Donnerstag, 30. April 2009

Demographics: China vs. Rest of World

Recently, several China blogs discussed the topic of China's rapid aging (e.g. Michael Pettis and Mark's China Blog, both apparently drawing on this source).

The prevailing theme: China is heading towards a demographic catastrophe, as the population is aging fast, and the children of the one-child-policy will face a close-to-unbearable burden. Michael Pettis even argued that "by 2030 Chinese will be older than the rapidly aging Europeans, with one of the highest, perhaps the highest, percentage of people over the age of 65 in the world."

But here's the thing: China may be aging fast, and this will undoubtedly cause all sorts of serious problems, but China's fertility rate is by no means extremely low.

Good sources for fertility data are PRB and the CIA. Let's use the CIA data for 2008 and see what it tells us:

- China has a fertility rate of 1.77

- Developed countries with a similar rate: Ireland (1.85), Australia (1.78), Norway (1.78), Denmark (1.74), Finland (1.73), Sweden (1.67), Netherlands (1.66) and UK (1.66)

- Developing countries with a similar rate: Vietnam (1.86), Algeria (1.82), Tunisia (1.73), Iran (1.71), Thailand (1.64), Cuba (1.60)

- Developed countries with a much lower rate: Germany (1.41), Italy (1.30), Spain (1.30), Japan (1.22), South Korea (1.20), Taiwan (1.13), Singapore (1.08), Hong Kong (1.00)

- Developing countries with a much lower rate: Russia (1.40), Ukraine (1.25), all the rest of Eastern Europe (1.2-1.5)

So apparently, China's fertility rate is comparable to or even significantly higher than in most of Europe (with the exception of France), it is much higher than in developing Eastern Europe, Russia, Japan, Korea and Taiwan, and it is quite similar to various Asian and North African developing countries.

What does that mean for China's aging society?

Well, it doesn't make it any easier for China to cope with its aging process, but claims that China will be "older than Europe" and perhaps have the "highest percentage" of 65+ seniors in the world are simply wrong:

- Ceteris paribus, fertility rates determine both long-term population growth/decline and long-term aging of a society.

- If a country has a high life-expectancy, it will grow older than other countries with the same fertility rate. China has high life-expectancy for a developing country, but still lags far behind Japan and Western Europe (though apparently, Beijing and Shanghai already have a life-expectancy on par with the US!). Maybe it will catch up over the next 20 years, but there's no reason to assume that it will surpass those countries. So this cannot explain why China should become older than those lower fertility countries with similar or higher life-expectancy.

- Immigration tends to ease aging, emigration worsens it. China has some net emigration, but it is negligible in % terms. Many of the low fertility countries listed above have low immigration or even substantial net emgiration (in particular most of Eastern Europe). So again, there is no reason why China would become older than Eastern European countries with lower fertility and higher net emigration, or older than any of the various countries with at best small net immigration.

- China has a distorted sex ratio: Normally, 1.06 boys are born for every girl. That's why a "stable population fertility ratio" is usually defined as 2.06 (-> 2.06 kids are needed to have 1.0 girls). In China, the necessary ratio may be as high as 2.20-2.25, as some of China's provinces have a strong prefernce for boys and abort huge numbers of females. This means that China's 1.77 fertility rate equals roughly 1.60 in a country with a "normal" sex ratio. This aspect makes China a bit older, but there are still plenty of countries with lower fertility left on the list.

So which countries will most likely remain older than China?

- East Asian countries with lots of cultural similarities to the PRC (Japan, South Korea, Taiwan, Hong Kong and Singapore) have the lowest fertility rates worldwide, far lower than the PRC. As they also have some of the highest life-expectancies, and - apart from Hong Kong and Singapore - little net immigration, their populations will almost certainly stay much older than the PRC.

- Most of Eastern Europe (including Russia and Ukraine) will fare even worse, as very low fertility rates go hand in hand with substantial emigration. Based on current trends, these countries will probably become the world's oldest societies quite soon.

- Germany, Italy and Spain will do a bit better, but they also have very low fertility rates. Immigration helps a bit, but only Spain has taken in substantial numbers of immigrants in recent years. Germany in particular has seen very modest net immigration. Therefore, it is very likely that Germany and Italy (and possibly Spain if immigration slows down) will also remain quite a bit older than China.

- Iran, Thailand and Cuba are countries with fertility rates, net emigration and life expectancy similar to China. Therefore, they will age to the same extent that China does (though in Iran and Thailand, this will happen a bit later, as fertility rates came down more recently than in China).

(For an earlier post on the same subject, click here)

Shanghai's Economy

According to Shanghai Daily, Shanghai's economy didn't do well in Q1: Whereas China's economy grew 6.1 % yoy, Shanghai managed only 3.1 % growth (remember: this is year-on-year data; as Shanghai's economy still grew in early/mid 2008, it implies significant GDP contraction in Q4/Q1). Industrial production was down 8 %, and exports were down 26 %. So apparently, Shanghai was hit much harder by the export-slowdown than the rest of the country. Strangely, "textiles, furniture and toys were among the worst hit industries". I didn't know these were big industries in Shanghai to begin with, and thought that Shanghai specialized much more on electronics. But electronics aren't even mentioned.

Also according to Shanghai Daily, Shanghai's consumers spent 3.1 % less than Q1 last year. Though that seems to contradict the other article, which claims that retail sales (including hotels and restaurants) rose 14.1 %. How can consumption drop 3.1 % when retail sales go up 14.1 %? I have no idea. China's seemingly contradictory stats never cease to amaze me...

(Hat tip China Hearsay for the links)

Random tidbit from UK

According to this article, average UK private sector wages contracted by 7.7 % in February compared to Feb last year. That's per worker, i.e. it doesn't yet factor in that the number of jobs decreased as well.

(For comparison: Public sector wages increased 3.2 %, and consumer price inflation was 2.9 %)

The number becomes a bit less shocking once you realize that February is prime bonus season in financial services, and average bonuses dropped 60 % yoy. According to the article, it is estimated that wages excluding bonuses stayed flat.

Isn't it amazing that 2008's financial sector bonuses apparently accounted for 13 % of total UK wages paid in the month of February? (-> drop of 60 % leads to overall drop of 7.7 %).

Mittwoch, 29. April 2009

German pensions: A ticking time-bomb?

Is Germany's pension system a ticking time-bomb?

Politicians tell us it isn't. Pension entitlements are based on complicated formulas taking into account the sum of wages paid and the number of pensioners. This will keep pension contributions more or less constant at the current 20 % of applicable salaries.

Sounds to good to be true?

Well, that's because it is. Contributions can be kept at 20 % only if pension age is increased (the standard pension age will soon be raised to 67) and the level of pensions keeps going down relative to salaries. There is no other way: If there are more pensioners per every worker, and the contribution rate stays constant, the pension entitlement has to decrease. If the purchasing-power of salaries increases fast enough, this could still mean that the purchasing-power of pensions stays flat, which wouldn't be too bad. Unfortunately, real wages haven't increased during the last few decades, and they are unlikely to increase all that much in the future (in my very humble opinion). Which can only mean one thing: Real pensions have to go down. And quite a bit.

Do they have "leeway" to go down? In other words: Are they high enough for an average pensioner to have a reasonably comfortable standard of living? Let's see what Deutsche Rentenversicherung's data can tell us:

This page informs us that the monthly "Standardrente" (standard pension) is currently 1,088 € (in West Germany).

"Standardrente" sounds like everyone can expect to get at least that, right? Well, maybe that interpretation is a bit premature: In fact, it's what you receive if you pay in an average contribution for 45 years.

Apparently, not many people manage to do so, because the average pension turns out to be much lower:

According to this page, 24 million people receive pensions, and the total monthly pay-out is 16 bn €. That boils down to an average monthly pension of... 670 €.

If you have neither a company pension, nor savings, nor own a house, how can you live on 670 €? Well, I suppose you can somehow get by (also considering that it's per person, i.e. couples get twice that amount), but the thing is: That's the average pension. Plenty of people get a lot more (as illustrated by the "Standardrente" of 1,088 € based on average contributions for 45 years; if you pay the maximum contribution, you can reach a pension of more than 2,000 €, though I doubt many people manage that), and plenty of people receive less. And for all those living on below-average pensions of 600 € or 500 € or 400 €, any further reduction in purchasing power going forward will be quite intolerable. If they can't live off their pensions anymore, welfare payments will have to fill the gap.

Unless of course something else happens: Whenever the formula implies a particularly hard year for pensioners and an election looms (and don't they always loom somewhere?), politicians will tweak the formula. A few billion more subsidies here, a few billion more subsidies there, and presto, the pain isn't so bad.

Either way, Germany's lack of kids will prove to be costly. Very costly.

Dienstag, 28. April 2009

Deutsche Bank

Ackermann likes to brag that Deutsche Bank needs no government support. But the thing is: While the bank has no formal government guarantee in place, it will surely be able to get government support if it turns out to be needed. All market participants know this, and they do business with Deutsche Bank based on this implicit guarantee, provided for free by the German taxpayer. That certainly improves Deutsche's business prospects, and lowers its funding costs. So maybe, just maybe, Ackermann would be well advised to keep a lower profile...

German Pensions

In the US and Canada, pension funds have huge exposure to the equity market. As a consequence, pension entitlements are down sharply across the board.

Meanwhile, Germany's labor minister recently announced a 2009 pension hike of 2.7 % for West Germany (3.7 % for East Germany). Pensions are linked to the previous year's sum of all wages. 2008 was a good year for employees (Q4's GDP crash didn't immediately affect the labor market), the sum of wages was up sharply. It also helped that health insurance premiums were lowered.

However, 2009 is a different story: The number of jobs is declining. Millions of people are on temporarily reduced hours (Kurzarbeit). Wages are frozen in many companies, and sometimes cut. In short, it's quite likely that the sum of wages will decline compared to 2008. Not as much as nominal GDP, which will be down 5 % or so based on current projections. But decline it will.

