UK Retail Sales Unexpectedly Jump in January — Looking Beyond the Headline Number to Debunk it and Uncover Flawed Methodology Used by the ONS

Optimism reached a new high in the UK on Friday and the UK equity market and the GBP jumped, when the Office of National Statistics published an unexpected jump in the retail sales index:

(The Telegraph) — Official retail sales data for January rose 0.9pc month-on-month, well above gloomy forecasts of a 0.4pc decline, as falling inflation and post-Christmas discounting lured consumers back to the shops. 

Economists said the performance was surprisingly strong because it came on the back of a 0.6pc rise in December, which was itself better than had been expected. 

"It suggests at the very least that we will be growing by 0.5pc in the first quarter and probably faster than that," said Scotia Capital economist Alan Clarke, who was one of the first to warn of a contraction before the 0.2pc decline in the final three months of last year. "This is the third strong indication that the UK economy has turned the corner."

As per usual, economists — this highly (over)paid yet ignorant and incompetent bunch — completely missed their forecast, and then tried to explain a posteriori the reason why sales jumped in January, yet again completely missing the point.

First, here are a couple of other pieces of news that were not making headlines — obviously so because market participants are in über-bullish mode and are only look at the bright side of the news:

(The Daily Mail) — Around 14 shops are shutting every day on the High Street, alarming figures show. 

Last year 5,268 shops were closed by major retailers and only 5,094 opened, according to a study by accountants PricewaterhouseCoopers and the Local Data Company. 

It was the first time since the height of the recession in 2009 that more shops were shut than opened.
[...]
The real number of closures could well be higher as the research only focused on chain stores in the 500 biggest town centres.
[...]
London fared worst in 2011, with 1,084 shops shutting and just 983 opening, according to the study.
[...]

Beyond showing the incompetence of Mervyn King, the following report confirms that debt deflation has started in the UK:

(The Daily Mail) — Bank of England Governor Sir Mervyn King yesterday spoke out against the ‘harsh treatment’ of small companies which are still ‘suffering’ at the hands of the banks.

He said ‘market failure’ meant firms are being starved of the funds they need to grow, create jobs and drive the economic recovery.

The startling statistics emerged in Bank of England figures showing that net lending fell by £10.7 billion in 2011 – in other words, the banks received £10.7billion more in loan repayments than they gave out in new loans. That took the total fall since the end of 2008 to £82.7 billion.

After all the manipulation and fiddling that the BoE is doing, the one thing that is currently working fine — small business not borrowing, and banks not lending to insolvent firms — is considered to be a "market failure". This is the favorite game of central planners and socialists: blame the market for their own failure, and make a bigger mess trying to fix it.

Summary:

• Retail sales as reported by the ONS jumped in Jan
• While business are closing at an alarming rate of 14 shops a day for the whole of 2011
• And debt has been deflating for 3 years in a row, showing that business are not trying to borrow to expand (in obvious contradiction with what would happen if sales were rising).

So, where am I going will all this?

As with any thing reported by the government, one must look a bit further than the headline number — ironically, market participants whose very job is to do so won't do it — and try to find what is really going on.

Looking at the methodology used by the ONS to calculate their retail sales index gives us the answer:

Understanding the data

Quick Guide to the Retail Sales Index (116.9 Kb Pdf)

Interpreting the data
The Retail Sales Index (RSI) is derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes all large retailers and a representative panel of smaller businesses. Collectively all of these businesses cover approximately 95 per cent of the retail sector in terms of turnover.

There, you have it: they survey 5,000 businesses, completely ignoring the fact that many businesses are closing on a daily basis. This creates a massive survivorship bias and leads to completely distorted numbers.  Could Wikipedia's quote fit more to the ONS flawed methodology?

Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility. This can lead to false conclusions in several different ways. 

The survivors may literally be people, as in a medical study, or could be companies or research subjects or applicants for a job, or anything that must make it past some selection process to be considered further. 

Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance.

Should someone send this link to the incompetent people at the ONS so that they can fix their methodology?

Finally, not only the survivorship bias make you miss direct losses due to businesses closing, but these failures make the surviving businesses more prosperous, artificially making the retails sales numbers bigger.

Let me give an example to illustrate this last point: imagine your local baker closes down because it wasn't a viable business. Yet, some part of their customers will still want to buy bread and would divert their shopping to another other local baker. The local baker might see it sales raise by say 20%, yet that original baker lost 100% of its sales. So the surveyed shop would report a jump in sale of 20%, but the loss of that 100% from the closed-down baker will not be accounted for in the retail sales number.

