Germany \’jər-mə-nē\

Posted on April 26, 2012 by HighTower

Posted By: Matthias Paul Kuhlmey

A lot of interest is being generated around “my people” (more specifically, the Germans) these days. Among other news, the recent edition of The Economist is featuring a cover story entitled, “Is the German model worth copying”?

Why even bother? It appears that in the midst of a failing Europe (tbd), the German economy has shown extraordinary resilience, still posting somewhat attractive economic returns because of its stellar employment situation. If one considers that the average cost for an hour of labour in Germany is over 30% above the average cost of labour in the European Union, the picture is even more impressive. The explanation, from my humble view, is complex, but a couple of points are indeed noteworthy:

First, the savvy German Mittelstand (mainly family-owned, mid-size businesses that account for 50% of German GDP and 70% of all employment) has been conditioned to compete at unfavorable terms for decades; a strong Deutschmark prior to the implementation of the Euro was every exporter’s nightmare. What was done? Quality was increased to the point of making price a secondary consideration. Secondly, we (taking the German side), had our fair share of dealing with significant unemployment over 10+ years, specifically after the German reunification in 1989. One may conclude that we have learned how to deal with a challenging environment; for years, austerity was the norm, not the exception.

The above progression, as we know, was not the case for most Anglo-Saxon nations or other select economies in Europe. Lack of austerity, credit expansion, and related speculation often created a false impression of economic success. Think of Spain, for example, where housing/real estate was a one-sixth contributor to national GDP, not long ago. Funny enough, it did not seem odd at all. On the other hand, Germany’s heyday did not include such a housing bubble (although they have experienced an increase more recently), and, yet, 85% of Germans are satisfied with their standard of living. Further, on the merits of the old Teutonics (Germanic people), countries that run positive account balances are by definition (oversimplified) savers on a national level – most certainly the case for Germany (and China, for completeness of the story).

Now the really amusing request, generally posed by The Economist and others is that the “cheap Germans” need to get off their behinds and maximize consumption. In other words, the Germans are a pain to the rest of the world, as surpluses (or savings on a national level) must be distributed – save less and give to the needy! Brilliant!

The Germans, however, may already know that the “sweet ride” is about to change. Their biggest export markets are neighboring Europe and the emerging world, specifically China. Things are not looking so good, and the exporting business may be quite painful going forward. Better hold onto your money!

In conclusion, a bit of history: The article in The Economist is actually titled, “Modell Deutschland Über Alles” (Germany above everything), which is somewhat distasteful, considering that this was the message of the first verse of Germany’s national anthem, Deutschlandlied, during times of being the world’s most unreasonable aggressor. This opening verse was eventually removed (along with the second verse), and only the original third verse functions as Germany’s official national anthem, since 1952.

Doctor, Doctor

Posted on April 18, 2012 by HighTower

Posted By: Matthias Paul Kuhlmey

Living in most of Europe may be an attractive proposition (forget about the credit crisis for a moment) – after all, isn’t health care and education (for the most part) free? Ever since grasping the nature of this concept, it has simply driven me crazy: “Oh, I have seen three doctors this week … my insurance covers it …” The sad thing about this notion is that the cost will remain in the system – in other words, even though we may not experience the cost “out of pocket,” there surely is a cost to be covered by someone, at some point in time; I think we can agree on this.

Last week, we reported that major Central Banks around the world have expanded their balance sheets quite massively, when compared to respective GDPs, over the past years. Status Quo: 25% for the Japanese and Europeans and about 20% for the good ol’ US and the Brits. If we slap other liabilities on top of those claims (in the U.S., this would refer to funded Public Debt and rather large unfunded allocations related to Medicare, Social Security, etc.), developed societies have been on a “spending binge,” and are unsustainably indebted; we call it, more tactfully, the Debt Supercycle.

Even though this unfavorable debt trend was already debated decades ago, we really “cranked-up the credit machinery” since 2000. So let’s not fool ourselves: The cost is in the system, and it has to be absorbed at some point; this is the hard realization for member countries of the EMU and European bank these days. According to a recent report, “good will money” provided by Central Banks is “running on empty.” The price of Credit Default Swaps, instruments to compensate their buyers in the event of a loan default, are indicating that at least four more European nations may face a debt-restructuring, sooner than later.

We know how much our regular readers love our 80s music analogies, and this blog just gives us the perfect segue to yet another. Remember the Thompson Twins? … “Oh, doctor, doctor, can’t you see I’m burning, burning? Oh, doctor, doctor, is this love I’m feeling?” We have an answer – it’s not love – it’s that funny, sinking feeling you get in your stomach when you realize that there’s not enough cash in the bank to pay this month’s credit card bill …

Missing Words … and Numbers

Posted on April 13, 2012 by HighTower

Posted By: Matthias Paul Kuhlmey

The German magazine, Der Spiegel, is running a very interesting cover story this week, entitled “Heimat.” When I tried to explain to my wife what the article is all about, I l realized that there is no English word to translate Heimat. After doing some research, we acknowledge that Heimat “is a German word that has no simple English translation, denoting the relationship of a human being towards a certain spatial social unit. The term forms a contrast to social alienation and usually carries positive connotations. It is often expressed with terms such as home or homeland, but these English counterparts fail to encapsulate the true meaning of the word.”

