Dawn

Dawn

Sunday, June 23, 2019

Thoughts from Galicia, Spain: 23.6.19

Spanish life is not always likeable but it is compellingly loveable. 
                  Christopher Howse: A Pilgrim in Spain
Spain
  • Midnight Madness anyone?
  • Here and here are complementary - but not complimentary - articles by the estimable Guy Hedgecoe on the leader of the Ciudadanos party, Albert Rivera. [BTW . . .Why is he not Alberto?]
  • As well as establishing a fine international airport in Oporto/Porto that now outclasses and outperforms all of Galicia's 3 'international' facilities, the Portuguese have somehow managed to give incentives to businesses in the north of the country which have persuaded many Galician companies - especially those in the automotive industry - to set up operations there. The Galicians are, naturally, unhappy about this but don't seem to have any ideas on how to reverse the trends,. Possibly because their 'localist' politicians waste too much time and energy being  . . .  well, localist. So, fighting with each other.
  • I see that the articles-which-are-really-ads for a private school in Galicia are labelled Publireportage in the top RH corner. I wonder how many readers notice this.
  • Percebes are goose barnacles. They used to be merely animal food in Galicia until successful marketing for these 'aphrodisiacs' resulted in them selling for as much as €300 a kilo. So the incentive to collect and sell them illegally - by furtivos - is great. One criminal has just been done for using a torpedo propulsor to enable him, it's reported, to travel 6 miles under water. I assume horizontally and not vertically. In this way the was collecting 40 kilos a day of the repulsive things.
  • Galicia's annual deaths are now twice the rate of its births. There can be only one outcome . . .
UK Politics
  • The Times: Karl Marx observed of successive French revolutions that farce followed tragedy. The danger is that the story of this Conservative leadership and, therefore, the tenancy of No 10 is becoming farce followed by farce.
Brexit
  • Richard North: Both candidates for the Tory leadership are offering false prospectuses on the flagship policy of Brexit. And, worse than that, they are putting forward scenarios that anyone with the slightest bit of knowledge should know is false.  That suggests one of two things. Either the candidates are so thick that they don't realise what they are offering simply won't fly, or they think we're so stupid that we won't notice.
The EU

  • France: Investors paying to lend money to France is a sign markets have gone mad. See the first article below.
  • Germany Things are not looking too good for the country's corporate giants. Or some of them, at least. See the second article below.
The Way of the World 
  • Reader María follows up here on the subject of the selfie zombies. Reading her post,†  I was reminded of the reminder I have on the back of my bedroom door: We are not here to to get all we can out of life but to try to make the lives of others happier. A sentiment expressed by William Osler.
Shysters/Nutters Corner
  • Jim Bakker: If Donald Trump Doesn’t Win in 2020, Christians Will suddenly die. Bakker makes a fortune from selling longline foodstuffs to gullible Christians awaiting the End Times and/or The Rapture.
Finally . . .
  1. A dumb phone-bomber . . .

2. Every time I mistype 'Spain' as Sapin I'm reminded of the claim that the country obtained its name because it was once overrun by rabbits. They say.

THE ARTICLES

1. Investors paying to lend money to France is a sign markets have gone mad: Matthew Lynn, the Daily Telegraph

It has some of the biggest government debts the world has ever seen. It has the highest state spending of any major economy, crippling taxes, chronic unemployment, a fragile political system, and history of defaulting on its debts. And yet, despite all that, the markets have decided to pay for the privilege of lending it money. The country is of course France, which this week for the first time ever saw the yields on its massive debts turn negative.

But hold on. Surely that is completely crazy. We have grown used to record low bond yields over the last decade, and rates for countries such as Japan, Switzerland and Germany have had a minus sign in front of then for some tine. But they are all at least completely rock solid. France isn’t anywhere close to the same league.

Every great asset bubble has a point where the market loses touch with any form of rationality. For the bond markets, negative yields on French debt may well be that point – and one day we will look back on it as the peak before the sovereign debt bubble finally burst.

After a decade of low inflation, and with central banks around the world printing money like crazy, yields on government debt keep on falling and falling. Countries have been able to borrow for virtually nothing for years, and increasingly for less than nothing as well. Once yields turn negative, you lend a state £100, and then five or 10 years later they pay you back slightly less than £100, so long as everything goes to plan that is.

It isn’t exactly a great deal, to put it mildly, but given that many banks and pension funds have to hold an asset that is a hundred percent safe, and if you expect prices to remain flat or fall slightly over the next few years, then it makes a weird kind of sense. Japanese rates went negative first, followed in the last few years by Switzerland and then Germany.

