We are by now quite used to those more descriptive Chinese expressions and terminology – they often seem to come with references to wildlife and nature as well as often with a more Confucian style. Most recently though, this illustrative style seems to have been replaced with a more blatant and blunt language which reflects the more difficult economic situations that this nation is now facing. The authorities have most recently taken to describing the country’s employment outlook as just “grim” – a very un-oriental description. It seems that urban unemployment has been increasing significantly as demand for exported goods have fallen back, and this now puts the administration into a very awkward situation.

This changed financial environment is a new and disappointing world for the Chinese authorities. Until now the unofficial “deal” has been quite straightforward – “yes you can leave the farmland and come to the cities and work hard in awful living conditions away from your family, but you will have the opportunity of getting onto and clambering up the ladder. Once on the bottom rung of the ladder you too will have at last the chance of climbing as high as you can”.  However, now someone has just taken away the lowest rungs! The dream of climbing out of the “slough of despond” has been taken away and replaced with the painful hunger of forbidden fruit, rejected opportunities and a negative outlook. Not the best thing for a developing and emerging population.

One of the great fears for the authorities, especially an authoritarian oligarchy, is the fear of social unrest and destabilisation. There have already been many thousands of examples of social “unrest” with riots in Gansu province for example (not including the issues relating to Tibet of course), of which, not unsurprisingly, we hear little, and such economic frustration is quite likely to lead to more of the same. It is hardly surprising therefore that the authorities have stated that “stabilising employment is the top priority for us just now”. Traditionally this would be solved by returning the new urban population to their rural roots, and those that could not do so would enjoy the somewhat limited international opportunities of an extended career in the People’s Revolutionary Army. Both are still possible but once the chance of advancement has been let out of Pandora’s Box, it will be supremely difficult to suppress the aspirations and desires of so many.

The authorities readily admit that this has been caused by the slowdown in global demand for Chinese goods and especially from their primary export market of the USA. With Europe now also in recession, these alternative markets which might have been able to pick up any slack in demand won’t really be able to help either. Time then for some clear reassessment domestically. The authorities may consider that excessive unemployment is unacceptable and that other actions may be necessary. State support may be one route, or potentially the dumping of low cost goods – however, maybe the more effective answer should be to stimulate domestic demand. With foreign exchange reserves of over $1.8trillion, there is no shortage of cash to be deployed by the Chinese and, if effectively used, it would encourage further economic growth and demand both domestically and internationally.  The authorities have already unveiled further rate cuts (down to 5.58%) and a $590billion package of partially new money, but in terms of the scale of this nation this is little more than a few drops in the Yangtze.

I suspect more will follow, but expecting nervous consumers to rush out to buy consumer goods in economically worrying times is a distant hope. They will behave just as we do in times of concern – stop and save. However infrastructure, service and healthcare developments may well see more concentration and that would be good news for overseas exporters providing specialist facilities and needs. We must wait and see.

If global trade is a partnership, then now is the time for those who have amassed the reserves over the years to play their part in keeping the recycling going – that of course does not mean handing the loot back, but rather ensuring that the very economy they have benefitted from so much is able to continue on to the next stage of the cycle.

China of course is not alone in this. The nations with trading surpluses should be looking to keep the process going. So as well as China, we can add Japan, the Middle East and Germany to the list. For those malingerers with their deficits, like the US and UK, they will have to learn the responsibility of sound financial management as well as learning to live within their means. Something that the Chancellor of the Exchequer  was reminded of last week as he sought to borrow and spend his way out of our recession with our debt. The UK should wake up – the rules have changed – we are no longer an oil exporter and cannot afford to live beyond our means.

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One measure of the dramatic slowdown in global trade can be seen in the charter rates for ships – an equivalent charter rate for a ship two years ago was about $26,000 per day – for the same vessel this would now be $6,000. The China effect in reverse!

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Some good news at last – the President Elect is assembling his team and has set the economy as his priority – and as part of this new team comes an old but much respected name – Paul Volker – Alan Greenspan’s predecessor and the man who sorted out the Savings and Loans scandal back in the 1980’s.  Now he may not be of Harry Potter’s wizarding capability but he certainly brings the credibility of someone who could properly understand and address these vital issues.

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And finally......to follow on from the Pre-Budget Report – also known as “Never has so much been wasted to achieve so little” - there was an interesting reaction in the Credit Default Swap (CDS) market. The cost of insuring against default of UK Government debt has risen to a record of 0.97%, or in plain English it now costs £97,000 to insure £10 million of UK Government debt for five years. Interesting possibly but more concerning when you consider that a Unilever CDS only costs 0.67%! So who is more slippery, a margarine manufacturer or a UK politician?

