We all know that the Middle East is a Tinderbox – though I wonder just how many people today would recognise such a thing if it hit them on the forehead?
So once you come round, now you can identify with what you have just been bludgeoned!
How will last night’s reprisals work out? Well it is fair to say that Tehran had to be seen to be doing something, to show the domestic audience and local acolytes that the leaders aren’t cowed by the US gorilla (yep, I mean you-know-who). But their target selection was fairly low level, and the results not even a pin-prick.
Will Trump reply, or just laugh at them? A big man would stand and smile benignly at the small child who is having a paddy. But this is Trump we are talking about. Oh dear!!
Our feel is that he will wait to see if the Iranians try again. If they do something of real economic consequence, then one can expect a hard strike at Tehran. I hope the ayatollahs have a good bunker.
There is some risk to global oil supplies, and successful attacks on Saudi refineries or shipping would provoke a very sharp response from the US. It would be a short erasing of any Iranian production capacity. However, we do not feel that it would lead to a sustained rise in oil prices. Pipelines can be repaired, and US Shalegas drilling is is very elastic to price rises.
Meanwhile, the markets are calm, down by less than 0.5%. We think that is right. The worst thing for Trump right now would be to appear weak to his electorate, or to blink. Our feel is that Tehran is drinking in the last chance saloon, and just ordered another round…….. There is clearly a point at which Trump will be keen to demonstrate to the world that the US economy and US lives are sacrosanct. If the bullets (or missiles) start to fly, then the markets will fall by less than 20% – because everyone, us included, will see very limited global economic consequences, and any falls representing a buying opportunity.
Why did we say “NOT YET”? Where is the real risk here then? If the Russians or the Chinese see an angle for stepping in to control the Middle East, then suddenly it becomes a geo-political play, and then we really are worried!
Every week it seems that some self-appointed climate fascists are instructing us that we need to stop eating and drinking in order to “save the planet”. As Global Warming has evolved into Climate Change then Extinction Rebellion, ever-more shrill instructions about how we should live our lives are issued, with the threat of dire consequences should we fail to accede to their demands. Is it only me that observes the same tone of dire-threats and moral righteousness that were so prevalent in the CND anti-nuclear armageddon protesters of a generation ago – or indeed the religious zealots of the previous millennia? Their chant was “do as we say, or you’ll burn for an eternity”, which, come to think of it, is pretty much what the anti-western-economies lot are telling us about temperature change.
Anyway, back to the topic. For a number of years, agriculture has been blamed for a very substantial proportion of UK greenhouse gas emissions, with as much as 25% of the total quoted as being sourced from farming. These numbers are grabbed by vegan enthusiasts to shriek that we all need to stop eating meat or we’ll burn in hell for all eternity. Okay, so maybe I paraphrased them a little, but the point remains.
However, the science they are using is duff. According to Prof Myles Allen of Oxford University Environmental Change Institute, quoted in the Sustainable Food Trust, the picture is much more nuanced. Back in February, we mentioned that the finger points at the methane released by cows. In the approach used by the International Panel on Climate Change, methane is treated as equivalent to carbon dioxide in its greenhouseness (like my new word?) The true picture is that carbon dioxide is chemically stable and stays in the atmosphere for hundreds of years. Meanwhile, methane breaks down rather quickly, and so has a much smaller impact on the atmosphere. The case against cows has been extensively overstated.
At a conference organised by the Country Land and Business Association, Labour spokesman Barry Gardiner suggested that British farming should be part of the solution to global warming by producing less food and planting trees instead. To put it mildly, this approach doesn’t pass even the most cursory scrutiny. (Ha that originally I typed “What a moronic idea!” before professionalism got the better of me). Does Mr Gardiner think that the UK population will eat less? All that his madcap scheme would achieve is more food imports. So the food production leads to the same emissions, just somewhere else in the world. Then the food is transported to the UK, with all the emissions entailed. Mr Gardiner’s scheme actually would increase global emissions. We do like the idea of more tree planting, but to claim that replacing UK food production with forests would reduce emissions is just wrong.
Agriculture is not the huge emitter of greenhouse gases that the hysterical brigade would have you think. Carry on eating healthy nutritious meat and dairy products, comfortable in the knowledge that locally sourced food has low airmiles and supports high-quality, high-welfare British farming.
Cripes, doesn’t Boris love poking the hornets’ nest with a sharp stick?