According to today's Sueddeutsche Zeitung, researchers now project a decrease of 2.3 % (assumptions are not provided, but it doesn't sound implausible. Possibly a bit on the pessimistic side, but not by much). Olaf Scholz, the labor minister, disagrees: "The government's calculations" apparently indicate pensions can rise in 2010. Of course he didn't provide a concrete number, and he didn't share those mysterious "government calculations" with the press. And anyway, just to be on the safe side, he wants a law passed that makes it impossible for pensions to be cut. Ever. Other politicians dislike passing a law, but agree that pensions must not be cut.

I also think pensions should not be cut. If we anyway need fiscal stimuli for the economy, subsidising the pension system to avoid a cut probably counts among the most sensible measures with the least potential for "wasteful spending". Still, it's interesting how much such a measure would cost.

According to the Deutsche Rentenversicherung, the sum of contributions paid in 2008 was 179 bn €. The government added another 56 bn €. (Yes, that's right: Nearly 1/4 of all pension payments are not financed by contributions, but out of the government budget, i.e. the taxpayer! I didn't know it either, only learnt it just now. Imagine that: Germany is just starting to feel the effects of an ageing population, but the government already now pays 1/4 of the pension bill to keep pensioners happy! What will happen in 10 years, when the population is much older, and political pressure to keep pensions from eroding keeps going up?)

Let's assume the sum of wages drops by 2 % in 2009. As a consequence, the government would have to add 3.6 bn € in subsidies (on top of what it anyway pays) to keep inflows constant. After throwing in a few billion for extra expenditures in spite of constant individual pensions (the number of pensioners is going up, and health care costs are also rising), we probably end up around 6 bn €. That's 0.25 % of GDP. Hardly noticeable compared to the projected deficits, isn't it? (The fiscal deficit for 2009 will be at least 4 % of GDP = 100 bn €, quite possibly more.)

It doesn't look like much in absolute terms (hey - Deutsche Bank alone already lost more money than that in 2008!), and it is a sensible short-term measure. There's only one problem: Once you increase those subsidies, they will be next to impossible to undo. Ever.

(See also: Previous post on this subject)

Montag, 27. April 2009

Chinese Banks

Banks everywhere are struggling to stay alive. Banks everywhere? No, there's a mystical faraway country where things are different: Chinese banks are still posting record profits.

ICBC's Q1 results were out today, and profits are up 6 % yoy. Quarterly profits of 35 bn RMB = 4 bn €. If they can keep that sort of performance up for the rest of the year, they'll be posting more than 15 bn € of 2009 net profits.

Two things struck me as noteworthy:

- Everyone keeps talking about the massive increase in lending by Chinese banks. But ICBC's balance-sheet shows that bank deposits have risen even more. In other words, it's not just borrowers wanting more money. It's also depositors saving more.

- Fascinatingly, loan loss provisioning is down sharply from last year. Their net reserving in the quarter was just 400 m €, less than 0.1 % of their loan book. It's obviously in accordance with HK-GAAP. But can it really be appropriate? Is it conceivable that there are hardly any default risks that should be provided for?

In any case, the numbers as stated are very, very good. Let's see if they stay that way over the next few quarters...

Hypo Real Estate

HRE published its full annual accounts over the week-end.

The number that was pre-released to the press some time ago was a loss of 5.5 bn € in 2008.

A quick look into their balance-sheet tells us that they really lost 7.8 bn €, not 5.5 bn €, because an additional 2.3 bn € was booked into their "revaluation reserve", which is now a negative 4.2 bn €.

Total equity is now officially negative, at -1.5 bn €.

We are also told that "pre-tax profit is expected to be negative at least in 2009 and 2010", because "further impairments ... expected as a result of the downturn in the economic climate".

Can anybody tell me any reason why the government is offering 1.4 € per share for a bankrupt bank with negative equity and more losses in the pipeline?

Mountains or Molehills?

On the week-end, the SZ had front-page news about a "leaked" list of problem assets at German banks. In essence, the article says: "According to a list, there are 816 bn € of problem assets, but we can't really give you a breakdown, and we can't really say how much of a problem those assets really are. Maybe a big one, maybe a small one. Heaven knows."

I find it a bit frustrating how the German press keeps tossing around numbers that are essentially meaningless. Take Hypo Real Estate as an example:

Sure, the bank is a big mess, no doubt about that. But according to the list, it has 267 bn € of problem assets. Their latest financial statements (9/08) tell us that the bank has total assets of 392 bn €.

So 70 % of their whole book (which mostly consists of loans, not subprime securities) is "problem assets"? Well, if you classify every loan that may possibly have to take some sort of haircut due to falling real estate prices as a "potential problem asset", you may end up at 267 bn €. But it is quite inconceivable that HRE will incur losses that come anywhere close to 267 bn €. And because of that, the number as such is meaningless. All it does is tell the public: "The risks are huge." Which they undoubtedly are, but you don't need an arbitrary 816 bn € number for that.

Having said that, I also think it is ridiculous that BaFin now wants to prosecute the people reponsible for the leak. Instead, they should make a full disclosure and tell people exactly what the list means, caveats and limitations and all.

Samstag, 25. April 2009

Remember SARS?

According to press reports, a new kind of flu, apparently linked to pigs, has spread in Mexico City. More than 60 people have died, more than 1,000 hospitalized. All schools and most public buildings have been closed indefinitely until further notice. Several cases have been reported in the US as well. Japan and Brazil have reacted by starting to screen all incoming passengers from Mexico.

This could fade away into nothing. Or turn into something big. No idea. But remember SARS? It basically managed to shut down half of Asia for several months. And while it was more deadly than this new illness seems to be, it didn't spread so easily, i.e. it wasn't too hard to contain it once people were fully aware of it.

Imagine an illness that makes a few hundred million people seriously sick for several weeks, kills a few million, and essentially shuts down public life for a few months. Just the right thing for a world economy struggling to recover from a mega-recession.

Hmmm. Economists have weird priorities, I suppose: Instead of worrying about the economy, we should probabably worry more about falling sick and dying...

Edit/Update: In the office today (Monday), several (female) colleagues were downright panicky. They were (in all seriousness) discussing about how they are way too young to die, how society might collapse, etc. When I pointed out that even a very serious epidemic with several million dead worldwide would imply that each individual only faces a 0.1 % likelihood of dying (probably less in the developed world with access to medication), they nodded, but I had the impression they were just waiting for me to leave the room to be able to continue with their doomsday scenarios...

Update (Monday evening): According to BBC, 149 people have now died, and all of them are aged 20-50. That people in this age group are apparently dying in large numbers is indeed a bit worrying.

Bad Bank Babbling

Following a heated discussion on various bad bank proposals (as documented in the various links in this post), I thought it might be helpful to summarize the various ways that problem banks can be dealt with:

1. Muddling through

The "simplest" option is to do nothing: Solvency standards are relaxed, accounting standards changed, in the hope that the problem will eventually go away. After all, if the banks are profitable with their new business, they will eventually earn enough to cover the current hole, right?

The advantage: No courageous and difficult political action is required

The problem: Bank customers are not stupid. Especially not now, after all that has happened. So they will be extra-careful, and refuse to do business with any shaky bank that doesn't receive comprehensive government guarantees. And that means: If things work out well, and future profits start flowing, they will eventually flow to shareholders again. Whereas if things don't work out well (if the hole is simply too big to be filled), the taxpayer is on the hook.

In other words: Socialize losses, privatize the gains.

There are several variations of "muddling through":

a) Do absolutely nothing

Simply allow the banks to go on with their business. If they can raise additional capital on the market, they should. Whereas if they can't, the government has to extend guarantees to keep the customers happy. Discussion: See above.

b) Create bank-specific "bad banks" without external help

In other words, banks put their toxic assets in newly created subsidiaries / SPVs. As long as they get no outside guarantees, and no external party buys any of the assets, this doesn't change anything: The bank still owns the same assets, they are simply one legal layer removed. "Smoke and mirrors", in other words. The vanSuntum proposal is part of this category.

c) Create an industry-wide "bad bank" without external help

This is the Enigma/Blick-Log proposal: Banks have to pool their bad assets in an industry-wide captive insurance pool. This is better than a/b, because it eliminates the non-systematic risk (that one bank's bad assets perform worse than average). However, the systematic risk (that the total industry's bad assets perform worse than expected) remains.

In my impression, the systematic risk element of the current mess is much more important than the non-systematic risk. Therefore, while I believe that this proposal helps a bit, I also believe that it doesn't go far enough: If the overall hole turns out to be too big for the industry to handle, the taxpayer needs to step in to socialize the losses. Whereas if the hole turns out to be smaller than expected, the shareholders of the various banks get to privatize the profits.

Oh, and there's also a technical problem: You need to allocate the various assets to "risk classes" and assign insurance premium payments to each class. This is highly subjective, and once you force companies to take part, there will be endless haggling about "fair" premiums (with every bank insisting that its main asset categories are less risky than other banks main asset categories). While you can set the premiums ex-post based on actual incurred losses, that obviously reduces the insurance-element of the scheme: If asset class A ends up with huge losses, and asset class B ends up with small losses, and you retroactively assign huge premiums to class A and small premiums to class B, what happened to "insurance"? You'd effectively have separate insurance pools for separate assets, and that would sharply reduce the desired spreading of risks between the various banks.

2. Remove problem assets

The government can acquire the problem assets, or "insure" them (i.e. guarantee them against a fee). There are essentially two approaches here:

a) Pay "fair value" and/or charge a "fair fee".

The advantage: If the prices are indeed "fair", there is no wealth transfer from taxpayer to shareholders.

