bit going on.

On the New York commodity market, gold has risen 17% since the beginning of the year, 10% less than the record set in 2011. During today’s trading, gold futures reached a price of 1,785 USD per ounce, its high level since October 2012.

When I looked at this before I noted some problems in the market so let me point out that between the June future and spot gold there is a gap of US $47. So taking that forwards would mean in simple terms a price some US $282 higher over a year or 16% which seems rather rich to me. There are costs to holding it such as storage and security but are they really that high?

For newer readers these are numbers I used to calculate for a living although not usually Gold. The reason why I have looked at a near month ( June) is that it is the most liquid one because as you go further out in time markets get less liquid and sometimes completely illiquid. But as you can see something looks wrong and in fact we are where we should not be.

The basis cannot theoretically exceed the carrying charge (the lion’s share of which is interest, usually calculated on the basis of LIBOR). If it did, speculators would be able to pocket risk-free profits in buying the cash gold and selling the futures contract against it. This arbitrage would quickly push the basis back to the level of carrying charge. ( Gold Standards Institute in 2012)

Oh Well! As Fleetwood Mac would say. We do have two of our buzzwords in play as I note this from the LBMA.

Gold Market “Resilient”

Gold’s Q1 2020 price rise included a brief period of exceptional volatility. In the eight trading days 6th – 17th March, the gold price fell 12.7% from a high of $1,687.00 per oz to a low of $1,472.35 oz before resuming its steady upward trend. “The gold market continues to be resilient….”

Ah resilient and of course the problems with getting hold of physical Gold were supposed to be temporary! As Lyndsey Buckingham would say.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

Swiss Franc

This is an issue that has persisted throughout the credit crunch era and if you are unfamiliar you might like to look at my articles on the Currency Twins and the Carry Trade. The Swiss National Bank has tried to punish those looking to buy the Swiss Franc via negative interest-rates ( presently -0.75%) and through what it called for a while “unlimited” foreign-exchange intervention. It had to abandon the latter in January 2020 due to.

Pressure pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets ( Queen)

Well like The Terminator it is back as I noted this morning as the sight deposits in Switzerland rose.

Swiss Domestic Sight Deposits (CHF) Apr 10: 552.0B (prev 535.6B) Swiss Total Sight Deposits (CHF) Apr 10: 634.1B (prev 627.2B) ( @LiveSquawk )

For those unaware it is a proxy for the intervention undertaken and as you can see the SNB has been trying to put a lid on the Swissy. It is at a significant level because at 1.0545 versus the Euro it is pretty much where it went after the “unlimited” intervention pledge was abandoned and the Swiss Franc soared.

Regular readers will note that I previously referred to the SNB trying to do this with the Swissy at 1.06.

Hold the line, love isn’t always on time, oh oh oh
Hold the line, love isn’t always on time, oh oh oh ( Toto)

So in spite of a -0.75% interest-rate and intervention demand for the Swiss Franc continues.

Comment

There are some sub-plots to today’s story. For example with equity markets where they are now really there should be little or no demand for safe haven investments. After all the US S&P 500 index future has risen from 2220 to 2788 which is quite a bounce. Yet as we have noted it seems to be like a Pantomime with investors continuing to shout “Behind You.”

There are other safe havens I have not mentioned. At the moment the Japanese Yen is not in play because it is to some extent a Japanese issue. What I mean by that is rallies involve fear of the Japanese repatriating some or all of their large foreign investments and hence large Yen demand. Investors front-run the expected demand and the party starts. It also seems that the Carry Trade reversals in the Euro have stopped so it has faded from view. We also have something of an anti safe haven in the UK Pound £ which has been having a good run as the situation in equity markets has calmed down.

Next comes sovereign bonds which are now one of the most complex safe haven issues of all. Where is the safe haven in a negative yield as so many place have? After all we now live in a world where even US Treasury Bills have seen a negative yield. As to bonds we have a real ying and yang in play. Firstly we expect an enormous amount of bond issuance to pay for all the government spending. But then you may be able to sell to that nice central banker who keeps buying them and breaking the price discovery chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain) ( Fleetwood Mac )

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Loads of questions arrived this week so I did a second one yesterday. Also I am now on Spotify after various requests to do so.

 

The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

What does Safe Haven mean in these troubled times?

We find ourselves yet again in a crisis and are reminded that some perspective is needed.  From CNBC at the end of last year.