The reality of his decision to close this Parliamentary session and arrange a Queen’s Speech to initiate a new Parliament is relatively small. Instead of Parliament having a recess for three and a half weeks over the party conference season, the break is five weeks. However, it has acted as a lightning rod for all of the pent up frustration and anger of the Remainers. Suddenly, they can see their case is lost. It was lost before, but now they can no longer pretend to themselves that they still have a chance.
So now the Remainers have only one option left – win a vote of No Confidence next week and force an election before the end of October. This would be welcomed by the Boris team, as discussed yesterday, who have developed a suite of policies on which to campaign, and have clearly judged that such a poll would be winnable.
Our view is that;-
The Remainers will not be able to win a vote of No Confidence
It is far from clear that Mr Corbyn will even dare to call one (see 1. above)
The EU will have to sit up and realise that the Remainers will not postpone Brexit
The EU needs to avoid blame for No-Deal, and so see a deal as necessary.
Suddenly, to us, a No-Deal Brexit seems less likely than it did 24 hours ago.
For the last three months, as the implications of the Brexit delay became apparent, we have been forecasting FTSE up to 7500 in July, and then a retreat to 7200 by November. Well, we got to 7500 in July, but back down to 7200 a little early. Our suggestion last month that the market was riding high but vulnerable to bad news was brought to life by President Trump’s step up of the tariff war with China.
So where to now?
As we noted last month, the global economy looks weak, and the UK could be in a technical recession by Christmas. (See our article last week, A Bleak Midwinter Brexit Recession By Christmas) Our central forecast for Brexit is that it will be a soft No-Deal, in that another Withdrawal Agreement will not be reached, but enough accommodations will be made to keep things ticking over. This outcome will scare the market further. However, FTSE tends to look 6 months ahead, and by February, it should become clear that the UK economy will be okay, and the world economy could be over its wobble.
So we think the worries of a No Deal will send FTSE down to 6800 by November, but that in the 6 month time horizon of our forecast, we think it will be back to 7200 by Friday 14 Feb 2020
Oo-er, suddenly the UK economy ain’t looking so good!
The news media are full of speculation about Brexit, and not many of the stories are looking forward to how wonderful the country will be once/if Brexit happens. We can expect more of the same for the next twelve weeks until Halloween.
Are we heading for No-Deal?
At the moment, both sides are digging in, trying to create a tough stance for the benefit of their populations (I hesitate to use the word electors when we are discussing the EU, but you know what I mean). Behind the scenes, it can be assumed that the diplomats and civil servants will see themselves as the grown-ups in the room, and thus be at least looking for common ground.
However, it seems unlikely that a comprehensive new Withdrawal Agreement will be crafted by October. But we can expect enough co-operation to keep the world turning.
So what’s the problem?
The problem is that investment is collapsing. The worst thing for businesses in uncertainty. Life has enough risks when it comes to business investment, without an unseeable future being only 12 weeks away. Similarly, house-buying and car buying are likely to miss out on their usual autumn surges this year.
And after Brexit day, will there suddenly be clarity and light? Nope. There will be hysteria in the media for a few weeks as every little shortage and business malady is blamed on you-know-what. And the effect of this – more hand-sitting and less spending.
What else is happening?
The US is starting to suffer from Mr Trump’s tariffs, to the extent that Jerome Powell has cut interest rates despite full employment. Meanwhile, China is suffering a marked slowdown from the trade war. This has now spread to Europe, which is also teetering on the edge of recession.
The UK is heading for recession – and it is difficult to see when it could end. Domestically, we’ll probably pull out next spring…. but that depends on what the rest of the global economy does. If things keep softening elsewhere, it could be a big one!
PS. The slowdown in Q2 announced today was no surprise, given the stockpiling in Q1 for the original Brexit day, and the factory shutdowns brought forward to April in case of Brexit delays.
PPS. The coming recession will be a direct result of Mrs May’s and Parliament’s timidity over Brexit. If they had gone ahead on 29 March, we’d be pulling out of it by now. The delay to October has just increased the uncertainty and halted the economy for 7 months, tipping us into a recession we need never have had.
The drama in Whaley Bridge over the weakened Toddbrook Reservoir Dam has captivated news audiences. One struggles to imagine how stressful it must be for owners and occupiers forced to leave their homes without notice.
However, this crisis is NOT the result of Global Warming/Climate Change/Extinction Rebellion or whatever it is called this week.