Is it time to become bullish on the GBP?

The pound has dropped dramatically against the Euro since Cameron announced his austerity policies — and very wrongly so. Keynesians and Monetarist don't get anything right, and so it's not surprising to hear that these mesures will weaken the economy and the currency. But it's precisely the opposite that is true.

On the sentiment side, it looks like the trade is one-sided, with every player in the market thinking that the pound is due for a collapse, while it reality, it has already collapse, and that deflation will make it's value higher, and not lower.

Here are a few quotes from a Bloomberg report:

Oct. 25 (Bloomberg) -- The only major currency rivaling the dollar’s decline since July is the pound, and foreign-exchange strategists say the worst is yet to come for Britain’s legal tender.

Sterling has depreciated 5.1 percent against a basket of the nine other most-traded currencies, including last week’s 1.29 percent drop. Strategists are the most pessimistic on the pound versus the euro since the ruling Conservative-Liberal Democrat coalition came to power in May, according to data compiled by Bloomberg.

The decline suggests investors are losing confidence in Prime Minister David Cameron’s ability to restore growth while promising the deepest spending reductions in British history to shrink the biggest deficit in the Group of 20. His 81 billion pounds ($128 billion) of cuts through 2015 will force Bank of England Governor Mervyn King to print cash through so-called quantitative easing to prevent a new recession, overwhelming demand for sterling, according to UBS AG.

“There’s definitely more weakness to come,” said Hans- Guenter Redeker, global head of currency strategy in London at BNP Paribas SA. “The fiscal consolidation is going to hit the economy at a time when it’s slowing. Under these conditions, you need to have loose monetary conditions and that weakens the exchange rate.”

UBS[...] recommended on Oct. 21 its clients sell the pound, especially against the Swiss franc, Australian dollar and Norwegian krone. Morgan Stanley strategists said it may weaken to 93 pence per euro from 88.96 pence today should the recovery slow further or Bank of England policy makers signal more credit-easing measures.
[...] 

The U.K.’s spending cuts are “insane” and the pound will slump to below $1.40 as early as this year, John Taylor, chief executive officer of FX Concepts Inc., told the Telegraph newspaper.

Yet another nonsensical statement by incompetent John R. Taylor. So far in the past, it has always paid for me to bet against him (follow this).

[...]
“The U.K.’s fiscal policy is going to be tighter than anyone else’s, and therefore there’s much less reason to expect any tightening of monetary policy even if there is some sort of global recovery,” said Adrian Schmidt, London-based foreign- exchange strategist at Lloyds Banking Group Plc in London. Schmidt said the pound may weaken to 95 pence per euro this year. “The ECB will be raising rates before the BOE,” he said.

[...]
“We like the pound relative to the dollar,” said Monica Fan, London-based senior currency strategist at State Street Global Advisors, which oversees $83 billion. “King’s recent statement, which the market took as an endorsement of another round of QE, took a bit of the shine off, but the pound remains undervalued against the dollar and the government’s fiscal consolidation will provide support.”

Monica Fan gets it. Cheerio!

[...]
Policy makers may favor a weaker pound to keep Britain’s exports competitive, said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees about $20 billion.

It looks like sentiment is extremely bearish on the GBP, while actually fundamentals have been improving. This is a positive development for trading the GBP against the EUR, which is in the opposite situation: extreme bullishness, and weaker (compared to where we were 6 months ago) fundamentals.

Full disclosure: no position open yet.

UK government cuts 500,000 government jobs, asks the BoE to print, print, print

I was about to write a post about Osborne's bright move to cut on 500,000 wasteful and useless public jobs, but then Cameron jumped in and ruined the good karma that was building in the UK:

Oct. 20 (Bloomberg) -- Chancellor of the Exchequer George Osborne detailed the deepest budget cuts ever in Britain, eliminating 500,000 public-sector jobs and imposing a levy on banks to extract the “maximum sustainable” revenue.
[...]
Osborne said he agreed with the Office for Budget Responsibility estimate that 490,000 public-sector workers will lose their jobs over four years. He said much of that will be achievable by not filling vacant posts.

