Are we living Europe’s greatest depression?

Europes great recession make that great depression

Some sobering reading from The Washington Post this week. The author, Matt O’Brien, has taken a chart from Nicholas Crafts “and extended it a bit to put Europe’s depression in, well, even more depressing perspective.”

The Eurozone GDP hasn’t returned to 2007 levels and particularly worryingly it appears not even Germany is immune “its GDP just fell 0.2 percent from the previous quarter”.

Matt O’brien points to the main reason why it’s all going wrong: “Too much fiscal austerity and too little monetary stimulus have crippled growth like almost never before. Europe is doing worse than Japan during its “lost decade,” worse than the sterling bloc during the Great Depression, and barely better than the gold bloc then—though even that silver lining isn’t much of one.”

Sobering times. With America recovering slower than anyone wants, China’s housing market moving in the direction no one wants it too and other nations like Australia and Brazil trying to muddle through by flogging as much iron-ore as possible, it’s hard to see where growth is going to come from.

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Australian consumer confidence at dire levels

Australians appear, at least on the outside, to be a fairly lucky bunch. Having avoided the major impacts of the GFC, profiting from a rapidly expanding China which has been chewing up as much as the Aussie miners can shovel in to its mouth, and now with The Dragon’s appetite slowing, appears to be transitioning to a non-mining boom economy quite well. In addition to all of this house prices are high, unemployment is low as are interest rates.

But something is worrying Australian consumers and just this week half a dozen of some of Australia’s largest retailers have put out worrying warnings of lower profits, less turnover and slower sales.

Australian Consumer confidence Index Sept 2012 - June 2014

TheAge blames three main points for the downturn: The May 2014 Federal Budget, the change in manufacturing with Holden and Ford pulling out of Australian Manufacturing and other large employers, like QANTAS, downsizing their workforces. From TheAge “Confidence had been tracking down before the Abbott government’s ”hard-hitting” budget, its release in May triggered a deep dive on the back of cuts to pensioners, health and family payments. ANZ’s consumer sentiment measure fell at the fastest rate since the financial crisis.

The government says it is trying to hoist the country back to surplus – which it argues will be better for the nation in the long run. And the ”tough” budget measures – including cuts to family benefits and pensions, and widely tipped higher university fees from a deregulated sector – have yet to pass through Parliament and if they do, the financial hit to many households would be quite ”mild”, economists say, until they start to kick in in two years’ time. Still, the real economy is hurting – and the retailers blame the budget.”

ANZ senior economist Justin Fabo goes further saying that even if issues like the budget and political instability (through the Senate) does run smoothly he doesn’t expect consumer confidence to bounce back any time soon to pre-election confidence levels. Fabo points to two other factors likely to weigh down sentiment namely, slowing house price growth and real wages growth.

“Real wages growth up until the terms of trade peaked was quite strong from a households’ perspective and firms didn’t mind that because the prices they were receiving were quite strong, so they were able to pass through reasonably strong wage increases to households.

”But now the terms of trade has come off and export prices have come off. That doesn’t only affect the mining sector, it affects business across the economy as well, so the prices that businesses receive for their output are not going up much, and they’re not going up much going forward, so they can’t afford wage increases anywhere near to what we had in the past.

”At the same time, consumer price inflation will probably be around 2 and 3 per cent, so we’re likely to have a scenario where real wage growth from a households’ perspective will be pretty modest for a long time.

”So that means people have got less money than they used to have to spend.”

Another factor which few are considering, or at the least acknowledging is that Australian consumers, unlike much of the rest of the global community, have watched what happens when economies spend until they drop. Australian’s watched the likes of the US, UK, Greece, Spain, Italy, all topple over in recent years and it’s entirely possible that Australians are just a bit shy when it comes to opening their wallets. They’re aware they need more savings, and that they need to cover themselves first and help retailers and the economy move along second (even though it’s a counter-productive view in some respects because they’re also the ones to be impacted by such a slow-down).

And of course we shouldn’t discount house prices which are extraordinarily high compared to wage earnings and servicing those loans takes up a high percentage of weekly take home earnings.

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The US bank Warren Buffett likes the most.

Wells Fargo’s current valuation on the brink of surpassing Citigroup’s high-water market capitalization of $282.75 billion, set back in February 1991 for US financial institutions. Wells Fargo shares are up 13% so far this year, besting the 2.7% gain for the S&P 500 financial sector.

