Britain’s Biggest Economic Disadvantage - Their Housing Market - MoneyWeek

Britain’s Housing Market Has Left The Economy Paralysed

Here is a very interesting article from Money Week Magazine, regarding the UK housing market and its risk to kill the merger GDP growth even more than their Olympic-sized Government debit levels. With rapidly slowing global growth (in both the developed and developing world) our politicians and central bankers seem to be at a loss as to how to deal with it. 

Sir Mervyn King (Governer of the BoE) reckons that the basic problem is the banks are still sitting on too much bad debt. The debt needs its value written down (or written off) and the banks then need to be patched up (again). All that needs to happen before banks are willing to lend again.  The tr ouble is, the “significant writing down of asset values” that King refers to, would involve allowing house prices to fall.  In Britain, house prices are the single most important economic indicator, politically speaking. When house prices are falling, governments lose elections.  It’s why public policy in the UK is to keep the property market from collapsing.  

So unless there is an external factor which forces the politicians hands don't expect the policy to change.  It funny but one of the reasons Britain did well after it fell out of the fixed exchange rate mechanism (ERM) was that while it was in it the politicians hands were prevented from printing money to provide a quick economic/political fix.  Resulting in them having to implement political difficult and painful (to vested interest groups) labour market reform which provided a long term improvement to employment and GDP growth, as explained by the former UK Chancellor of the Exchequer Norman Lamont in an interview in the Daily Telegraph Newspaper on the 20th anniversary of Black Wednesday, Britain’s exit from the Exchange Rate Mechanism (ERM). 

It reminds me of an old quotation from the former UK Prime Minister Sir Winston Churchill:

"You can always count on Americans to do the right thing - after they've tried everything else" (just replace Americans with politicians)

Food for thought isn't it?

Click here is see Moneyweek - Britain’s biggest economic disadvantage - our property market

Average Income for Pensioners Has Never Been Better! (Statically at Least)

Here is a very interesting chart from the Economic Research Council Weekly Digest Chart of the Week, which was on the Average Income for Pensioners.  A recant report from the ONS showed how pensioners' net income has changed over the past ten years and it is largely good news for pensioners as they received on average 27% increase in their real income. However things aren't all rosary, when you investigate the number in detail thee is still a large amount of inequalities still exist.  

Click here is see the Average Net Income Distribution of UK Pensioners.

Expect UK house prices to fall as banks pull back from the property market - MoneyWeek

The Prospects for the UK Housing Market Don't Look Promising!

The most important drivers of the UK property market is borrowers’ access to credit.  Until the resent credit crunch, almost everyone had forgotten about this and thought is was just aspirational and want that drove it.

So with this in mind how is the UK property market going to perform in the next few years.  statistics - Banks are pulling back from property - expect prices to fall. 

Macro Man: Life's Little Luxuries

The Italian Government Takes No Prisoners In Its War On Tax Evaders

If you are in any doubt about the scale of the super yacht exodus accros the Club Med Countries have a quick look at this report on empty marinas across Italy.

Meanwhile who’d want a new Ferrari after last year’s campaign against tax evaders – which involved tax inspectors raiding the owners of luxury cars in smart ski resorts and visiting Ferrari-owner events to check the tax returns of every single driver?  According to the blogging hedge fund manager at www.macro-man.blogspot.com the “persecution of Ferrari owners” has become so severe that they are selling them in their thousands. You can now pick one up for the “price of a new VW Polo”.

This is not only bad for Ferrari but all Luxury Car companies, not only are sales being hit by general austerity and shocking enforcement of the law, but global second hand prices are likely to be hit by the new exodus of cars from Italy.  “This is going to be “a vicious value collapse” says Macro Man.

Will this mean people will be turning against ostentatious wealth, and luxury brands associated with it?

Copper Price is as Expensive as it was in the 1970s – Inflation Adjusted Historical Copper Price since 1900 in Pounds Sterling and US Dollars

Copper Price Today is as Expensive as it was in the 1970s Once Accounting for Inflation

Copper in a common metal which as been used since ancient times.  Due to its very good electrical and thermal conductivity it used in a very wide range of industrial applications from wires cables to sea water corrosion resistant bronzes used to make marine propellers.  Because of this it is often refereed to as one if the bellwether industrial commodities, which are used to trend the health of global industrial production. 

