On Bankruptcy and Davos (January 2018)

January 2018

UK Gilts fell 2.17% and the FTSE index fell 2.01%. In contrast, foreign equity markets performed strongly – Europe was up 3.01%, Japan
1.46% and the S&P 5.62%. Intra-month, these latter gains were higher but a tremor of fear passed through markets in the last days of January to take some of the gains back.

Gold rose 3.23% and oil climbed 6.99%. The fund holds both.

The oil price rise deserves further study because during January US oil producers announced significant and unexpected increases in production. This would normally have weighed on the oil price but on this occasion did not appear to do so.
 
Bloomberg Germany sourced chart showing US oil production which is at an all-time high, 10m barrels per day.


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US 10 year interest rates continued to rise and are now at 2.8%, up from 2.3% in early December. This is quite a significant increase and will have a bearing on interest rates in other countries, especially emerging markets. We have written about the likely end of the 30 year bull market in US Treasuries in previous reports.
 
Chart showing the 35 year long fall in US 10 year interest rates (=rise in the bond market). Has this now run its course? Yield high of 15.8% in Sept 1981, Yield low of 1.36% in July, 2016


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Bond markets often lead equity markets with a lag. We have had 18 months since interest rates bottomed and now right at the end of the month we have seen some sharp selling in shares. We have also seen some high profile profit failures in the US and UK (see below). The key question therefore is whether this is a blip or the beginning of a more serious downtrend?
 

Carillion, Capita and GE. Here are examples of what happens when the debt cycle turns against you.

During January there was an important bankruptcy in the UK in government contractor Carillion, and a profit warning from Capita, a second government contractor. In the US there was a profit warning from General Electric. (Among banks Wells Fargo and Deutsche Bank also reported losses). The first 3 named companies had taken on low margin business. All have high levels of debt and high pension commitments. In the case of GE the company had borrowed money to finance share buy backs. GE used to be known as the bell weather for the US economy.
 

Carillion announces bankruptcy. This is what the share price of a bankrupt company looks like. As Ernest Hemmingway said, “Gradually, then suddenly”

 
Carillion


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Capita


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General Electric


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It is indicative of underlying weakness in the economy for these failures to be occurring now, especially since growth is supposedly positive and interest rates still at unnaturally low levels.
 

Australia has been a genuine success story

January’s report is being written from Australia, an impressively successful country which has experienced 26 years of unbroken economic growth. 1991 was the last time Australia was in recession.
 
Australian Annualised Real GDP since 1989 – positive since 1991.


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The Reserve Bank of Australia is one of the few Central Banks which has steered monetary policy with skill and prudence over the past quarter century and the success of its economy can certainly be attributed in part to this. However, whilst not to detract from Australia’s achievement, its success was also closely bound with China’s emergence from socialist central planning to market driven economy following reforms introduced by Deng in the late 80s. China has been the dominant market for Australia’s exports of raw materials since then.

The most important element of Deng’s reforms was the re-introduction of the right to own private property, albeit in a limited form. However, as has been mentioned previously in these reports, the return to a market economy was conducted through a Keynesian lens which meant that much of the growth achieved in China was financed by debt. As Carillion, Capita and GE have experienced, debt magnifies a cycle like a mind bending drug – it makes the good times better and the bad times worse and in China’s case especially, it gave already strong growth an additional turbo boost. The Central government, regional governments, businesses and individuals all availed themselves of low interest rates and loaded themselves up with debt.

The nature of debt is that it is cyclical; it expands and it shrinks as interest rates fall and rise. Rising US rates will make themselves felt in China which would cause China to slow. Australians are watching the Chinese debt cycle closely. They know that there is a limit to what they can achieve independently and that any slowdown in China will be felt down under. But this aside, Australia has much going for it for the rest of the world to envy.
 

