Samstag, 28. Februar 2009

Where does it hurt the most?

In both the German and the international press, a lot has been made of the fact that globalization's poster child Germany, the country that "rose to the challenge" (quoting The Economist), seems to be hurt even worse by the current crisis than the "sinners", i.e. the US and Great Britain.

The reason is obviously to be found in Germany's high reliance on exports, and its product portfolio which is heavily oriented towards expensive capital goods.

However, is it really true that Germany is hit "worse" than the US and the UK?

It seems to me that this is far from clear. In particular because:

1. While Germany's population is declining slightly, the US is growing at a rate of 1 %. So if Germany's GDP drops by 2 %, and the US achieves a drop of only 1 %, that's essentially the same on a per capita basis. For some strange reason, this rather important aspect hardly ever gets mentioned.

2. In the case of the UK, looking at "real GDP" on a local-currency basis does not take into account the sharp depreciation of the pound: Britain is now substantially poorer than one year ago when compared internationally, and every Briton who likes to spend money on imported goods or likes to go to Spain for his vacation can feel it quite acutely.

3. The "pain" from a drop in GDP is most appropriately defined as the decline in living standards of the population, i.e. mainly the level of consumption, and possibly also personal wealth. The drop in German GDP is caused mostly by a drop in the current account surplus and in domestic investment. Consumption is (so far) not down at all, so private households in aggregate have hardly been affected. Whereas in the US and UK, households obviously have to cut back in order to deleverage (and in the UK's case, because of inflation caused by the pounds devaluation), and because their pension plans have gone up in thin air.

In short, there's a reason why the overall mood in the US and Britain is hopelessly gloomy, whereas most Germans are (so far) only mildly apprehensive.

(The worrying bit is of course that the German economy might enter a vicious negative feed-back cycle once the lay-offs start to mount. Hasn't happened yet, but it could well happen.)

GDP growth projections

Right now, it's quite entertaining to follow GDP growth projections in the press. Never before have they been revised so many times in the space of just a few months. Even The Economist has repeatedly become confused and quoted one set of growth projections in an article, and a totally different set of growth projections in the statistics section (courtesy of The Economist's own Intelligence Unit) at the end of the same issue.

Anyway, it seems to me that the current crisis has been severely underestimated for a very long time, but lately, the doomsday prophets seem to be going overboard: A few weeks ago, some analyst was forecasting -10 % growth for Taiwan and Singapore. And this week, Deutsche Bank's Norbert Walter revised his Germany forecast from "could be as bad as -4 %" to "we have to be quite lucky to do no worse than -5 %".

I beg to differ. Things are certainly bad, and it will take time for them to get better. But I am quite confident that Taiwan will not contract by 10 %, and Germany will not contract by 5 % this year. Q1 2009 should still be horrible, and there should be contraction for the rest of the year and possibly 2010 as well, but all sorts of self-stabilising forces are kicking in by now, not least the various fiscal stimuli. So while the minus signs should remain, the numbers after the minus signs should gradually become a bit smaller.

My personal prediction for Germany:
It won't be much worse than -3 %.

Funny somehow: Half a year ago, "it won't be much worse than -3 %" would have been considered outrageously bleak by just about everyone (except possibly Nouriel Roubini). Now it puts me into the "cautiously optimistic" camp. Who would have thought...

(Post to be revisited one year from now.)

Europe's Car Industry

The first step was all sorts of subsidies for car buyers (including the incredibly wasteful incentive to scrap perfectly good 9 year old cars, many of which only slightly more polluting and with slightly worse mileage than the news ones intended to replace them).

Now, a couple of billion Euros of "guarantees" or "government participation" or "research funding" or whatever it takes to save Opel. For now.

Doesn't anybody want to see that regardless of the curent crisis there is huge overcapacity in the European car industry, and something's got to give sooner or later?

If/when the current crisis is over and the world economy picks up, there's little doubt that the oil price will start skyrocketing again.

Eventually, people will have to reorganize their lives in ways that require less driving. Fewer and fewer big cars will find buyer. And eventually, fewer and fewer cars will find buyers.

Wouldn't it make sense to start industry-downsizing now, at a time when people are voluntarily reducing their car purchases, instead of pouring billions and billions of subsidies into what is essentially a sunset industry?

Germany's current account surplusses - follow up

Checked the Bundesbank statistics. Apparently, as of 12/08, Germany's net asset position vis-a-vis the rest of the world is roughly 1 trn €, or 40 % of Germany's GDP.

Net income (as in: income on foreign assets minus foreigners income on their assets in Germany) has hovered around 40 bn € per year during 2006-08. That's roughly a 4 % return on the net asset position. Similar to government bond yields during that time.

Not too bad. Except that it sounds unlikely such returns can continue going foward. Will be interesting to look at the same statistics one or two years down the road...

(Btw, I'm not too sure how these numbers are calculated in detail, and can't be bothered to find out.)