The High Peak area of Derbyshire had some quite heavy rain showers last week. But thunderstorms are no more proof of Climate Change than they are of the existence of fairies. The dam was not overwhelmed by a biblical downpour.
As an aside, if by biblical rainfall, are we talking about total flooding which requires an ark to be built? One can only think that comparing a bit of a summer cloudburst to the flooding of all the land in the world as perhaps over-exaggerating.
Anyway, back to the dam. What happened was that there was heavy rain, and the water rose enough to flood over the spillway, as it was intended to do according to the 1831 construction, and has done so many times before.
What was different was that the sealing of the concrete slabs on the spillway failed, allowing the water to run underneath the hard surface, and wash away material that formed part of the structure of the dam.
The weakening of the dam was nothing to do with climate change, it was simply the result of bad maintenance of the spillway. One has to wonder why the BBC was so convinced in its news programmes that this POTENTIAL CATASTROPHE could be attributed to Climate Change?
Not once was it suggested that it is the Canal and River Trust – owners of the reservoir – who are responsible for lack of maintenance.
Unfortunately, by falsely linking every weather-related event to Climate Change, the BBC has become labelled as creating another Project Fear, this time about Climate Change. To us, it is impossible to access clear and unambiguous data about Climate Change. Also, there is so much variance in the weather that it takes decades to accurately assess changes to the average. However, we take the view that it would be prudent to address some of the worst potential triggers in human activity. But it would be wrong to reduce western civilisation to penury, just to fight what might still be a collective hysteria.
As we have written before, we are not fans of the BBC, and this event illustrates how they continue to twist their news reporting with political interpretation.
The Whaley Bridge Dam Drama is not about Climate Change
The damage to the reservoir was caused by bad maintenance by the Canal and River Trust
The BBC and other media have let Climate Change hysteria politics affect their reporting
PS. Nice politics by Boris, visiting and looking concerned!
The attractions are easy to understand…… the Government seems happy to lend huge sums of money to local authorities at tiny rates of interest and with apparently few questions asked. I wish they’d do the same for me!!
Central funding of local councils can be around 80% of their overall income – and so when this was cut after the Great Financial Recession, it must have hurt badly. So we admire the entrepreneurial spirit of councils like Spelthorne, who have borrowed cheap money and put it to work. Their efforts have been so successful that, according to the ST, Spelthorne now enjoys more income from property than from council tax.
But the risks remain. Commercial property values can be hugely volatile. What happens if there is a huge fall in values – say 50% – and suddenly Spelthorne loses £500 million? That is rather a large amount of money! It will only be a paper loss – until they sell – but it will still show in their accounts. Only a fool puts all of their investment cash into one kind of asset.
And one has to ask the question;- Why have they been investing in office blocks and shopping centres all over the country, when some of the investment funds could have gone into local housing, which would have created income and opportunities for people in the borough to access rental homes? A sensible investment approach would have allocated investment to other, non-correlated assets too – say shares, loans to local businesses, corporate bonds and so on. No investment is foolproof, but at least a spread of assets means they are less likely to collapse in value all at the same time! They could have at least invested in offices and shops within their area to gain a return and develop the local economy.
We will watch this space with interest over the next few months. Rather scarily, it is much easier to see commercial property losing 50% of value than it is to see it gaining 50%. And that is going to hurt Spelthorne and similarly daring councils.
It is accepted wisdom in the chattering classes that trade tariffs are necessarily a bad thing. But why is this so?
The Principle of Comparative Advantage was published in 1817 by an economist (yayyy), David Ricardo. This postulates that in international trade, relative advantages in labour costs, productivity and other production factors will enable cheaper consumption – and hence higher living standards – for both the producing and importing nations, than the alternative of home production in each country.
An easy example of this effect, even within the UK, was the impact of the railways. Suddenly, there was no value in each small town having a maker of pots and pans. Such items could be made better and cheaper by a huge factory in Birmingham, and so pan-buyers (Pans-People as they might be termed by grey-haired fans of Top of the Pops) had a better standard of living, having devoted less of their income to obtaining better cooking utensils. The pan-workers presumably had marginally higher wages than elsewhere too.
However, it perhaps wasn’t so good for the country-town pan-makers, who were competed out of a job. And some of the inhabitants of such villages may have mourned the disappearance of their friendly local manufacturer – and all the workers in the previous supply chain. Special orders would be more difficult, with just a few standard designs. So the nett gains, including non-monetary items, weren’t always as large as perhaps thought at first glance.