Unfortunately, just a couple days later, Cameron and Osborne started pressuring the BoE (as if they needed to be pressured to do so...) to print, print, and print:

Oct. 22 (Bloomberg) -- Bank of England Governor Mervyn King is under pressure to show just how far he’s willing to go to support Prime Minister David Cameron’s once-in-a-generation austerity drive.

Cameron, 44, has broken with the convention established by the previous Labour government and publicly put the onus on the Bank of England to shore up Britain’s economy. Finance minister George Osborne, 39, said as recently as yesterday that the central bank can “deploy monetary policy tools” to offset the budget squeeze he unveiled this week to cut half a million jobs.

“I’ve always been, if you like, a fiscal conservative but a monetary activist,” Cameron said this month.

King said in early 2008 that it would be “foolish” for politicians to try to influence monetary policy. The financial crisis has nevertheless reshaped the relationship between the central bank, based in London’s eastern financial district, and the Treasury in Westminster.

At stake is the independence that King says helped foster the longest streak of uninterrupted economic growth in two centuries and low inflation in the decade before the crisis hit.

This is one of these OMG!!!! moments... Low inflation? Economic growth? Then, out of the blue, the worst in a lifetime crisis? There was no economic growth to begin with, there was just massive, historic credit inflation. Sometimes, reporters should just avoid putting in there own analysis when the subject is beyond their understanding...

Just about two weeks ago, I wrote my Thoughts on the never seen before actions of the Bank of Japan:

The actions of the Bank of Japan, besides being completely wasteful and destructive, just confirm some of the many facts that we already knew:

• Complete lack of independence from the political power
• Complete lack of understanding of economics
• Complete of integrity

Remember "Central Banks independence myth"? Politicians are making the monetary policy in Japan. The same holds true for the UK, the US, Europe and every other country with an "independent" central bank.

Debunking bubble economies - The UK pt2

Let's try to debunk the common misconceptions about the UK housing bubble and banking system:

• House prices reflect fundamentals: a £1.2 trillion a year mortgage market and record numbers of properties for sale on the markets. Fundamentals?
• We don't have subprime issues in the UK: looks like 50% of the mortgages written since 2007 are actually liar-loans!
• Banks have been conservative in their lending behaviour: sure, they just forgot to check the validity of their client statements when lending hundreds of thousands of pounds to each of them
• Regulation works — it doesn't: regulators are mostly incompetent or close their eyes because they don't want to be the ones ruining the party.

This is an interesting report from Bloomberg dated back on the 13th of July — I saved it to post about it, but time has been lacking massively for me to spend time writing.

July 13 (Bloomberg) -- The Financial Services Authority plans to ban self-certification mortgages as the regulator moves to crack down on risky lending.

The FSA found that 46 percent of households in the U.K. had either no money left or a shortfall after their income payment, the FSA said in a report on its website. The London-based regulator, which published a consultation paper on the 1.2 trillion-pound mortgage market, may issue final rules next year.

Self-certification loans don’t require consumers to validate their income. By 2007, customers’ incomes weren’t checked in 45 percent of new mortgages in the U.K., the regulator said in October as it called for a ban on the home loans as part of a crackdown on risky credit in the country’s mortgage market.
[...]
The Council of Mortgage Lenders today said the FSA’s proposals ran the risk “that the gain will not match the pain in the short term.”

“There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership,” Michael Coogan, the group’s director general, said in a statement. “The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.”

Michael Coogan, working for the Council of Mortgage Lenders, has interests that are clearly opposed to those of the general public and of the borrowers. He nonetheless tries to make us believe that all these regulations are bad for consumers... I'll let you decide on this good faith about this statement and his integrity generally speaking.

In fact, these rules, in a fractional reserve lending system are actually good for both the lender, the consumer, and in a fractional reserve lending banking and crony capitalistic society like ours, it's also good for the tax payer, as he's not going to have to bail out banks which behaved irresponsibly and load money they shouldn't have.

The UK: Deathbed of Keynesian Economics

Many friends sent me a link to this is a fantastic report by Matthew Lynn, on Bloomberg:

Feb. 23 (Bloomberg) -- The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

The public debate about the state of the British economy was enlivened last week by a brawl between economists.

On Feb. 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.

That brought a stinging response from the Keynesians, who are urging the U.K. to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a “a sharp shock” now “would be positively dangerous.”

So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere.

The U.K. has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.

And just as the Keynesians were wrong three decades ago, they are wrong now.

The U.K. has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 percent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 percent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 percent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on U.K. government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 percent.