Have a good weekend,

Justin

And so the cry goes up – “tax cuts – give them the money and they will spend our way out of this recession”.  Oh the power of popular mantra.  With all of the forward thinking of an excited Tigger on speed, the politicians of the world seem wide eyed with excitement in the hope that they have found the answer to economic alchemy and the end to our economic recession.   All you have to do is give the plebs some of their tax back and they will go out and spend it on shiny trinkets and electronic dobbins, with the result being just enough to spark a national recovery in our economy with greater sales revenue, more sales tax, rising company profits, more employment, and save the Pound.  So that’s done then – well maybe not.

Merely giving money back to people does not automatically result in spending.  If consumers are nervous, they are far more likely to sit on their hands.  After all, look at the Japanese who were prolific consumers in the 1980’s, only to become professional misers in the 1990’s.  They saved and didn’t spend and certainly this was one of the reasons that their economy was so sluggish for so many years.

Although I can understand the concept of trying to reignite the failing fires of the economy, the actions of just throwing monetary incentives at the problem is unlikely to solve it.  Flicking matches at a damp bonfire achieves little and just wastes rather useful matches.

The recovery to any economy will be based on two words – trust and confidence.  If consumers feel more confident then they are more likely to spend; if consumers are more nervous then they are more likely to first pay down their debts and then start saving.  The latter action is of course generally far more laudable, especially for the longer term financial security of the individual.

Following on from this, one area that annoys me with all the major political parties has been their blinkered view of consumer expenditure, debt and savings.  All our leaders seem to have encouraged us to go out and spend; after all doesn’t that help the economy?  Then to add to it – they also encouraged us to go out and then borrow to spend.  The other side of this is also that they have done little to encourage significant consumer savings in a co-ordinated way. Platitudes about meaningful saving for the future achieve little when pension benefits are reduced by the government.  Marginal value ISAs and tinkering with toddlers’ trust funds do very little to help, and then with many traditional pension structures discredited in many users eyes, it is hardly surprising that many employed people have little interest in significant saving.

Sir Martin Jacomb, one of the most highly respected grandees of the City, pointed out the risks of ignoring savings in the FT last week, “In the past 10 years, outstanding mortgage debt has increased from £450bn to £1200bn, while consumer indebtedness has risen from £100bn to more than £230bn, making the UK population the most highly indebted in Europe.  Most of this has been financed by credit markets fed by the savings of the workers in Asia.”

This is obviously not sustainable.

I am not going to pontificate on the potential contents of the Pre-Budget Report as I am much more interested in the actual output rather than the speculation of its possible content, however I can only suppose that it will follow the comments and warm words made at the G20 meeting.  As I have mentioned before, this meeting was never going to be another Bretton Woods agreement in a weekend, but it is a clear and historical marker of economic changes.  By the time the statements have been translated into all our various tongues we will be left with well intentioned platitudes and economic dogma, but this is to ignore the importance of such an event.  This inaugural G20 meeting effectively highlights the transfer of influence, if not actual power, away from those older 20th Century powers to those of the 21st Century – i.e. those with the surpluses not the deficits.  This is only the beginning of a new order.

To help restore some economic balance, it is in the interest of these nations to keep the money circulating, not because they have a duty of care to those nations reckless enough to blow their assets, but rather that they too will benefit from a growing world economy – and potentially also suffer if it shrinks.  China, Germany and Japan all have such surpluses and along with the Sovereign  Wealth Funds of the Middle East and South East Asia, this can provide some powerful firepower for a recovery.

***

My colleague Peter Sleep found a great quote from a US commentator about inflation –

“Not 6 months ago central banks were fighting inflation.  Now, like corner men fanning towels over a wobbly fighter, they are trying to revive it”.

Last week the fussing went from inflation to deflation and a realisation that this switchback ride of pricing is tipping back the other way.  Deflation in a debt ridden economy is an evil virus that we want to do all that we can to avoid.  Economic Lemsip will be the order of the day.  However, let us also remember that with so much money and paper being printed and pumped into the system, that a couple of years out from here we could be seeing another inflation spike – welcome to the VILE decade – volatile inflation and lower earnings.

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Last week’s announcement made by the directors of UBS and Barclays that they were not going to be getting a bonus should hardly be greeted with much applause.  How on earth could they justify any bonus, let alone some of their pay levels, having destroyed their share value by 84% and 82% respectively.  I see no reason to be appreciative.

***

And finally............more excellent value from our local authorities as I see that Kent County Council has spent £15,000 on a video showing viewers how to cross the road.  Can’t they remember Dave Prowse and the Green Cross Code? – surely anyone capable of playing Darth Vader is a better teacher and that it has already been filmed.

