Dienstag, 31. März 2009

China's demographics

Over the next 10-15 years, China is facing a large demographic shift:

In 2008, 18-22 year-olds were 25 m per yearly cohort, while 58-62 year-olds were only 12 m per birth year. In other words, the potential labor force was growing at 13 m (nearly 2 %) annually.

In 2023, the 18-22 year-old will be down to 16 m per year, whereas 58-62 year-olds will be 20 m. In other words, the labor force will be shrinking by 4 m (0.5 %) annually.

(In actual fact, the impact will be a bit smaller, because China's elderly have so far been retiring at an unusually early age.)

( source )

Comparing major auto makers

Let's compare the 2008 results of three major auto makers:


- Auto sales: 148 bn $ (-17 %)
- "Automotive cost of sales" excl. all overheads ("selling, general, admin and other expenses"): 149 bn $
- Total operating loss: 21 bn $
- Total loss incl. non-operating items: 31 bn $
- Sh.equity: -86 bn $ (39 bn $ deterioration compared to 07)

Comment: GM didn't even manage to earn enough revenue to cover the cost of building the cars, excluding all selling, general, admin, overhead and non-recurring expenses.


- Auto sales: 129 bn $ (-16 %)
- Operating loss: 9 bn $
- Total loss: 15 bn $
- Sh.equity: -17 bn $ (23 bn $ deterioration compared to 07)

Comment: While GM's losses are much higher, it's amazing that Ford thinks it can ride out the crisis without anybody's help: A negative equity of 17 bn $ isn't exactly a solid capital base. Plus: Ford hasn't been profitable in a looooong time: It posted operating losses every year 2004-2008 (35.6 bn $ over 5 years; I don't know if they were profitable prior to 2004, because I couldn't be bothered to look up earlier years)


- Auto sales: 107 bn € (+ 4%)
- Operating profit: 5.8 bn €
- Total profit: 4.7 bn €
- Sh.equity: 37 bn €
- Sh.equity after taking out all intangibles: 25 bn €

Comment: VW might be facing all sorts of problems in 2009, but compared to GM and Ford, it's amazing how boringly solid their numbers look...

Is Opel fundamentally sound?

For some reason, GM Europe performed much worse than Ford Europe:

-GM Europe's financials: -

2008 operating loss: 2.8 bn $
2007 operating loss: 0.5 bn $

(before "corporate&others, i.e. no coporate overhead allocated)

Adjusted for "special items":

2008 operating loss: 1.6 bn $
2007 operating profit: 55 m $

"Special items" are all sorts of negative stuff which - according to management - occurred outside the normal course of business, and therefore should be excluded. Of course there are always special items in every year, and they are always negative...

Note that the losses of all GM divisions together add up to only 10 bn $ in 2008, whereas GM as a whole lost 31 bn $. So 21 bn $ aren't the responsibility of any division, they just happened to occur for "special reasons" or are corporate overhead.

- Ford Europe's financials: -

2008 operating profit: 1.0 bn $
2007 operating profit: 0.7 bn $

(However, Ford figures exclude Volvo, which lost 1.7 bn $ in 2008, and 2.7 bn $ in 2007. If Volvo is included, GM Europe and Ford Europe don't look too different.)

Super-Steinmeier saves Opel!

It's election time, and the SPD likes to get the votes of Opel employees.

The labor minister started it some time ago (as noted here), and now it's Steinmeier's turn: He published a "10 point plan to save Opel". Apparently, point 9 is missing, so it's actually only a "9 point plan". But who are we to be finicky, if his plan can save Opel?

Let's see what he has to offer (picking out some juicy morsels):

- Quote: "Opel's business plan for the next few years shows: Opel has a future!"

Hmmm. I wonder if he knows that most business plans of turnaround cases are not worth the paper they are written on?

- Creation of a new Opel-Holding in Rüsselsheim, owned 50%-1 by GM, 10 % by employees and distributors, 1-3 % by management, and the rest by the German government, German states and other European countries.

Oh my. Makes it really easy to reduce overcapacity by shutting some plants, if all relevant German states and European countries are direct shareholders...

- If Opel dies, 130,000 jobs will be lost: 28,000 Opel employees, 35,000 employees at distributor-level, 70,000 employees of suppliers

Is he aware that there are other car companies, and customers would simply buy other cars instead? Sure, if he is concerned about German jobs, he could argue that many of those other cars would be produced abroad. But surely the jobs at the distributor level are needed in any case, no matter where the cars are produced. And if -say- half those other cars are produced in Germany, that reduces the job losses in production to 14,000. As for the suppliers: Are there really 2.5 German supplier jobs on the line for every German Opel job? (and even if that number is true, the job losses would only hit to the extent that foreign cars are bought which don't use German-made parts, i.e. even in a worst-case scenario, we would be looking at 20-30,000 instead of 70,000 jobs)

Assuming an overall net loss of 40,000 German jobs, and a short-term capital need of 3 bn €, that's 75,000 € per "saved" job. For the short-term.

- Opel's pension obligations need to be honored, and the pension security fund would need to pay for them in case Opel dies.

It would be helpful to know how large those pension obligations actually are, and if they are partially funded, or only backed by Opel's production assets (i.e. factories).

- "Opel is in better shape than many people believe. The company is debt-free."

Sure. Because the "company" Steinmeier wants to create doesn't currently exist.

- "The business plan is conservative und only assumes a slow improvement of car sales over the next few years. It assumes that 2014 car sales in Germany will still be below the level of past years."

Wow. That is sooo concrete: "Below the level of past years" -> Which years? How far below? And why should we assume that German car sales will grow in the longer run? Is he aware that Germany's population is shrinking? And why does he talk exclusively about German car sales? Opel sells Europe-wide, with Germany accounting for less than 1/3 of total sales.

- "Opel needs to get access to markets outside of Europe. That's where the growth potential lies."

What bullshit! Let's get this straight: In the GM world, Opel serves Europe, and other GM subsidiaries serve the rest of the world. R&D is shared, and the cars use similar platforms. According to Steinmeier, GM would still hold a 50 % stake in Opel, and still do extensive technology-sharing, but suddenly Opel would aggressively compete with other GM units in the rest of the world. Whereas the other parts of the GM world presumably still wouldn't export to Europe, or their products would be so inferior that nobody wants to buy them here? And how would those overseas markets be served? Presumably by building new Opel factories in Asia and America? Or since when have European mass-producers exported large amounts of cars to Asia and America? (as opposed to building them locally) Can somebody please draw up a 10-point-plan that details how to save Germany from politicians like Steinmeier

Montag, 30. März 2009

If it wasn't for all those losses, we would have been profitable...

Last week, the other Bavarian basket-case bank, Bayern LB, also came out with high-level financials.

Let's see:

Bayern LB lost a cool 5.1 bn € in 2008.

But hey, the business is fundamentally sound, because "excluding direct impact of financial crisis", the bank would have made an operating profit of 0.3 bn €

In other words,

1. if the bank had not had a "crisis-related impact on the trading result" of -2.1 bn €,

2. if it had avoided 1.9 bn € "crisis-related losses on investments",

3. if it had not suffered Lehman-related write-downs of 0.5 bn €,

4. if it had not experienced Iceland-related write-downs of 0.9 bn €,

hey, if all of that had not happened, the bank would have posted a tiny little operating profit, and a pre-tax RoE of 1 %!

One thing the results presentation doesn't mention:

Bayern LB has its very own M&A disaster, the acquisition of Hypo Alpe Adria Group in mid-2007 (Bayern LB's current stake: 67 %). Apparently, HAAG accounts for 500 m € of Bayern LB's 2008 loan loss provisions, and according to the FTD, HAAG posted a full-year loss of roughly 500 m € as well. Not sure where FTD got the 2008 loss figure, it isn't on the HAAG website. However, the 6/08 interim results (finalized in August 2008) inform us that the bank is confident to achieve a "small profit" for the year 2008. Imagine that: HAAG had lost 64 m € in the first half, but in August 2008, with the financial world collapsing all around them, they still merrily assumed a second-half profit of 100 m € or so

Sonntag, 29. März 2009

Hypo Real Estate: The Saga Continues

Following up on this post a few weeks ago, new events have been unfolding at HRE this week-end:

1. In a press release, HRE states that the German government will take a 8.7 % stake by paying 60 m € for 20 m newly issued shares at an issue price of 3 € per share.

Market price of the shares has been below 1 € for a while, yet the government still pays 3 €. According to the press release, this is the minimum price allowed by law. It is not explained why there is such a "minimum price allowed by law". But the 3 €/share conveniently matches what Chris Flowers has always argued for.

(Edit: Apparently, 3 € is the par value of HRE's shares. Under the relevant German law, capital increases cannot be made below par.)

In any case, it is not explained why the government invests 60 m € at this stage. It is a tiny amount compared to the scale of the overall problems, and in particular compared to the ballpark 10 bn € capital need that has been rumored in the press for the last few months.

2. In a separate press release, 2008 results are summarized:

The full-year loss was 5.4 bn €. As of 9/08, the loss had been 3.1 bn €, i.e. HRE lost 2.3 bn € in Q4.

I didn't go through all the details, but it appears that most of the Q4 loss is due to additional "provisions of losses for loans and advances" of 1.7 bn €. The way they explain it, the need for provisioning is spread far and wide, and is related to real-estate loans in Germany, Britain, Spain and the US, as well as exposure to "certain public sector and infrastructure finance segments". In other words, lots of their loans are going bad all over the place.

The part of the press release dealing with HRE's capital base is downright bizarre: It is argued that HRE's equity excluding revaluation reserve was 2.6 bn € as of 12/08. Now why should the revaluation reserve be excluded? It is part of the overall equity, and it stood at -3.3 bn € as of 9/08. If the amount didn't change much in Q4, total net equity is now below zero. But we don't know, because we aren't told, which is ridiculous: Why do they make an announcement regarding HRE's capital base, if they don't tell the reader what the capital base is?

Oh, and the press release also states that HRE expects further losses "up to and including financial year 2011", i.e. for the next three years. No attempt is made to quantify those upcoming losses.

Things are quite a mess, no doubt about it.