The S&P 500 has returned more than 50% since President Trump was elected, more than double the average market return of presidents three years into their term, according to Bespoke Investment Group.

After that the equity market took the advice of Jeff Lynne and ELO as 2020 began.

And you, and your sweet desire
You took me higher and higher, baby
It’s a livin’ thing

Whereas a few minutes ago Bloomberg tweeted this.

European equities are poised for their worst week since the 2008 financial crisis.

So ch-ch-changes and another clear reminder of this came from Bloomberg as recently as the 20th of this month.

Virgin Galactic climbed again to a record high, defying analysts who say the stock is overdue for correction

We can stay with the theme of the man who fell to earth because since then the share price has halved from $41.55 to $21.30 after hours last night.

If we take this as a broad sweep ELO were on the case it seems.

It’s a terrible thing to lose
It’s a given thing
What a terrible thing to lose

Where can you go?

Japanese Yen, Swiss Franc and Euro

You may be questioning two of those so let me explain. If you look back in time I wrote quite a few articles on the “Currency Twins” the Yen and the Swissy. This was because they were borrowed heavily in before the credit crunch and people rushed to cover positions as it developed. This was equivalent to buying them and they surged building a safe haven psychology. Although it was more minor there was some of this in the Euro as well.

If we move forwards to now the simplest is the Swiss Franc based as it is in a country which is considered safe and secure, hence the demand at times of fear and uncertainty. The Swiss National Bank has returned to selling the Swiss Franc recently to try and keep it down. Switching to the Yen the main issue here is the large size of Japanese overseas private investments. At times of uncertainty the fear is that the Japanese will start to repatriate this and push the Yen higher so markets shift the price just in case. The Euro is not quite so clear but the area does have strengths as for example its current account surplus. Also at times like this it gets a bit of a German sheen as well.

You may have noted an interesting similarity here. This is that all these three currencies have negative interest-rates and I have posted before that there are avenues ahead where the SNB will cut to -1%.

US Treasury Bonds

There are two factors here of which the opening one is the effective reserve currency status of the US Dollar. So you can always buy commodities and the like in US Dollars with no risk of devaluation or depreciation. Next comes the fact that bonds offer a guaranteed return as in you will always get your nominal US $100 back as well as some interest, or if you prefer yield or coupon. So you get both the reserve currency and some interest, hence the knee-jerk rush into US Treasuries at a time like this.

The problem is the old familiar refrain that things aren’t what they used to be. In particular you get a lot less yield now as for example both the two and five-year yields have fallen below 1% overnight. I have chosen these because in a safe haven trade you tend  buy short maturity bonds. But it is also true that longer-dated bonds do not offer much these days as even the ten-year Treasury Note has seen its yield fall below 1.2% now. Some events here are contradictory because the two-year future is up 27 ticks this week and whilst that is really rather satisfactory for those who got in early it should not move like that if you are looking for stability. You do not want Blood Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round
Talkin’ ’bout your troubles it’s a cryin’ sin
Ride a painted pony let the spinnin’ wheel spin

Some of the logic above applies to other bond markets which have soared too. Although in some cases the logic gets awkward because both the German and Swiss bond markets have yields which are negative across all maturities. So here we are back to the currency being a safe haven and such a strong one that people are willing to accept increasingly negative yields to take advantage of it. My home country the UK has seen Gilt yields plummet too as a combination of factors are in play. The irony is that the safest UK  haven which is RPI linked Gilts already were extremely expensive and frankly having little relationship with inflation which seems set to fall in response to the present crisis.

Gold

This is something of an old curiosity shop in these times. In general we have seen a gold price rally which continues a phase we have been noting in recent months. But it is also true that just when we might have expected it to rally rally further the price of gold fell backwards.  There are an enormous number of conspiracy stories about gold and its price but for out purposes it is something of a patchy safe haven. Our favourite precious metal was of course “The Precious! The Precious! ” in Lord of the Rings but in our world the central banks give that title to other banks.They however are most certainly not a safe haven as we learn more about the use of the word “resilient ” by central bankers.

Comment

Let me add another factor in the safe haven world which is timing.If you had movd into any of the markets above earlier this week you would now be doing rather well. This comex with an implication that prices and levels matter which often gets forgotten in the melee and excitement.