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.


The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.


It is the argument quacks always push: If the medicine isn’t working, increase the dosage.


And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.


Stimulating the economy isn’t working.

In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.

And yet the real lesson of the U.K. in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more.

In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

Is the USD really undervalued?

This just another one of these random and meaningless real-life tests that I like to conduct every now and then.

The real-life value of a currency is what it's going to buy, and having leaved in the UK for too long now, I knew the GBP was highly overvalued compared to the EUR simply because everything that cost X pounds in the UK, cost X euros in the France (which is actually among the most expensive countries of the Eurozone).

I had been thinking about buying the G10 for quite some time, and then changed my mind and decided to hold off for an updated version. And it appears that the updated version just came out a few days ago : the Canon PowerShot G11.

Here's some prices grabbed on various Amazon web sites:




As you can see, $499 becomes £439!

Worse! Here are the recommended prices:

• $499
• €589
• £569
  

So, is the USD really going to crash in the short term? Has it lost a lot of value in the real-world? Does it buy you a lot less than what a Euro or a Pound would buy you?

U.K. Economy Shrinks in Longest Slump

I hope you didn't think that debasing the GBP by 30% , bailing out all insolvent banks in order to try re-inflate the credit bubble and adding the burden of this multi-trillion wealth transfer from the people to the banks would save UK's bubble economy...

Even government agencies didn't manage to cook the books enough to create even a technical, job-less recovery as the other countries managed to do:

Oct. 23 (Bloomberg) -- U.K. gross domestic product unexpectedly dropped in the third quarter as enduring slumps in services, manufacturing and construction kept the economy mired in its longest recession on record. The pound tumbled.

Gross domestic product dropped 0.4 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a 0.2 percent increase, according to the median of 33 forecasts in a Bloomberg News survey. None forecast a contraction. The economy has now shrunk over six quarters, the most since records began in 1955.

It is time to remember Bob Farrell's 8th market rule: When all the experts and forecasts agree – something else is going to happen...

[Update:] Here's the result on the GBP - who said the markets were efficient in forecasting the economy?

(Click for bigger view)

World's most expensive public transport to get a lot more expensive

While the UK is having the worst economic crisis for at least a century, after the biggest credit binge in history and the British Sterling Pound worth now less than a Potato Pound at any supermarket, prices are still going up.

I have reported many times that this is the worst possible scenario. High unemployment, sinking currency, and Keynesian Fools trying to lift of the prices as if it would make things any better.

While some say that Britain is the worst place to live in Europe, London having the world's most expensive public transport already back in 2007 has gotten a lot more expensive in 2008 and 2009 and is ready to get yet another hike price, and not a tiny one:

Oct. 15 (Bloomberg) -- London Underground’s fares will rise by an average of 3.9 percent in January, while the cost of riding the city’s buses will increase by 12.7 percent, Mayor Boris Johnson said. A seven-day bus pass will rise to 16.60 pounds from 13.80 pounds.

The city’s traffic-congestion charge also will be increased next year, to 9 pounds from 8 pounds, the mayor said. London will introduce a new automated system for collecting the congestion charge. The fee will increase to 10 pounds for drivers who don’t use the new payment method, Johnson said.

Revenue on the city-owned London Underground is falling as passenger traffic declines because of higher unemployment and the economic slowdown. The railway carries around 3 million passengers each weekday.

[...]

London Underground’s cash fares are already among the world’s highest. A single ride in central London is 4 pounds ($6.44), compared with New York City’s $2.25. The cheapest single fares with a pre-paid Oyster card in central London range from 1.60 pounds to 2.20 pounds.[...]

Fares rose by 6 percent on average this year. [...]

Contradictory signals regarding the British Pound

I have been very bearish about the British Pound for the past two years, and I am currently short the GBP vs the EUR, which turned out to be quite a profitable trade, I was rethinking my position a couple of days ago.

There are a few things to take into consideration:

The UK was the most debt-addicted country on the planet, worse than the US. So when the credit contraction begins, it will be highly deflationary (and hence bullish for the GBP)

Let's not forget that the even when BoE rates were at 5.75% people were borrowing like crazy and banks pushing ARM interest only mortgages to unbelievable levels, so the British are probably more addicted to debt than any other people I have heard of. This is inflationary and bearish for the GBP.