Samstag, 28. März 2009

US Emigration

While on the subject of migration flows, I looked up the relevant US statistics. Funnily, there is lots of data on US immigration, mostly compiled by the Department of Homeland Security. But for some reason, there is no data at all for emigration.

Apparently, the US is of the view that the poor huddled masses will come to its shores. But once they have arrived, they will never again think of leaving...

(There are some scientific studies trying to estimate emigration numbers, though, and they put long-term average emigration of legal residents in the 300-400,000 p.a. ballpark. This compares to 1.0-1.2 m immigrants being given PR status in recent years).

German migration: Where to, and why?

I recently had a heated discussion with an American, who maintained that Germany is suffering a massive braindrain: According to him, well-educated Germans are deserting the country in great numbers, and are mostly headed for the US and Britain.

I suppose he has a point with respect to a few specific professions: German academics are frequently lured to American universities, German doctors don't mind working in Britain and Norway, and the City has pulled in investment bankers and related professions.

Though in all three cases, it seems that things have changed dramatically in recent times: American universities are no longer hiring as their endowment funds have evaporated, British doctors are earning a lot less in Euro-terms based on latest exchange rates, and the City clearly isn't in a hiring mode anymore.

In any case, the discussion prompted me to look up migration statistics to see where people are migrating to.

The statistics don't tell us who exactly is coming and going (it doesn't distinguish between doctors and hairdressers), but it does give us a country breakdown. Latest numbers are for 2007, and major highlights are as follows:

- Old people are leaving, young people are coming: In the 50+ age bracket, Germany had a net loss of 16,000 people. Below 50, the net gain was 60,000.

- The gain is larger with respect to women (+32,000) than for men (+12,000).

- Germany attracts lots of Eastern Europeans (in particular: Poland +33,000, Romania +19,000, Bulgaria +12,000, Russia +8,000).

- There are moderate deficits with the UK (-4,500) and Austria (-4,400), and a major deficit with Switzerland (-17,000).

- Germany had deficits with all "old-EU" countries, except for small gains with France, Luxemburg, Finland and the Netherlands.

- Surprisingly, there was a deficit with Turkey (-3,000), and a sizable deficit with Greece (-6,700).

- Further afield, there were modest losses with the US (-3,700), Canada (-2,500) and Australia (-1,300), but gains from Brazil (+2,200), China (+2,000), India (+1,800) and Thailand (+1,200).

- Small but high-profile "expat destinations" did not play a major role: Singapore gained 300, Ireland 700, and the UAE 500.

All in all, it is true that in 2007, Germany had gains with respect to "less developed countries" and losses with respect to most "highly developed countries" (as well as with Turkey and Greece). However, the net losses with respect to all Anglo-Saxon countries combined were quite moderate in absolute terms (a net loss of 13,000 to US, UK, Canada, Australia, New Zealand, Ireland).

German Demographics

Everyone knows that Germany is aging fast. What most people don't seem to realize is that working-age population is still stable at the moment, but will start declining rapidly within a few years. So the impact on the economy will only start to hit in coming years.

According to the official population forecast (as published by Destatis), the population segment aged 20-65 will change as follows:

2005-2010: -0.1 %
2010-2020: -4.1 %
2020-2030: -11.6 %

This projection assumes 100,000 net inwards migration per year from 2010 onwards. If no net inwards migration takes place (Germany appears to have had no migration surplus in 2008, and only 40,000 in 2007), the numbers are worse:

2010-2020: -6 %
2020-2030: -14 %

It will be rather hard for Germany to achieve any GDP growth at all after 2020, when working-age population drops 1.4 % per year (and presumably by that time, worldwide resource constraints will also be felt much more acutely, making growth even harder).

(The projection assumes fertility of 1.4 kids per woman, roughly in line with what is currently being observed. But even if fertility goes up a bit in the near future, those extra kids won't hit working-age until after 2030)

(For an update of latest fertility trends, click here.)

(For a comparison with other low-fertility countries, click here.)

Freitag, 27. März 2009

Chinese Real Estate

Another victim of China's real estate slump:

Kingfisher, a large british DIY retailer (it also has a stake in Germany's Hornbach Baumärkte), reported sharply lower sales in the financial year ended 1/09: China revenue was down 24 %.

Quotes from the press release:

"...the dramatic housing market slowdown has impacted performance and exposed internal operational issues that have exacerbated the impact of the market slowdown on reported losses ... ambitious expansion in recent years had been too fast, resulting in a rump of loss making and oversized stores. The business had become too reliant on a booming apartment design and installations market ... The plan encompasses rationalising the store portfolio from 63 to 41 and revamping the remaining stores, 17 of which will also be downsized ... An accounting write off of £107 million has been booked in 2008/09 ..."

Of course it's possible (and even admitted to some extent in the investors presentation) that Kingfisher had simply mismanaged its China expansion, i.e. didn't offer the customers what they wanted. But it does sound like they were caught on the wrong foot by massively lower demand for home furnishing products... In any case: Yet another ambitious foreign investor that got burnt trying to profit from China's limitless business potential...

Russian Banks

As reported on the front page of today's FT, leading Russian bankers expect 15-20 % non-performing loans by the end of this year. Not at some banks, but as an average of the total Russian banking system!

It is expected that hundreds of Russian banks will "disappear", while the largest 20-30 banks will survive based on state support.

But hey, things aren't all bad: Russia's biggest vodka maker has posted record sales in 2008, and expects further sales growth for 2009. На здоровье!

US bank bailouts

The various US bailout initiatives are becoming ever more convoluted. Picked up via nakedcapitalism:

"Yves Smith noted the rather extraordinary (though unsurprising) development that the very institutions that played such a critical role in the crisis -- Citibank and Bank of America -- are now using TARP funds they received not to extend more loans (the ostensible purpose of the bailout), but rather, to buy up more and more of the very distressed assets that Geithner insists they need to be relieved of, because they now know that, under Geithner's plan, they will be able to sell them at a substantial profit courtesy of public funds (i.e, the Government will buy those crippled assets at well above their current market price. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money. . . Welcome to yet more looting."

Donnerstag, 26. März 2009

Chinese banks

The FT's Lex Column thinks foreign banks are stupid because many of them are currently selling their stakes in China's big banks. According to Lex, Chinese banking is a wonderful growth market, and "there is still fortunes to be made".

In other words, he thinks Chinese banking stocks are undervalued.

Today, ICBC's 2008 results came out (the condensed version, annual report to follow later): Record profits of 111 bn RMB, 20 % RoE.

ICBC's Hong Kong market cap stands at 1.2 tr RMB, i.e. P/E = 9. Not expensive at all, if one assumes solid long-term growth potential.

Unfortunately, things can change quickly in the banking world, as the shareholders of nearly all non-Chinese banks have learned the hard way over the last two years.

But China is different.


Is China different?

Maybe. Maybe not.

Some things jump out at you when looking at ICBC's 2008 results:

- ICBC has a cost/income ratio of 30 %. No Western bank ever managed to sustain such a low ratio. Competition doesn't allow it. In other words: Profitability compared to business volume is very high by international standards.

- The main reason is a huge interest margin: ICBC charged 7.1 % on loans, but paid only 2.2 % on deposits. As both loan and deposit interest-rates are tightly regulated, that's essentially a political gift granted by the regulator. It need not stay that way forever.

- Non-performing loans are extremely low, at 2.3 % (and reserved at 130 %). Maybe that's correct as of 31/12/08 using HK GAAP accounting standards. I have no reason to doubt it. But does anybody believe NPLs won't be up sharply in 2009?

I suppose it suited the authorities to make loans expensive in 2008, because they wanted to slow down the economy. And it conceniently allowed the banks to shore up their balance-sheets via profits, in preparation for worse times to come.

And things will get worse quite soon. There will be trouble with real estate. And there will be trouble with state-owned enterprises in certain sectors. Plus, banks have been directed to lend aggressively. Economic growth needs to be assured. Aggressive lending in recessionary times. It may be good for the economy. It isn't normally good for a bank's balance-sheet quality, though.

The big question: How bad will it get? Just a little, or quite nasty? I have no idea, but I know that solid-looking banks can turn out to be very shaky very quickly. It won't necessarily happen to Chinese banks. But it may. We shall see.

Fiscal Stimuli

According to Tyler Cowen (Marginal Revolution), German reunification proves that fiscal stimuli are useless or even harmful.

The argument goes like this: German reunification was a huge fiscal stimulus for the West, but the West actually underperformed compared to other European countries in subsequent years, therefore fiscal stimuli are harmful.

What a comparison! He conveniently forgets that

1. A fiscal stimulus spent on yourself is different from a fiscal stimulus spent on somebody else (West Germans paying for East Germans). If you spend money on yourself, you either get additional utility from consumption, or future production capacity from spending on infrastructure, human capital, etc.). If you spend money on others, you get "demand", but to fulfill the additional demand, you essentially have to work for free.

2. West Germany wasn't exactly in a terrible recession at the time, so of course there was crowding out. In particular, there was crowding out with respect to public spending, which got redirected eastwards, and was sorely lacking in the West for many years.

Capitalism: A Systemic Crisis?

Warning: This post is somewhat philosophical (Krugman would label it "wonkish").

I've been reading FAZ-columnist/blogger Thomas Strobl aka Weissgarnix. He has his own economic theory to explain the current crisis. It is based on a lose assortment of non-mainstream theorists (Marx, Minsky, and a couple of contemporary German academics). While I don't agree with the overall theory (assuming I understand him correctly), I find it useful to dissect unusual approaches, because it can help to get the real issues back into focus.

So what is he saying?

In essence, the train of thought seems to be:

1. The capitalist system cannot exist without growth ("ein nicht wachsender Kapitalismus ist nicht möglich! Und ein nicht wachsender Wohlfahrtsstaat auf Basis eines monetär-marktwirtschaftlichen Systems schon gar nicht.")

2. Growth can only be funded via credit expansion, i.e. no growth without more and more indebtedness ("ohne Nettoneuverschuldung ist der Kapitalismus schneller erledigt, als Sie den Ausdruck 'deflationäre Depression' aussprechen können")

3. If/when indebtedness becomes too much and further debt can no longer be sustained, a crisis ensues

So let's see:

ad 1: Capitalism requires growth

I don't quite understand his reasoning why the capitalist system "needs growth".