The problems: First of all, who determines the "fair" bit? With all the political pressure, subjectivity all too easily translates into intransparent fighting among lobbyists and interest-groups. Secondly (and quite possibly even worse): It's quite likely that a removal of assets at "fair value" means that many banks are insolvent. Which brings us back to scenario 1, i.e. the taxpayer havnig to guarantee the downside (otherwise, the insolvent bank cannot survive), whereas potential upside can still go to the shareholders.

b) Pay a "generous value" and/or charge an "affordable fee".

The advantage: The banks become more healthy, insolvency risk recedes.

The problem: The taxpayer pays for it all, and the shareholders can rejoice.

IMHO, this is by far the worst of all possible options.

3. Nationalization

If a bank cannot meet a reasonable solvency standard (based on reasonably honest accounting rules), shareholders are asked to provide additional capital. If no private investor is willing to commit additional capital, this proves that private investors consider the bank's fair value to be negative. Therefore, it can be nationalized without any compensation for existing shareholders.

The advantage: From then on, it's "left pocket, right pocket", no more wealth transfer from taxpayer to shareholder. If there is any long-term upside, the taxpayer gets it in return for taking care of the current mess.

The problem: If the hole is big, the cost for the taxpayer is big. But it's still better than filling the hole and giving parts or all of the upside to the shareholders (as is the case in options 1 and 2).

As for corporate governance: Politicians are not good at running companies. That's obvious, and the Landesbanken mess is just the latest reminder. So it would be important to minimize political meddling and to make sure the banks are managed like private companies. It would probably help to have them report to the finance/economics ministries in Berlin, as opposed to state presidents. Ensures at least a minimum level of economic/business know-how that seems to be completely lacking on a state-level (if the Landesbank debacles are any guide).

And yet another, long-term caveat: When the banks are eventually reprivatized, care needs to be taken that they are not sold off too cheaply.

4. Controlled insolvency

The most radical proposal: Why should the bleeding be limited to the shareholders and the holders of hybrid capital? Why do unsecured creditors need to be protected? Sure, "normal" bank deposits are sacred. Too many political promises have been made, and it makes sense to protect the "little man". Secured creditors are also protected, because they have their collateral. But unsecured creditors can take losses.

In other words, the banks should enter insolvency proceedings. That doesn't mean they should close down. Business can and should continue, but creditors need to accept a haircut, quite possibly a severe one. It happens all the time in other industries, why not in banking?

The advantage: Taxpayer cost is minimized. It might still cost something if the hole turns out to be really huge, but definitely far less than in all other options.

The problem: It would be the end for nearly every Western financial institution (as in: none of them would survive with its present ownership structure intact). Much (if not most) of unsecured debt is held by other banks and insurance companies. It was hard enough for the system to survive the Lehman collapse. Any more big institutions to go down that route, and all the dominoes will be falling. It would take a lot of political courage to effectively restart the world financial system from zero. And it would take extensive international cooperation and agreement: Once one big country goes down that route, it effectively forces all other countries to go along (Think AIG: If the US had not propped up AIG with government funds, Deutsche Bank would apparently have lost 13 bn $. Game over for Deutsche Bank). The international repercussions could be huge, because some countries would lose out, and others would gain. As for Germany, there's an additional aspect to consider: The biggest part of the problem are the Landesbanken. Can the government as owner of these banks really refuse to inject more capital and to let unsecured creditors bite the bullet? Is it politically feasible to let state-owned banks screw up and then pretend they are limited-liability companies, bye-bye and thank you very much?

Summing up:

IMHO, option 4 is the most consistent one from a theoretical point of view. It would also be the fairest one, because it places the pain with the investors (which bought shares and bonds of their own free will), not with the taxpayer. But it's not politically feasible. Way too complicated. So the "smallest evil" is probably option 3, i.e. nationalization (without paying anything to shareholders and hybrid capital owners). Options 1 and 2 involve unnecessary and inappropriate transfer of wealth from taxpayer to shareholders.

Freitag, 24. April 2009

Opel and Fiat

So Fiat has expressed interest in Opel. Never mind what anybody with the slightest M&A experience knows: 90+ % of "expressions of interest" lead nowhere. And never mind that Marchionne is also negotiating with Chrysler, and it seems rather unlikely that Fiat can do both things. He probably just prefers to have two balls in the air instead of just one. That's always good for your negotiating position.

What I fail to understand is this: The unions and the SPD immediately start shouting: "No way! Not with Fiat!". Their reasoning: Fiat and Opel produce similar cars. So there is obvious potential for efficiency gains, which would lead to job losses and possibly factory closures.

Well, isn't that the point? When a company has problems being profitable, and the problems are so bad that its whole survival is at stake, what you do is: You look for a way to cut costs, and to improve economies of scale. A Fiat-Opel merger would make perfect sense from that perspective.

What would be the alternative? A financial investor running Opel on a stand-alone basis? Adding value... how exactly? Yeah, sounds very promising.

In addition, the unions fear that jobs will go to Italy. Opels coming out of Southern Italian factories, with German factories getting closed. According to the FTD, Opel's Gesamtbetriebsratschef (boss of workers' council) Klaus Franz said: "Fiat would take out a sharp pencil and make calculations as to which factories have to be closed. We would have to suffer for Fiat's sins."

Not quite sure why this should be the case: As Fiat doesn't exactly have money to burn, it would presumably assess the various factories by merit (isn't that what even Franz himself said: They would use a sharp pencil to make their calculations!). If Opel's factories pass the test, why would they be closed down?

Plus, with all the government guarantees and high political profile of the whole thing, they'd be crazy if they didn't make sure to properly spread the pain. Sure there would be cuts at Opel, but there would have to be cuts everywhere anyway.

There is no ideal solution for Opel. But it seems to me that a merger with Fiat would be the lesser of various evils.

A Korean Miracle?

As pointed out by Creditwritedowns, the Korean economy managed to stagnate in Q1. Quite an amazing feat, considering that just about every developed country expects to suffer record GDP drops. More details on the GDP release here.

However, after taking a closer look, it becomes clear that the "miracle" isn't quite so miraculous after all: Together with Taiwan and Singapore, Korea was among the countries worst hit in Q4, with annualised q-o-q GDP dropping around 20 % (Germany's annualized drop was "only" 8 %, and Japan contracted 12 %). So in a way, Korea has dropped to the bottom first, and other countries are still "catching up". Still, it is sort of encouraging when a sizable country such as Korea has somehow managed to stop its free fall.

(On a side note, the Korean Won has devalued quite drastically over the last 12 months. So exports competitiveness has improved, whereas Koreans' wealth in terms of "foreign purchasing power" has decreased. Among other things, this has lead to an exodus of Korean residents in Beijing: According to this report an amazing 50,000 of them have left Beijing for Korea. Why? For one thing, many Korean families sent their kids to study in Beijing's international schools, because it was so much cheaper than in Korea. No longer, it seems.)

Another Bad Bank Proposal

Interesting discussion (in German) at Weissgarnix regarding yet another bad bank proposal made by Prof. van Suntum (INSM).

I won't discuss it here, as I already left lots of comments over there. Suffice it to say that I agree with Weissgarnix, who calls it "Nebelkerzen" ("smoke and mirrors").

Other posts on this topic (in German): right here, Blicklog and Verlorene Generation

Donnerstag, 23. April 2009

McDonald's and the Crisis

Some people argue that McDonald's is benefiting from the crisis because people want cheap eats. For example, this source comments on the Q1 results:

"The positive result is due, in large part, to the crisis. With limited resources people tend to forgoe traditional restaurants when eating out opting for cheaper options"

A closer look at McDonald's financials does not support such a view:

Fx-adjusted worldwide revenues grew 1 % in 2008 (compared to 2007), and 2 % in Q1 2009 (compared to Q1 2008).

(Actually, McDonald's stresses growth of 4.3 % in its Q1 presentation, but that's so-called "comparable sales", not total fx-adjusted sales, which are hidden further down in their announcement)

I suppose it's fair to say that McDonalds is not particularly affected by the crisis. But if they are benefiting from it, how does that square with 1-2 % growth?

Interesting detail for China-watchers:

According to this report, Mc Donald's admitted that "we have seen a slowdown in China due to the economic environment there". Apparently, "customer traffic continued to grow in China during the quarter, but average purchases declined". Furthermore, it is mentioned that revenues were particularly weak in Southern China "due to the closure of many factories". No total China sales revenue figures are provided, so it's a fair assumption that they actually declined, or at best stagnated.

Interesting, isn't it? Statistics China tells us that Q1 retail sales (including restaurants) are up 15 %. But McDonald's is seeing enough of a slowdown to actually point it out in its results presentation...

However, McDonalds is far from being fast-food market leader in China. That honor goes to KFC, part of Yum Brands. Its China sales were up 20 % in 2008, and 12 % in Q1 2009. A slowdown, yes, but 12 % growth is far from catastrophic (source: company press release).

So maybe it's not the Chinese economy: Maybe the Chinese just don't like McDonalds all that much.

Expanding Germany's Airports

According to the Handelsblatt, German politicians are arguing that Germany's major airports urgently need to be expanded.

The list is long: Frankfurt, München, Berlin, Düsseldorf, Köln/Bonn, Hamburg and Stuttgart apparently all require a substantial expansion. Emphasizing the role of airports for "growth and employment", the transport ministers of the federal government and various state governments think that the "future of German exporters" depends on an adequate expansion of airport capacity. If capacity is not expanded quickly and aggressively, air cargo traffic will move to Holland and France. Due to the sense of urgency, they suggest that cost-benefit-analysis and updated demand projections are unnecessary and should not be carried out.

I see. Has anybody told them that both passenger and air cargo traffic have been plummeting for more than half a year, and any recovery to pre-crisis levels is likely to take a long time?

Mittwoch, 22. April 2009

Japan's Exports

Japan's exports are still incredibly weak: March data is out now, and there is no sign of improvement: Total exports are down 46 % from last year, similar to the drops seen in Jan and Feb.