Over the last couple of years, I have repeatedly come across comments that copper has never been this expensive and that this will push  up the price of consumer goods or cause industrial production to slow or contract.  There are some reviews of the copper market and price such
as the following:
"What to do as Dr Copper turns bearish" 
"The Copper Yuan Carry Trade"
"Copper and Global Stock Markets Rollover"
"Copper Price Forecast, The Fall of The ChineseMiracle 2012" 

However these don’t usually cover the long term price history or adjusted to account for inflation, so I thought that I would investigate.

The annual average copper price data since 1900 to2010 came from the USGeological Survey.  The data for 2011 and the early part of 2012 came from the World Bank.  In both cases the price data is based on the average price of Grade A cooper traded on the London Metals Exchange (LME).  The historical UK Pound to US Dollar exchange rate data came from Lawrence H. Officer, "Dollar-Pound Exchange Rate From1791", MeasuringWorth, 2011 at www.measuringworth.com/exchangepound/.  The prices were adjusted for inflation by converting the nominal price into the equivalent in 2011 US Dollars and 2011 GP Pounds Stirling.  The US inflation data came from the historical CPI from the US Department of Labor. 

For the UK inflation the data came from Dominic Webb (2006) "Inflation:the Value of the Pound 1750-2005" Economic Policy and Statistics Section, Research Paper 06/09, House of Commons Library, UK.  From this you get the following results shown in the graph below.

Historical Annual Average and Inflation Adjusted
Copper Price since 1900 in US Dollars and UK Pounds

The doted lines are the unadjusted nominal annual average copper price, and the sold lines are the inflation adjusted copper price.  The first thing that becomes obvious is that the unadjusted copper price was at its lowest in the in 1932 in both US Dollars and Pounds Sterling at approximately $128 and £36 per a metric tonne respectively.  Additionally before 2012 the nominal price peak occurred in 2011 in both US Dollars and UK Pounds at $8,823 and £51504 per a metric tonne respectively. 

However when you examine the inflation adjusted copper price, you notice that its lowest prices occurred in 2002 in US Dollars at $2,089 and in 1999 in UK Pounds at $1,465 per metric tonne.  The closed the inflation adjusted price came to those lows in both currencies, occurred in 1932, 1945, and 1993.  The highest inflation adjusted price happened in 1916 in US Dollars and Pounds Sterling at $12,962 and £9,383 respectively. 

The historic inflation adjusted copper prices in US Dollars and UK Pounds can be more easily seen in the chart below which only shows the inflation adjusted price on a linear axis (non logarithmic, unlike the first chart).

Inflation Adjusted Copper Price since 1900 in US
Dollars and Pounds Sterling

As it came bee seen the general trend in the inflation adjusted copper prices was a high volatility before the 1920s, were upon it experienced a sharp decrees by the early 1920s.  Prices were relatively stable from the 1920s until the end of the 1940s, in competition to the price volatility see before the 1920s.  During the 1950s there was a sharp rise to $7,662 and £6,775 in US Dollars and GB Pounds respective.  The price dropped almost 50% by 1958 in both currencies, where upon it steadily increased to peak in 1970 and 1974 at a price similar to that in 1955.

From the peak in 1974 the price steadily decreased to an all time inflation adjusted low by 2002 in US Dollars at $2,089 per metric tonne.  In UK Pounds the all time inflation adjusted low occurred in 1999 at $1,465 per metric tonne and this was almost matched again in 2003 at £1,483.  Since these lows the inflation adjusted copper price was increases rapidly to prices comparable to those seen in the 1970s.

Using the price in 1900 as a baseline the inflation adjusted copper price in UK Pounds and US Dollars was indexed.  This allows the examination of the relative price changes during this historical period of time more easily and is shown below.

