Present investor cautiousness inside the Eurozone and even North America is only to be expected today given the strong traction and impressive rallies across certain sectors, banking the most notable, on the back of Mario Draghi’s promise to undertake whatever actions are deemed necessary. The fervency has diminished last week as profit taking by those who rode the wave; with general conjecture that investors will ‘rotate’ their holdings away from ‘defensives’ toward ‘cyclicals’ – better news for recently stock battered car-makers.
Caution Abounds -
Adding to that sense of caution has
been the fact that a kind of impasse still exists between Spain and
the ECB before the EU court approved monies can be injected, all
dependent upon Spain’s official request for aid, which could in
itself re-generate capital market fears. So the Eurozone appears to
be in yet another ‘push-me, pull-me’ hiatus.
Adding to the sense of gloom is the
reiterated press coverage regards the 40% drop of the Chinese stock
market over the last year, the accompanying concerns of a possible
Sino-Japanese military clash over the East China Sea islands, and the
resultant continued constraint of Chinese consumer and industrial
goods demand. Obvious is the parallel impact upon Germany’s export
economy ranging from premium cars to specialist equipment, seen in
manufacturing indicators, so affecting its ability and willingness
to “lead” (in Soros-speak) the Eurozone's additional liquidity
programme.
[A radical Sino-German corroborated
agreement to improve the Eurozone situation would certainly be a
revival short-cut, but would also deny the very necessary
deleveraging actions required by the ECB and IMF via ESM & OMT,
and possibly herald EU stagflation].
Indication from PRC leaders that new
national stimulus measures worth $35bn would be forthcoming, so
affecting the global picture, helped raise oil and metals prices.
So, the general macro-economic picture
then could be said to have seen darkened clouds, interspersed with
bright spots; investor reaction and prime stock markets, as ever
reacting to the news-stream and indeed itself in a self-fulfilling
manner.
The Oft Described Present Paradigm -
Yet, in what has become a very
correlated investment world – confounding the historical orthodoxy
of inverse asset class relationships – clear investment signals
must be heeded, especially regards equities. An all-important true
big picture perspective should to a far greater degree include much
more ‘bottom-up’ recognition, interpretation and influence.
More than ever investors seek both a
level of medium security and medium return. Yet western government
bonds have massively diverged so as to be either a) over-subscribed
and safe but with negative real interest yield, versus b) overtly
volatile relative to Eurozone 'real-politik'. Commodities have
suffered as part of the worldwide downturn so seeing heavy reduction
in CapEx and sector restructuring. Property has likewise diverged as
money has been directed out of EU periphery and various EM regions,
so as to create a new and probably sustainable 'hyper-pricing' in
select inner-city districts, and new hiked price-floors in the most
pleasant suburbs. Equities are still trading on macro, fiscal-policy
induced sentiment rather than in many cases underlying fundamentals.
Noted in automotive have been the overt price swings - even amongst
some of the best positioned (BMW & Daimler) - which are
inconsistent with the company revenues : perhaps the most basic but
prime indicator at present Reduced earnings guidance and goodwill
write-downs seemingly having disproportionate effect on already
historically depressed price/earning ratios. A beneficial era for
those seeking to trade on interspersed peaks and troughs, but adding
little to much needed confidence building throughout the West.
The Exponential Return of Confidence
Invariably Slows Animal Spirits -
The present zig-zag effect along what
appears a relatively narrow floor to ceiling band has been described
by academics as the tail-end of the 'exponential effect'. The steep
to shallow shaped curve created on a stock index after the previous
mass exodus which tracks investors' initial 'rush for value'
purchasing behaviour, so providing the massive uplift seen during the
2008 financial crisis, and to a lesser extent more recently over the
summer as concerns about sovereign debt abated. The propensity for
investors to snap-up what are viewed as bargain stock prices
undoubtedly wanes as time passes. More participants enter the frey,
and the near-term 'under-valuation gap' recedes. So the 'exponential
curve', with its flattening tail, is the natural outcome, seen many
times before and hardly a revelation.
The question is what happens next?
A collapse of confidence and so mass
exit? Ongoing zig-zagging within a bounded range? Or the beginning of
a new growth era?
Undoubtedly the short and mid term
speculative investors will seek to monetise their gains, and seek new
opportunities in other under-values capital markets – the MSCI EM
index highlighting rebound possibilities after the man-made and
natural disaster woes of Japan and Thailand, a settling of the Arab
Spring, South Africa's diffused tensions, Brazil's internal rebound
and China's present predicaments.
So western buoyancy, having seen a good
run, may be for a time deflated.
But just as normal 'corrections' (ie
pause for investor thought) is seen in typical stock growth spikes,
so the exponential curve's 'flat-tail' premises time for renewed
macro and micro consideration. This does not necessarily mean a
partial collapse of confidence, but likely a new growth curve based
upon firmer fundamentals rather than speculative re-bound stock
buying.