Worst-hit are cars and electronics, but every major sector is down sharply. The collapse extends to just about every destination country: UK -61%, US -51 %, Germany -48 %, China -32 %, to name just a few major markets.

Imports are also down sharply (-37 %).

But I suppose people can see positive signs even in the worst data. The BBC quotes a Japanese economist as saying:

"The worst of the decline in exports may be over, and there are some positives to take from this data. Exports to China are falling at a slower pace and may improve further due to the Chinese government's stimulus package." Interpreting a 32 % year-on-year drop of exports to China as a positive sign - that's certainly what I would call a "positive attitude"...

Germany's Bad Banks

According to the FTD, the current government thinking regarding "bad banks" is as follows:

- Sell toxic assets at fair value to SPV

- Government guarantees the fair value, and receives guarantee fee from banks

- If final value falls below estimated fair value, government makes up for the shortfall

- If final value is in excess of fair value, the bank gets the upside (this part is a bit unclear, because it is not explicitly stated; but usually, a guarantee only covers the downside -> if the government were to take up- and downside of an asset transferred at fair value, there would be no need for a guarantee and a guarantee fee, the government would simply take over the asset, and that's that)

Quick assessment:

If the assets are indeed transferred at "fair value", and the government receives an "appropriate" guarantee fee, that's a reasonable solution.

However, there's an obvious problem: Who will determine the "fair value" and the "appropriate guarantee fee"?

(If the "fair values" are too generous and/or the fee too small, then bank shareholders win and the taxpayer loses out.)

More on Germany's GDP

According to Der Spiegel, forecasters are now expecting Q1 year-on-year GDP of -6.3 %. For Q2, they see things worsening to -8.2 %.

Based on the analysis in my last post, this would mean a further contraction of 2.6 % from Q1 to Q2 (and Q1 also being a bit worse, with -3.3 % from Q4).

If this proves true (and assuming stagnation in Q3 and Q4), we would indeed be at -7 % for the full year.

I don't claim to have a particularly good crystal-ball, but intuitively, I still don't believe it will be that bad. We will see.

Dienstag, 21. April 2009

The Arcandor Success Story

Arcandor, owner of Thomas Cook, Karstadt department stores, and various mail order retailers, is a never-ending turnaround story.

The latest press release says:

"Für die Umsetzung dieser Maßnahmen rechnet der Konzern zusätzlich zur anstehenden Refinanzierung im Sommer 2009 in den kommenden 5 Jahren mit einem weiteren Finanzierungsbedarf von bis zu 900 Mio. €. Derzeit basiert das Refinanzierungskonzept im wesentlichen auf einer weiteren Bankenfinanzierung. Zusätzlich dazu prüft der Konzern jedoch auch Optionen für eine staatliche Unterstützung."

So in addition to the money Arcandor anyway needs to refinance, the latest round of restructuring leads to additional capital needs of 900 m €. And they expect banks to provide that money, but are hoping for government assistance in case that doesn't work out.

Arcandor's financial statements for the year ending 9/08 show net equity of 1.2 bn €, a net asset value (net equity after deducting intangibles) of -3.5 bn €, and net loss of 750 m €.

And it gets better:

In the 12/08 interim report, they show a quarterly loss of "only" 58 m €, but equity is down to 0.7 bn €, and net asset value is down to -5.8 bn € (2.3 bn € deterioration over just 3 months!).

The reason for the extreme drop? Apparently "fx changes" (they have a lot of UK an Eastern European assets) and "value changes of derivatives".

Based on such figures, why would any sane bank lend them still more money?

As for government assistance for department stores, mail order retail and a UK-based travel company: Are they serious?

Montag, 20. April 2009

Germany's 2009 GDP

Forecasts for Germany's 2009 GDP currently range from -3 % (Allianz) at the most optimistic to -7 % (Commerzbank) at the gloomiest end.

Let's take a closer look at what the various forecasts actually imply:

Seasonally-adjusted quarterly GDP dropped all through 2008, i.e. Q1 GDP was the highest, and it went downhill from there:

Q1 to Q2: -0.5 %
Q2 to Q3: -0.5 %
Q3 to Q4: -2.1 %

We know that Q1 2009 will be dismal, probably around -3% compared to Q4. Compared to Q1 last year, that would be a drop of 6.0 %.

Now let's assume the economy will stagnate after Q1, i.e. no further fall, but also no growth.

This would mean that the year-on-year growth gets better (or rather: less bad) from quarter to quarter:

- Q2 would be -5.6 % compared to Q2 last year
- Q3 would be -5.0 %
- Q4 would be -3.0 %

Average for 2009 would be -4.9 %.

In other words:

Anybody who forecasts a drop of more than 5 % implicitly assumes that things will keep going downhill:

- To reach -6.0 %, you would need to (e.g.) assume further quarter-on-quarter drops of 1 % in Q2 and Q3, followed by a stagnating Q4.

- To reach -7.0 %, you would need to assume drops of 1.8 % in both Q2 and Q3.

And anybody who forecasts a drop of less than 5 % assumes that things will start improving:

- To reach -4.0 %, you would need to assume quarter-on-quarter growth of 0.7 % in Q2 and Q3, followed by a stagnating Q4.

- To reach -3.0 %, you would need to assume growth of 1.5 % in both Q2 and Q3.

My personal guess is that things will more or less stagnate beyond Q1, possibly grow a bit. That would leave us between -4.5 % and -5.0 %.

Sonntag, 19. April 2009

China's Export Dependence

According to this week's Economist, China "is less dependent on exports than is commonly believed". More specifically, exports supposedly make up 18 % of total domestic value-added, which equals roughly 45 % value-added content of China's exports (based on exports = 40 % of GDP). I wonder how The Economist knows this exact number is true, considering there is ongoing heated debate on the subject. But 18 % is indeed within the range that most observers consider to be realistic.

Now here's the thing: The Economist also claims that exports were only a secondary factor in the slowdown of the Chinese economy, with a "collapse in the property market and construction" being the more immediate reason. I don't disagree, but I wonder if the export slowdown is really so "secondary":

Assuming a "normal" growth-rate of 10 %, and taking into account that Q1 exports droped 20 % year-on-year, the export slowdown from 10 % growth to 20 % decline equalled -5.5 % of GDP (0.18 * 30 %). So assuming everything else had stayed constant, the export slowdown alone would have slowed the Chinese economy from 10 % growth to 4.5 % growth.

In fact, it grew 6.1 % (according to the GDP release). So the rest of the economy must have grown faster than 10 % to keep it growing at that speed, no? (Otherwise, total growth would have had to be less than 4.5 %, not 6.1 %)

So what happened to the famous domestic slowdown? The one everyone seems to agree on? Well, as already discussed in previous posts, it's nowhere to be seen in the GDP release data: Investments and consumption are supposed to be up strongly. So based on that, it's a pure export-led slowdown. The domestic slowdown may have existed in late 2008, but according to the official numbers, it was already over in Q1.

But let's revisit the export dependency assumption once more:

Thursday's FT had yet another article on the mystery of China's export dependence. It quoted a study, according to which a 150 $ Made-in-China IPod only contains 5 % Chinese value-added, and only 2 % of all related wages are paid to Chinese workers.

(Tried to locate the article, and found different versions here, here , here and here )

While it is obviously pointless to try and deduce China's overall export-exposure from the study of one particular product, I think this once again drives home an important point:

A headline number like "China's exports are down 20 %" can tell us very little without further info:

- If the drop is mostly due to vanishing demand of Ipods, the impact on China's economy will be close to negligible.

- But if the drop is due to vanishing demand for labor-intensive toys, textiles, steel, etc., the impact on the economy is huge.

(Earlier discussions on this topic here)

Oh, and on a more wonkish note:

The studies quoted above set me thinking about a detail with potentially important consequences: Apparently, the main component of the IPod is the harddrive, which is made by Toshiba. The study assigns the "gross margin" of 26 % of the sales price to "Japan", because Toshiba is headquartered in Japan. However, if it is manufactured by a Chinese subsidiary, the "gross margin" would presumably be recorded in the books of the Japanese subsidiary as part of the sales price of the harddrive. It could then be distributed as dividends back to Japan (which would be repatriated profits; in other words, the trade surplus would be articificially inflated, but the current account would not be affected due to offsetting profit repatriation), or reinvested in China for expansion (which would have no impact at all in the current or capital account of China). The gross margin of this one component is estimated at 20 $, as compared to 7 $ for the complete Chinese value-added of the finished IPod. If it is recorded in the Chinese subsidiary's books and reinvested in the country, it counts as Chinese value-added for the purpose of China's GDP calculation. Even though it has nothing to do with what is being produced in China, and even though the money belongs to the Japanese shareholders of the Japanese mother company, China's GDP suddenly goes up by an extra 20 $, or 30 % of the sales price of this particular component. If the same holds true for other components, the Chinese value-added of the IPod for GDP-purposes might reach 25-30 %, and the current account surplus of China would increase accordingly, even though the real value-added after stripping out this special effect is only 5 % (and the real trade surplus is also only 5 %).

It can be so confusing to figure out what data really tells us...

Samstag, 18. April 2009

Terms-of-trade Effects and GDP

OK, this may sound wonkish, but I'm posting it because I think it has real-world effects that can lead to misinterpretation of data.

In one of my last posts, I pointed out that China's Q1 trade surplus had risen by 50 %, even though exports were down 20 %, because imports had dropped even faster. That got me thinking about why trade balances change, and what the implications are.

Let's look at a simple example:

A country produces 100 $ worth of "stuff", exports 50 $ of stuff abroad, and imports 50 $ of oil for domestic consumption.

GDP = 50 $ consumption of stuff + 50 $ consumption of oil + zero trade position = 100 $

Now let's assume oil prices collapse by half. As the oil-producing country finds it harder to afford "stuff" (the price of which doesn't change), it cuts its imports by 20 %.