At one point, he argues that companies need to grow in order to repay their debt and interest. That is not convincing, because a company producing a profitable product can simply repay its creditors from the revenue it generates by selling the product. Over time, it can grow, stagnate or even cease to operate. Many entrepreneurs like to grow their businesses. Others grow because of scale effects (i.e. they cannot compete if they don't grow). But that's on the company level. It has nothing to do with overall economic growth.

On another level, he argues that the economy needs to grow because otherwise there will be increasing conflict over how to distribute the stagnating pie. According to him, "capital" automatically demands a bigger and bigger piece of the pie, so if/when the pie no longer grows, the "labor" element of the economy will start getting really upset about getting less and less.

But there is no "natural law" that an ever-increasing portion of GDP is distributed as capital income:

- First of all, it is not necessarily the case that more and more capital has to accumulate. Capital accumulates if an economy saves more than the existing capital stock depreciates. If people choose not to save, or if the government uses the savings to redistribute them for consumptive purposes, then there is no net saving, and the capital stock declines.

- Secondly, it is not necessarily the case that the interest/profit earned on the capital increases or even stays constant. If investors can't find attractive investment opportunities, interest and profit go down. The share of the pie allocated to "capital" goes down.

World GDP has been growing because productivity is going up and capital is accumulating. That's the way it has turned out. But it is not a necessary condition for capitalism to exist. If/when productivity growth slows, resource constraints hit and people prefer consumption over productive investments, growth will slow down, or even become negative. But that won't kill the "capitalist system" as such. Why should it?

ad 2: Growth requires credit expansion

Of course world growth over the last decade was to a large extent fueled by credit expansion in the US, UK and some other countries. That's a fact.

But Strobl argues that this was inevitable, that the capitalist system can only work via credit expansion. Maybe the Americans overdid it a bit, but in any case a growing debt mountain would have been necessary to stave off stagnation followed by a systemic collapse.

I'm unable to follow: He argues that capital accumulation can only be financed via debt. But that simply isn't true. Expansion can be equity-financed as well. And equity can come both from outside investors and from retained profits. Neither case requires debt. In fact, all companies in the world could (in theory) operate without any debt and still grow, as long as investors are willing to provide capital in the form of equity participations and/or refrain from full profit distribution. (Strobl counters this argument by saying that equity is a form of debt as well. He lost me there.)

Debt comes into existence becomes some people and/or companies want to consume/invest more than they earn. Others want to consume/invest less than they earn. Credit makes it possible that the first group can borrow today and repay tomorrow, whereas the second group can have funds today and repay tomorrow. It is of course somewhat fragile in the sense that repayment is never assured. But only in the case of straightforward debt obligation (-> repayment with interest) is repayment actually required. Equity participations do not require fixed repayment, they pass on upside and downside instead. Equity and debt have very different characteristics, and Strobl's argument breaks down when the possibility of more equity-financing is introduced.

During the last 5-10 years, leveraging was en vogue. Private equity, hedge funds, off-balance-sheet SPVs - the more leveraging to increase your upside, the better. Too bad that there was also more downside. You can say all you like about the (lack of) relevance of finance theory: Anybody who understands Modigliani-Miller, CAPM and the like knows that leveraging per se doesn't create value. You can slice it anyway you like. And you can certainly structure it with little or no debt.

Admittedly, the concept of equity participation (as opposed to debt) only works for companies, not for private households: A household cannot sell stocks in his personal net worth. If he wants to borrow money to build a house, go to college, etc., he needs debt. But again, there is no need for this debt to keep expanding at an unsustainable pace: If households don't overextend themselves, they can keep their debt exposure low. If their debt doesn't grow faster than their income, the situation is sustainable.

ad 3: Overleveraging leads to crisis

I certainly agree with this point: There is way too much debt in certain countries right now, and things have become unsustainable. I also agree that laissez-faire capitalism frequently exhibits unstable tendencies, if/when governments and regulators allow it.

So to summarize:

In my humble opinion, Strobl's theory doesn't hold water.

I think things are less convoluted, and can be summarized as follows (Keynes and Krugman would probably agree):

- There was significant overinvestment in certain sectors, most notably residential and/or commercial construction in the US, UK, Spain and China

- This overinvestment was facilitated by naive behavior everywhere: hands-off regulators, a banking sector that seemed to think risk can always be passed to someone else, and deluded private households and investors. None of that was inevitable

- Once the bubble burst, there was sudden lack of demand in important sectors of the world economy

- This shortfall of demand by itself would have been enough to set off a recessionary spiral, as demand for capital goods automatically goes down when overall demand cools off

- The collapse of the financial industry exacerbated the problem by suddenly choking off credit, and creating overall panic based on the flood of "end of the world" news

- In the end, everybody's mindset was in "catastrophic crisis"-mode, which meant nobody (neither firms nor private households) wanted to make any investment decision anymore

- And presto: We have a depressionary spiral that can only be solved by government intervention

So what is the role of excess leverage in all that?

Simple: The housing bubble wouldn't have occurred without buildup of excess leverage.

Necessary follow-up question: How would the world have fared if the bubble had never happened in the first place?

According to some (including Martin Wolf), that wouldn't have been good either: In their view, the world faces a "savings glut". The "glut" is particularly acute now that Americans are no longer consuming and building even more houses, but it already existed in the past. If Americans hadn't gone on a spending binge, the excess savings of Asia and Germany wouldn't have been used by anybody, and the world would have entered a recession much earlier. So for a while, America (and the UK) saved everybody's day by putting all those excess savings to use.

In essence, this is similar to the good old-fashioned liquidity trap aka "depression economics": If the world saves too much, there can be no market clearance, because nominal interest rates can't fall below zero. So unless somebody - usually the governments - steps in to use the excess savings, a recession/depression ensues. To put it a bit provocatively: In Martin Wolf's worldview, heroic American consumers did their part to keep the world out of a world recession/liquidity trap. Now they can't continue, and other countries have to do their duty of investing to keep things going. And things have to keep going, growth has to continue.

If it is true - and I tend to agree - that the world saves too much (in the aggregate, savers want to save more than investors are willing and/or able to borrow), and there aren't enough useful investment opportunities to deploy all that money, then governments clearly have to step in and do something. However, the current piling up of government debt mountains is not the only way. It can be a short-term stop-gap solution, but the risk is that people will become mistrustful of the long-term consequences of so much debt. While there is a demand shortfall, there is no "automatic" inflationary pressure. But that only holds true if people do not lose faith in the monetary system. Once there is a credibility crisis, anything can happen, as people no longer want to hold cash and bonds.

However, there is an obvious alternative to escalating government debt: If people insist on saving too much, governments can tax away the excess savings. Of course that's not popular, in particular in the US. And of course there's a danger of setting wrong incentives by going too far: Are people still motivated to work if their earnings are taxed away and generous government transfers are promised to everybody anyway? But if the "savings glut" hypothesis is indeed true, then that's where things will have to go: Higher taxes, more redistribution. It doesn't destroy the "capitalist system". It only readjusts the rules a bit.

And if I'm not mistaken, Strobl wouldn't really disagree with my conclusion, even though he has a somewhat different view of the workings of the "capitalist system"...

(Has anybody continued reading until here? Yes? Wow! I'm impressed by your perseverance!)

Mittwoch, 25. März 2009

German migration flows

German demographers like to assume that Germany will receive significant inwards migration to counterbalance the shortfall in births. And Germans seem to hold the opinion that many foreigners would love to live in Germany.

Strangely, migration figures do not seem to bear this out:

In 2007, Germany had a migration surplus of a mere 44,000, or 0.05 % of population.

For 2008, numbers are out until August, and so far, they show a small deficit, i.e. slightly more emigration than immigration.

Considering the very good state of the economy and a booming job market during most of 2008, this is quite surprising.

I wonder if the current crisis will have an impact on migrant flows.

There will be less of an incentive to migrate if there are no jobs to be had anywhere. And many countries that sucked up lots of foreigners in recent years will be spewing them out again: UK, Ireland, Singapore, Malaysia, Spain - all of them will see large numbers of foreigners going home (for UK/Ireland, this is already very visible; for some reason, Spanish immigrants so far seem to prefer to stay put, though).

But for Germany, the outlook is less obvious: What will go down more, immigration or emigration?

My take is: Fewer people will be leaving. And many Germans that went abroad in recent years will come back. Whereas much of German immigration is not primarily linked to the state of the economy (think: foreign spouses), so it won't go down by much.

So overall, my guess is that the migration balance will turn solidly positive again. But it will continue to fall far short of the numbers needed to compensate for the birth deficit.

Japan's Foreign Trade

Oh my, this is really bad:

Japan's provisional Feb figures are out, and they show that exports have plunged 49 % yoy, with imports down 43 %. In Jan, exports had already dropped 46 %.

Exports to the US were down 58 %, to China 40 %, to Hong Kong 46 %, to Taiwan 52 %, to Western Europe 53 %, to Russia 84 %.

Exports to nearly every single trading partner are down 40 % or more (one exception: exports to Switzerland have increased slightly, probably due to a big ticket delivery).

Every category of goods was down sharply, with cars leading the decline (-73 %).

With true Japanese love for detail, the customs office gives an amazing breakdown, right down to product category by main destination. Raw data to be found here:


Dienstag, 24. März 2009

Munich Real Estate

Munich appears to be one of very few cities worldwide where real estate prices are currently going up. And quite substantially so: According to recent data, residential rents have gone up nearly 10 % year-on-year, and residential property prices have risen nearly 15 %. (Germany as a whole has seen slight drops of rents and prices).

According to press reports, there is a growing sentiment among upper-middle-class households with significant savings that "paper assets" should be turned into "solid hard assets" while it's still time (i.e. before inflation takes off). If this is indeed a widespread feeling, then the Munich real estate boomlet may run for a little longer before fizzling out.