The latest signs of deflation, an economic slowdown, and signals of yet more quantitative easing to come from the European Central Bank meant that a few more countries joined the negative yield club this week. Austria and Finland were among them, but the most significant new member was France, which saw the yield on its 10-year debt drop down to -0.0012pc. President Macron may have plenty of problems, but the cost of servicing his country’s debt isn’t one of them – which is just as well really when you pause to consider just how much of the stuff there is out there.

Up until now, all the countries with negative yields have at least been rock solid, with stable revenues and strong finances. But France? Let’s take a look at a few of the numbers. At the close of 2018, according to calculations by Bloomberg, France’s total debts came to a mighty €2.31 trillion (£2.06 trillion).

Another €80bn of borrowing is scheduled for this year, mainly as a result of President Macron’s concessions to the gilet jaunes protestors, which means the total will be up to around €2.4 trillion by the end of this year. At that level, it will easily overtake Italy as the fourth most indebted country in the world (the top three, in case you were wondering, are Japan, the US and China, but they all have the significant advantage of being a bit bigger). True, its debts are not quite as big as Italy’s as a percentage of GDP, but they are growing much faster, and they are already close to 100pc of total output.

Can France ever start to re-pay all that money? There isn’t much sign of it. France hasn’t run a budget surplus since way back in 1974, which is before Macron was born. State spending accounts for an eye-watering 56pc of GDP, the highest in the developed world. According to the OECD, France now collects 46pc of GDP in taxes, overtaking Denmark as the country that squeezes the most money out of its long-suffering citizens. The OECD average is a mere 34pc. Is it possible to get even more revenue out of the economy? The violent response to a modest rise in diesel duty last year suggests not.

It is not about to grow its way out of trouble either. Unemployment is stuck above 8pc of the workforce, and labour reforms have only made a modest difference so far. The trade deficit keeps getting worse and worse and growth even in a good year struggles to get to 1pc. Perhaps most worrying of all, France owes all that money in a currency it doesn’t control, and can’t print, and most of it is borrowed abroad (unlike Italy, which mostly borrows from its own people). True, it has an okay record on re-paying its debts - it hasn’t defaulted since 1812 – but even so a French sovereign debt crisis seems inevitable one day. It is only a matter of time.

The really important point, however, is surely this. It was already fairly crazy, and worrying, to have negative yields on Japanese or Swiss debt. It is Alice-through-the-looking-glass economics, and it has never been likely to end well. But at least that debt is almost certainly secure. Investors are not risking anything. Both countries are solvent, and can print money if they have to. A negative yield on French debt is simply irrational. And when the market does something completely bonkers, it is always a sign of a bubble about to burst.

It may not happen this year, or next year. But it is certain one day.

2. The demise of Deutschland AG: why Germany's once untouchable giants are gripped in scandal and crisis: Lucy Burton, the Daily Telegraph.

With VW, Deutsche Bank and Lufthansa in crisis, what has gone wrong with Germany Inc?
In the home of schadenfreude, misery loves companies. Germany’s once seemingly untouchable national champions – from VW and Deutsche Bank to Bayer and Wirecard – have been gripped by scandal and crisis. Business rivals are asking each other how much worse it can get for Deutschland AG.

“This is not what ‘Made in Germany’ stands for,’” says one senior German business executive. “There is a sense of embarrassment that some of the country’s few global champions seemed to act ruthlessly, bending the law and incurring legal fines for misbehaviour.”

It has certainly been a rough period Europe’s powerhouse. Frankfurt-based Deutsche Bank, once a symbol of German economic might, is now Europe’s most troubled big bank despite repeated efforts to revive fortunes and move on from past misconduct.

Described by analysts as “the Punch and Judy clown that keeps getting up again,” it is currently under scrutiny over its links with Donald Trump, is expected to unveil sweeping cuts next month and faces a US investigation for possible money-laundering lapses.

It is not facing challenges alone. Wolfsburg-based car maker Volkswagen is trying to move on from its 2015 diesel emissions scandal but, alongside its German rivals BMW and Mercedes-Benz owner Daimler, it could be hit with further fines by EU regulators over claims they colluded to block the development of clean air technology.

Then there’s Bavaria-based payments giant Wirecard, which has this year been hit with claims of fraud and accounting irregularities (the company has denied the allegations). And Leverkusen-based Bayer, the German chemical behemoth which acquired Monsanto for $63bn (£49.5bn) last year and now faces thousands of lawsuits over claims that Monsanto’s weed killer Roundup causes cancer.

Bayer, which has seen its shares plunge since the deal, was the “poster child for consistent value creation by German corporates” and the volatility caused by the legal drama has rocked investors, says Berenberg analyst Sebastian Bray.