What happens to our country? Let's see:

- Domestic consumption stays at 50 $ of stuff. Oil consumption stays constant in real terms, but decreases 50 % in nominal terms. In other words: Total nominal consumption drops 25 % to 75 $, but real consumption is unchanged.

- There is now a trade surplus: Exports of 40 $, imports of 25 $, i.e. a 15 $ surplus.

- Domestic production is down 10 %: 50 $ local consumption + 40 $ exports = 90 $, as opposed to 100 $ last year (that's both nominal and real, as we are assuming that the price of stuff didn't change)

- GDP is 90 $ in nominal terms (75 $ domestic consumption + 15 $ net exports), i.e. down 10 %. But is up sharply in real terms: Domestic consumption is unchanged, and the trade surplus went from 0 to 15 $. In today's prices, that's a GDP increase of 20 % (15/75). In last year's prices, the increase is 15 % (15/100).

Isn't that amazing and rather counterintuitive?

Domestic production is down 10 %. Domestic consumption is unchanged. But real GDP is up sharply. All because imported commodities became cheaper, and export prices didn't budge (and even though export volumes went down significantly).

The headline GDP number sounds great (strong growth). But people on the ground won't feel it, because production (read: jobs) is down sharply. While their purchasing power is up (because imports have become so much cheaper), they will more likely focus on bad job prospects, hold on to their money, and worry about the future...

Still More on China's GDP Data

Somehow, I am unable to let this topic go...

Yesterday's FT had a few articles devoted to discussing China's GDP release and the overall state of the economy. Some interesting bits:

- The spokesman of Statistics China was asked to explain the discrepancy between falling electricity use (industrial use was down 8.4 %) and rising industrial productino (up 5.1 % overall, with rising production reported for both light and heavy industry). Quote: "Mr. Li said he had no explanation ... but insisted that both figures were accurate and the issue required further study." No explanations, huh? I remember reading an article some months ago, where a Chinese official said that those postulating a connection between electricity use and industrial production have no clue how the Chinese economy works. Of course he had "no explanations" either.

- The FT states that "rapid cooling in the Chinese economy has been led by a collapse in ... private-sector investment". It goes on to say "there is still little evidence of new private-sector investment". No numbers are quoted, so I suppose the FT is conjecturing based on anecdotal evidence. Stil, if the assumption is true (and it sure sounds plausible to me), there is an interesting implication: If overall investments grew 29 %, and private investments dropped, doesn't that mean that state-led investments must have grown much much faster than 29 %? Actually, there are some official numbers: According to Statistics China, "state-owned and state-controlled investments" grew at 35.6 % in Jan/Feb (compared to 26.5 % overall investment growth in Jan/Feb; March not yet available). They don't tell us about private investments, but assuming that private investment is all the rest (which should be the case by definition), that still implies 20 % growth for private investments. "Collapsing private investments", as the FT puts it? Hardly! And we are also told that "housing" and "development of real estate" were stagnating (growth of 3 % and 1 %), so "non-real estate related private investment" must have grown much faster than 20 %.

- According to the FT, "the bulk of the increase came from government-supported infrastructure projects". Again, I wonder how the FT knows that? As backup, it is stated that "government investment in railways more than tripled from a year ago in the first two months". While this sounds impressive, here's the thing: In Jan/Feb, investments in "railway transport" accounted for 3.3 % of all investments. And the growth in railway investment contributed 1.4 % of total investment growth in Jan/Feb. So sure, they splurged on railroads. But that explains... 1.4 %. No, not 1.4 percentage points of 26.5 % total investment growth. I mean 1.4 per cent, as in: 1.4 % * 26.5 % = 0.3 percentage points. In other words, it is totally immaterial.

- So where did all that investment growth come from? The total transport sector did contribute heavily, as lots of money was spent on roads and urban transport (read: subways) as well. But in total, investments in the transport sector accounted for only 12 % of Jan/Feb investments. The real biggie is the manufacturing sector with 30 %. And manufacturing investments grew at 25.4 %, nearly as fast as investments overall (26.5 % in Jan/Feb). And which manufacturing companies did the investing? Turns out nearly everybody, but in particular machinery makers, chemical products, metal products and "non-metallic mineral products". Interesting, isn't it? Industrial production is barely growing. Normally, you'd expect manufacturing companies to invest less. Yet they are investing like crazy. No idea what they are investing in: Can't be manufactured products (machines, etc.), because production hasn't increased, and imports haven't increased either. So did they build lots of factory buildings in anticipation of future demand growth? I have no clue whatsoever.

- According to the FT, "fixed asset investment accounted for more than 40 % of Chinese GDP in 2008". That's a generous definition of "more than 40 %", because the exact number was 49.5%, i.e. 50 %. Assuming that 2009 investment growth is 29 % (in line with Q1), and the overall economy grows at 8 %, that would bring investments to 59 % of GDP. Doesn't sound plausible at all. So whatever happens, investment growth must come down going forward. And quite sharply.

- In a separate article (another page, but same day), the FT's Lex Column openly doubts that China is really experiencing rapid investment growth: Apparently, Komatsu (one of the world's biggest heavy machinery makers, producing the stuff you need to do big infrastructure projects) reported a 28 % decline in China sales in the month of March. Which again leads to the question: What exactly does all this explosive investment growth actually consist of? Or, as Lex puts it: "Any recovery will come with firmly Chinese characteristics." Yes, that's a good way to put it.

On a separate matter, Statistics China has now also issued a breakdown of retail sales. Turns out that "accommodation and catering" is also part of retail, and was up 18.9 %. "Wholesale and retail trade" was only up 14.6 %:

- Amazing that hotels and restaurants were booming so much: I understand that high-end hotels in Beijing, Shanghai and Guangdong have been largely empty over the last few months. Budget hotels were doing much better, but considering the price difference (a room in an "international 5 star hotel" can cost you 10 times as much as a "domestic good value hotel"), a drop in 5 star revenue should matter for the overall total. Does that mean that "normal" Chinese people were travelling and banqueting like crazy, to make up for the shortfall in the high-end segment? No idea. Note also that these broken down numbers are nominal, not real, so they include price reductions. In other words, even though high-end hotels slashed their prices (there are lots of press reports about empty hotels trying to lure guests with cutthroat room rates), and guests migrated from 5-star to budget hotels in large numbers, the overall nominal revenues were still up 19 %? Does that mean the number of guests was up 30-40 % year on year? It is simply impossible to believe this. But maybe restaurant revenues were up 30+ % to make up for lower hotel revenues? Hmmm. I vividly remember eating in eerily empty restaurants when I was in Shanghai in March...

- As for "wholesale and retail trade", Statistics China kindly provides a breakdown by category. They tell us how much is being spent on foodstuff, clothing, automobiles, commodities, household and video appliances, cosmetics, jewelry, cultural articles, sports articles, garments, grains and oils, petroleum products and communication appliances. Sounds quite exhaustive, right? Here's the thing: Overall sales growth was 14.6 %. All listed categories grew less than 14.6 % or even declined (some as much as -7.5 %), except for cosmectics (+14.8 %) and garments (+15.6 %). So how do we get to overall 14.6 % growth? Ah, maybe we need to remember the previous release, which for some reason told us that furniture sales were up 24 % and construction and decoration materials were up 20.2 % (these two categories were excluded in the detailed release). So I suppose furniture and construction materials can easily overcompensate the weakness of all other sectors. Never mind that furniture production didn't actually grow, and the real estate sector is in a slump (with one of the biggest DIY-chains recently deciding to close down half its stores due to large decline of revenues and unsustainable losses).

Conclusion? It's all rather... enigmatic.

Freitag, 17. April 2009


According to a statement issued by ICBC's chairman, the bank expects profits to keep growing in 2009.

Considering that 2008 profits were a record 111 bn RMB (12 bn €), and considering that ICBC is aggressively extending huge amounts of new loans to help fight the recession, that sounds a tad ambitious.

But then, non-performing loans only become officially non-performing when they are no longer serviced. As long as fresh money is handed out to service the existing loans, it should be possible to "postpone" the recognition of any such inconvenient problems for quite a while.

( See also: Earlier post on ICBC )

Donnerstag, 16. April 2009

China's enigmatic GDP data

I've been reading China's Q1 2009 GDP release, and no matter how hard I try, I can't imagine how the numbers can possibly make sense:

Total GDP grew 6.1 % year on year.

GDP can be decomposed into consumption, investment and foreign trade surplus.

Let's see:

- Investment was up 28.8 %.

- Consumption is not stated, but retail sales, which should be a good proxy for total consumption, are up 15.9 %.

- The trade surplus was up 50 %.

Yes, all components of GDP grew much faster than total GDP!

How can that be? I have no idea.

Some comments on the details:

- I find it extremely strange that investments are up 29 % in the context of a sharp economic slowdown - they should be growing less than the overall economy, not more. Who is doing all this investing?

- Overall consumption might have grown less than retail sales. However, we are also told that services (= "tertiary industry") have been growing faster than manufacturing (= "secondary industry"), so if anything, total consumption should have grown faster, not more slowly than retail sales.

- We are told that retail sales of furniture (as part of total retail sales) are up 24 %. No idea why they singled out furniture sales, probably because growth was particulary high. However, separate statistics show that production of furniture in Jan/Feb was only up 1.8 %. How can sales be up 24 %, when production is stagnating?

Mittwoch, 15. April 2009

China's Economy

For a while, I've been trying to make sense of the recent disconnect between energy use and GDP growth in China.

According to latest data, March energy use was down 2 % yoy, after a 5.2 % decline in Jan/Feb. In total, that's -4 % for Q1.

At the same time, industrial output was supposed to be up 3.8 % yoy in Jan/Feb, and 8.3 % in March. And according to sources, total Q1 GDP grew 6.1 % yoy.