If it passes Citigroup’s market cap amount, it will make Wells Fargo the most highly valued financial company in US history, chart below.

historical-market-values-at-biggest-us-banks-bofa-wells-fargo-citi-jpm-goldman-morgan-stanley

 

From QZ.com “Besides being one of the biggest banks in the US—it is top in market value, but ranks fourth by assets—Wells is also probably one of the most boring. The vast majority of its revenues are derived from plain-vanilla lending to consumers and businesses. Still, the stability of the bank’s returns have earned it loyalty from the star investor Warren Buffett, who made Wells his number one position at his company, Berkshire Hathaway, which owns a stake worth around $24 billion. “

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US Intelligence Funding – by agency and purpose

A stunningly clear graphic has been doing the rounds in the last 24 hours of US Intelligence Funding by agency (NSA, NRO, CIA, FBI etc), and the main purposes of what those large buckets of money are spent on: Data Collection, Data Processing and extrapolation, Data analysis, etc.

The source for this wonderful graphic is the FY2013 Congressional Budget Justification Book.

Click on the image for full size.

US intelligence Funding NSA, CIA, FBI,

 

 

Agency funding and purpose
Below is the top 5 agencies funding looks like over a 10 years period, and each agency’s stated purpose.

 

Top secret U.S. intelligence funding by top 5 agencies

 

Visualisation credit.

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Iron Ore: Small miners affected more than big miners

With all the Iron Ore price drama happening at the moment, MacroBusiness have produced perhaps the best, simple, graphic examples of what’s happening to Iron Ore miners and when viewed through this lens the challenge of David vs Goliath, big vs small becomes obvious.

As noted in a previous post on this topic, Iron Ore Price Smash, smaller miners are disproportionately affected by poorer Iron Ore prices and China’s rapidly shrinking demand.

Below are two graphics which demonstrate how the market is reacting to the large and small miners on the ASX, since all this Iron Ore hullabaloo started.

First, the big miners… RIO, BHP and Fortescue (FMG)

Iron Ore Large miners iron ore price change

 

And now for the smaller miners…. AGO, ARI, MGX and GBG

Iron Ore small miners iron ore price change

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Facebook’s $22B acquisition history visualised

Facebook has spent nearly $22 billion on acquisitions since it’s startup, and outside of its big ticket acquisitions such as buying Instagram for $1 billion, Oculus for $2 billion and WhatsApp for $19billion, there’s some wonderful startups and smaller acquisitions which make Facebook one of the fastest growing, most capable, technology companies on earth today.

Facebook acquisition history AKA how to spend $22 billion

Hat tip to Mashable for the graphic.

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Iron Ore Price smash

Iron Ore is falling, falling hard, and according to Macrobusiness “FMG and RIO both continue to hold up better than they should, down 2.2% to $4.44 and 1% to $59.48 respectively, but both are still above the lows of the past few weeks despite the iron ore price being materially lower” while “Miners are down across the board. AGO has well and truly taken out terminal support at 75 cents, last at 70 cents.”

Below from Macrobusiness is a relative performance chart:

Miners iron ore prices vs indexed moving average RIO FMG AGO

 

So, what to expect from here?

From The Australian “Iron managing director Ken Brinsden said despite the iron ore price cooling on the back of increased supply in the market he was optimistic because the demand side did not look as if it had materially changed.

“The supply side has absolutely increased and it will take some time for those tonnes to find their natural home,” he said.

“But I firmly believe they will displace some other high-cost production in which case the buying tension re-emerges.”

Mr Brinsden said while anyone expecting the price to go back to $US150 a tonne would be disappointed, he believed there was a good chance the price could stay in the range of $US100- $US125 for years to come. “Our challenge as a business is to take advantage of our good assets in the ground, our good people, make sure we look after our cost base and that we’ve got a healthy balance sheet so we can weather the storm and come out the other side,” he said.”

And what does this mean for investors? Well according to Business Spectator‘s Value Investor ”

We can see that BHP Billiton, Rio Tinto, Fortescue Metals and Brazil’s Vale are at the lower end of the global cost curve and are well-positioned, as they remain profitable down to $50-60/tonne.

Meanwhile, mid-cap mining companies such as Mt Gibson and Atlas, may face problems, should the iron ore prices fall further, given they are higher up the cost curve with a breakeven price of around $80/tonne. Generally, these companies came into existence due to the historically high iron ore prices over the last seven years. While they currently remain profitable, were the price to fall towards $80, they would struggle to break even.

Mid-cap miners also tend to mine lower-quality iron ore and cannot charge as much in the first place. Their cost base is higher due to their smaller size and they do not possess the same economies of scale as the larger miners.

It’s important to understand that none of the iron ore producers, with the exception of BHP Billiton due to its diversification, are suitable as long-term investments – unless you have a matching long-term bullish view on iron ore. Nearly all of them are cyclical trading stocks only, best bought during fear and pessimism and sold at premiums to value during optimistic times.”

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