Interest rates have dropped from 5.75% to 0.50% and are unlikely to rise for the foreseeable future. This is inflationary, at least in the short term, for as long as the debt addicted people can keep on borrowing. This is inflationary and bearish for the GBP.

Mervyn King and Alistair Darling are probably bigger fools than Bernanke and Obama, the deficits are huge, even compared to the US ones, and recently, Mervyn King tried to print £200 billion... This is inflationary and bearish for the GBP.

The GBP has already lost about 25% to 30% of its value against the Euro and the Dollar (paper currencies...), I'm unsure about how much it can drop in the short term (on the long run, paper currencies fall to their intrinsic value: zero). So we might have hit the bottom or be close to hitting it — at least in the short term. This is then bullish for the GBP.

Lots of mainstream papers have started to print article about a collapse of the Pound below the Euro. This is, on the short term, a contrarian signal that the GBP is about to hit bottom and is hence a bullish news for the GBP.

A study by Unbiased.co.uk (I don't know them, so don't know if the results are trustworthy or not) shows that borrowing has been increasing again in the UK. This is inflationary and bearish for the GBP in the short term. But it also means that the Brits are struggling to pay their everyday expsenses and the default rate is going to rise once everybody has loaded their credit card with the 12 months interest-free loans credit card companies are promoting.

Conclusion: All in all, I think the GBP is likely to decline on the very short term (next few weeks maybe) before rebounding. I am hence keeping an eye on it and will look for an exit of my position if GBP/EUR gets close to 1.00 or manages to break that floor.

The £200 billion that Mervyn King didn't get

This is old news, but I still think it's important to keep it in mind while thinking about the future of the GBP: the UK was probably the country were the credit bubble was the biggest (the UK and the US were competing for the title...) and is now probably experiencing the biggest credit deflation as well.

While this deflation is very bullish news for the GBP, the actions taken by the Keynesian Fools are very much likely to destroy the currency: Alistair Darling and Gordon Brown, who already driven the country in the ditch, debt-wise, and are now not only increasing the deficits, but with the help of Mervyn King, they are monetizing the debt.

This is the biggest credit deflation and economic down turn ever, and yet, prices are rising in the UK.

As you can see, they will not end this until they in the war against deflation.

Aug. 19 (Bloomberg) -- Bank of England Governor Mervyn King and two other policy makers were overruled in a push to expand the bank’s bond-purchase program to 200 billion pounds ($329 billion) as the majority favored a smaller amount.

The pound fell after the nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds, according to minutes of the Aug. 6 decision released today. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

“All members agreed that substantial further asset purchases were needed over the next three months,” the minutes said.

King, who has now been defeated three times as governor, said last week it’s “likely” that inflation will slow below 1 percent this year and won’t return to the goal until at least the end of 2012. Investors scaled back expectations for interest-rate increases next year after the comments.

“I’m stunned,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former Bank of England official. “This sends a clear message that the bank is willing to do whatever it takes, and that’s encouraging. It’s more likely they’ll make extra purchases than start tightening over the next year.”

An argument for a larger expansion of the bond purchases was that “insufficient stimulatory monetary policy” would harm confidence in the recovery. The risks of “another large stimulus might be less than the possible costs of acting too cautiously,” and the policy could be reversed if found to be “overly expansive,” the minutes said. [...]

Inflation unexpectedly held at 1.8 percent in July, instead of slowing as all economists in a Bloomberg News survey had predicted. Policy makers said that without more purchases, “nominal demand would likely be insufficient to prevent inflation remaining below the 2 percent target, perhaps substantially, throughout the forecast period.”

Sterling crisis looming

I have been forecasting the collapse of the British Pound for quite some time and I am very bearish on this currency (last post was in March 2009: GBP to be devalued by 50%-70% within next 6-12 months). The recent rally in the GBP, which follows the rally in Equities and Bonds - the market playing the V shaped extremely fast recovery - is so ridiculous that I took it as an opportunity to increase my short position and I have kept capacity to do so for the time being.

Now it seems like other people are getting worried about the GBP (Jim Rogers has been extremely bearish on it, but as far as I know, he's one of the only guru openly predicting the collapse...) so it's refreshing to see this kind of report on Bloomberg:

June 30 (Bloomberg) -- The state of the U.K. economy fills British financial historian Niall Ferguson with foreboding.

“The probability of a real sterling crisis is around one in three, and the probability of major tax hikes and cuts in public spending is roughly one in one,” the Harvard University professor says.