Apart from the statistical miracle of compiling GDP figures two weeks after the quarter is over, this just doesn't seem right: How do you get 6 % GDP growth using 4 % less electricity? And how do you increase industrial production 8.3 %, with electricity use down 2 %?

I know, in theory it's perfectly possible, if energy-intensive industries are hit hard. But we are told that just about every sector of the Chinese economy has grown, some more, some less. So my guess is: The economy is not in fact growing at 6 %, no matter what the official numbers say.

Oh, here's a graph showing electricity use: Quite a drop since Q3, eh? -17 % from Q3 to Q1, to be exact. Weren't they supposed to use less electricity during the Q3 Olympics?

Dienstag, 14. April 2009

Sahra Wagenknecht

(Sahra Wagenknecht is the “intellectual theorist“ of Germany’s left-wing party Die Linke. She recently published a bestselling book on the financial crisis. As this post quotes heavily from the book, and is anyway mostly “special interest” for German readers, I am posting in German for a change)

Wer hätte das gedacht: Sahra Wagenknecht als Bestsellerautorin. „Wahnsinn mit Methode – Finanzcrash und Weltwirtschaft“ heißt das Buch, und ist vor ein paar Monaten und damit genau zur richtigen Zeit erschienen.

Wahrscheinlich hat man sich zum Schluß ein bisschen sehr beeilt, das würde ein paar bizarre Fehler erklären (so z.B. die Behauptung auf S. 43, General Motors Bonds hätten ein AAA-Rating; oder S. 182: ein Anstieg des Yen um ca. 1 % koste Toyota „35 Milliarden“). Aber wenn man von solchen Kleinigkeiten absieht, muß man sagen, die wesentlichen Fakten zur Finanzkrise sind alles in allem durchaus korrekt beschrieben.

Gegen Ende des Buches, wenn's ans Schlussfolgern geht, stehen einem dann aber doch die Haare zu Berge.

Zunächst wird dargelegt, daß die Superreichen immer reicher werden, und alle anderen immer ärmer. Da die Reichen nicht so recht wissen, wohin mit dem Geld, und den größten Teil davon sparen, fehlt es irgendwann an Nachfrage, weil es einfach nicht genug attraktive Investitionsmöglichkeiten gibt. Also übersteigt das Angebot die Nachfrage, und die Wirtschaft ist in der Krise. Das kennen wir ja schon von Marx. Und es ist durchaus vereinbar mit ökonomischen Ansätzen im Sinne einer Liquiditätsfälle bzw. dem neumodischeren „Savings Glut“.

Nur komisch: Die hochgeschätzte Sahra ist trotz dieser inzwischen ja eingetretenen Krise weiterhin der festen Überzeugung, daß die Reichen immer reicher werden. Ist ihr denn nicht aufgefallen, daß die Krise vor allem die Reichen trifft? Entwertete Aktienportfolios und Luxusimmobilien, geleveragte Unternehmen, die ihre Schuldenberge nicht mehr bedienen können, Banker die keine Boni mehr bekommen – es ist doch nicht die Mittel- und Unterschicht, der gerade das Vermögen wegbricht.

Da wird munter mit den historisch immer weiter steigenden Aktienkursen argumentiert, an denen nur die Reichen wirklich partizipieren konnten. Daß es sich auf Sicht der letzten 10-20 Jahre aber überhaupt nicht rentiert hat, in Aktien zu investieren, weil die Aktien in letzter Zeit so stark gefallen sind – wen interessiert das schon, passt ja nicht ins Konzept.

Und was will Sahra gegen die Malaise unternehmen?

Nötig ist, „daß die politischen und gesellschaftlichen Kräfteverhältnisse so weit nach links verschoben werden, dass die Überwindung des Kapitalismus von einem programmatischen Fernziel zur politischen Tagesaufgabe werden kann.“

Klar. Aber was haben wir denn nun zu erwarten, wenn das passiert ist?

Da wäre zunächst „die demokratisch kontrollierte Entwertung der Vermögen … in einer Form, die die oberen Zehntausend trifft. … Würden Finanzvermögen von mehr als 1 Mio. € abgeschöpft, wären die Schulden der Staaten auf einen Schlag getilgt, und öffentlicher Aktienbesitz und Einflussrechte könnten in wesentlichen Bereichen der Wirtschaft hergestellt werden.“

Alles klar: Niemand darf mehr als 1 Mio. € besitzen.

Wichtig ist ferner „eine Wirtschaftsordnung, in der nicht die Maximierung der Kapitalrendite, sondern demokratisch gesetzte Maßstäbe über Investitionen, Arbeitsplätze, Forschung und Wachstum entscheiden … sie wäre nicht nur sozial gerechter, sie könnte auch ungleich reicher, produktiver und umweltbewusster sein.“

Ach so! Politiker sollen also in Zukunft über Investitionen, Arbeitsplätze, Forschung und Wachstum entscheiden. Weil Politiker das ja so gut können. Und ganz nebenbei wird die Gesellschaft dadurch nicht nur gerechter, sondern auch reicher und produktiver.

Vermutlich ahnt die liebe Sahra die Skepsis des Lesers, den sie ergänzt sicherheitshalber:

„Der Umstand, daß es eine solche Ordnung bisher nicht gegeben hat, spricht nicht gegen ihre Möglichkeit. In der Geschichte entsteht immer Neues.“

Und völlig staatswirtschaftlich soll es doch nicht werden:

„Die Überwindung des Kapitalismus bedeutet nicht die Abschaffung von privatem Produktiveigentum, sondern dessen Beschränkung … der Stachel von Eigeninteresse und Gewinn kann durchaus Innovation und technologischen Fortschritt fördern.“

Allzu viele Refugien für „privates Produktiveigentum“ bleiben aber wohl nicht übrig, denn:

„Banken, Versicherungen, Schlüsselindustrien und viele Dienstleistungen … etablierte Großkonzerne mit globalem Handlungsradius … Energie, Wasser und Mobilität, oder Wohnen, Gesundheit und Bildung“ – alles das hat gefälligst staatlich zu sein.

Da wären zum Beispiel die Banken: Sie sollen gefälligst gemeinwohlorientiert sein, und nicht renditefixiert.

Hmmm. Gab’s da nicht mal eine kleine überschaubare Bankengruppe, die sich Sparkassen nannte, und die sich genau das auf die Fahnen geschrieben hat? Wenn die so überlegen wirtschaften, dann verdrängen sie ihre privaten Konkurrenten doch irgendwann automatisch, oder? Und außerdem: Gab’s da nicht auch mal sogenannte Landesbanken, ebenfalls in Staatseigentum, und im Dienste der regionalen Wirtschaft?

Stimmt, die hat Sahra natürlich nicht vergessen, und sie lässt uns wissen: Das Unheil nahm bei den Landesbanken erst seinen Lauf, als diese „kommerzialisiert und auf Rendite getrimmt“ wurden. Richtig: Bayern LB, HSH Nordbank, West LB und so weiter haben also nur deshalb gigantische Verluste gemacht, weil sie Gewinne erzielen wollten. Hätte man keine Gewinne erzielen wollen, wäre es nicht zu Verlusten gekommen.

Nein, bei gemeinwohlorientierten Banken kann das nicht passieren. Da sitzen dann erleuchtete Politiker im Aufsichtsrat, die Kreditentscheidungen im Interesse des Gemeinwohls treffen, und denen Geld geben, die es brauchen, um damit das Gemeinwohl zu maximieren. Halt irgendwie so wie bei den Landesbanken, nur eben mit fähigeren Politikern. Vermutlich entsandt von Die Linke.

Und warum sollen wir nicht nur die Banken verstaatlichen, sondern so ziemlich alles, was größer ist als eine Pizzeria oder ein Friseursalon?

Ganz einfach, weil die Kapitalistenklasse mit uns allen ein „bizarres Spiel“ spielt, und dabei „Lohndrückerei, Steuerdumping, Entlassungen und Betriebsschliessungen, reduzierte Investitionen und minimierte Forschung, bis hin zur … militärischen Erpressung ganzer Länder, zu Aggressionskriegen und Besatzerregimen im internationalen Maßstab“ anwendet. „Ergebnisse sind schleppende Produktivitätsentwicklung, sinkende Lebensqualität, … zerstörte wirtschaftliche Kapazitäten … und zunehmende Armut. … Der heutige Finanzkapitalismus hat die kreative und produktive Zerstörung im Schumpeterschen Sinn endgültig durch die Zerstörung von Kreativität, Produktivität und Wohlstand ersetzt.“

Abgesehen von sozialer Ungerechtigkeit ist der Kapitalismus also an allen diesen Dingen Schuld? Ja klar! Die verringerte bzw. zerstörte Produktivität hängt mit M&A und Aktienrückkäufen zusammen, die Geld vergeuden (S. 219). Aus dem gleichen Grund werden auch Kapazitäten nicht erweitert, und Forschung und Entwicklung gestrichen (S. 220). Nur das mit den deutschen Aggressionskriegen habe ich nicht so ganz verstanden. Vielleicht meint Sahra den gewaltsamen Anschluß des ostdeutschen Bruderlandes, bei dem ja nur deshalb keine Schüsse fielen, weil unsere friedliebenden sozialistischen Brüder insgeheim bereits wussten, daß die Wiedervereinigung nötig war, um ihrem sozialistischen Gedankengut auch in Gesamtdeutschland zum Durchbruch zu verhelfen.

Wenn das alles so ist, dann ist natürlich klar, daß wir ein umfassendes Verstaatlichungsprogramm brauchen. Der Staat wird dann durch erleuchtete Politiker und überragende Planungs- und Allokationsfähigkeiten dafür sorgen, daß die Kapazitäten wachsen, die Produktivität neue Höhen erreicht, Innovation und Kreativität blühen, und Kapitalisten endlich keine Kriege mehr vom Zaun brechen.

Und was passiert, wenn wir Der Linken nicht auf diesem Weg folgen?