It is the principle of comparative advantage that postulates that we are all richer as a result of international trade. And tariffs dent international transfers of goods, hence at the margin impoverishing both exporting and importing nations.
A clear, and currently pertinent example is the UK beef industry. It is not cost effective for the custodian of 200 acres of Devon countryside, with hedges, copses and ancient barns to maintain, to compete with a mid-west American farmer with a 640 acre (square mile) of flat, fertile, but featureless maize land. The US beef farmer keeps all his animals in a feed-lot year round and transports in fodder from the prairie or the local grain silos. Cheaper feeding with no overheads – oh, and growth hormones. Does the UK consumer want cheaper beef, or enough profit in UK farming to retain our beautiful countryside? In surveys, they would select the countryside, but I suspect in Morrisons they would choose the cheaper steak! So the UK farming industry will need tariffs to raise food prices or, alternatively, subsidies to maintain the countryside.
What do tariffs mean in terms of Brexit? In the case of a No-Deal Brexit, then the EU could choose to treat the UK as a third party country and apply tariffs. (It could drop tariffs on the basis that a withdrawal deal or trade agreement is imminent. It’ll be interesting to see if there is sufficient goodwill for that to happen). Given the 15% fall in sterling, the average 3% cost of tariffs across all goods won’t actually make much difference. However, in cases such as beef and lamb exports to EU, 40% tariffs will hurt. Here, sector support will be essential during any interim period, as the reaction of prices to these tariffs will be only partly a rise in prices in EU, with the rest of the slack taken up by a fall in export incomes received by British farmers.
The second impact of leaving the EU’s customs union will be an increase in paperwork. This is just sand in the machine, benefiting nobody (except perhaps paper-makers and form-fillers).
Work will be required on both sides of the channel to ensure delays don’t become excessive. We have seen figures suggesting that if the processing time per lorry increases from 30 seconds to a minute and a half, then the whole of southern England will somehow face gridlock. This view doesn’t seem credible to those without a pre-decided political position. Both sides of the channel have had plenty of notice about the forthcoming change, and already have capacity to cope with fluctuations in volumes. If each lorry needs three times as long to be processed, then is it not a case for having three times as many booths? Or maybe twice as many with a few changes to reduce the bottle-necks or critical time-paths of each customs inspection?
Finally, there is the Irish economy to consider. The vast majority of their goods travel across England to get to continental Europe. If tariffs are bad for the UK, they will be hugely worse for the Irish. Will they pay a tariff to get their goods into UK and another one to move them into France? One has to hope that Brussels won’t dump the Irish economy as a side-effect of punishing the UK!
In the very long-term, one has to assume trade deals will be made with both EU and US. There is some prospect that we will have to choose whether to be in the trading orbit of the US or EU, as having one foot in both may be untenable.
Tariffs (and paperwork) are bad, but not catastrophic.
The already lower pound sterling, and future tax and export-subsidy payments will mitigate the worst impacts.
Brexit is a political choice. Tariffs are a part of that decision, but should only be a small input, not the deciding factor.
Regular readers (Hi Mum) will recall our excitement over US Non-Farm Payroll numbers, and how we await them every first Friday with breath so bated that we’ve turned blue. And this month’s release was a blinder!
Last month, the May number, reviewed here, was shockingly low at 75,000, far below our neutral level of 180,000-200,000. Since then, the consensus market view has been that the US economy has started to look (in technical terms) “a bit iffy”.
So June’s number of 224,000 was great news right? (Click here for the Bloomberg report) Well, not for Wall Street. After the data were released on Friday lunchtime (8.30am in NY), share prices went down! Normally, the market likes the economy to be doing well (which this figure implied) ……. but there is a twist.
Everyone is excited about whether the Fed will cut rates at the end of July. This year has seen quite a turn-around in expectations for interest rates. In January we expected three or four hikes in 2019. However, weaker data in US and around the world, plus all this talk about tariffs and trade wars, had turned things so far that markets were forecasting the Fed to ride to the rescue and cut this month.
So now things aren’t so bad, maybe we won’t get the cut after all? And higher rates (or non-arriving lower rates) are bad for companies because of higher borrowing costs, customers having less spending cash and higher discount rates when looking at future profits. So we get the bizarre outcome that a strong economic figure pushes the market lower.