There are also other winners which get given temporary safe haven status at times like these.For example those producigface masks or involved in teleconferencing.  I have to confess I had a wry smile at the price of teleconferencing companý Zoom rising as it did not work on my laptop when I tried it for Rethinking the Dollar.

Apologies to those affected by a blog misfire earlier as Windows 10 played up again.

UK GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.

 

 

The rise and rise of Bitcoin and the crypto currencies

On Friday the news in the UK was grabbed by the ransom wear attack called Wanna Cry. At first the media concentrated on the impact on the National Health Service but soon news that attacks were happening around the world filtered in as well. It was hard not to think of the large amount of funds that have been poured into NHS IT infrastructure which seemed somewhat at odds with the fact that it was still running Windows XP! Mind you as a person who was sold the Vista system by Microsoft I am someone who still thinks fondly of XP and think it was a better system.

However an intriguing part of the attack was the request to be paid in Bitcoin. Also I have to confess I was curious as to why the individual claims were small. From Wall Street Wires.

For instance, the ransomware is asking for $300 in Bitcoin.

Not much is it? Perhaps they hoped that it would be small enough that people would pay it discreetly and they would avoid publicity. Also if everyone paid up not doubt it would amount to a tidy sum indeed. It did bring Bitcoin back into mainstream news albeit in rather a seedy way. Although for our would be criminals there was something of a draw back which is that it turned out the world could watch them being paid. Indeed @actual_ransom is on the case.

Note: This bot is watching the 3 wallets hard-coded into ransomware. It tweets new payments as they occur, totals every two hours.

In some detail as this from a few minutes ago indicates.

Someone just paid 0.0045 BTC ($7.61 USD) to a bitcoin wallet tied to ransomware.

As of the time I am typing this the total paid is apparently as shown below.

The three bitcoin wallets tied to ransomware have received 151 payments totaling 24.75899797 BTC ($42,640.91 USD).

Of course the real boom will be in online security consultants who seem so far to be selected from a group who wear sunglasses indoors if the output of BBC News is any guide.

An Asset Bubble?

The Financial Times has been on the Bitcoin case.

Sky-high valuations for bitcoin have helped the value of crypto currencies burst through $50bn, raising fears of an asset bubble in the unregulated market.

A sky high valuation?

A sharp spike in the price of bitcoin, which has risen 55 per cent this month and is worth more than gold, pushed it past $1,900 on the Bitfinex exchange on Friday.

So the price has been very strong although I have to say that the idea that it “is worth more than gold” has a few issues with it. What is the unit of comparison for a start? After all gold is a physical commodity whereas Bitcoin is a virtual one. If we move to the aggregate level then if Only Gold is correct then all the gold so far mined is worth some US $7.4 trillion which rather dwarfs the US $50 billion value of the crypt currencies. Presumably they are comparing a singe Bitcoin with a troy ounce of gold. Also it is unusual for the FT to fear an asset bubble is it not?

A lot has been going on in this space including the fact that whilst Bitcoin is the most famous of the crypto currencies it is far from alone.

A growing number of alternative digital currencies — or “alt-coins” — is feeding the speculative frenzy with values in some rocketing as much as 500 per cent in the past week………Aside from bitcoin, there are more than 830 alt-coins ranging from Litecoin, a challenger to bitcoin, to MiketheMug, a coin that promises to make weekly payouts to holders.

There have been quite a few developments along the way.

An increase in initial coin offerings (ICOs) — unregulated issuances of crypto coins where investors can raise money in bitcoin or other crypto currencies — is fuelling the market and drawing attention from lawyers and financial professionals. Many fear ICOs, which are trying to market themselves as an alternative to venture capitalists as a way of raising cash for businesses, breach existing securities law.

Of course quite a lot of ordinary conventional offerings fail which poses quite a few questions for how you regulate such markets. Some seem to be the preserve of city professionals.

Observers say many individuals are trading alt-coins from corporate IT departments, concentrated in the financial sector and falling under the radar of senior executives. Many are sitting on virtual fortunes, but are unable to liquidate their cash as banks clamp down on measures to avoid money laundering.

There is an obvious problem with the phrase “virtual fortune” is there not? If they are legitimate it seems very odd that they are caught up in money laundering regulations so I suspect that there is more to this than meets to eye. After all the financial sector is ridden with financial crime of many sorts. Also I have seen plenty of supposedly bona fide markets where investors have been unable to realise the money they thought they had made. The case a couple of decades ago when investors put money into Italian shares is something of which I am reminded of by this. It was oh so easy to put money but, ahem, considerably more difficult to ever take it out.