Dann mögen wir doch bitte bedenken: Die letzte große Wirtschaftskrise „brachte in Europe brutale faschistische Diktaturen an die Macht … und führte zu einem mörderischen Weltkrieg.“

Wichtig ist deshalb, „mit aller Kraft denen zu widerstehen, die auch hundert Jahre später zu der gleichen Unterdrückung und den gleichen Verbrechen fähig wären, wenn nur das noch Profit verspricht.“

Ach so war das damals! Hitler hat den 2. Weltkrieg vom Zaun gebrochen, um mehr Profite zu erzielen! Er war also eine Art großkapitalistischer Antichrist. Und der heutige Großkapitalismus wartet nur auf die Gelegenheit, die Krise dahingehend zu nutzen, um endlich Hitlers Verbrechen zu wiederholen.

Ist klar, oder? Völker, hört die Signale! Auf zum Die Linke wählen!

(Es ist mir ein Rätsel, warum diese offensichtlich intelligente Frau eine derart wirre Revolutionsrhetorik anschlägt. Viele der Kritikpunkte am „Finanzkapitalismus“ sind ja durchaus berechtigt. Und auch über als zu groß empfundene soziale Ungerechtigkeit und mehr staatlich initiierte Umverteilung kann man diskutieren. Aber welcher halbwegs unvereingenommene Mensch mit ein bisschen Lebenserfahrung und Kenntnis der jüngeren Geschichte glaubt denn ernsthaft, daß die umfassende politische Steuerung einer weitgehend verstaatlichten Wirtschaft nicht nur zu mehr Gleichheit, sondern auch zu mehr Produktivität, Innovation und Wohlstand führt?)

Chinese Real Estate

The FT quotes a leading Chinese economist (Cao Jianhai, professor at the Chinese Academy of Social Sciences) as arguing that Chinese urban residential property prices will decline 40-50 % over the next two years. That's right: 40-50 %!

Some other choice tidbits from the interview:

"... preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy"

"The volume of empty apartments across the country hit 91m sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. Those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587m sq m or apartments sold in the past five years but left empty by their owners."

Not good. In my last post, I argued that 5 % growth wouldn't be a catastrophe for China. But if China can actually manage to achieve those 5 % growth, that is an entirely different matter...

Montag, 13. April 2009

Does China "need" 10 % growth?

According to Nouriel Roubini, China will manage around 5 % growth this year, and there's further "downside risk". He points out that this constitutes a "hard landing" for a country used to double digit growth rates, 13 % growth in 2007, and 9 % in 2008. And he claims that China needs 10 % growth "in order to move millions of poor rural farmers to the modern urban manufacturing sector every year."

But does China really need to 10 % growth every year? What's so horrible about 5 % for a year or two? After all, 5 % growth still means that - on average -, every Chinese person will be 5 % richer than the previous year (well, actually only 4.5 %, if population growth is taken into account).

Just asking this question led to Peking Duck calling me "naive, immature and ignorant of Econ 101", because it's apparently obvious that a slowdown from 9 % growth (in 2008) to 5 % (in 2009) is a "cataclysmic" event for China.

But why? The fact remains that 5 % growth means China is producing 5 % more than the year before. If the previous year was acceptable, then 5 % more than the previous year shouldn't be considered a total disaster, should it?

Presumably, the notion of 10 % "required growth" comes from the assumption that China's potential growth is 10 % (after all, it managed to achieve 10 % growth for many years). If potential growth is 10 %, and actual growth is 5 %, then the economy falls short of its potential by 5 %. This could mean, for instance, that 95 % of the economy is doing fine, but 5 % is falling off a cliff. 5 % of jobs are lost, 5 % of companies go bankrupt, etc. Or, if labor-intensive sectors (the notorious "migrant workers") are hit particularly hard, unemployment could even rise by much more than 5 %.

But in spite of this, China would still be producing 5 % more stuff.

And it doesn't end there:

If - as seems likely - China's current account surplus goes down sharply this year due to flagging exports (one of the main reasons why GDP growth is down in the first place), then 5 % GDP growth actually implies growth in domestic GDP use of 7-9 %. In other words: Domestic consumption and domestic investment will grow by 7-9 %, even though the economy only grows by 5 %. So again: Why is 7-9 % growth of both consumption and investment necessarily catastrophic and cataclysmic? (And if - as would happen in the West - corporate investment also goes down to adjust to lower demand growth, consumption could grow even more and still be compatible with overall growth of 5 %; but this being China, I suspect that corporate investment won't slow down all that much.)

Let's ask a Ukrainian, facing a 20 % or so drop in GDP this year, if he thinks that 7-9 % growth in per-capita consumption is horrible. Or an Indonesian, who can expect stagnant per-capita GDP this year. Or an Indian, who might even see 3 % per-capita growth. I wonder what they will say? Will they sympathize with the plight of the Chinese people? (by the way: All those countries have a lower per-capita income than China!)

If the government redistributes resources in an appropriate way, it can cushion the blow to all affected sectors. Many people might lose their jobs. But they can still get their rice-bowls and subsidized apartment rent and newly introduced healtcare and whatever, courtesy of the government. Nobody has to be worse off. OK, some will be somewhat worse off, but at least things don't have to be catastrophic for those affected.

I know, redistribution towards the poor and disadvantaged is not exactly what the Chinese government has chosen to do in the recent past. So in a sense I am not saying this will happen. I am saying it could happen, because it is an obvious choice that the government has, especially considering that it is the government of a "people's republic". And it is a choice that it can afford to take, considering the resources China has available by now.

But considering its track record, maybe people (understandably) doubt the Chinese government's ability to manage a "harmonious" transition to a lower growth rate? Maybe the assumption is that many millions will lose out in a slowdown, and the government won't do enough to prevent or counteract their plight. That the millions of migrant workers laid of by Guangzhou factories and Beijing construction sites have nowhere to go, no income, and nobody cares about them. That the government will - as in the past - choose to pour billions and billions into rather useless investments of all kinds, be it hard infrastructure or heavy industry, which ultimately do not benefit the standard of living of the masses, and certainly won't do much to help unemployed low-skilled migrants (except possibly giving some of them their job back, if only for a while).

Yes, that's a possible outcome. But then, that wouldn't be due to the inadequacy of 5 % growth. It would be due to misallocation of resources: If you "throw away" large portions of your GDP by overinvesting in things nobody needs, everyone needs to work much harder to also produce the things people do need. In other words: The growth is not exactly "quality growth".

So if the assumed "need" for 10 % growth simply comes from the implied assumption that much of it isn't allocated well, and lots of growth is therefore needed so that some of it trickles down and benefits the little man - if that is indeed what the fixation with 10 % growth is about, well, in that case maybe China seriously needs to restructure its economy. And right now is the best time to start doing exactly that.

In any case: If India, Indonesia, the Ukraine and Egypt can somehow get by - and in the case of India even be celebrated as a moderate success story -, then China can certainly deal with a year or two of "only" 5 % growth. It may not be great, and China understandably wants to do better, but it's far from a doomsday scenario.

Donnerstag, 9. April 2009

Easter Break

No new posts until Tuesday. Need to do my bit to stimulate the economy by taking a short holiday trip... Am I a responsible recession-fighting citizen, or what?

Edit: After experiencing endless traffic jams on German Autobahnen, overcrowded shops and restaurants in Strasbourg, and an incredible number of people trying to squeeze into the Mainau Botanical Gardens (on an island in Lake Constance) after happily forking out 30 € per family for admission (not including parking), I am tempted to ask once more: "Crisis? What crisis?"

Commercial Shipping: Update

According to Bloomberg, China will bail out its ailing state-owned shipyards by directing state-owned shipping lines to pick up orders cancelled or otherwise abandoned by international buyers.

Apparently, worldwide orders for commercial vessels are down 95 % year-on-year in March, with a total order volume of just 9 ships being placed worldwide.

Meanwhile, Chinese shipyards alone had 110 cancellations in the 5 months from October to February, and it is expected that 60 % of remaining orders will be cancelled this year or next.

China Daily is running a similar article:

New orders placed with Chinese shipyards in Q1 are down 98.3 % year-on-year (orders at all shipyards worldwide are "only" down 97 %).

The China Shipbuilding Research center expects the "global shipbuilding depression" to possibly last "even more than 5 years".

And China Import-Export Bank has extended fresh credit lines of 160 bn RMB (17 bn €) to China's two largest shipyards (both state-owned). Sounds like lots of bad loans in the making...

Last but not least, the FT offers data on worldwide container shipping (from yesterday's print edition, therefore no link):

- According to analysts, the industry (i.e. all container shipping lines worldwide) is estimated to post 2009 losses of 32 bn $ (!)

- Placed orders for new container vessels amount to 49 % of the existing capacity- According to market forcasts, roughly 40 % of orders are expected to be cancelled, the rest is being built.

- Cosco (China) has outstanding orders of 89 % of capacity, Hanjin (Korea) of 72 %, and some smaller lines have >100 %.

The CEO of Neptune Orient Lines is quoted as saying: "I have no idea what in the world they (-> lines with large order books) have in mind. What would you do with that number of ships?"

See also this earlier post on this blog:The container shipping disaster

US Residential Housing

According to various analysts quoted by the FTD, the US needs 1.5 - 2 mio new housing units per year due to its population growth. At the moment, annualised housing starts are only around 600,000, i.e. much lower than equilibrium demand. But as 1.8 mio units are currently vacant, there's still 1 year's supply on the market that needs to fill up before demand for housing starts will increase again.

Let's see:

- 600,000 is roughly equal to Germany's annual housing starts on a per capita basis.

- But of course US population has been growing at 1 % p.a., whereas Germany's population has barely stayed constant, so it is reasonable to assume that the US has a much higher demand for new housing on a per capita basis.

- 1 % population growth equals 3 mio people. Assuming 2 people per household implies a demand of 1.5 mio. units.