But it will inevitably fizzle out quite soon, as Munich is already by far Germany's most expensive city as far as real estate prices and rents are concerned. And while it is indeed very popular to move to Munich, and the city's population has grown in recent years (as opposed to Germany's overall population decline), there is no denying that many sectors of Munich's economy are hit hard by the crisis. Few jobs have so far been lost, but new hiring is nearly inexistent.

Who can afford to move to Germany's most expensive city if he doesn't have a well-paying job lined up? So while real estate prices may possibly increase a bit further if enough investors are worried about inflation, rents are bound to edge lower quite soon.

China's economy

Two tidbits that caught my attention:

China's steel-makers are apparently cutting back their production quite sharply once again, as recent production increases have led to a massive surge in inventories.

China's "fiscal revenue" is down 11 % yoy for Jan/Feb. Local government revenue was stable, but the central government's revenue dropped by 20 %. Total tax revenue was down 13 %, of which "business tax" revenue was down 5 %. "Business profits" from SoEs were also down (the extent of their drop was unspecified, but considering that taxes and total revenues dropped by a similar amount, business profits were also in the same ballpark). That's quite a drop for a country used to nominal growth of 10-15 %. Though as usual, one shouldn't read too much into a mere two-month-period.

Print Newspapers

Last week, Seattle Post was the latest US paper to stop its print edition. Apparently, 147 staff will be laid off, and 20 staff will remain to take care of the online edition.

British papers don't seem to be doing much better: UK newspaper advertising revenues are down 15-55 % yoy, depending on the segment. The Daily Mail Group alone is now cutting 1,000 jobs.

German papers are also hit by vanishing ad revenues: The WAZ Group announced plans to cut staff by 1/3 late last year, and Sueddeutsche also appears to be contemplating substantial staff cuts, though no announcements have been made.

The question is: How much of the current drop in ad revenue is caused by the economic crisis (ad revenues have always been highly cyclical), and how much is a fundamental problem due to the migration of readers to the internet? (considering that circulation is also down for most papers, and circulation isn't particularly cyclical)

It always struck me as terribly inefficient that Saturday papers used to weigh half a pound because of all those job, real estate and car ads: 90 % of readers didn't care about those ads, because the weren't looking for a job, house or car. So the migration of these ads to the internet saves a lot of paper and ink, not to mention delivery boy back aches.

I don't know how much of a newspapers' operating expense goes to pay the journalists' salaries, and how much is needed to print and deliver the paper itself. Can internet ad revenue cover the salaries, even if print papers disappear? I have no idea.

Personally, I get most of my news from various online sources. But I still like to read a print paper (or print magazines such as The Economist). It's so much more pleasant to sit down in a comfy chair or lean over a paper for breakfast. But I must admit that I don't have a print subscription: During the week, I get the papers for free in the office, and on the week-end, I somtimes buy a copy, and sometimes don't. If my company didn't offer a paper, I probably wouldn't take out a private subscription.

Montag, 23. März 2009

GM's pension liabilities

As I wrote yesterday, Germany's labor minister said "letting Opel die will be too expensive due to all those pension liabilities". I have no idea what Opel's pension liabilities are, as Opel doesn't publish stand-alone financials, but the statement prompted me to look up GM's overall financials. The 2008 annual report is not out yet, but the 31/12/2007 figures are revealing enough. Let's see:

Total pension obligations (incl. "other retirement benefits") were 220 bn $. That's quite a cool number, huh? It's much bigger than GM's whole balance-sheet (which was 149 bn $), because the funded part of the obligations is off-balance-sheet.

US pension obligations were actually overfunded as of 12/07. However, there were deficits for non-US pensions, as well as "other benefits" (both US and non-US). In total, underfunding was 39 bn $ (due to a massive 54 bn $ hole in "US other benefits", which presumably refers to health care).

This amount was recognised on the balance-sheet as a liability, i.e. it was part of the reason why GM had an equity of -37 bn $ as of 12/07. (That's right: GM officially posted a net equity of -37 bn $ already as of 12/07, before running up an additional 30 bn $ in losses during 2008!)

But we're not done here. In fact, we're only getting started:

According to recent press reports (Detroit Free Press Online), the accounting bucket containing US pensions went from +19 bn $ as of 12/07 (i.e. healthy overfunding) to -12 bn $ as of 12/08.

Ouch. How did that happen?

Apparently for several reasons. One reason is a drop in asset values. To their credit, GM's fund managers reduced their equity exposure sharply during 2007. They started the year with 36 % equities, and ended it with 26 %. Still, the stock market crash hurt, and overall 2008 fund return was -11 % (a loss of 11.3 bn $).

(I assume their stuff is mark-to-market, i.e. the 11 % drop includes the equity crash, value gains on high-quality fixed-income, and losses on lower-quality fixed-income. It probably does not include revaluations on real estate and alternative investments, which amount to more than 20 % of fund assets)

So where did the other missing 20 bn $ go? Apparently, they went into all sorts of efforts, such as funding attrition programs, enticing employees to accept health-care cuts, funding all sorts of health-care holes, etc. In any case, they are gone now. (If we want to be optimistic, we can assume they somehow reduced the massive hole of the "other benefits" bucket)

But we're still far from done:

GM's pension obligations are calculated using a discount-rate of 6.35 % as of 12/07. Why 6.35 %? According to the financial statements, that's the yield on high-quality fixed-income investments. Hmmm. That's kind of interesting, because 30y treasuries yielded 4.5 % as of 12/07, so their high-quality fixed-income included a nice little spread of 225 bp over treasuries. And in any case, yields have dropped: As of today, 30y treasuries yield 3.7 %, and 10y treasuries yield 2.6 %.

Let's recalculate pension obligations based on more realistic yields:

Assuming a 20 year duration, and a yield of 4 %, the present value rises by 22 % compared to GM's balance-sheet. That's 39 bn $ more.

Or maybe duration is 30 years, and the appropriate yield only 3.5 %? That would increase the present value by 40 %, or 69 bn $.

So, let's summarize:

1. "Official" underfunding as of 12/07 was 39 bn $

2. Market value losses during 2008 were 11 bn $

3. Increase in present value of obligations due to lower interest-rates is 39-69 bn $, depending on the assumptions

4. Plus hard-to-quantify amounts related to the various reallocations of pension funds during 2008, as well as fair-value-losses on real estate and alternative investments. Let's be nice and only assign 10 bn $ to those miscellaneous issues

=> Sum total of the "hole": 100-130 bn $ (of which 39 bn $ already shown in the 12/07 financial statements, but not covered by assets due to the negative equity). Roughly 80 % of this amount is related to US workers, the rest to foreign employees (Canada, Germany, Belgium, UK, etc.).

I wonder who'll end up paying all of that. Pension entitlements will presumably be picked up by the various pension guarantee funds (i.e. the relevant governments and/or companies contributing to those funds). I'm not too sure about US health care. Presumably much of that would be lost/eliminated in case of bankruptcy.

German GDP growth

Apparently, two more research institutes have now downgraded their projections for German 2009 GDP to "best case -5 %, worst case worse than -6 %". I assume that puts their base case at around -6 %.

(Edit: And Commerzbank just revised its forecast to "-6 % to -7 %")

It seems that all those forecasters that still refused to acknowledge the severity of the downturn less than half a year ago have now switched to the other extreme. While it is of course possible that we will end up at -6 %, I still think there will be some sort of bounce-back that will lift total 2009 figures into the -3 to -4 % range. Would still be the worst post-war year on record. By far.

If anybody wants to bet, I am willing to take a bet that Germany's GDP will decline by less than 5.0 % in the full year 2009 based on final official numbers as published by Destatis. Anybody?

Sonntag, 22. März 2009

Opel and German politics

One bizarre aspect of the current government coalition is that various cabinet members openly disagree on just about everything:

Now the labor minister (SPD) has said that not only is he "not afraid" of the government directly investing in Opel as a major shareholder (because Opel has "good perspectives"), but he even thinks "letting Opel die is more than a mistake, it would be inexcusable government failure". And why? Because someone would have to fund Opel's pension liabilities in case of bankruptcy, and that would undoubtedly be much more expensive than bailing out the company.

Yeah, right. He really has an in-depth grasp of the issues.

(Leaks from the economics ministry have apparently confirmed that there is not a single private investor in sight who is interested in Opel. And GM has stated that it will not invest a single cent in its European operations. Sure, considering GM's finances...)

An acute shortage of engineers?

According to Spiegel Online, Germany currently suffers from an acute and escalating shortage of engineers. The report, which also quotes a so-called "chief innovation consultant to Angela Merkel", says that in recent months, the fight for scarce engineering talent has intensified further, as more and more companies are actively trying to poach staff from competitors.

Which planet are they living on? Let's see: Engineers mainly work for machinery makers, car/truck/airplane makers, and electronics companies. In all those sectors, orders and production are in free-fall. But I'm sure that Qimonda's and Opel's engineers will be happy to hear that they needn't worry about job security as they are about the get poached by the competition...

Oh, and later on in the same Spiegel article, it is stated that every year, 37-43,000 engineers are retiring. At the same time, 44,000 new engineering graduates enter the workforce. Sounds like the supply of engineers is actually going up. In a country where the overall workforce is shrinking.

Engineering has always been a highly cyclical job-market. But it seems to me that the relevant industries have lived through their best times ever during the last few years, and even when the current crisis abates, they are unlikely to return to their previous mega-boom. In addition, engineering has lots of highly specialized sub-disciplines, and people can't easily switch from one area to another. Therefore talking about an overall shortage isn't very helpful, as there are usually shortages in some fields, and significant oversupply in other fields.

Having said that, of course engineering is and will be a very useful profession, and by all means a good thing to study for anyone who is so inclined.

Samstag, 21. März 2009

Quality journalism?

The Sueddeutsche Zeitung is one of Germany's most respected daily papers. Unfortunately, their business/financial section isn't particularly good. However, today they outdid themselves with an article about Taiwan's economy (it's published only in the print edition, not online, so I can't link to it): Not only did it read like an intern had quickly assembled some snippets from the internet, it also contained an amazing number of factual errors. Let's see:

- Statement: Taiwan's GDP dropped 8 % in 2008

Sorry, but according to official numbers, Taiwan's GDP grew by 0.1 %. The author presumably got confused by the Q4 data release, because Q4 GDP was lower than Q3 GDP by 8 % on an annualised basis (which equals a 2 % drop from Q3 to Q4).