But it is not just scandal-hit firms that are being dragged down. Last month Thyssenkrupp, the German lift company, said it would slash 6,000 jobs after abandoning plans for a merger with Tata Steel. Last week Cologne-based Lufthansa, Europe’s biggest airline, and Munich-based chipmaker Siltronic both issued profit warnings, the former squeezed by competition from low-cost rivals and rising fuel costs, and the latter hit by the US crackdown on exports to China, Germany’s major export destination.

“The issue for German companies is the over-reliance on exports which is great when global trade works [but] nowadays trade is questioned, the currency doesn’t offer incremental benefits and technological trends move away from German core skills,” says Arndt Ellinghorst, an analyst at Evercore who used to work for Volkswagen. “This drives the need for transformation away from machinery and engineering into software and digital. German labour and education can manage that change but it will take time and likely involve a recession.”

Others argue that the problem with these companies goes much deeper and reflect a wider problem with business culture in Germany. Michael Huenseler, a fund manager at Assenagon Asset Management in Munich, says the fact that firms in multiple sectors have faced issues shows that “corporate governance has been part of the problem” and the “power of the CEO” is where the difficulty lies.

One London-based restructuring boss, who asked not to be named, says his company avoids doing work in Germany because there has traditionally been a hierarchical structure where people don’t tend to question management and investors keep quiet.

“In many classic companies in Germany, hierarchies are very pronounced and the management approaches are often power-oriented. Unfortunately, the management style is often too top-down,” agrees Michael Wolff, a professor at the University of Gottingen.

“Traditionally, institutional investors have [also] played a subordinate role in assessing the corporate governance structures of German companies. Hardly any pressure was exerted on poorly performing companies and their supervisory boards. Due to the growing importance of institutional investors and their demand for professionalisation of supervisory board work, more systematic pressure is now being exerted.”

Bayer acquired Monsanto last year and now faces thousands of lawsuits over claims that Monsanto’s weed killer Roundup causes cancer Credit: Jeff Roberson
Recent shareholder meetings show that investors are finally starting to put their foot down. The 9,000 Frankfurter sausages, 9,000 pretzels and 13,000 slices of cake Deutsche Bank ordered for its nine-hour shareholder meeting last month failed to appease investors, with one shouting “we are faced with a pile of ----” and “if Pope Benedict XVI can resign, why not [Deutsche chairman] Paul Achleitner?”.

BMW also faced criticism at its recent shareholder meeting, while last week Wirecard was criticised for being “managed like a start-up”. In April, investors delivered Bayer chief executive Werner Baumann and his team an unprecedented vote of no confidence during a marathon, 12-hour meeting.

“The acquisition of Monsanto was carried out without asking the shareholders. As a result, the majority of investors at the last [AGM] voted against the relief of the management board. This is unique in German economic history,” says Wolff. “The loss of reputation is enormous and the pressure on the board has increased significantly.”

Deutsche Bank chief executive Christian Sewing is under pressure to revive the business
Sacha Sadan, who is in charge of corporate governance at Britain’s Legal & General Investment Management (LGIM), says he expects scrutiny to grow on German companies in future. LGIM, for example, opposed 36 German companies in 2018 compared to just 19 the year before.

Germany’s listed businesses are feeling the pressure as foreign investors such as LGIM, which manages around £1 trillion worth of assets, make their demands known.

The advisory arm of London-based Hermes Investment Management last year called on Deutsche Borse chairman Joachim Faber not to serve his full three-year term, to 2021, months after the German exchange giant faced allegations of insider trading. Faber is stepping down next year.

Meanwhile, in an eight-page letter published earlier this year, Sadan called on German corporates to hire an “independent counter-power” onto their board and to increase diversity at the top. He also warned that the common practice in Germany of asking a former member of the management board to be chairman of the supervisory board – the country operates a two-tier board structure – creates “an inherent conflict” of interest.

“You’re seeing an ever-increasing importance of foreign institutional investors in the German market which means that for the first time there’s a more fundamental reflection of where governance should go,” says Joerg Rocholl, president of the European School of Management and Technology in Berlin. “It was unheard of in the past that there could be no approval of the advisory board [in Germany] – this is definitely something that is completely new. I would expect this trend to continue and for investors to take a more active stance than they have done in the past. It will certainly have an impact on management.”

Some think now is a good time to invest in German businesses. Frédéric Guignard, a fund manager at Aviva Investors which has holdings in German software group SAP and medical conglomerate Fresenius, says there are plenty of opportunities as companies are currently undervalued. “Germany’s economy has historically been more reliant on exports than other European countries, and the country is highly exposed to the automotive, chemicals and industrials sectors. These sectors are currently suffering from the ongoing trade war between the US and China. We think this situation is creating opportunities for patient, long term investors,” he adds.

No comments: