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  • Nick Raffan

The Raff Report - October 4, 2016

Henry’s readers are no doubt aware that ASX: MINING has comfortably outperformed all other sectors, especially the BANKS & TELCO. The reason that the Raff can think of for the outperformance of the likes of BHP and South32 is that stocks in this sector got sold down heavily and it would seem that investors have jumped the gun seeing rosy times near at hand. Rosy times reflected in a positive change in dynamics are probably not before 2018 at the soonest. In another life the Raff often met with London and New York money managers and most only took an interest in the mining sector when global industrial production (IP) was one the rise. Actual and change in World Industrial Production mirrors trends in the USA as depicted in the following charts. Yardeni Research, Inc. publishes an excellent chart package showing world IP but their charts are copyrighted and cannot be reproduced here.

Global growth in IP is currently rising at an anaemic rate, if it was a heart beating it would require a pacemaker. IP in the OECD countries as a whole has been flirting with negative percentage changes y/y and flat-lined below a record high in 2007. In despite of Brexit, the UK is doing well with IP in an upward trend. Other countries faring well are India, Taiwan, Indonesia, Malaysia, Philippines, Mexico, Bulgaria, Czech Republic, Hungry and Poland. France and Italy are shockers; Russia and Germany are treading water. With respect to IP the major economies are moribund. At this point in time there is no reason for the situation to change for the better anytime soon indicated by a steepening of the global index for IP.

There seems to be nothing on the horizon to trip a new boom in demand for commodities. In the short- too medium-term the opposite. In the USA New Orders for Durable Goods (USNODG) clearly stand at a peak with the 12-month moving average starting to turn down. What should scare the be geezers out of many is US Capacity Utilization which is symptomatic of a world with installed industrial capacity greatly in excess of what’s needed. And let’s not forget the trend in constant dollar USNODG which have stepped down and unlikely to regain former glory. A recession or slowdown is coming to the US and so it will come to Australia when the construction boom ends. The Raff has it good authority that teams of young tradesmen have and are moving from QLD to NSW, mainly Sydney because the construction boom in QLD is over and there little or no demand for these people. Never mind, the King is riding by in all his finery and all is good. The recent blackout in SA might well have been due to a weather event but the question that should have been asked by media was why did SA experience brownouts prior to the blackout? Well that’s simply answered in that SA can no longer support heavy industry. The Raff ponders how the aluminium to make the wind turbine towers and blades will be made without coal or nuclear power base-load power stations. The world has truly gone mad.

US Capacity Utilization (crikey 10% below full), Capacity and Industrial Production

No doubt aware

Source: US Federal Reserve

US New Orders for Durable Goods

Data source: US Government

Update on China

Although an industrial boom in China is ancient history, China is not yet down for the count. However, mounting debt, the subject of a recent Raff Report has potential to bring China undone. The slowdown is shown in the following chart.

China’s Industrial Production (% change on a year ago).

Source: Trading Economics

The dragon seems to be stirring. Looking at some of the recently released key indicators many are higher than the previous reporting period. Rises were exhibited by total vehicle sales, production of cars, new car registrations, production of steel, production of cement and electricity produced. Statistics relating to vehicles and cars are well down on record highs. From historical highs total vehicle sales at last reporting are down 26% as was production of cars. New registrations were also down 26%. From these data demand for oil imports should be slowing. IP rose m/m and y/y. Business Confidence is a tad higher and so too are key PMI indexes. The index for New Orders was down a tad. Inventories have levelled off and stand around 2X higher than for 2006.

Comment on ABS Unemployment Statistics

The Raff figured it was about time again to try and raise the ire on unemployment statistics produced by the ABS. The reason being the figures the pollies gloat over are a nonsense.

The latest figures produced reveal the number of employed Australians standing at 11.97 million with unemployment rate of 5.7%. The actual numbers of unemployed are not revealed. One can work backwards and assume that 11.97 million persons is equal to 94.3% of the potential workforce. On this basis the workforce is 12.69 million and the unemployed must number around 724,000.

This is what it requires to be unemployed:

  • Be at least 15 years old.

  • A person must have not worked more than one hour in the reference week. This irrespective of if the person is paid for work or not.

  • The person must be actively looking for work in the previous four weeks.

  • The person must be available to start work in the reference work.

This is so stupid that a person working for 2 hours a week on a farm for no pay could not be counted as unemployed. Perhaps not too many farms are surveyed from the 26,000 dwellings surveyed in addition to a selection of schools, hotels, hospitals, schools, colleges, prisons and indigenous communities. In each survey a total of 52,000 people is questioned via telephone. Apparently 1/8th of the dwellings are replaced each month. Of course all the people surveyed each month tell the truth? The ABS claims their methodology conforms to an internationally agreed standard and this has been the case since 1966.

A caller to ABC radio recently said that apply methodology that was used decades ago gives and unemployment rate of 35%. Of course it’s the ABC so we know it must be true. An unemployment rate of 35% is almost certainly untrue but from the Raff’s personal observations the unemployment rate is at least double the official rate and is more in keeping with the 10.4% estimated by Roy Morgan.

Why will the ABS/Social Security not reveal how many people are receiving the dole, that’s right the actual number to the nearest 100. This metric must be known and should be landing on the desk of someone important every day. Whatever the number it’s going to get bigger with increases in productivity replacing jobs at an ever faster pace. The world has excess production capacity. There are simply no jobs for the legions of unemployed in Europe as one instance. Not everybody can be absorbed into the public service although most Aussie states are giving it a red hot go. Crikey what a mess with no ready answer.

The Raff

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