Historical Inflation Adjusted Copper Price since
1900 in US Dollars and GB Pounds, Indexed to 1900

The indexed price data clearly displays that the historic inflation adjusted copper price has drop since the 1900s but not by any ware as much as the inflation adjusted aluminium price had done.  By the early 2000s the copper price bottomed at almost 20% of the price of what it was in 1900.  This was slightly lower than the previous bottom in 1930.  The current copper price by the beginning of 2012 is comparable to the inflation adjusted prices in the 1970s, which were slightly lower than the average in the years before the 1920s.

So from a historical perspective once inflation has been accounted for the price of copper is comparable to the peaks seen in the 1970s.  This begs the question, as copper is used as a bellwether the health of global industrial production, does this means the developed economies are due to repeat the economic difficulties that were experienced in the 1970s?

Written by Inflation Monkey. Join on Google+

Aluminium the Metal that has Never been so Inexpensive – Inflation Adjusted Historical Aluminium Price since 1900 in Pounds Sterling and US Dollars

 The Metal that has Never been Cheep - Aluminium

Aluminum is a silvery white metal used in a wide verity of industrial application and in consumer products.  It is the third most abundant element and the most abundant metal, in the Earth's crust.  Aluminum is a remarkable metal due to its low density and for its ability to resist corrosion via passivation.  Many of the structural components made from aluminium and its alloys are vital to the aerospace industry and are important in other areas of transportation and structural materials.

Aluminum forms strong chemical bonds with oxygen.  Compared to most other metals, it is difficult to extract from ore, such as bauxite, due to the high reactivity of aluminum and the high melting point of most of its ores.  For example, direct reduction with carbon, as is used to produce iron, is not chemically possible because aluminum is a stronger reducing agent than carbon.  Aluminium electrolysis with the Hall-Héroult process consumes a lot of energy.  Electric power represents about 20% to 40% of the cost of producing aluminum, depending on the location of the smelter.

There are some reviews of the aluminium market and price, but these don’t usually cover the long term price history or adjusted to account for inflation, so I thought that I would investigate.

The annual average aluminium price data came from the US Geological Survey and it dates back to 1900.  The historical UK Pound to US Dollar exchange rate data came from Lawrence H. Officer, "Dollar-PoundExchange Rate From 1791," MeasuringWorth, 2011 at www.measuringworth.com/exchangepound/.  The prices were adjusted for inflation by converting the nominal price into the equivalent in 2011 US Dollars and 2011 GP Pounds Stirling.  The US inflation data came from the historical CPI from the US Department of Labor.  For the UK inflation the data came from Dominic Webb (2006) "Inflation: the Value of thePound 1750-2005" Economic Policy and Statistics Section, Research Paper 06/09, House of Commons Library, UK.  From this you get the following results shown in the graph below.

Historical Annual Average and Inflation Adjusted Aluminum Price since 1900 in Pounds Sterling and US Dollars

The doted lines are the unadjusted nominal annual average aluminium price, and the sold lines are the inflation adjusted aluminium price.  The first thing that becomes obvious is that the unadjusted aluminum price was at its lowest in the late 1940s in both US Dollars and Pounds Sterling at approximately $331 and £82 per a metric tonne respectively.  Furthermore before 2010 the nominal price peak occurred in 2006 in both US Dollars and UK Pounds at $2,690 and £1,453 per a metric tonne respectively. 

However when you examine the inflation adjusted aluminium price, you notice that its lowest prices occurred in 2002 in US Dollars at $1,792 and in 2003 in UK Pounds at $1,190 per metric tonne.  These lowers were virtually matched in both currencies happened in 1992, 1999, and 2007.  The pries see in 2010, in both US Dollars and Pounds Sterling are comparably to the inflation adjusted prices through out the 1990s and 2000s.

The historic inflation adjusted aluminium prices in US Dollars and UK Pounds can be more easily seen in the chart below, which only shows the inflation adjusted price on a linear axis (non logarithmic, unlike the first chart).