Comment

If we step back for a moment we can compare Bitcoin with fiat money. On such a road we can see that the ground for Bitcoin has been fertilised by the way that central banks have been so keen on asset price rises. Compared to these assets which in concrete terms people face with the cost of housing but otherwise in bond and equity markets cash has depreciated in value. On that subject the UK FTSE 100 index has risen to an all time high of 7454 today again depreciating the value of cash money compared to it. Of course consumer inflation numbers look the other way from this.

There are obvious problems with the Bitcoin and crypto currency world. Firstly its role as a medium of exchange is limited as many places will still not accept it as a means of payment. That is why the recent news from Japan was welcomed by price rises. Also in an irony the recent price surge poses a question for its use as a store of value. It is not just the concept of “what goes up must come down” sung about by Blood Sweat & Tears in the song Spinning Wheel but also the issue that the price volatility means that the value is swinging wildly as Bloomberg point out.

Even during the huge run up this year, it has moved more than five percent on 21 different days, with nine of those being moves lower.

In the end it comes to the fact that Bitcoin fans have more faith in blockchain mathematics than central bankers. Of course some prefer the anonymity it provides and some just like the technological aspect. The main danger from authority must be from the likes of Kenneth Rogoff who must be very disappointed that the latest outbreak of financial crime is not being driven by high denomination bank notes. Of course there are other dangers which include it falling out of fashion and being replaced by other alternatives. Whilst there are obvious differences between this and the growth if the railroads back in the day there are similariites and how many succeeded again? Oh and as we stand it poses an increasing challenge to measures of money supply especially in areas where it is widely used.

The economy of South Africa must be in turmoil

This week has seen South Africa reach the headlines but it has not been about cricket or rugby. Instead the removal of its finance minister has led to a currency crisis being reported. However as we look deeper we see that the South Africa Rand has been “fallin”  in Alicia Keys terms for quite some time and is in fact a serial offender on this front. If we look back we see that five years ago just under 7 Rand purchased one US Dollar and this morning it takes some 15.5 of them. Over the past year the move has been accelerating as back then it took 11.6 Rand to buy a buck. In essence it has been singing along to Paul Simon for quite a while.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

This sort of situation is self-fulfilling as if you have funds available the sensible course is to park it abroad which only makes the currency fall further and encourages others to do the same in a repeating loop.

How well do financial markets work?

This is another view of the equilibriums of economic theory which invariably turn out to be something between a mirage and a chimera. Let us look at this from the point of view of an average house buyer in the UK who has according to official data some £286,000 to spend. Each of those UK Pounds will buy around 23 Rand at these levels. According to Knight Frank (h/t James Mackintosh) you could buy this in Cape Town.

This beautifully appointed well-loved family home offers great open plan living. With 3 reception areas consisting of formal lounge; open plan dining room leading to gourmet kitchen and family room; separate scullery;4 bedrooms (2 en-suite bathrooms);family bathroom; guest toilet and covered outside patio for easy entertaining, this house ticks all the boxes. – See more at: http://search.knightfrank.co.za/za5986#sthash.6W60O6JK.dpuf

That description misses out the swimming pool! For half the price you could pay this.

Valley View Lodge is a 120 Ha lifestyle lodge situated in the Swartberg Private Wildlife Estate, at the foot of the Swartberg Mountains in the Klein Karoo. The main house is a comfortable 4 bedroom, 3 bathroom family home with open plan living areas and beautiful views over the surrounding Swartberg Mountains. Two of the bedrooms lead to a patio with views over the terraced garden with pool. There is a separate one-bedroom cottage with a full en-suite bathroom and a fireplace in the lounge. – See more at: http://search.knightfrank.co.za/za5698#sthash.Q5yNf3bI.dpuf

The catch in Cape Town is the mention of a local security lodge as in the serious problem with crime there, but if we just stick to a bit of number crunching well it is hard to not mull this from Henry Pryor earlier.

Buying an average home in Victoria Road after next April as a 2nd home will cost £1,113,750 in Stamp Duty.