Ferguson’s concern stems from the deterioration in the U.K.’s public finances, which prompted Standard & Poor’s to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britain’s banks at 100 billion pounds ($166 billion) to 145 billion pounds and said government debts could double to almost 100 percent of gross domestic product by 2013.

Chancellor of the Exchequer Alistair Darling said on April 22 that this year’s government deficit would hit 12.4 percent of GDP. Alan Clarke, a London-based economist at BNP Paribas SA, expects it to reach 17 percent of GDP in 2010.

GBP to be devalued by 50%-70% within next 6-12 months

I have read a very scary report about the intentions of Gordon Brown, Alistair Darling and Mervyn King. It is now given that they will pursue the target of an inflationary collapse in the UK instead of trying to solve the problem.

Here are some details quoted from a JPMorgan report:

• The BoE has embarked upon the most aggressive programme of QE in the industrialized world, creating base money to finance Gilt and private asset purchases worth 10% of GDP (and with no guarantee it will stop there).
• The BoE’s asset purchase programme will likely push growth in the monetary base to 115% by May and 205% by late summer, comfortably exceeding growth in the US (93%) and Euro area (39%). The UK money base will grow nearly six times faster than it did in Japan under the BoJ’s QE policy.
• All central banks are pursuing unconventional monetary policies now but the BoE is pushing the boundaries further than others, encompassing the de facto monetisation of the fiscal deficit.
  

Some other interesting information can be found on MarketWatch.

Also worth a read:

March 6 (Bloomberg) -- The British government will boost its stake in Lloyds Banking Group Plc to 75 percent in exchange for insuring 260 billion pounds ($367 billion) of toxic assets, two people familiar with the plan said.

Of course, this confirms that the UK is finished and that one must be crazy to hold any GBPs. I have sold half of my GBPs last Friday, and will sell the remaining probably within a week or two. Next step is to stell GBP short in order to hedge my salary against the coming collapse.

Also note that the US$ currency base is growing at the atronomical rate of 93% and that even in the Euro area, the growth is 39%, which is a crazy crazy rate of growth... ... but this still means that the € should raise against the USD and GBP.

The mega printing of currency in all developed and developing economies is of course very bullish for precious metals and commodities.

GBP arbitrage opportunities gone, replaced by very high inflation

I made a post about how it was possible to do arbitrage in late December by buying products in the UK instead of the Eurozone since the retailers had not updated their prices to reflect the collapse of the pound:
GBP arbitrage opportunities

Apple has updated their desktop computers range, and here are the price changes:

• MacMini jumped from £391 to £499 (+27.6%)
  
• iMac jumped from £782 to £949 (+21.3%)
  
• MacPro jumped from £1712 to £1899 (+10.92%)
  

Many items on Amazon.co.uk have also had a major price increase.

Well, these arbitrage opportunities are almost all gone now, meaning that prices have jumped by about 20% in the UK for many products in just a matter of 2 months. You can thank Mervyn King, Alistair Darling and Gordon Brown. This also confirms my theory that you will have rising prices in this environment and that whoever thinks that we are a deflationary environment and that prices are going to collapse might be more wrong than right...

Look at the screenshots here and compare them to those from the original post. I can tell you one thing: I see similar trends when I go do my grocery shopping in the supermarkets!

Jim Rogers: "The UK is finished" [Updated2]

Jim Rogers just said at loud what I have been thinking for several years now: the UK is going to sink into the abyss because of their bubble economy, complete reliance of the economy on the Financial and Housing industry. The other major issue is the huge amounts of debt contracted by the UK citizens as well as the reliance on foreigners for high-end and low-end jobs. When your currency weakens, the foreigners flee the sinking ship (this is probably the next step for me as well)!

I have sold most of my pounds before the big collapse that started 18 months ago now, and have sold some more in the 1.30€ area, and since I got lucky and was right on the call that I made a few weeks ago, I sold almost all the remaining GBPs during the rally that followed the rate cut last week. I do not own a single share of a UK based company. And of course, my pension funds investment styles are Asia and Europe ex-UK.

For those who still do not who is Jim Rogers, here's a quote from Wikipedia:

Born in 1942.
In 1970, Rogers joined Arnhold & S. Bleichroeder, where he met George Soros. That same year, Rogers and Soros founded the Quantum Fund. During the following 10 years the portfolio gained 4200% while the S&P advanced about 47%.
In 1980 [at age 37], Rogers decided to "retire".