The reality is that in the scheme of things, 25bp (a quarter of 1.00%) is neither here nor there when rates are so low already, but the market loves to have something to chew on!
Our house view is that the tariffs-thing will start to have a minor effect in the rest of the year, but US growth will survive.
Roll on 2 August for the next exciting episode of Non-Farm-Payrolls!
Last week, we promised you an installment about the slow rate of house building. I hope the tension of waiting hasn’t been too tough for you all?
Every week (or so it seems) the large housebuilders are accused of operating a cartel to restrict the building of new houses – and thereby hold up prices of their land banks. This is incorrect for a number of reasons;-
There are about 25 million houses in this country – and the build rate is less than 250,000 per year. Therefore, with new build less than 1% of stock, prices are set by turn over of the existing stock, not by the tiny amount of new build. In reality, it works the other way around – the value of land is the residual, the result from the sale price of a house less the build cost (and some profit).
House-builders are in the business of adding value to land by building houses – the more houses they can build, the more money they turn over and the more profit they make. Why leave money tied up in land when it can be turned over and a profit made?
The housebuilders are accused of sitting on plots with planning permission – again, to drive up prices. This is not true, and displays a fundamental misunderstanding of the market. A housebuilder needs a pipeline of sites ahead to keep production going and to usefully employ their many personnel.
There is also a matter of commerciality here. If ABC Building plc has a site with permission for 5000 houses on the edge of a small city, it would be crazy for them to build all 5000 in one go: the market for new-build houses in a small city cannot absorb so many new houses in one location, there just won’t be enough potential buyers. So the builder has a programme to build 500 houses per year. This has the dual benefit of feeding houses into the market to meet demand levels – and also avoiding the inevitable bankruptcy that would come from building 5000 houses in one go and having 4500 of them sitting empty! Both of these factors are pretty important for building companies.
Where the large builders are red-handed is in the support of ever-tighter regulations and controls on the building industry, knowing that they can cope but their smaller competitors do not have the specialist teams required.
Commentators sometimes whinge about the ever-reducing number of small and medium size builders competing with the big-boys. This is the Government’s fault, not due to a lack of entrepreneurial spirit in the construction industry.
For a small builder, with limited capital, every month/year of planning delay is a month/year when that investment in land is not earning any return – but you know what, the bank still wants its interest! Every “good-idea” foisted on the planning application adds cost and delay. This is the typical list of work that has to be commissioned, received and paid for before a planning application can be submitted;-
A full set of drawings (fair enough)
Design and Access statement
Air Quality Assessment
Biodiversity Survey and report
Crime Impact Statement
Flood Risk Assessment
Heads of Terms – Section 106 Agreement
Heritage Impact and Justification Statement
Land Contamination Assessment
Landscape and Visual Impact Statement
Photographs and Photomontages
Playing Field Statement
Statement of Community Involvement
Supporting Planning Statement
Sustainability Appraisal and Energy Statement
Town Centre Uses
Transport Assessment and Statement
Tree Survey / Arboricultural Implications
Phew! And that is just planning. Next, the builder has to negotiate Section 106 agreements with the planners, CIL’s, Section 104 agreements with the Water Authority, and Section 38 agreements with the Highways Department. Then, after he has taken all these costs into account, he has to provide 30% affordable housing (at a reduced sale price). All this can be allowed for in the purchase price of the land. But what if the Council then throws a wobbly and declares a Selective Licencing area, where any buyers thinking of letting their property has to pay the council £900 for extra regulation. Suddenly the sale price is less.
Oh, then we come to the Health and Safety Executive. Over time, the small builder will learn that if there is an accident on site, he is likely to go to jail. Of course nobody wants to see people hurt or killed on a building site, but the reality is of moving heavy loads about at high levels with an ever-changing crew of people. No matter how experienced the workers are, if they do something stupid, it is the builder who goes to prison.
All of the above measures were put in by well-meaning ministers, very few of whom had ever worked in construction, nor any other kind of physical job. Each time the job was made more difficult for the small builder, more of them left the business or never started.
The outcome is an industry dominated by a few large firms. It is the inevitable outcome of decades of ever more complicated planning requirements, government interference and Health and Safety zealots.
This situation will not change until a Housing Minister with common sense is appointed. Unfortunately, the phases ‘housing minister’ and common sense’ rarely seem to go together. Thus, we are doomed to a shortage of housing and ever-climbing prices. Make no mistake, the death of the small builder is entirely the fault of Government Ministers.