Have a good weekend,

Justin

It feels a bit like the scene in that iconic German film “Das Boot” when the submarine commander orders all the tanks to be blown in a vain effort to try and stop the damaged U-boat from sinking.  One by one all the levers are pulled and one by one their effect is negated by the weight of the sinking vessel.  I am sorry if this is a rather negative analogy to the current situation but with each day that goes by, we hear of yet another initiative from one country or another pulling their economic levers to desperately attempt to fortify the failing strength of their economies.  In the past week, the Chinese, the Americans and the Australians have all been acting but with seemingly little actual effect on events or sentiment.

Now to be fair, such actions rarely have an immediate effect but the flurry of action, whilst encouraging to see, does sometimes smack of desperation as politicians and central bankers rush along pulling every lever available to try and get their economy to start to resurface.  I must add though that in the film, the U-boat does eventually surface and all ends well (for at least that part of the film at any rate).  However, before being able to resurface, the damaged submarine had to spend an inordinate period of time lying motionless on the sea bed.  In economic terms this analogy would therefore stretch to being the period of recession that many countries are facing or have already entered.

The good news is that at least this time the politicians and central bankers have been acting, whereas in Japan during a similar period in the early 1990’s, such action was limited and somewhat tardy – with the result that there was a depression of some magnitude.  So now all the levers of tax cuts, direct investment and support for the financial system are seemingly being pulled – “blow all tanks”!

However, let me also be the purveyor of some more positive comments.  Most recently the ‘world’s most successful investor’, Mr Warren Buffett, provided some much needed fortitude for nervous investors when he said:

“A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful, and most certainly fear is now widespread, gripping even seasoned investors.”  Sound logic which we should all agree with, but the question is when? To which his answer is:

“I haven’t the faintest idea as to whether stocks will be higher or lower a month, or a year, from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment, or the economy turns up.  So if you wait for the robins, Spring will be over”.

Right, better get the bird feeder out then.

I am often asked can we see a bottom to the market – and the truth is you will never know until it has happened.  All you can tell is that by investing in such periods, we will all likely benefit over the next few years.

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Financial alcoholism is an easy trap to fall into.  Such sufferers of this addiction often start innocently without realising their potential trouble.  Often the excuse will be to support a key company or industry during a period of weakness, then followed by a need to protect jobs in an already weakened area and finally, by the ultimate financial alcoholics, an excuse that it is cheaper to keep them going than to face the economic consequences of sobering up.  Welcome to the US car manufacturing industry.

For too long they have been building the wrong cars for a past era that is never to return.  Protected by politicians trying to save their seats and followed by a desperate attempt to wrap the national flag around them, these are the last flailing efforts of a sad sodden addict desperately seeking another shot of government finance.

In our new world of economic austerity, maybe it is time for a brave move by a new leader to proffer some tough love to these failing corporations and let them seek solace in Chapter 11 bankruptcy.  Perhaps this will finally make them seek to rationalise their outdated business functions, employment and operational practises.  By most people’s measure, the likes of GM and Chrysler are bust.  The US government needs to carefully deploy its restricted finances to areas where it can have real effect and future growth, and not in propping up financial confused alcoholics in quasi state-run enterprises.  In the UK we can only speak from experience where we stood guilty ourselves of such financial inebriation and inaction for many years with fiascos British Leyland and Rover.

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And finally... We may think that economic conditions are tough at the moment, but Berlin is determined to look after its canine population.  An ‘exclusive’ soup kitchen just for dogs has opened in the city. 

This follows on from another service just for pooches launched in September providing a doggy bus service, ferrying the dogs to a doggy day-care centre.  On board, the passengers enjoy air-conditioned cabins and music on the trip, which costs 15 Euros per dog.  They must be three stops short of Dagenham.

Have a good weekend,

Justin

... you are sure of a big surprise."

This week the meeting of the "G20" in Washington on the 15th has the opportunity to be an extremely important event. Although some have tagged it as the opportunity to create a new "Bretton Woods" international agreement for a new financial world order, the reality is going to be considerably less but nonetheless the meeting is still going to be vital. As we fumble our way through this financial fiasco, at least our leaders have realised just how internationally linked and inter-dependent we all are. Thus a meeting of the 20 including the likes of China, India and Russia, is far more realistic than the older cosy club of post WW2 capitalists.

However, the meeting must not be a waste of time as this crisis has now spread like some hideous cancer to affect even those more stable and well run emerging nations. Now is the time for a clear message of international collaboration and co‐ordination to show that a powerful response can be provided. Extreme risk aversion along with a credit seizure is a terrible combination and only a unified approach can start to rebuild confidence - which will assist some stabilisation and consequently rise in value and, so vitally, confidence.

