Mining stocks and China's hard landing

A quick update on some comments I made about China's economy in June: China and the miners - place your bets.

It was a time when the argument over China's faltering economy was finely balanced: would growth rates dip and quickly recover (soft landing) or could China be on the cusp of something more serious?  I suggested that buying mining shares rather than China funds - like Glencore and Anglo Pacific - was a good way to go if you were feeling bullish.

Events since, including lower than expected industrial output, export and inward investment numbers, have pushed the debate decisively in the direction of the China bears.

So have mining stocks declined?  Not really.  Glencore and BHP are up 20% and 15% respectively since my article at the end of June.  Anglo American is down but there are special factors including a disputed copper mine in Chile. Anglo Pacific is up 8%.  Iron ore, coal, oil and copper prices are all up sharply.

So in the short term it looks like the correlation between poor Chinese economic data and mining assets doesn't hold.  However stock markets are forward looking and much of the China bad news had been factored in by the time of my article.

The latest rises represent bounces from previous setbacks not renewed optimism.  The bounce has been attributed to a belief that the Chinese government will ease policy to keep growth rates up and especially sanction another slew of infrastructure projects which are resource intensive.  Another factor is a growing belief that the ECB is prepared to act decisively to head-off the crisis in the Eurozone probably by buying Spanish and Italian sovereign debt.

Where now?  In the medium term it's hard to be wildly optimistic about the Euro situation whatever the ECB does.  As for the bigger question of how long can China keep growing at 8% plus it seems that the authorities will pull all the levers necessary even if that means maintaining the economy's hideous imbalances in particular the bias towards wasteful investment (nearly 50% of GDP) in property and infrastructure.

Meanwhile the big miners are scaling back on some of their expansion plans to reduce the threat of oversupply.  Share price meltdown averted?  For now maybe although it doesn't feel like the right time to pile into resource stocks particularly after recent gains.

From our website:  A guide to Spain's autonomo system

Spanish savers: government to the rescue?

Last week I wrote about the Spanish savers who are set to lose everything because they were sold preference shares in their banks which have subsequently gone bust - New fears over Spanish bank accounts.

I said that it was worrying that the government was not prepared to step in and help despite the fact that the policies were blatantly missold to the vast majority of retail investors who thought they were just deposits with lock in periods.

It seems like I may have jumped the gun and surprisingly underestimated the Spanish government on this one.  According to an article in the FT they are going to ensure that most small savers are repaid in some form.

The concession is complicated by the Memorandum of Understanding the Spanish government signed with the EU prior to receiving access to up to €100bn of bail out money for their financial institutions.  This envisages bank preference shareholders taking their losses in full and there are restrictions on what can be repaid e.g. no more than 10% more than the current market value of the shares.

Some of these shares trade at below 50% of face value so saver could still be taking a big hit.  However the outlook has definitely brightened for them and it slightly increases general confidence that the government will protect the retail depositor more generally whatever happens.  If it can afford to.

From the website:  Spanish tax form 210

New fears over Spanish bank accounts

A little while I wrote about the security of Spanish bank accounts in the midst of the rapidly worsening economic situation in Spain: Are Spanish Bank Accounts Safe?

The gist of the article was that although there are government guarantees for deposits up to €100,000 I wouldn't be too confident because, in a worse case scenario, the government might fail to honour the guarantee or even pay up in devalued pesetas.

The latest twist in the tail concerns savers who have lost their savings without any recourse to the government deposit insurance, because they have been sold preference shares in their bank.

These were sold as if they were just deposits with especially good rates of interest but they have turned out in fact to be risky securities which would not pay out at all if the bank went under.  That's exactly what has happened in some cases, especially the giant Bankia which had to be bailed out last month leaving "preferential shareholders", mostly innocent savers, wiped out.

I have read that there hundreds of thousands of these preference shares in private hands.  But if your money is in a proper bank account then you should still be able to claim on the government deposit insurance if your bank goes to the wall.

There has been no suggestion that the government will step into help preferential shareholders which does rather support my view that Spanish government bank deposit guarantees might not be honoured if things get really bad.  No wonder it is said that tens of billions have already been shipped out of the country.


From our website:  Changes to Spanish tax form 210

Oh no, Brown and Osborne have morphed into Geordon

They reportedly hate each other but the current and former Chancellor are increasingly merging into one.

No one was more fiercely critical of Brown as Chancellor than me and that was in the boom years as well as the the recession which followed.

I hoped George Osborne would draw a line under the Brown years and set Britain on the right course.  But increasingly it seems there is little to choose between the current Tory economic policies and the Labour ones that left the UK in ruins.

Read these five criticisms of recent Treasury policy and decide who they apply to, George or Gordon:

Out of control public sending - The Chancellor has allowed public sector spending to rise remorselessly as a % of GDP to the point where half of the UK economy is taken up by government spending, 20% of that financed by borrowing which never seems to come down, making a mockery of the "austerity" or "iron" Chancellor reputations.

Blame the foreigners - once it was the US for the sub - prime crisis which had the temerity to burst the UK's bubble and now it's the Eurozone for slowing demand for British exports.  Convenient scapegoats for a disastrous performance by the UK economy and its chancellors.

Laissez faire monetary policy - The decision to farm out responsibility for monetary policy to the Bank of England was widely-praised but it looks to me like an abrogation of responsibility.  How can you claim to be running the economy when the most important policy decisions (QE, interest rates) are made elsewhere?      The B of E has a government set inflation-target of course but this is deeply flawed and takes insufficient account of asset bubbles, money supply, the exchange rate and absolute levels of indebtedness.  The unspoken rule of the Chancellor seems to be that the B of E is free to adopt whatever monetary policy it likes . . . as long as it is loose.

Tricks and wheezes  -  There used to be a time when Chancellors announced programs which changed the face of the country - think Lawson's tax reforms in the late 80s and Healey's change of course in the late 70s.  Now we get short term fiddling and little games to try and "wrong foot" the opposition.  Lots of knockabout political point scoring and short term initiatives, nothing substantial for the long term.

As a footnote there are two members of the government who ARE making important reforms with long term economic ramifications  they are just not in No 11 (Gove - Education, Duncan Smith - Welfare).

Off balance sheet finance - why raise money transparently and honestly through the tax system when you can finance pet projects on the never never via dubious PFI schemes, Infrastructure Banks?  These schemes look like they are giving the taxpayer something for nothing but, as we are finding out with PFI-financed hospitals, they will come back to bite us in the end.

Can't decide which criticism belongs to whom?  It's because increasingly they  apply to both equally. Brown and Osborne have morphed into one terrifying being.  Heaven help us.

From our website:  Starting a business in Spain