So one street in the Royal Borough of Kensington and Chelsea – admittedly the most expensive one – would give you enough money to buy both properties and maybe fill the swimming pool with notes with just the Stamp Duty. Even Einstein would have struggled with such a version of relativity as we consider the phrase, Go Figure!

The Reserve Bank of South Africa

It has applied conventional central banking methodology and done this in response to the currency decline. From its December Quarterly Bulletin.

Having raised the repurchase (repo) rate by 25 basis points to 6,0 per cent in July 2015, the Monetary Policy Committee  (MPC)  agreed on an unchanged rate in September, but at its meeting in November 2015 decided to raise the repo rate further to 6,25 per cent per annum.

Sobering in what we call a zero interest-rate world with negative tinges. Plainly a brake is being applied to the South African economy at what I will explain below is a bad time for it. But if we stick with interest-rates there are other problems as the ten-year bond yield has pushed above 10% meaning that any longer term borrowing is very expensive right now. In terms of its target this is what the Reserve Bank is aiming at.

the inflation target range of 3 to 6 per cent

Commodity Wars

The fall in commodity prices which is so welcome in many places is not welcome everywhere and South Africa is one of the latter.

In addition, mining production shrank for the second consecutive quarter, affected primarily by lower production of platinum and iron ore in the third quarter. Platinum production declined due to scheduled maintenance work at certain platinum furnaces as well as safety stoppages, while iron ore production was reduced in reaction to a global oversupply.

Something of a double whammy is at play here.

In general, mining production continued to be affected by declining international commodity prices and rising production costs.

Also we get a reminder of which commodities are in play.

the mining sector declined at an annualised rate of 9,8 per cent in the third quarter, largely brought about by decreases in the production of platinum, diamonds, iron ore and manganese ore. Production volumes of coal and gold mines, however, remained broadly unchanged over the period.

Precious metal prices have been in a bear market too and if Jon Stewart was right it is not a good time to be a musician right now.

People out there turnin’ music into gold
People out there turnin’ music into gold

Also agricultural output has been hit by a drought in an example of Shakespeares woes come in battalions and not single spies.

Inflation?

Yes but not as much as you might think.

Annual consumer price inflation was 4,8% in November 2015, up from 4,7% in October 2015

However there is goods price inflation of 3.8% which is quite an anti-achievement if you note all the commodity price falls leading to goods disinflation in so many other countries. Also the currency decline will mean that the heat is on in this area as we look into early 2016.

If we look for some perspective then the underlying index is at 116.5 where 2012=100.

Economic Growth

Actually a rebound in manufacturing means that South Africa has just had some.

. Following a contraction of 1,3 per cent in the second quarter of 2015, growth in real gross domestic product accelerated to an annualised rate of 0,7 per cent in the third quarter……. the level of real gross domestic production in the first three quarters of 2015 was still 1,0 per cent higher than in the corresponding period in 2014.

Apparently if you exclude the sectors which are shrinking then the outlook is brighter.

Excluding the contribution of the usually more volatile primary sector, growth in GDP would have bounced back from negative growth of 0,4 per cent in the second quarter of 2015 to positive growth of 2,2 per cent in the third quarter.

Comment

There is much to consider here as we see how a crisis in the financial sector impacts on the real one. Economic growth has slowed and remember this is the Africa which was supposed to be “boom,boom,boom” according to the mainstream media. If we look at this in terms of what you can buy from abroad then (h/t Renaissance Capital) GDP per capita has dropped from over US $8000 in 2011 to more like US $5700 now or back to 2009 levels.

There are of course other issues such as the endemic corruption and the presumably related energy crisis which is so bad there are regular black-outs. It even makes UK energy policy look a little better that is how bad it is! The political crisis and further falls in commodity prices have seen the Rand fall further whilst I have been typing this article and it has reached 16 to the US Dollar. Peak currency crisis? Maybe, but I am reminded of the relative house prices displayed today compared to my home country of the UK.

There should be a flow of money in to buy such things waiting and hoping for better days. In an individual sense this is good as it will support the Rand and maybe reestablish some sort of equilibrium. But also it comes with dangers as the fastest movers are likely to be vulture style hedge funds as we fear an outbreak of asset stripping. Time perhaps for some Freddie Mercury.

Are you ready, hey, are you ready for this?
Are you hanging on the edge of your seat?
Out of the doorway the bullets rip
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust

But let us end on a more hopeful note with Florence and the Machine.

It’s always darkest before the dawn