Given the recent news (Glencore, VW Group, etc.), we expect uncertainties based on the present macroeconomic situation to remain on the high side. There are a number of reasons for this. During the past few weeks, and especially since the publication of the latest Fed comments, numerous reality checks have occurred and analysts and economics are now finding that results weren’t as bright as expected.
Until now, higher consumer spending was encouraged by good news from the job market, by higher direct or indirect revenue streams, low inflation, and by more general improvements such as the re-industrialization of Europe and the USA. But the reality is that the scope of this good news only applies in the short-term, and more importantly seeks to generate equally short-term improvements in consumer behavior. In fact, the present society is living in a short-term universe, and media such as smartphones and the Internet greatly encourage this mindset. The publication and addressing of more complex issues, such as the scandal at VW Group, the liquidity squeeze at Glencore, the migration flow towards Europe, and the end of the convergence cycle with major unsolved problems remaining in Latin America (which is highly dependent on mineral exports to China) has created an overflow of unpleasant information which has turned into a boomerang for investors.
While we believe that issues are often exaggerated, some major damage to the system has occurred. Even if GDP growth figures remain in line with forecasts, especially in Europe and China, markets should remain volatile for quite some time. There is no evidence to suggest that things will quickly change for the better. The major reason is that we have not yet seen the necessary major readjustments, e.g. much lower growth in EMA, a lower level of consumption in the USA, higher interest rates, and lower returns for financial investments. For the time being it’s easier and more lucrative to obtain profit from financial investments that speculate on the failure of someone else than by making investments that make people work and create sustainable profits.
Calculated from its top point in April, we have witnessed a general market correction of about 20%. Yet, no major corresponding economic change has taken place, except that China is preparing to be economically independent. At this stage, the recent market turbulences created by the VW Group case and the liquidity squeeze at Glencore appear to be more bottom-up issues rather than top-down economic events. However, if they aren’t, then we have definitely entered a new economic phase and a deep reality check could soon be on the cards.
Nobody is above the law
There is no doubt that the manufacturing processes and standards implemented by the car industry were known to the national supervisory and inspection authorities, because all cars produced and sold have to be certified and approved for use on the road by government entities. If not, then we can only conclude that severe ignorance within some authorities was at work and it was supported and tolerated, either unwillingly or willingly, by other authorities. Although this argument is highly simplistic and crude, it’s a plausible explanation for the present problems faced by the German carmaker. The fact that in some regions of the world up to 40% of the working population is directly connected to the car industry speaks for itself. Put bluntly, governments have tolerated the misconduct in order to safeguard jobs and social security in their economies. While the countdown for the car industry is over, we estimate that numerous other industries have similar issues to address and they are well advised to undertake the corrective action immediately, unless they wish to share present and future profits with one particular jurisdiction and not with its shareholders.
The reality is that today’s technological developments do not allow smaller diesel powered cars to meet the emissions standards – not unless a complete recycling unit was trailored behind every small car, thus cancelling out the benefits of lower consumption and less emissions. So ultimately, diesel powered engines are on its way out and this is opening the avenue for alternative offers. Are gas driven engines opening a new secular trend? They are clean, robust, and as responsive as diesel powered motors.
What makes the story more compelling is that today society is judging VW for its unethical behavior and while the company is preparing for sanctions, be it monetary or even exclusions from some markets for a number of years, yet the fundamental question is, what drove Volkswagen’s decision to implement that deceptive device?
Some of the initial reasons that come to mind include a) immediate profit from the operation, estimated to be about USD 350 per car, b) higher market share in the medium term, and c) fulfilling their “duty” to deliver constant good news for starving investors. Yet, we believe these reasons represent only a fraction of the whole equation.
We believe that the requirement to meet ever-higher quality and emissions standards was also a key driver in this particular story. The industry’s drive to show tangible progress in meeting “green policy requirements” may override potential concerns of walking too close to the ethical edge.
Today, the car industry’s behavior as a whole is being questioned, it is being accused of cheating on standards and hurdles which were developed and promoted by the political system. It’s interesting that none of the promoters of these new rules from the policy sphere ever get questioned about the feasibility of their lofty goals. Obviously, they believe that reaching the target levels is possible, but they never bear any kind of responsibility for communicating the wrong time frame. The promotion of new emissions rules and requests for immediate implementation, knowing that the industry’s technological developments are still several light years away, should be as punishable as the actual industrial act of installing a deceptive device.