With further lack of words, let us attempt to explain the current market or market participants’ behavior — as good as we can (promise). Setting the scene: We have terrible job numbers in the U.S. — meaning terrible(!) — about 50% under expectations, as reported last Friday (known as a “miss” in financial jargon); there is a continuously deteriorating situation in Europe, with our beloved European Central Bank (ECB) preparing to buy European Sovereign Debt to ease markets; and, last but not least, we have seen a modest increase in Unemployment Claims, here at home. The Conclusion: It does not matter! The “Solution”: As soon as bad news “hit the tape,” the Talking Heads of the FED, ECB et al (Central Banks Unite) are not shy of words, even though they should choose them carefully. The “quick fix” is generously promised, and a bit of “hinting here and there” gives investors the confidence needed.

Wait a minute, what is an investor, anyway? You would think a thoughtful person, studying balance sheets, and being in for the long run — but not so fast. Doing some research on this word, even sp eculators may as well be considered investors. And here is the dilemma: Central Banks, ever since the Credit Crisis of 2008/2009, have been facilitating the most significant liquidity injection ever experienced by modern society. The Bank of Japan (BoJ) and ECB have expanded their balance sheets to about 25% of respective GDPs, while the FED and Bank of England come in at around 20%. On this basis, we are not talking investing, but rather of a massive inflation trade in the making.

Without a more formal approach to investing (and now we are referring to the “real thing”), there will be disappointment over the outcome, sooner than later. However, if you think all is “dandy,” consider another great data point, as observed by Bloomberg: Apple stock’s price performance has accounted for 8% (!) of the Standard and Poor’s increase from March 2009 to this week. Fortunately, we do have an English word to describe our reaction to this — “Speechless!”

… A Matter of Luck

Posted on April 4, 2012 by HighTower

Posted By: Matthias Paul Kuhlmey

There are a few principles my father lives by, and one has become a crucial guide in my personal and professional life: As his saying goes, “Thinking, (more often), is a matter of luck.”

If a random group is being asked to judge the level of energy consumption in New York City, the more common thought, or even conclusion, would be that it is “a lot,” “excessive,” or even “wasteful.” Assumptions would logically be based on prevailing facts: Massive office buildings are kept at comfortable temperatures all year around, a stream of cars “sit” in bumper-to-bumper traffic, plus millions and millions of people are simply constantly using energy. Case closed: Big cities are a nightmare for the green and conscious mind. But now, consider this:

“New York’s population density has environmental benefits … it facilitates the highest mass transit use in the United States … gasoline consumption in the city is at the rate the national average was in the 1920s, and greenhouse gas emissions are a fraction of the national average, at 7.1 metric tons per person per year, below San Francisco, at 11.2 metric tons, and the national average, at 24.5 metric tons. New York City accounts for only 1% of United States greenhouse gas emissions while housing 2.7% of its population.”

Yesterday’s FOMC Minutes (of Benny B’s group March meeting) concluded that the FED is not über-actively exploring monetary measures to further stimulate growth of the U.S. economy. Among other reasons cited, the concern of rising inflation played a role in policymakers’ decision not to extend bond purchases in an attempt to lower rates. One would think that this is all good news, as the economy is on-track, there’s a little inflation (hence, velocity of money finally “getting somewhere”), and cheap stocks to buy on this positive backdrop! However, sure enough, the opposite took place, with market participants “fleeing” from their commitments – from bond markets yesterday and equity markets today.

Total confusion. Wasn’t it the common understanding, and leading opinion, that stock markets have hardly ever been more attractively priced from a valuation standpoint? So what is the commotion all about? If things are much brighter (economically speaking), we would have expected more commitment from our investment community and, subsequently, markets to trade in positive territory. Investors, however, may have been led by a logical fallacy, accepting that a specific belief is true simply on the basis that we don’t know that it isn’t true.

Our suggestion is to, once again, examine the economic landscape more carefully; the recovery is not what we are led to believe it is. The U.S. may look good on the surface, but we are not dealing with a normal recovery. Several studies have shown that financial crises leave behind deep recessions of long duration and considerable volatility (we are most likely in the middle of the process). Europe is another topic, and a disappointing Spanish Bond auction is more than indicative that market participants are slowly changing their excitement about Euroland’s recent rescue mission.

It is about time to put behind us all that has occurred since the big turnaround in financial markets. In this respect, we will conclude with words by another great man: “The world we have created is a product of our thinking; it cannot be changed without changing our thinking.” Thank you, Mr. Einstein.