Freitag, 27. Februar 2009

Where do Germany's current account surplusses go?

Alongside China and Japan, Germany has posted the world's largest current account surplusses for most of this decade. But what has this accumulated "net asset" position with regards to the rest of the world been used for? While I can't offer any comprehensive statistics, my guess is that much of it has been frittered away in overpriced cross-border M&A, non-profitable international business expansion, and of course misguided bets made by various banks.

Care for some selected examples?

- Daimler's amazing success story with Chrysler

- BMW's UK adventure (Rover)

- Deutsche Post's American debacle (DHL)

- Various acquisitions made by Deutsche Telekom (e.g. Voicestream)

- The billions invested by Infineon and Qimonda in building up their Asian factories (not that their German ones are doing any better, but we are talking about transfers abroad here)

- German funny money channelled into making second-rate Hollywood movies (lavishly supported by the German taxpayer to make it worthwhile)

- And last but of course far from least, US-related suprime losses incurred by the various Landesbanken, HRE, and a few others

Just picking some high-profile example. There are many more with less visibility...

Sovereign Funds

It's kind of funny how just a year or two ago, everybody was looking in awe at the various Sovereign Investment Funds, especially Singapore's Temasek and GIC, but also Norway, Abu Dhabi and whatnot. At the same time, people were deriding the Chinese for being naive about their foreign investment strategy, dabbling in all sorts of deals without following through (some minor exceptions notwithstanding), and keeping so much cash in low-yield US treasuries.

Who's laughing now, I wonder:

China's holdings of US government bonds have held up just fine, whereas Singapore has been clobbered by putting its financial firepower into various Western financial institutions, nearly all of which have been more or less wiped out by the crisis.

Spanish government bonds

Just like many other people, I'm wondering how best to invest my money in fixed-income considering the low level of interest-rates along the whole yield-curve.

One thing I find rather hard to understand is the divergence between government bond yields of various Eurozone countries. I can understand that people are worried about tiny Ireland being overwhelmed by its various commitments. I can also understand that people are reticent about handing their money to high-debt Italy and Greece. But how come Spain has to pay such a huge spread compared to German bunds?

Sure, Spain is in trouble. Everyone's indebted, the real estate market is just as bad as in the US, and both current account and the government's budget are deeply in the red. But then, so is Germany: Exports are dropping like never before, and Germany's core industries are producing lots of stuff that nobody wants right now. At least Spain has sunshine, reasonably priced hotels, reasonably good governance (including a banking supervisor who has helped Spanish banks to be in much better shape than German ones), and a not exactly high level of government debt.

So why is there a 100-130 bp spread compared to Bunds? Does anybody really believe that the default risk of Spanish government bonds is so much higher than German Bunds? I don't get it.

Trade Wars?

Various commentators keep arguing that the various "surplus countries" (usually defined as China, Germany and Japan, though some smaller countries such as Singapore and Switzerland could also be added to the last) are somehow to blame for an impending trade war that will lead to the disintegration of global trade. For instance, Martin Wolf of the FT has been harping on this for quite a while now, and Michael Pettis at Chinese Financial Markets keeps bringing it up as well.

It seems to me that those stubborn surpluses are in the process of autodestructing anyway, so there isn't really much point in telling the "culprits" to do something about them:

- Japan's exports have collapsed so thoroughly, that the country has been showing a trade deficit for several months now. Would have been quite unthinkable just a year or two ago.

- German exports are also undergoing a spectacular decline, whereas imports are largely holding up. As you would expect if your exports are largely capital-intensive goods (cars, machinery), while your imports are standard consumer-goods. My guess is that Germany's 2009 current account surplus will drop by at least half compared to 2008, and quite possible more than that.

- That leaves China as the "main culprit". Apparently, China's trade surplus has even increased of late, as imports have been falling much faster than exports. But the thing is: Chinese imports are to a large extent components to be processed further in China and then reexported. So it's entirely natural for exports to lag behind imports for a few months. If so, the Chinese surplus should stark shrinking, and shrinking fast, in February or at the very latest in March.

So it seems to me that while there are lots of things to worry about right now, stubborn trade surpluses posted by the "usual suspects" shouldn't exactly be at top of the list.

General Motors

While the press is full of coverage regarding GM's losses and cash needs, nobody ever seems to mention what their balance-sheet looks like. So I downloaded the 2007 annual report (2008 not available yet), and lo and behold, they had a negative equity of -40 bn US$ as of 12/31/07. That's before taking into account 30 bn US$ of losses in 2008, so their latest number should be around -70 bn US$. That's assuming they are a "going concern", which is a bit doubtful right now. Taking into account further costs for downsizing, restructuring etc., the "real" equity shortfall is probably 100 bn US$ or more.

Good luck to shareholders, bondholders and American taxpayers, if they seriously plan on recovering even small parts of their money!