Finally, here's the excerpt from the Bloomberg interview:

“I would urge you to sell any sterling you might have,” Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.”

Here's another post worth reading, on the Telegraph this time: Gordon Brown brings Britain to the edge of bankruptcy:

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The ridiculous and shameless Gordon was already famous for this "I will not allow house prices to get out of control" quote in 1997 but I hadn't heard about this one, which has been dug by many on the web during the past few days:

"A weak currency arises from a weak economy, which in turn is the result of a weak government" (Gordon Brown in 1992)

The GBP has crashed against all major currencies: 30% against the EUR, about 25% against the USD, and about 50% against the JPY! Doesn't that sound like the kind currency move you hear about in developing countries?


Jim Willie is very realistic in my opinion about the UK & US:

US & UK ECONOMIC FAILURE – RUNNING ON SCHEDULE
The death of the AngloSphere is unstoppable and on course. The two nations suffer from imperial over-reach, from corrupted paper markets in everything conceivable (stocks, bonds, housing, commodities). They both suffer from a devastating backlash related to nationwide dependence upon a housing bubble as an economic foundation. What a very sick concept!

RECOGNITION OF FAILURE – PAIN OF ISOLATION
The year 2009 will be marred by recognition of the Untied States and United Kingdom as failed states, beyond remedy. My description is for the US-UK to have morphed into crime syndicate control of government bodies in a widespread sense. They have strangled their hosts, and sucked them dry. The nations of the world will embark on a mission to protect themselves from the imploding giants. The natural progression in failed nations is from democracy to fascism, from capitalism to the Fascist Business Model, from free societies to martial law. A tragedy has already begun. It will run its full course.

GBP arbitrage opportunities

Alright, so with the collapse the GBP against EUR, and the emergence of what I call the British Euro (GBP - EUR parity), I think the current correction too deep and can be explained only by massive shorting of the GBP. I mentioned this already last week, and the British Euro has sunken a lot deeper since that time.

The Euro has basically rised by about 50% against the GBP in the past 18 months.



Apart from financial markets, it looks like there are other arbitrage opportunities, which also confirm that on the short term at least, the GBP is undervalued against the EUR, as I show in the next paragraphs below. I am very bearish on the UK economy and have been for the past 3-4 years, but this shouldn't prevent you from taking such great arbitrage opportunities.

So, it's Christmas, and it's Sunday, so instead of going to my broker I might just go on the web and shop for Christmas presents. Here are some random thoughts:

How much can you save by buying your Apple products from the UK instead of France?

Another great opportunity here:

Looks like you have to be selective anyway. This one is still cheaper in GBP but not by a massive amount:

[update] Disclaimer: Although I am short USD long EUR, I have no speculative GBP positions yet.
[update 20090304] Please read the follow up on this post here.

Bullish oil and GBP [update]

It looks like I am turning bullish on crude oil and the GBP (against USD and EUR).

The facts are simple: both of them have collapsed in a very brutal way.

Oil is fundamentally a precious commodity as it cannot be created and there are going to be shortages on the long term. On the short term, I think it has fallen way too much compared the the fundamentals and it is likely due to the Great Unwind and to shorting. Shorts will have to cover, and fundamentals will prevail some time in the mid- to long-term.

The GBP has collapse almost vertically, and while I am very bearish on the UK economy, the way the collapse has happened leads me to think that this is mostly due to massive shorting. Shorts will have to cover and a rally is very likely on the short term. If you combine that with the over-valuation of the USD, a long GBP/short USD trade sounds tempting to me.

Plus, for both of them, almost all the analysts have come up with their "new" estimates (they always update their estimates after a major move, making them wrong about 95% of the times) which is also very bullish to me, since most forecast oil between $25 to $40 and EURGBP at 0.92 or something close.

Disclosure: I am long oil. I am also long GBP because my salary is in GBP. But I have not taken a speculative position on the GBP/USD yet, I might or might not do it depending on how things evolve.

[Update on the 2009-02-03: I am no longer bullish on the GBP since the last rate cut of the BoE. I have sold most of my remaining GBP that day at about 1.13€. I think the GBP's short term value will fluctuate around 1.15€ although I wouldn't be surprised by a rally to 1.20€ due to short covering but the mid- to long-term value (6 months to 3 years) of the GBP against the Euro will be about parity.

I am still bullish on oil]