Here, investment-auto-motives believes
that any sharp retraction of confidence here and now would only
contravene the logic of the broader picture, a picture that sees good
reasons for mid and long-term confidence, created by :
a) China's willingness to top-up
previous QE measures (presently $35bn)
b) Spain's assertion of continued
austerity action to quell fears, 50% pass rate banking sector stress
tests, official aid request.
c) France's shift toward 'socialism
bounded within global reality'
d) Germany's low unemployment rates,
increased pay awards assisting domestic consumption and decision to
constrain high frequency trading so stabilise capitalise markets
volatility.
e) An improving EU outlook, possibly
averting extensive use of ESFS-ESFM / OMT
f) UK's much re-strengthened banking
sector, improved growth prospects, still sound credit rating &
room for additional QE moves as required.
g) US's ongoing bond-buying ($40bn per
month) and retained 0% rate until 2015 with regulated responsible
credit easing so assisting consumer spending across SMEs and
blue-chip firms, highlights capital markets support..
If western markets are indeed rational,
these relatively few but powerful macro indicators point to a more
upbeat picture than that being presently painted.
A picture which overly concentrates
upon the reduced Q3 & Q4 earnings guidance of many Euro-centric
and multi-national companies, perhaps without recognition of the
ongoing productivity balancing now inherent as part of new era
operations. As witnessed by Volvo Truck, far leaner and more flexible
operational stances have been demanded, especially in the areas of
labour and supplier relations, which will allow for better commercial
rebound than was the case in 2008 and 2010/11.
The Shape of Things Today -
This slow and admittedly painful
commercial re-invigoration process, necessary as part of the broader
'structural turnaround' requirement across much of the west has and
continues to be the central over-arching theme. Whilst the two fiscal
crises brought about undoubted hardships, any contrived continuance
of the former period of credit-fuelled 'good living' for governments,
companies and consumers, would have simply widened an increasingly
untenable cost-base gap between the notionally advanced and EM
regions. By international standards, the EU was in danger of
operating with increasing over-valuation of its competitive
abilities, and the economic region in danger of having to become
increasingly isolated to maintain what was essentially cost-driven
currency inflation. Thus, many advanced nations, though especially
the EU periphery, would have become wholly disconnected from the
global stage, creating very real conditions of far greater public
distress and possibilities for far right or far left political
outcomes.
Instead, the west continues its hard
but required 'economic diet', this period setting the tone for
re-assessment of not just the usual econometrics of monetary and
fiscal policies, but given the size of macro re-shaping required,
questions about the basic very socio-economic template of the west.
As EM nations are able to replay the west's 20th century
industrialisation & commercialisation play-book, so the very high
costs of 'saving' America and Europe – undertaken via 'QE' – must
deliver a desired strategic social outcomes across (developed) skills
and (higher value) employment, on a pan regional basis, so that
America and Europe may seek to retain their positions as
value-creators, in the face of what have become very capable EM
nations.
That EM capability has obviously been
derived from industrial and commercial learning absorbed directly or
indirectly from the Triad regions (North America, Europe and Japan)
and latterly S.Korea, Directly via multi-national companies seeking
to expand their global footprints and gain promising new markets
(BRICS especially so), and indirectly from a new generation of
globe-trotting, constantly technologically & culturally
absorbing, nationals. The obvious intent to replicate what is learned
from the advanced nations so as to replay.
[NB It could be argued that much of
that learning has already taken place throughout the last decade, so
putting EM regions on a far more advantageous footing versus
US-Euro-Japan-Korea].
The true beneficiary is of course the
multi-national corporation, whether western in origin or increasingly
so, with much improved financial and cultural 'fire-power', BRIC &
CIVETS 'new multi-nationals'.
Many within this latter group will be
unknown to average westerner, and often have limited insight amongst
western investor groups, broadly followed but at a shallow level by
analysts. Yet they have ever growing influence. That lack of general
knowledge and deeper insight exists almost by default, as besides
being beyond 'western geographies' such companies tend to populate
the lower levels of the industrial pyramid. Greater exposure to the
lower visibility 'primary' extraction/agricultural activities on a
worldwide operating basis, medium exposure to 'secondary'
processing/manufacturing activities typically on a LatAm, CIS or
Asian regional basis, and though some inhabit the tertiary service
sectors (ie telecoms) and have become dominant 'market saturation'
players, do so typically on a regional intra-national basis (but have
possibly the greatest world expansion ambitions given business model
structure and access to retained and geared liquidity).
Though they may be listed on
international bourses, and ranging in size from conglomerate to
sector-contained, names like CNOOC Oil, BreadTalk and America Movil
are still 'off the radar' and so foreign to westerners.
[NB This itself the natural consequence
of historic western capitalism].