Historic Inflation Adjusted Aluminum Price since 1900 in US Dollars and Pounds Sterling

The inflation adjusted price of aluminium was flat for the first 5 years of 20^th Century whereupon it rose rapidly and peaked in 1907 at $24,000 and £20,150 per metric tonne.  From this peek it fell steady for the next 10 year, until 1941 were it experienced a sharp rapid increase, which coincided with the First World War (WWI) and fell back to its pre war prices by the 1920s.  The price remained fairly flat thought out the 1920s and 1930s.  There was a substantial decrease in the prices in the early 1940s, however from the late 1940s until the late 1970s the aluminium prises stayed pretty constant between $4,500 to $3,500 and £4,000 to £2,300 per metric tonne.

Using the price in 1900 as a baseline, the inflation adjusted aluminium price in UK Pounds and US Dollars was indexed.  This allows the examination of the relative price changes during this historical period of time more easily and is shown below.

Historical Inflation Adjusted Aluminium Price since 1900 in US Dollars and GB Pounds, Indexed to 1900

The indexed price data clearly displays that the historic inflation adjusted aluminum price has fallen considerably since the 1900s.  Once inflation was accounted for the real price of aluminum by 2000s was approximately a tenth of what they were at the beginning of the 20^th Century.  So from a historical perspective once inflation has been accounted for,  the price of aluminium has virtually never been cheaper.

Written by Inflation Monkey. Join on Google+

In Which Currency is Crude Oil Presently Cheapest?

The Crude Oil Price Peeked in 2008 but how Expensive is it now in World Currencies

Just recently there has been a lot of talk about the price, plus the increasing price of petrol and diesel (which our US brethren refer to as "gas").  So I thought that I’ll look at the crude oil price over the last couple of years.  There are many benchmarks for the crude oil price, such as the West Texas Intermediate (WTI) and Dubai Crude, but I’m going to use the Brent Crude spot price.  The nominal Brent Crude oil price peaked on 3rd July 2008 at $143.95 (US Dollars) per barrel, before rapidly falling during the “credit crunch“ after the collapse of the US Investment bank Lehman Brothers Holdings Inc.  The nominal Brent Crude price bottomed on 26th December 2008 at $33.73 per barrel.  Since that time the prices have increased and by the 1st March 2012 the price was $125.76 per barrel, which is 87% of the peak price on 3rd July 2008.  However unless you live in the US, buy all your goods and get paid in US Dollars, the Dollar price of crude oil doesn’t mean much as your reference will be another currency.  So I’ve converted the crude oil price since 2008 to determine the price in several world currencies.  The Brent Crude Oil price since 2008 in US Dollars, UK Pounds and Euros is shown in the chart below.

Daily Brent Crude Oil Price since 2008 in US Dollars, Pounds Sterling and Euros per Barrel.

The data for the historic daily Brent Crude Oil spot price since 2008 came from the US Energy Information Administration, the and the daily international exchange rates forUS Dollars came from the Board of Governors of the Federal Reserve System, Washington, DC. 

From the chart above you can see that the oil price in UK Pounds and Euros (EUR) at the time of the peak on 3rd July 2008 were £72.61 and EUR 91.64 per barrel respectively.  Furthermore their receptive price on 1st March 2012 was £78.83 and EUR 94.41.  As it can be seen these vales are higher than those see at the peak price on 3rd July 2008.  Normalizing the crude oil priced in the different world currencies by indexing the prices to the value on 3rd July 2008 (i.e. by making the value on that date = 100) highlights the comparative price changes between those currencies over time.  The chart below shoes the index daily Brent Crude Oil price since 2008 in US Dollars, GB Pounds, Euros, Japanese Yen and Chinese Yuan.  Its interesting to note that compared to the 2008 peak price, the oil price at the beginning of March 2012 in Chinese Yuan and Japanese Yen is approximately 78% and 65% respectively.  Compare this to approximately 85% for the price in US Dollars, quite a difference!

Daily Brent Crude Oil Price since 2008 - Indexed to 3 July 2008 - in US Dollars, Pounds Sterling, Euros, Japanese Yen and Chinese Yuan per Barrel. 