World Economic Forum – Davos

Every January, the money and power elites gather in Davos in Switzerland to drink expensive wine, do business deals and listen to lectures while feigning concern about poor people. They are accompanied by their celebrity pets, access journalists and various corporatist types. It’s called the World Economic Forum.
 


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Simultaneously, every year the left-wing foundation, Oxfam, publishes its latest finding, (which doesn’t change from the previous year), that 1% of the world’s population owns half of the wealth – which is actually about right given the Pareto 80/20 distribution law – which is a power law ie 80 of 80 owned by 20 of 20 etc).

Both of these are public relations operations. The WEF’s message is “We’ve got it, and they haven’t” and Oxfam’s message is “They’ve got it, and we haven’t”. They are in harmony.

Virtue signalling, hypocrisy and grand delusion are rife in each camp and it is easy to satirise both. This year’s theme at the WEF is “Creating a shared future in a fractured world” which is of course brought to you by the very people who fractured it.

People go because they do not want to be left out; they know their tokens to fix the world are preposterous but they enjoy the pretence, they like belonging to the elites and would be upset if they felt excluded from them. This goes equally for the celebrities. Cate Blanchett, Elton John and Bollywood Icon Shah Rukh Khan opened the conference with an awards ceremony. Last year’s line-up was Angelina Jolie, Charlize Theron and Matt Damon.

The cost of attending Davos using data from 2011 is as follows:

First, there is the annual membership fee: 50,000 Swiss francs. In 2011, that was $52,000. But this is the most basic level of membership. If you want access to the private meetings, which the deal-doers presumably attend, you had to pay membership of $137,000 a year. Then there was the cost of a ticket into the Davos meeting at $19,000. So the total annual fee for insiders was $156,000.

No target is too lofty. This year’s agenda includes the following:

  • Shaping the Future of Consumption
  • Shaping the Future of Digital Economy and Society
  • Shaping the Future of Economic Progress
  • Shaping the Future of Education, Gender and Work
  • Shaping the Future of Energy
  • Shaping the Future of Environment and Natural Resource Security
  • Shaping the Future of Financial and Monetary Systems
  • Shaping the Future of Food Security and Agriculture
  • Shaping the Future of Health and Healthcare
  • Shaping the Future of Information and Entertainment
  • Shaping the Future of International Trade and Investment
  • Shaping the Future of Long Term Investment, Infrastructure and Development
  • Shaping the Future of Mobility
  • Shaping the Future of Production

With all this shaping to do it is really amazing that they also find time for the partying. In terms of satire, I think Monty Python’s How to do it sketch beat the Davos crowd to it by over 40 years. It’s worth a quick look.

 
Davos 2018


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The WEF has awarded itself the moniker of protector of the little man. To justify its existence it needs a constant stream of dangers from which to protect us. The more dots on the above chart, the better. (If they really wanted to protect us they should address the rigged money system, the military industrial complex and the politicians and mainstream media which are beholden to both.)

The same cocktail goes for Oxfam, namely hypocrisy and a determination not to find a cure for the disease which they are mandated to fight. First hypocrisy. Oxfam recently gave its US boss a pay package worth more than half a million dollars and at least 13 more senior employees in US alone are on hefty six figure salaries. These people then raise more cash & profile by campaigning about inequality. Welcome to the poverty industry.

Next, curing poverty. Oxfam is staunchly anti-capitalist despite the fact that capitalism has lifted billions of people from poverty, feudalism and agricultural subsistence.
 


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Oxfam misrepresents world poverty. Each year they fail to take account of human advancement and income improvements as shown above. They ignore the effects of demographics – it takes time to accumulate wealth so most wealth is owned by old people. Developing countries with high birth rates have high numbers of young people.

Demonising capitalism may be fashionable in the affluent Western world but it ignores the millions of people who have risen out of poverty as a result of free markets. Oxfam seems obsessed with the rich rather than concerned with the poor which is why it targets Davos. On top of which it gets good publicity which presumably helps its fund raisers. But its report each year really is only suitable for the economically uninformed.
 
 

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