Profit Warnings = Market Warnings

You may not know that profit warnings have hit a 6-year high in the UK. Of course, some companies blame exchange rates, others low oil prices, but I think it’s something else. The list of companies is diverse and tends to imply a more structural problem.

Balfour Beatty I mentioned the other week in a blog post as they issued their sixth consecutive profit warning. Along with them are others such as French Connection, P&G, Caterpillar, Oxford Instruments, Bohoo.com and Monitise. Tesco have had massive accounting irregularities to contend with, not to mention the price war that rages in the supermarket sector, affecting not only the supermarkets themselves, but also their suppliers. They have lots of them over a barrel, in many cases being their only customer.

What we’re seeing here is what I predicted would happen if we didn’t raise interest rates after the credit crisis. We’ve basically been subsidising a lot of companies that should have gone to the wall back in 2009. Because rates are so low they are dying in slow motion, and their executives will then have a tendency to think that it’s not really happening, if they notice it at all. Failure has come much more swiftly in more normal economic times. Of course, if they’re cooking the books then we have to ask why would anyone be doing that unless they’re over-extended or their company is dying?

Most areas of life exude denial. Unions deny that technological progress means fewer jobs, and so do governments for that matter, when they should be working out who to pay not to work, but instead are ‘inventing’ jobs that simply create more administration for the rest of us (i.e. they make the economy less efficient). The idea of full employment is a thing of the mid-20th century (probably not a good one) and will never happen in our world. Companies are in denial that their markets can ever dry up or that they might ever go out of business. People are not very good at being detached enough to see the wood for the trees.

Put all of this against the back drop of my article yesterday, where I said that it’s only foreign money parked here in the UK that is creating the illusion of not having a recession, and profit warnings start to make a lot more sense.

I remember when the credit crisis hit I knew unemployment was going to be bad because I was very much part of the ex-pats in London community. I knew all my Brazilian friends were going home because times were getting too hard here. My Polish cleaner went home for a visit and never came back. I predicted an unemployment tsunami because there was already momentum among the workers who are not included in the official figures. I was right. And it’s mainly migrant workers who fill those roles at the lower end of the pecking order, so it’s a good place to look for the health of the job market.

True we had around 280k immigrants coming to the UK in 2014 for work. Oh, that looks healthy then? Well given around 725k retired, not really. Either we’re a few hundred thousand workers short, which doesn’t seem to be the case, or it was cheaper to let those people retire than make them redundant. Natural attrition. That’s another indicator as to how poor the job market and the economy is.
The recession that has been postponed like a deferred interest mortgage will have its day.

Anyway, it’s not all doom and gloom. Shorting is the most efficient and rewarding use of your capital. Happy days!