From the chart above you can clearly see that the crude oil priced in Pounds Sterling and Euro were by the begging of March 2008, higher than at the July 2008 peak (by 8% and 3% respectively).  Below is the same index chart of the Daily Brent Oil Price but for a set of emerging market currencies (Indian Rupees, Brazilian Reals, Thai Baht and Japanese Yen).  

Daily Brent Crude Oil Price since 2008 - Indexed to 3 July 2008 - in US Dollars, Japanese Yen, Indian Rupees, Brazilian Reals, Thai Baht per Barrel .

The worrying thing for the UK and Euro Zone is that the crude oil price has been constantly high (at closet to 100% for the UK and 90% for the Euro Zone) compared to the 2008 peak oil price since the beginning of 2011.  For the rest of the world oil prices started high at the beginning of 2011 and then fell back.  It was only since February 2012 for some of the other world currencies that the oil prices started to rise to relatively high prices seen at the 2008 peak (examples are the Indian Rupee and US Dollar).

Below is a table displaying the Brent Crude Oil Price in a number of world currencies at the July 2008 peek, at the beginning of March 2012 and the index price at the beginning of March 2012.  The currencies have been ordered such that the one with the heights indexed oil price is first and the lowest is last.  The US Dollar row is highlighted by being bold to illustrates in which currencies the oil price index are larger or lower compared to the US Dollar price. 

Table of Brent Crude Oil Price per Barrel in a Number of World Currencies       

Currency	Brent Oil Price on 3rd July 2008	Brent Oil Price on 1st March 2012	Index Price on 1 March 2012 (3rd July 2008 = 100)
Pounds Sterling (£)	72.61	78.83	108.6
Euro (EUR)	91.64	94.41	103.0
Indian Rupees	6,214.32	6,179.85	99.4
Swedish Kronor	861.92	832.61	96.6
Norwegian Kroner	733.53	701.74	95.7
South Korean Won	150,355.00	140,348.00	93.3
Brazilian Reals	231.20	215.15	93.1
US Dollar (US$)	143.95	125.76	87.4
Hong Kong Dollar (HK$)	1,122.49	975.28	86.9
South African Rand	1,109.85	938.80	84.6
Taiwanese Dollar (TWD$)	4,380.00	3,693.00	84.3
Malaysian Ringgit	470.00	377.28	80.3
Chinese Yuan	986.47	792.30	80.3
Thai Baht	4,799.29	3,835.68	79.9
Australian Dollar (AUD$)	149.89	116.41	77.7
Swiss Franc (CHF)	147.88	113.83	77.0
Singaporean Dollar (SIN$)	196.18	139.45	71.1
Japanese Yen	15,372.0	10,206.00	66.4

As it can been seen that there is a very wide variation in the crude oil prices in local currencies and the relative change to those prices since the peak price in July 2008.  Taking the price on 3rd July 2008 as the reference point, in Pounds Sterling and Euros the crude oil price was larger by the beginning of March 2012 than it was on the reference date, by 8.6 and 3% respectively.  For all the other currencies the price is still lower, even thought it is only just for Indian Rupees.  For the majority of currencies the oil prices is around 80-90% of the 2008 peak prices, like the US Dollar.  However there are a few currencies where the oil prices is less than 80% of the 2008 peak prices (Australian Dollar, Swiss Franc, Singaporean Dollar and Japanese Yen).  Nevertheless the currency in which the crude oil prices is the lowest compared to the 2008 peak is the Japanese Yen and it the lowest by quite a margin!

The troubling thing for the UK and Euro Zone is that the crude oil price has been constantly high (at closet to 100% for the UK and 90% for the Euro Zone) compared to the 2008 peak, since the beginning of 2011.  This is not a good sign as it highlights external stresses being placed on their economies from high energy prices in their local currencies.  On the other hand the Japanese and to a lesser extent Singaporean, Swiss and Australian economies wont be suffering the same external stress from high local energy prices (although they are likely to suffer from other things instead).

So it would seem that compared to the peak crude oil prices seen in July 2008, oil is cheapest priced in Japanese Yen and the most expensive priced in Pounds Sterling. 

Written by Inflation Monkey. Join on Google+