Action taken already to provide support to the likes of Singapore, South Korea, Brazil and Mexico is a good start but more will need to be done both directly by the Fed and the EU, but also via the IMF who, hopefully, may benefit from further support from the likes of Saudi Arabia. The 1944 agreement at the Mount Washington Hotel in Bretton Woods took months to hammer out, and the G20 cannot emulate that - but it can lay down some clear intentions for their acolytes to act on. The alternative should not be contemplated.

You would have thought that the election of Mr Obama (or Mr O'Bama according to one New York Irish columnist) should have resulted in warm and friendly words from leaders around the globe - and certainly most were in that tone. However, the really quite astonishingly aggressive tone from the Russian President Medvedev came as quite a surprise. The content seemed to reference back to the days of the Cold War when another young President came to the White House. Locating missiles in the Kaliningrad enclave, Russian energy traded in Roubles, and US responsibility for the Caucasus violence seems an aggressive menu for a congratulatory moment. Perhaps this is a strategic ploy to test the President Elect and to test his resolve?

A week after the election, as the bunting and banners are now lying forlornly on the floor, the importance and magnitude of the Obama election is only really beginning sink in. This is not just a change of President but a change of generation and, I believe, a vital turning point in both economic and political conditions. The President Elect has the aspirations of millions weighing on his shoulders and a level of disappointment is bound to be inevitable. I can only hope that he is not seen as the new Prince of Camelot, but rather a fresh face with a team aiming to try and tackle the worst economic situation since the Depression. We must watch with interest who he gathers around him, but the potential addition of Paul Volker (nicknamed the Prince of Darkness) the predecessor of Alan Greenspan at the Fed, may well be seen as a astute selection.

Meanwhile back in Blighty, I had mentioned last week that we could see a 1% cut in the Base Rate but a 1.5% was certainly a welcome move. However, this in itself is no miracle salve. The Government and its acolytes must force the situation further and especially by pressuring banks and certainly those that are state owned or part owned, to pass the cuts through to both companies and clients. LIBOR has continued its steady decline as the healing of the monetary system slowly improves but, unless we can get money flowing faster, then the economy will find it even more difficult to turn around. Friday saw 3 month LIBOR down to 4.5% from 5.56% the previous day - thus showing that the reduction is still not being passed through.

So what could this recession look like?

Resetting company expectations is a painful process as we can see from this season's reporting. Some have certainly been extreme, like Volvo's European third quarter truck orders dropping by 99.79% from last year's 42,000 to just 115, but others may show at least a similar if not quite such a disastrous fall off - but be prepared to be surprised. The market is thus trying to establish what this recession is going to look like and to this end the IMF's World Economic Outlook may be of some help. The key theme that they seem to have identified is that recessions linked to financial, and especially banking crises, seem to last twice as long as those that are not.

Citigroup have written on the earnings issues and expect a potential fall off of some 50% and that so far we have only seen 10%, and thus the damage could be spread for a longer period than just a year as has been mooted, to something that looks more drawn out over a period of three years. The opportunity therefore for a swift turnaround in confidence and markets would seem to be a tad too optimistic. Although equity markets do tend to recover during recessions, if this is an extended recession then we should prepare for a longer, drawn out and lower level of market recovery.

Well apparently the seaweed is curling up and we should all prepare for an early Winter. Obviously the order of the day is to go out and collect your nuts, bury your stash, fill up the sand bags and prime your hurricane lamps. Early Winter storms and tidal surges are being forecast by long term predictors, Weather Action, and we could be in for two "mega storms" which would normally be a 20 year event. Given our current run of financial news I am in no mood to disbelieve them. Perhaps we should follow the actions of my friend Mr John Whiting - sold his business, got his Freedom Pass and gone on a three month trip of the Antipodes.

And finally............another beauty contest has provided us with another vision of loveliness for us all to admire. A quote about the contestants came through as "They are different in terms of beauty, shape and how eye catching they are." Apparently also some of their great attractions include "A distinctive high bridge nose, shaggy hair, with a fine silky quality". Yes in fact these stunners are Saudi Arabian goats from the Najd region. Apparently the winner in the male category had a value of 450,000 Riyals (£76,000). However, there is now some concern as certain Islamic hardliners condemn such beauty contests as evil and say those involved should seek repentance. So I say we should all appreciate our goats while we can.

Oh yes and just one more point that annoyed me..........seemingly some local councils, including the enlightened officers in Bournemouth, have announced that they are going to ban the use of Latin terms and words as some poor unfortunate citizens might not understand what they mean. Apparently the term "via" could be confusing - well yes, presumably if you don't know where you are going. Additionally, the Plain English Campaign feels that banning Latin might stop people confusing the term "e.g." with the word egg. Brilliant - yes, that has been such a problem. Streuth!

Have a good week,

Justin