- Statement: Taiwan's GDP growth in 1965-80 averaged 29 % p.a.

That claim sounded so unbelievable that I actually bothered to look up the historical figures: The average growth rate during those years was roughly 10 %. Record growth got close to 14 % in some years. Never ever did the Taiwanese economy grow anywhere close to 29 % in a single year, let alone in 15 consecutive years.

- Statement: Taiwan's stock market will climb 20 % from now until year-end, and will be among the world's best performance stock-markets

Wow! I wonder if the journalist has already bought Taiwanese stocks? (But then, he's only quoting something a JP Morgan analyst has apparently written somewhere else)

- Statement: The Taiwan dollar has appreciated significantly against the US$

Certainly not true: The NT$ ended the year 2008 down 1 % against the US$, and has dropped another 3 % since then (as of yesterday).

Or maybe the author meant some other currencies? (though the US$ was specifically mentioned) Well, in case he meant RMB or Yen, that isn't true either. In particular, the NT$ depreciated quite sharply against the Yen in 2008.

- Statement: One of the reasons why the NT$ is appreciating is the upcoming stock-market rally.

So let me get this straight: The author argues that the Taiwanese economy is in really big trouble. The appreciating currency is making these troubles even worse than they anyway are (never mind that the currency has actually depreciated against the US$, not appreciated). But there's nothing that can be done about it, because a stock-market boom will come and this expectation of course pushes the currency up (which unfortunately prices Taiwanese exports out of the market, thus destroying the profitability of Taiwanese exporters, but so what, stock markets will boom anyway!). Convincing, huh?

- Statement: Taiwan will have to decouple from its unhealthy dependence on exports to the US by looking for new export markets in Asia

In 2007, a mere 12.8 % of Taiwan's exports went to the US. Far more than half of all exports went to Asian countries. True, a signficant part of Taiwan's exports to China consists of components for stuff that is subsequently re-exported to the US. Still, it is a fact that Taiwan isn't exporting a lot directly to the US, and in any case, exports to Asian countries have recently dropped a lot more sharply than exports to the US.

OK, I lost interest in dissecting the article even further. Only one question remains: How come newspaper companies are still puzzled as to why readership numbers are down?

Freitag, 20. März 2009

Oil - Update

It was intended as a long-term bet, but after seeing the oil price rise dramatically during the last 4 days, I sold my oil certificates again. Not the original intention, but a very nice profit nonetheless.

More Shanghai ramblings

Had two hours to spare and went over to the newly opened Shanghai World Financial Center building. For a while, it will be China's highest building, until Shanghai Tower opens for business right across the road in 2014.

It feels a bit surreal. First of all, there are dozens of security guards at all entrances, you have to walk through metal detectors, and there are German shepherd dogs sniffing you. Or rather, for some strange reason the dogs were only sniffing visitors with Asian-looking faces, whereas I was waved through with a "thank you, sir!".

Inside, there's a small food/shopping section downstairs, which is all nice and shiny, but doesn't seem to have any customers. But then, it was 2 pm, so the lunchtime crowd had left already. On the ground floor, there's the reception that gives you access to the office floors of the tower. There were about a dozen smiling receptionists waiting for visitors. Unfortunately, the only visitors coming in and out were groups of old ladies from the provinces being led around by young flag-waving tour guides. And a group of Japanese men in office suits, which looked like, well, Japanese salarimen on a tour to see Japan's most high-profile investment in China. There was no list of tenants to be seen anywhere. But there were computer screens showing stock market news, and sometimes naming a few "sample tenants" of the building. So all in all, it sounds like the market rumour of 10-30 % office occupancy might well be true.

No problem, you might say, these buildings take a while to fill up. Except that right next door, there was a smaller, but still massive skyscraper in the final stages of construction. Two blocks down the road, the Shanghai IFC shopping mall and office tower complex looks like it will be completed later this year or early 2010. And just by looking around in all directions, I could spot another 4 high-rise buildings in various stages of construction.

As for office demand, I only have anecdotal evidence, but it doesn't sound too great: A domestic insurance company hurriedly moved out of its Lujiazui offices, leaving several floors to let. A foreign JV insurance company just consolidated its two locations into one. Another foreign JV insurer sent all expats home to cut costs. Dresdner Bank Shanghai branch has a floor in Jin Mao, whereas Commerzbank has a floor at WFC. Surely the merged bank will not need two separate Shanghai branches. All of it is small fry, but it's just the few things I've heard about during three days in Shanghai.

So it's no surprise that - as Shanghai Daily reported yesterday - "prime quality" office rents have fallen 20 % in late 2009, and are set to fall a further 20-30 % this year, with vacancies continuing to climb sharply.

But I guess the big Chinese banks might take up some of the vacant space: According to China Daily, the big four banks want to hire 30,000 college graduates this year (in all of China of course, not just in Shanghai), to deal with rapidly expanding business volumes. Smart move: They'll need lots of manpower to deal with all those upoming real estate problem loans...

Mittwoch, 18. März 2009

Random thoughts from Shanghai

Shanghai is the usual hustle and bustle: Overbooked plane on the way here (stewardess said it's been ALWAYS full for the last few months, except for a few quiet weeks around Chinese New Year), a busy-looking hotel, and Lujiazui is the usual construction site (currently they are working on the IFC mall and office center, just started work on Shanghai Tower which is supposed to be China's tallest building by 2014, and have various other minor skyskrapers in various stages of construction). It seems hard to believe that Shanghai will need all this office space: The major Chinese banks are all headquartered in Beijing, the regional companies prefer to stay in their respective regions, and what's left for Shanghai is the MNCs. Do they really need to double their Lujiazui office-space for that target market? I somehow doubt it, but then, I'm the perennial sceptic with regards to such things... Anyway, the only negative bit of news I've heard is that during the last few months, dozens of expats have been sent packing by their employers. Not really a material number (and anyway just anecdotal evidence), but it seem to show that MNCs are becoming more cautious with regards to their China business.

Montag, 16. März 2009

German pensions

The German labor minister just announced that pensions will rise 2.7 % (West) and 3.7 % (East) this summer. According to him, this proves that the German system is better than in the US, because so many Americans have to rely on pension funds which have lost many billions, forcing them to accept a much lower standard of living.

Maybe he should have kept his mouth shut. Obviously, if you invest in equity-based pension plans, you bear the risk of a sharp downturn. Americans have been collectively stupid by putting so much of their money into equities, but that doesn't prove that the German pay-as-you-go system is superior. Americans could have chosen to put their pension assets into treasuries or other (non-subprime) fixed-income, and their pension plans would be completely unaffected by the crisis.

German pensions can only be increased because of last year's boom: Employment and wages were both up, and pension contributions grew accordingly. No longer: Unemployment will increase rapidly over the next few months, and contributions per job will also go down due to decreased working hours. It will be quite hard to keep pensions constant in 2010: If pensions had to be financed solely by contributions, there would probably be a cut in 2010. As this is not politically feasible, government subsidies to the pension system will once more be increased. A superior system? Hardly!

Having said that, I do believe that there is a worldwide "savings glut", and that going forward, real returns on savings will be very low. If everyone saves for retirement by accumulating assets, there are simply not enough profitable investments for all those funds. So the return on funded pension plans will be bad. But the return on German-style pay-as-you-go plans will also be bad, and particularly bad for countries with unfavorable demographics such as Germany.

But in any case, the 3 % pension hike is yet another German stimulus contribution. Who says Germany isn't doing enough to stimulate demand?

What crisis? (Installment 2)

A colleague of mine tried to book a skiing holiday in Austria. She contacted various hotels and got told that they are fully or close-to-fully booked, much better than last year, in particular due to very strong demand from all over Eastern Europe.

Eastern Europe? Aren't they supposed to be in the middle of an economic meltdown? (Or maybe they want to enjoy one last skiing holiday, before they turn off the lights...?)

Qimonda to become Chinese?

Apparently, a Chinese state-owned company called "Inspur" might want to buy 50 % of Qimonda, if Saxony and Portugal are willing to take the other half "for an interim period". The company would keep the European manufacturing base and build a new factory in Shangdong. According to Qimonda's administrator, this would be "a unique opportunity to work with a Chinese government company which has the strong strategic goal of making China's IT industry independent of Korea, Taiwan and the US". So we are talking about a "strategic German/Portuguese/Chinese technology alliance"? If it's so wonderfully strategic, I presume that mundane matters such as "profits" are a secondary concern...

Never heard of Inspur. According to their website, they are a leading IT company involved in hard- and software. And apparently, a strategic decision was made in 2008 for Inspur to go into semiconductors, and to invest 3 bn RMB (330 m €), with 2/3 of the funds coming from the Shandong government and the national government. So they seem to be rather serious about it.

It's interesting that they have the precondition of Saxony and Portugal taking a stake. Presumably, they are not sure if the company has a future, and want the reassurance that others also believe in the business model?

(Knowing how these things usually work, there are likely to be all sorts of other demands which we don't know about: Government subsidies, debt to be forgiven by the creditors, etc.)

Oil Price

So today, I finally put my money where my mouth is, and invested 6,000 Euros in an oil futures certificate. The only thing I don't particularly like about it is the Goldman Sachs counterparty risk (would have been willing to invest a much larger sum in a world without counterparty-risk...).

Sonntag, 15. März 2009

German manufacturing

Detailed manufaturing data for January has now come out. While the overall (bleak) numbers have been known for a while, it is interesting to note that the problem is mostly "imported" from outside the Eurozone (there is no further breakdown, but it should be mostly the US and Britain, though Russia may also play a role):

While overall manufacturing orders were down 8 % from Dec to Jan (seasonally adjusted), the drop from outside the Eurozone was a massive 18%(!), compared to -1% from within the Eurozone and -4% domestically.

A similar picture for manufacturing revenues: Overall -7%, of which: Outside Eurozone -14%, Eurozone -6%, domestic -4%.

Revenues from car sales, the worst-hit sector (here, data is year-on-year, because it's taken from another press release): Outside Eurozone -43%, Eurozone -34 %, domestic -25%.

Inflation? Deflation?

More and more people seem to think that current monetary policy coupled with ever larger fiscal stimuli is a recipe for runaway inflation (in particular in the US and Britain, but also in the Eurzone).

Is that so?

As usual, the answer is: "It depends".

Typical causes for inflation are:

- Demand exceeds supply. As in: There's so much demand from consumers, firms and the government that supply capacity cannot keep up, and prices rise to balance supply and demand. Not really a major concern right now, but might be an issue once private demand comes back, in case government spending isn't cut back to size.

- Sectoral shifts. As in: There may be excess capacity in some sectors, but demand has shifted to other sectors, were capacity is not sufficient to meet the increased demand. This isn't much of a concern in the US, where demand is down for pretty much everything, but is - for example - a major issue with German infrastructure stimuli, as the German construction industry isn't doing too badly anyway, and doesn't have the excess capacity to deal with all the extra orders coming in due to the stimulus package. Unsurprisingly, significant price increases for various building materials have already been flagged.

- Supply shock. As in: Some things (think: oil, foodstuffs, or any other commodity) are suddenly no longer in sufficient supply. The 2008 oil price explosion is a prime example. Back in the 70s, the sharp hike in oil prices sparked a wage/price-spiral, with unions insisting on pay hikes sufficient to cover rising costs of living. Unfortunately, this was not possible, because higher input costs meant that the overall standard of living had to decrease, so the rising wages caused prices to increase further, and inflation spiralled higher and higher. A supply shock is certainly possible (some - including myself - would say: very likely) once the world economy recovers: High oil prices in mid-2008 were not caused by speculators, they were caused by fundamental factors (a capacity ceiling for oil production). Those fundamental factors remain unchanged - the supply constraints are still there, and are arguably turning worse due to lower investments in additional capacity.

So what can we conclude?

Firstly: It's not true that expansionary monetary policy and large budget deficits "automatically" cause inflation: In the past, bank-bailouts have massively increased government debt in various countries. Inflation didn't generally ensue. And Japan has had interest-rates around zero for decades, together with sky-high budget deficits and total government debt that is twice as high as America's in % of GDP. Still, inflation stayed around or even below zero for the last two decades.

Secondly: Government spending and lose monetary policy can and does turn into a problem when demand starts to exceed supply. If/when that happens, the policy response has to be firm (in other words: they have to know when to stop, and when it's time to shift into reverse). Considering the large budget deficits currently projected for the US, "stopping" might imply quick and massive spending cuts and/or tax hikes. So I suppose there is a risk that American politicians will not be willing to shift into reverse fast enough. But it's not automatic: What the policy response will be when the time comes, is pretty much impossible to predict. (And in any case, this is mostly an American problem. The Eurozone's situation is quite different, and at least for the next few years, Eurozone inflation is unlikely to be caused by excess government spending.)

Thirdly: In my humble opinion, a supply shock is by far the most likely reason why the world will face inflationary pressure if/when the economy recovers.

Samstag, 14. März 2009

Crisis? What crisis?

The situation of the airline industry is grim. And China's hotel industry is doing badly as well, right?

So you'd think Lufthansa should be happy about selling a business-class return ticket to Shanghai, and Shanghai hotels should be falling over one another offering splendid discounts.

But no. Not even close. Plane tickets are only available via waiting list (and only due to frequent flyer VIP status), for an outrageous price. And hotel room rates seem to be more or less the same as last year.

(Anyway, this post is my way of announcing that I will be travelling from Tuesday to Friday, and will therefore not post anything during that time.)

American universities

It's been known for a while that many (or possibly most?) private American universities have major problems with their endowment funds. As in: They decided to invest them in shares, hedge funds, private equity and the like. And now they're discovering that they've lost money, big time.

So not only are there hiring and salary freezes, but also (according to the FTD), some rather more drastic measures: Brandeis is trying to sell the paintings in its museum for 350 m $, which would be ok I guess, except that the paintings were donated for the explicit purpose of being put on display in the museum. And the University of Hawai no longer turns on the aircon for parts of the day. No aircon in an American university? Things are dire indeed.

Anyway, I was wondering why American universities actually need endowment funds in the first place, considering the exorbitant fees they charge, and the donations they receive on top.

But then an American colleague pointed out a WSJ article about university sports teams. Everyone knows that "academic" sports teams are a big thing in the US, and that you needn't worry about your academic performance, as long as you're on a sports scholarship. But what I didn't know is: Universities subsidise their sports teams big time!

The WSJ article focuses on basketball. Apparently, the typical net operating loss incurred by a university basketball team is about 1 m $ annually, excluding university overhead and capital expenses, which can easily reach another 1 m $ or so if the university has invested in good facilities. (Why are there losses in the first place? Well, for a start, team coaches typically receive compensation packages of 1-3 m $, plus various perks. Not bad, huh?)

So if a university has -say- 20,000 students, 100 $ out of each student's tuition is needed to cover the basketball team's losses (operating + capital expenses).

And of course basketball isn't the really big thing: Football and baseball are, and presumably produce even bigger losses. So in aggregate, all those various sports teams might easily cost 300-500 $ per student and year!

And then I stumbled across a different article, which discussed the salaries of university presidents. It appears that all 32 research-intensive private universities pay their presidents salaries in excess of 500,000 $. And 1/3 of the public universities does the same. So based on 20,000 students, at least 30 $ of your tuition money goes to pay for the president's salary. (Not sure what a German university president earns, but considering he's a civil servant, it can't be more than 100,000 € or so.)

I'm beginning to understand why those high tuition fees are needed...

Freitag, 13. März 2009

Solar Cells

Der Spiegel reports that prices for standard solar cells have fallen by 35 % over the last 6 months. It will be interesting to see what this means for installation volumes. And what it means for the various producers. Apparently, part of the reason for the price drop is sharply increasing competition due to massive oversupply coming in from China. Industry shake-out getting closer?

(I would be interested to see the export earnings of the Chinese solar energy industry. Wonder if solar cells make up a noticeable proportion of Germany's China imports by now...? Edit: Apparently neither tiny, nor terribly huge: According to the Bundesverband Solar, Germany's solar cell producers had revenues of 7 bn € in 2008. They claim that half the production is exported, and a similar amount imported. That would mean solar cells worth 3.5 bn € were imported. Plus components of locally produced cells. So the total "import bill" should be in the 4-5 bn € ballpark, with - so far - less than half of it coming from China)

The not-so-great bit is that German electricity users have to pay dearly for high installation volumes: As a fixed price far in excess of market price is paid to all producers of solar energy (and guaranteed for 20 years!), end-user electricity tariffs are bound to rise as the share of solar energy goes up faster than expected.

Germany's GDP

The Jan numbers for German manufacturing are dismal:

Production is down 23% yoy, and orders 38 %.

Some of the production drop is due to the closure of most car plants in late Dec / early Jan to reduce inventories of unsold cars. So Feb production should be a bit better. But the continuing free-fall of new orders is not encouraging.

How important is manufacturing for the overall economy?

In 2008, it accounted for 1/4 of German output. So if everything else stays stable, and manufacturing drops 20 %, GDP is down 5 %.

But somehow, I can't quite picture manufacturing output to keep contracting at a rate of 20 % for the full year.

If it drops 10-15 %, and the other sectors stay stable, GDP would drop 2.5 - 4 %. That sounds more realistic to me, so I still stick to my forecast of 3-4 % contraction of German GDP.

CEO compensation

According to the FT, US CEO compensation as a multiple of average workers' pay went up from 25x in 1975 to a range of 200-300 in 2000-2007.

Things are less extreme in Germany: Assuming CEO pay packets of 1-3 m € for most large companies, and an average "workers salary" of maybe 50,000 €, that would put the multiple at 20-60.

In my humble opinion, anybody who requires annual compensation of several million Euros to be motivated to do a good job isn't the right person for a CEO position.

A CEO should be motivated by other things than just money, and surely 1 m € or so is sufficient financial reward.

Anyway, it will be interesting to see how CEO pay develops as the crisis unfolds...

Oil Price

With oil costing 40-50 $ per barrel, it's so easy to forget that as recently as last summer, the price was pushing 150 $.

The price didn't drop because supply went up. It wasn't a speculative bubble either.

It dropped for the simple reason that worldwide demand is down sharply.

Which means: If/when the economy recovers, the oil price will quickly explode, and it won't stop at 150 $:

We know that the "cheap 'n easy" oilfields are in decline.

While there may be lots of "hard 'n difficult" oil still in the ground, it will be much more expensive to get it out.

And in addition, even if we throw lots of resources at it, it will take time, and the amounts we can get out in the short run are limited.

So we'd do well to remember that any meaningful economic recovery will immediately cause resource-constraints.

This means higher oil prices, and (among other things) lower demand for European and American cars.

(While oil supply will stay more or less at the 2007/08 level during the next 5-10 years, and will start to decline thereafter, it is a sure thing that emerging market demand will go up, so the market can only be balanced if mature economies are sufficiently "crowded out" by a much higher price)

Donnerstag, 12. März 2009


Of all developed economies, Singapore is hit the worst: According to The Economist, the 2009 forecast is for a 7.2 % contraction (some analysts have even put forward estimates of -10 to -12 %).

Out of curiosity, I looked up their 2008 statistics, and stumbled across some rather unusual data:

2008 labor productivity was down by a massive 7.8 %. The decline accelerated over the year, and reached -12 % in Q4.

First, I thought it was due to the manufacturing downturn: If production goes down, and they can't shed workers fast enough, productivity plummets.

But no:

Every single sector - manufacturing, hotels, financial services, transport, retail, you name it - recorded negative labor productivity.

And not only that, 2007 labor productivity had already been negative (only -0.8 %, but still: 2007 was supposed to be a good year; so why was manufacturing productivity down 3 %, and hotel productivity down 6 %, to name just two examples?).

What is going on here?

It appears that population growth was 5.5 % in 2008, and the workforce grew even more strongly (i.e. they had a massive inflow of working-age immigrants), while GDP was up only 1 %. Average wages were also up a healthy 5 % (per person, not for the labor force as a whole). In other words, unit labor costs were up a massive 13 %.

It looks like Singapore is not really well placed to ride out the downturn: The numbers went all the wrong way in 2008 when GDP was still growing a bit. The economy is focused on international trade (-> collapsing), regional HQs of MNCs (-> cutting back sharply), capital-intensive industries (-> sorry, no more orders) and finance (-> at least the cut-backs will be smaller than on Wall Street, and lots of shady funds are moving over from Switzerland...).

So how are they going to cope with a 7 % GDP contraction?

I suppose what will happen is:

1. Massive repatriation of foreign workers (both low-skilled and professionals)

2. Massive increase in unemployment

3. In spite of 1 and 2, labor productivity will drop further

Again: Manufacturing productivity is already down 14 % over 2 years. And it will almost certainly drop sharply again in 2009. Not a healthy trend, by any measure.

Singapore used to be the country with the world's highest current account surplus in % of GDP: In 2007, it was 25 % of GDP, or 30 bn €. In 2008, it dropped to 16 %, or 19 bn €. As the GDP drop is export-led, it is possible that 2009 will see a surplus of less than 5 % of GDP.

In spite of ugly losses on Temasek's and GIC's investments, Singapore is still exceedingly rich. It can certainly afford a large stimulus to supplement people's incomes (even if that goes against Lee Kuan Yew's Confucian convictions). But it can't do much to stop GDP contraction: As a tiny city-state with fewer than 5 m people, it imports just about everything it consumes. So no matter how they structure a stimulus, most of it will leak into import demand.

"Labor" vs. "capital"

Looking at German GDP statistics from 2000 to 2008, it is striking that labor income kept growing at a much smaller pace than capital income, year after year. In many years, growth in labor income was negative in real terms, in spite of overall GDP growth.

The trend was surprisingly strong:

- In 2000, total labor income was 2.6 x total capital income.
- By 2007, it was down to a mere 1.8 x total capital income.

In late 2008, this trend has reversed: While Q4 labor income was still up 3.5 % from one year ago, capital income was down 8.1 %.

Of course: While unemployment has so far barely gone up, and wages are increasing at 2-3 %, profits in manufacturing and the financial sector have taken a beating.

Worse is to come: There's little doubt that 2009 profis will be shrinking like never before.

Let's look at some numbers:

- Assume 2009 GDP drops by 3-4 % (in real terms).

- Depreciation, indirect taxes and total labor income should remain roughly unchanged. So the complete drop has to be absorbed by capital income.

- Capital income accounted for roughly 25 % of 2008 GDP.

=> 3-4 % of GDP equals 12-16 % of capital income.

Capital income includes rent and interest income. As these will be much less affected, the hit to overall profits should be in the range of 30-60 %.

The unions and the SPD can be happy: No more need for redistributional politics, the market is already taking care of it...

Mittwoch, 11. März 2009

What exactly is wrong with Hypo Real Estate?

According to reports in today's Sueddeutsche and Der Spiegel, HRE will need a capital injection of 10 bn €.

Unfortunately, press reports on German banks don't offer much in-depth analysis. Der Spiegel still traces HRE's problems to liquidity issues caused by short-term financing of long-term liabilities. Yes, that was the official explanation given by the old management when the crisis first started. But is it convincing? Hardly: With more than 100 bn € of guarantees provided to HRE by now, and much lower money-market rates for sovereign debt, any short-term refinancing problem would have been easy to solve. The fact that it wasn't solved strongly indicates that HRE is deeply involved in the sub-prime mess.

Full-year results are not due until late April, so the best an outsider like me can do is dig up the 3rd quarter interim report.

Let' see:

- Q3 loss was 3.1 bn €

- 1-9/08 loss was 2.9 bn € (i.e. Q1/Q2 profit was 0.2 bn €)

- However, equity is down 4.2 bn € since 12/08, i.e. additional valuation losses of 1.3 bn € weren't taken through the p+l

There's 1.9 bn € equity left as of 9/08. Not exactly a reassuringly strong capital-base.

Now for the interesting bit: Why exactly did HRE lose those 4.2 bn €?

- 2.5 bn € is due to write-down of goodwill. They bought DEPFA in 10/07, and they wrote off the entire goodwill in Q3 2008. M&A can be such a wonderful way of destroying value!

- 1.4 bn € were changes in the revaluation reserve. In other words, the market value of some of their assets declined.

- Another 0.6 bn € were due to "valuation result of the CDO portfolio", i.e. yet more market value drops.

- 175 m € were "impairments related to Lehman Brothers".

- A positive effect of 180 m € was related to an "embedded derivative".

- Finally, 40 m € Icelandic impairments are hardly worth mentioning.

All of this adds up to 4.4 bn €. They only lost 4.2 bn €, though. Which means they had an operating profit of 200 m € from the rest of their business.

And they make much of this in their report: "This pre-tax profit underlines that the HRE Group was profitable with its operations despite the financial market crisis".

That's right! They actually have the guts to write that sentence. As in: If we hadn't lost all that money for all sorts of reasons, we would have been profitable.

Now what does all this mean for the Q4 results?

Nothing good. Sure, the 2.5 bn € goodwill write-off is gone. But as various other banks have already shown, Q4 was much worse than Q3 as far as market value adjustments were concerned. HRE took a 2 bn € valuation hit in Q1-3. If the rest of the financial industry is any guide, their Q4 hit is likely to be substantially bigger than this. So it's not about liquidity. It's about their balance-sheet having lots of assets which aren't worth as much as they're supposed to be worth.

Having said that, it is of course misleading to look at the >100bn€ of government guarantees and assume that they will be lost. HRE has a balance-sheet of 400 bn €, and much of it is backed by German real estate and German municipalities. It's pretty much inconceivable that they will lose anything close to 100 bn €.

Let's take a closer look at their balance-sheet:

- 144 bn € loans to public sector. Not too much of a problem, hopefully.

- 61 bn € real estate loans. If they applied proper German lending standards, that shouldn't turn into a major problem either. Again, hopefully.

- 46 bn € are "loans to other banks". If there are no more big bank failures, that should be ok (fingers crossed).

- But there are also 105 bn € in "financial investments", and those are rather troubling: A lot of toxic stuff can be hidden in there.

According to a country break-down, 17 % of the credit portfolio is related to the USA. That's 70 bn €.

Apparently, 45 bn € of this is related to "public sector & infrastructure finance", which doesn't sound like subprime (though American municipalities do default at times).

8 bn € are related to US commercial real-estate. That's more risky.

Finally, 17 bn € of US-exposure are related to "capital markets & asset management".

According to the financial statements, less than 5 bn € are CMBS, RMBS and CDOs (i.e. potentially toxic securitised stuff), of which only 1 bn € related to the US.

Hmmm. Vaguely comforting. Doesn't sound like they will lose 100 bn €. The way they put it, they will lose hardly anything at all.

So why is it that they took a valuation loss of 2 bn € in Q3, and why is it that they need 10 bn € of fresh capital...?

And what about this innocuous little sentence in the "Outlook" section: "Provisions for losses on loans and advances will significantly rise in the future"

So what can we conclude? My guess is: When all is said and done, the overall valuation hole will be in the 5 to 20 bn € ballpark.

Oh, by the way, regarding the cost of the various guarantees:

HRE received a bridge facility from the Bundesbank at 250 bp above the normal lending facility rate. The final contract then provided for a 93 bp spread over 3-month Euribor, plus a Besserungsschein for an additional 90 bp if they return to profitability.

Not exactly prohibitively expensive, especially considering how much money market rates have fallen. If their liabilities are indeed fully recoverable, they should make a decent profit out of it. If they fail to make a profit, it once again proves that the real problem was the quality of their asset side all along. We shall see.

And before we conclude, here's a snippet picked up from "general administrative expenses":

Expenses were materially affected by consultancy fees in connection with the acquisition of HRE shares by Chris Flowers.

No details/amounts are provided, but it was material enough to deserve a mention, and "other general admin expenses" were 176 m € as opposed to 91 m € in the same period last year.

Hmmm. Why did HRE need to incur massive consultancy fees in order to sell a stake to Flowers? Did they mandate an investment banker who charged a huge success fee?


Few countries are hit as hard by the crisis as Taiwan is:

- In Jan/Feb, exports fell 37 % yoy, with exports to China down an incredible 50 %

- Total industrial production was down 41 % yoy (Jan only, don't have Feb figures yet)

- Latest GDP forecast for 2009 are anywhere from -6.5 % (The Economist) to -11 % (according to unnamed "analysts" cited by Taiwan News Online)

What are the reasons for this collapse?

1. Destocking of Chinese manufacturers: Most of Taiwan's exports to China is used as components to be further processed in China. Due to the credit shortage, there has been massive destocking over the last few months.

2. Taiwan specialises on electronics. Many of its products have recently seen a collapse in price. Things are particularly extreme for memory chips, where prices have dropped to an extent that is causing massive losses for all industry players.

3. And finally, there's a drop in demand from end users. Some of it may also be linked to delayed purchases, but some of it may last as a consequence of the current downturn.

The first reason will definitely not last. The second cannot last for long, but may not be resolved until a year or two down the road. How the third reason plays itself out is anybody's guess.

But all in all, it is highly likely that the situation will start to stabilise over the next few months (as in: production and export will still be down yoy, but the percentages will be much lower than the disastrous Jan/Feb figures).

A few days ago, Taiwan's premier told parliament that he will resign if GDP drops by more than 5 %.

There's little doubt that Taiwan's 2009 GDP will drop sharply, but he might still have a chance of keeping his job. It will be a close call, but it's still a possibility.

Dienstag, 10. März 2009

Tibet and China's economy

Today's FT is running a front page article entitled "China locks down Tibetan towns". That set me wondering: Did the mess in Tibet possibly have a significant impact on China's overall economic performance?

At first glance, it sounds unlikely: Ethnically Tibetan China (Tibet, Qinghai, parts of Sichuan and Gansu) makes up a mere 0.5 % of China's population, and maybe 0.3 % of GDP.

What sort of impact can any event in those out of the way places possibly have?

Well, maybe more than it seems at first glance:

- Foreign tourist arrivals in Tibetan areas have all but stopped since last March. Few of those foreign tourists only go to Tibet. They use Beijing or Shanghai as a gateway, and frequently visit Yunnan, Guilin and other Chinese regions as well.

- Domestic tourism to Tibetan areas was also down sharply. Presumably, many of those potential domestic tourists went to foreign destinations such as Singapore or Thailand instead.

- An indirect effect of the Tibet/Xinjiang tensions was a drastic change in the visa regime which seriously pissed off many tourists and business-people. As a result, foreign arrivals in Beijing were actually down in 2008 compared to 2007. Has it ever happened that a city hosting the Olympics has experienced a decline in foreign visitor arrivals in the very year the Olympics took place? I doubt it.

- "Misbehavior" by Western politicians caused all sorts of retaliation from the Chinese side: Business licences were delayed, meetings cancelled, contracts not signed, boycotts of French products launched and withdrawn, and on and on. While it is hard to assign hard numbers, it seems entirely reasonable to assume that foreign direct investment was lower than it would otherwise have been.

- Public opinion in the West was negatively affected, adding to an anyway mostly sceptical view of Chinese product safety and quality. Few people will boycott Chinese products because they don't like Chinese politics. But if they're anyway not too thrilled by those products, it may well be the final push that causes them to leave Chinese-made stuff on the shelves.

All in all, it seems entirely reasonable to assume that the Tibet crisis had a negative impact on China's Q2-Q4 2008 GDP of at least 0.5 %. Not huge, but not negligible either.

(Oh, I forgot to mention: According to official statistics, Tibet's economy grew 10 % in 2008. Yeah, sure. Must have been all those tourists...)

Chinese shipyards

According to China Daily, Chinese shipyards saw their orders shrink by 41 % in 2008. A further drop of 48-66 % is expected for 2009, as well as cancellations amounting to 15-25 % of existing orders.

China had 3,050 shipyards (as of late 2006). The largest, China State Shipbuilding Company, says it has 8.8 % of the entire world's ship-building order-book (in total, China claims to have a market-share of nearly 50 % measured by order-book-size).

China's ship-yards focus on bulk freighters (such as the ones hauling iron ore from Australia to China), which make up 66 % of orders. Oil tankers account for 18 % of orders, container vessels for only 9 %.

Presumably, current production is still going strong due to the order backlog, and will only start dropping off later this year or 2010. However, the mid-term outlook is certainly grim: Massive overcapacity implies zero new demand for all standard-type vessels.

I couldn't find industry revenue figures. However, China Daily reports the industry's 2008 net profits as 28 bn RMB. Assuming a profit margin <10 %, revenues would have been >300 bn RMB (>1.5 % of China's GDP).

There certainly won't be any more profits going forward. Nor will there be many jobs left.

Crystal-ball gazing: China's economy

China's Q4 GDP supposedly grew 6.8 % yoy. Meanwhile, yoy electricity use contracted 7 % in November and 9 % in December.

Considering the pronounced weakness in energy-intensive sectors such as steel, cement and construction, a drop in electricity use isn't necessarily at odds with overall GDP growth (though it's a bit hard to say, because industrial heat generation doesn't rely on the electricity grid, but on other sources, mostly coal-fired ovens).

Still, the extent of the gap is strange: Household electricity use should be quite constant, so the drop must be due to a very sharp decrease in heavy-industrial output. Makes 6.8 % yoy GDP growth sound a bit unlikely.

And now we are told yoy electricity use in Jan/Feb was still down 3.7 %. But steel output is up 2 %, and cement output 17 %.

So if energy-intensive heavy-industry output is indeed up, how come overall electricity use is still down?

Assuming the numbers are correct, the only possible explanation is a sharp slow-down in light manufacturing.

The 50 % Jan/Feb yoy decrease in Taiwan's exports to China points in the same direction.

Doesn't bode well for Q1 GDP, I'd say.

Germany's fiscal stimulus

Big headline in today's Sueddeutsche Zeitung: Obama and Summers are asking for much bigger European stimulus package.

Apparently, Obama has even said that the current economic downturn is to a large extent due to Europe's economic weakness, which according to him has negative effects on the US economy.

Yeah, right.

Germany's fiscal position will go from a balanced budget in 2008 to a deficit of roughly 5 % in 2009, and to an even bigger deficit in 2010. And that doesn't even include the various bailout packages, loan guarantees and export guarantees.

If that isn't expansionary fiscal policy, then what is?

(I know, official projections foresee a deficit of 3 % for 2009, and 4 % for 2010. But they are far too optimistic regarding unemployment and corporate tax receipts)

The world has to face the fact that the current downturn goes hand in hand with a huge sectoral shift in demand. No amount of stimulus will change that. Spending money on useless things makes no sense, unless you want to argue that people are genuinely happier doing useless work (wasting scarce resources in the process) than being idle. The only thing that stimuli can and should do is soften the impact of the downturn, and keep the economy from falling into a downward spiral.

Export dependency

The fact that Japan and Germany are doing particularly badly in the current crisis is often blamed on their "export dependency".

That's a bit misleading: It's not the export dependency. It's the product portfolio.

Imagine a small country that specialises on supplying McDonald's with its worldwide needs for hamburger buns and beef patties.

Such a country might be hugely export dependent. Yet it would be doing splendidly right now.

Whereas Germany and Japan specialize on providing the world with sophisticated and expensive capital goods. And demand for this kind of goods works like this:

- When the world economy is growing fast, the stock of capital goods needs to be extended fast.

- When the world economy stagnates, demand for capital goods drops to replacement level only.

- When the world economy is shrinking, demand for capital goods collapses, as there is excess supply based on the already existing stock alone

Assume a truck has a useful live of 20 years, and a company operates 100 trucks:

- If trucking volume grows by 5 %, it needs to order 10 trucks per year

- If trucking volume is stable, it needs to order 5 trucks per year

- If trucking volume drops by 5 %, it needs to order no truck at all

That's roughly where we stand right now:

Demand for consumption goods (= trucking volume) is "only" declining a bit, but the need for capital goods (= trucks) goes down by nearly 100 %...

German demographics

For a while now, Germany's family ministry has tried to put a positive spin on birth rates, which happened to increase slightly both last year and up to Q3 2008.

Unfortunately, there has been such a sharp drop in October and November, that overall births in 2008 are likely to be lower than in 2007.

To anybody who knows about Germany's age structure, this does not come as a surprise: The number of women aged around 40 (and therefore about to leave child-bearing age) is much larger than the number of women in their mid-twenties. If fertility rates stay constant, this automatically implies a decreasing number of births every year going forward.

It seems that fertility rates have been edging up a bit lately, in spite of the recent drop. Still, it doesn't make much difference to population projections if fertility rates are 1.35, 1.40, or 1.45.

The conclusion is simple: Germany's population will inevitably decline significantly during the next 30 years. Anybody who thinks net immigration will even begin to make up for the fall is delusional.

Montag, 9. März 2009

The container shipping disaster

There used to be a time when container shipping grew at annual rates of 10 % or more. That time seems like a distant memory, yet we were still living in that world as recently as last summer. Investors, convinced that the good times would never end, ordered new container vessels like never before. As a consequence, new deliveries scheduled for 2009 will amount to 15 % of the current world container fleet.

That's right:

Shipping volumes are plummeting, yet capacity goes up by 15 %.

As a result, there are three things you definitely don't want to be right now:

1. A shipyard building standard commercial vessels

2. A container shipping line
(or more broadly speaking: owner of container ships)

3. A bank specializing in shipping finance

German money is heavily involved in 2. (Hapag-Lloyd comes to mind, plus loads of private money, much of it due to tax breaks intended to benefit the German shipping industry) and 3. (HSH Nordbank comes to mind, see previous post)

Germany is also a major player when it comes to building container ships, though China and Korea are more heavily exposed.

According to the FTD, the world's ship-yards still have an order-book worth 540 bn $ (all kinds of commercial vessels, not just container shipping). It's unclear how much of this can be cancelled. What is clear is that very little of it has so far been paid.

To illustrate the extent of the gloom 'n doom about to descend on the industry, here are some facts and numbers:

- Current freight-rates are somewhat below variable costs. In other words, it's hard for a shipowner to cover the running costs of his ships. He earns zero to cover depreciation and financing costs

- 11 % of the worldwide container fleet have already been idled as of late February. Industry observers estimate this percentage will double in the mid-term

- Much of the rest of the fleet is sailing half-full, at reduced speed (to save fuel), and taking detours (going around Cape of Good Hope to save Suez canal charges, for instance)

- Container throughput at China's ports has dropped 17 % yoy in February (and China is supposed to be the world's most dynamic economy)

Of course it's unlikely that shipping traffic will continue to fall at such a steep rate. But there is absolutely no indication that it will resume growing in the forseeable future.

And even when economic recovery finally comes, why would European and American imports from Asia resume growing at 5-10 % p.a., if their economies are growing at best 1-3 %? Just because there used to be huge growth rates in the past doesn't mean a trend can't come to its end. There's such a thing as a saturation point. And not to forget: Fuel charges will also start rising again if/when the world economy stages a convincing recovery.

To conclude, here are a few snippets regarding Neptune Orient Lines, a major Singapore-based shipping line (and yet another gem in Temasek's fabulous investment portfolio):

- NOK suffered a year-on-year volume drop of 35 % during the first six weeks of 2009. Revenue per container also went down 12 %, so total revenues dropped 43 %

- NOL has balance-sheet equity of 2.5 bn $. Yet its market value has dropped to less than 1 bn $ (a 70 % drop yoy)

- NOL has "property, plant and equipment" (presumably ships as well as port facilities) of 3.6 bn $. Depreciation charges alone are nearly 300 m $ per year.

- NOL has "non-cancellable operating lease commitments" of 6.1 bn $: No matter if they have paying customers or not, they will have to fork out 6.1 bn $ over the next few years.

Anybody want to buy some shares?