- However, roughly half of America's population growth is due to immigration. While no hard data is available, net immigration has probably gone down sharply in 2008, and will not recover anytime soon. In particular, construction-related jobs used to be filled by unskilled Mexicans, and those jobs have gone. And potential newcomers have less incentive to come, because they won't be able to find jobs.

- Assuming that short-term population growth is down to 2 mio people, that would lower yearly housing demand to 1 mio units. In other words, current available supply of 1.8 mio units would last two years, not just one year.

- And that doesn't yet factor in that demand also has something to do with the ability to pay rent or take out a mortgage: With unemployment swelling rapidly, and tent cities filling up all over the Southwest, it seems like actual demand (i.e. demand backed up by the ability to pay) will be considerably lower than 1 mio units for the foreseeable future.

Summing up: While US housing starts are now so low that they probably won't fall further, it seems unlikely that there will be a strong and sustainable rebound any time soon.

HRE takeover offer

Just out:

The government is offering HRE shareholders 1.39 € per share, valuing HRE at 320 m € for 100 %, or 80 m € for the 25 % held by Flowers et al.

What a waste of taxpayer money! HRE isn't worth anything.

Where's the baby boom?

Germany's family minister liked to brag that due to increased financial incentives, Germans are at last having more kids. Unfortunately, 2008 birth statistics have just been released, and they show a decrease in 2008 births compared to 2007:

2006: 673,000
2007: 685,000 (+1.8%)
2008: 675,000 (-1.5%)

Based on these numbers, the press spins a story of policy failure. However, things aren't as bleak as they may appear at first glance:

The thing is that due to demographic changes, the number of women in prime childbearing age (in Germany, that tends to be the age bracket 30-40) is going down quite rapidly:

Total number of women aged 30-40:

2006: 5,486
2007: 5,279 (-3.8 %)
2008: 5,096 (-3.5 %)

(Data source: Destatis)

In other words, while births have decreased a bit in 2008, the number of births per woman aged 30-40 has actually gone up quite significantly in 2007, and was up again (albeit only slightly) in 2008.

This can also be seen in the fertility rate, which went from 1.33 in 2006 to 1.37 in 2007. 2008 numbers haven't yet been calculated, but it's likely that it has increased a bit further, probably to 1.38.

Sure, it's not exactly a baby-boom, and compared to countries like France, Britain and the US, the fertility rate is still extremely low. But at least things aren't getting worse, they appear to be getting just a tiny little bit better.

(In any case, statisticians will probably argue that changes of such small magnitude are not statistically significant, so we might as well assume the underlying long-term fertility rate is simply constant...)

Eastern Europe's Car Boom

The FT has details how Germany's car subsidies are helping Eastern European car factories:

- A Hyundai plant in the Czech Republic used to export 20 cars per month to Germany. In March, it exported more than 2,000. The factory is hiring 500 workers to cope with the surge in demand.

- Dacia (a Romanian subsidiary of Renault) sold 25,500 cars in Germany in 2008. German orders received during Q1 are already more than the 2008 total.

- Skoda (VW's Czech subsidiary) has seen monthly German-bound sales double to 11,000 in February (March data is unavailble, but probably much better than February).

- Fiat's Polish plant exported 47,417 cars in March, compared to 38,000 in March 2008 (no country breakdown is given)

Those are highly impressive numbers, large enough to have macroeonomic significance:

- Assume 500,000 additional cars are imported in 2009, at an average price of 10,000 €. That's 5 bn €.

- 5 bn € equals 0.2 % of Germany's GDP (though of course the cars do not increase Germany's GDP, as they are produced abroad; instead, they reduce Germany's current account surplus; incidentally, 5 bn € is also the total amount spent by the German government on the subsidy, i.e. government debt will also go up by 0.2 % of GDP).

- Let's assume the Czech Republic supplies 30 %. That's 1.5 bn €, a bit more than 1 % of GDP (though some components are imported, lowering the net effect on GDP).

Though of course next year, when there's no more subsidy, Eastern Europe's car exports to Germany will crash completely...

Dienstag, 7. April 2009

So many ways to lose your money...

Over the last few years, many Germans put money into Schiffsbeteiligungen (closed funds investing in commercial vessels).

Considering the horrible state of the commercial shipping market, most of them are probably regretting it by now.

But hey, good news: According to the FTD, 22.1 % of the invested funds are not exposed to the shipping market at all.

Why? Because 22.1 % is the average proportion of so-called "soft costs" (expenses for distribution, marketing and administration).

Isn't that a relief: Investors only have 78 % of their money to worry about, because the other 22 % are anyway gone...

(For comparison: Closed real estate funds have average soft costs of 18.3 % if they invest abroad, or 15.6 % if they invest domestically)

Want a TV for free?

Want a TV for free? Yes?

Then maybe you should move to the Chinese countryside:

According to today's FTD, China is now subsidising TV purchases with 3500 RMB (380 €). Only rural residents are eligible.

Don't know what a TV set costs in China, but I'm pretty sure you can get a pretty decent one for less than 380 €.

Sounds too good to be true?

Well, maybe that's because it isn't actually true:

According to China Daily, China is in fact paying a 13 % subsidy up to a maximum purchase price of 3500 RMB (increased from an earlier cap of 2000 RMB). The scheme also extends to other kinds of "household appliances".

Dear FTD, there is a slight difference between 3500 RMB and 13 % of 3500 RMB, wouldn't you agree?

Edit: On April 8, the FTD is running another, much longer article, repeating the same statement. Unfortunately, repeating wrong information doesn't make it true.

Montag, 6. April 2009

The "Condominium Death Spiral"

Here's a new twist to the US housing disaster:

According to Reuters, more and more condominium buildings in Miami are facing a (using the words of a Miami Beach city official) "death spiral".

What's that?

Apparently, many condo associations are unable to collect maintenance fees from the unit owners (many of which have walked away from their mortgage). Delinquency rates of 50 % are not unusual, and in one particular building, more than 200 out of 244 condos are troubled.

That means: Either maintenance will be cut (i.e. pools will be closed, the greenery won't be watered, and the hallways won't be cleaned), or the other owners have to make up for the difference.

According to the spokesman of a condo association, some condo buildings will probably become derelict, as too many owners are walking away from their obligations.

So if you're thinking of buying a dirt-cheap Florida vacation home, better make sure you know what you're doing...

Commercial Real Estate

Maybe not particularly surprising, but still interesting:

US commercial real estate is also getting hammered. The nationwide vacancy rate has now risen to 15.2 %, with market participants expecting a further rise to 19 % or more. In other words: Soon, nearly 1 in 5 offices will be empty.

Prices for commercial real estate have dropped 22 % since 2007, and average rent is down 3 % year-on-year (for those properties that are not vacant), with steeper drops expected going forward as existing leases are renegotiated or expire.

New York City, the epicenter of the financial crisis, has fared somewhat better as far as vacancies are concerned (they now stand at 10 %), but rents are down quite sharply (9 % year-on-year), with further drops expected.

(Sources: Reuters, WSJ )

Edit: Additional news regarding vacancies in the US retail sector.

In comparison, German commercial real estate is - so far - holding up quite well:

Vacancy rates in major cities: Hamburg 7.5 % (stable), Munich 7.0 % (stable), Berlin 8.2 % (going down), Frankfurt 12.2 % (going up).

Rents are declining a bit, except for Berlin, where they are increasing (from a considerably lower base compared to the other big cities) due to strong demand from government agencies and lobbyists.

However, the downturn is only starting to make itself felt: German companies are now beginning to seriously reduce head-count, and vacancies will obviously increase throughout 2009 and into 2010.

(Sources: here, here, and here )

European Housing Prices

The FT has compiled a European house price index. Some of the data is quite surprising (to me, at least):

- Spanish house prices have only started falling year-on-year in Q4 2008, and so far, they are only down 2.8 %. Price increases had been slowing down over quite a while: In mid-2006, they were rising at a rate of 10 %, down to 6 % in mid-2007, and 2 % in mid-2008. Instead of a US-style bubble that popped very quickly, Spain seems to be doing things in slow motion. No idea if that means price declines will be smaller than elsewhere, or if the real crash is still to come.

- Irish house prices have been declining for two years, and are down 15 % from their peak as of Q4 2008. Compared to Spain, things happened much more rapidly: It took just 3 quarters to get from 13 % year-on-year increase to 2 % decline.

- UK prices are also down 15 %, but they managed the same decline in one year instead of two. UK prices had already stagnated back in 2005 (growth rates of 2-3 %), but then re-accelerated (+11 % in Q2 2007) before finally dropping into negative territory in Q2 2008.

- As a sub-region of UK, Northern Ireland is hit the hardest, with a decline of 34 % in just one year. Wow. Though as recently as Q1 2007, prices were rising at an incredible 58 % rate. Compared to 2 years ago, prices are still 21 % higher.

- Most other Western European countries are down a bit, but only in the 0-5 % range.

- German prices are up 2.4 %, and the increase has been accelerating (in Q3, they were up 1.0 % year-on-year, in Q2 down 1.6 %, in Q1 down 2.6 %). Regional discrepancies seem to be large (the FT index doesn't drill down by region; but according to press reports, Munich prices are up more than 10 %, so they must be falling elsewhere to get to a 2.4 % increase overall).

Let's compare this to the US (as of 1/09):

- Compared to peak (July 2006), average house-prices have dropped 29 % in the 20 largest metropolitan areas.

- The best performers were Charlotte (-11 %), Dallas (-11 %) and Denver (-13 %).

- Worst performers are Phoenix (-49 %), Las Vegas (-47 %), San Francisco (-43 %), Miami (-43 %), San Diego (-41 %), Los Angeles (-39 %), Detroit (-39 %).

Compared to the US, what has (so far) happened in Spain, UK and Ireland has been quite moderate (with the exception of Nothern Ireland). Don't know if that means the situation is less serious, or if larger falls are still to come.