The Need for Western Advance -
There is increasingly realisation that
much of the west is becoming 'left behind' as the gaze of heavyweight
investor groups continues to look eastwards and southwards,
calculating the investment promise from western multi-nationals'
involvement in EM states, and vice versa, the ability of 'emerging
multi-nationals' to:
1. improve performance in domestic
markets as general population wealth grows
2. collect “unpolished” western
assets for business turnaround (typically in premium &&
luxury domains, eg TATA - JLR)
3. expound the possibility to align
domestic EM product & service offerings to the increasingly
cost-driven needs of the 'austerity west'.
This much altered contextual backdrop,
a reversal of the historical norm, then sets very real challenge for
western national industrial policy setting, the strategy &
operations of domestically orientated SMEs and blue-chips, and the
overall population's skills-base those notionally 'advanced' regions.
'Advanced' a misnomer for notionally
'post-industrial' countries, which today after the credit-boom, are
more than ever reliant upon a selection of medium-value and
high-value industries for economic health, but must also contend with
large sections of the 16 - 65 population who do not have the
requisite formally taught or self-educated skills-set themselves to
become proactive in those buoyant hi-tech, financial and cultural
sectors which are in global demand, but are not geographically evenly
spread over a nation.
Whilst certain level of unskilled and
semi-skilled is invariably required to service basic service and
industrial needs, and a return of 'off-shoring' is occurring thanks
to rising EM wage levels, there appears to be very real and
relatively urgent need for transformation of western labour-force
capabilities. This very much the case because the international
capabilities and competition gap within the private sector that has
formed over preceding years (1995-2008) – in favour of the much
improved EMs – was greatly masked by the west's maintained GDP and
GNP growth levels, themselves under-pinned thanks to record
(unsustainable, credit-fuelled) government spending to maintain
national growth.
The necessary on-going contraction of
central and local government funding and so downsizing of
governmental responsibility – a central theme of the 'new normal' –
means that any repetition of previous government funded job creation
schemes in old industrial, economically depressed, areas such as is
wholly untenable.
That unfortunate economic void can only
be filled by the private sector and public-private partnership
projects.
The former has a responsibility to
invest wisely for the long-term, undertake ever greater due diligence
and likely rebuff only temporary investment incentives. The latter is
under new pressure to attract private participation, especially in
infrastructure, when it has been noted that commerce dislikes the
bounding regulations and terms that accompanying PPP's/PFI's;
especially so at a time when governments have less financial and so
philosophical and thus operational flexibility, and is more likely to
enforce terms to reduce its own exposure.
This then indicates that western
nations' future economic fortunes increasingly rely upon the private
sector, a sector whose own commercial landscape has altered massively
over the last 30 years, the last 5 years of which have been a major
watershed.
As a consequence of the very
personality of capitalism, seeking to grown general wealth and have
such monies re-cycled into the capital markets via various avenues,
the strength and role of the private industry – specifically the
corporation – has grown and grown. That process, with its pros and
cons, has seen organic decay of middle and small sized enterprise,
unless otherwise supported as in the German mittelstand, as the power
of economies of scale and access to capital for market expansion
decides not only the fate of stock-holders, bond-holders and
employees, but of local economies; and now in a few select cases, as
with Apple Inc, even impact the health indicators of national
economies.
The Shape of Things to Come -
However, the 21st century's
rise of corporatisation has a distinctly different flavour to that of
the 18th & 19th century versions, even
arguably that of the 20th century model. Increasingly
corporations, with the shop-widow of their prime and sub brands have
become increasingly socio-centric, as the products and services of
specific brands become ever more entwined into people's lives,
consciousness and sub-consciousness; and so an increasing tribal
arrangement ensues, promoted by the “socio-corporatisation”
effect of web-based presentation and social networking
So whilst product and brand loyalty has
always been an explicit part of consumerisation, best seen by the
tribal rivalries of Chevy vs Ford pick-up truck owners in the
American mid-west, or BMW vs Audi owners in affluent cities and
suburbs, today because of the ability for brands to become present
“24/7” through personal communications devices, the tribalisation
effect of various sectors with especially close relations to its
users in reality and hyper-reality (ie meshed reality) means that the
corporate ability to mould people's self-identities at an all time
high.
Through a wide spectrum of direct
'brokering' personal enablement and indirect cultural 'lifestyle'
association, brands such as Apple Inc and RedBull have become far
more powerful and socially entwined than product and service
providers of the past, even compared to such socially impactful
commercial leaps as gas-provision, electricity provision, previous
white and browns goods provision, personal transport provision
Utility service branding only really coming into effect in recent
times when service bundling was introduced, but then only to a small
degree as consumers price-hopped.
The commercial beauty of creating
socially powerful brands is that – as seen with the model series of
improved iPhones' – the elasticity of conventionally rational and
so flexible pricing structures is overtaken by the ability to pre-set
product life-cycle pricing structures, to control the supply-side
provision to constantly be under demand-side levels, so maintaining
sector and markets busting profit margins.
There is now arguably more allegiance
to socially powerful brands than to the 'old' relationships with
socio-groupings such as national identity, community identity,
familial identity etc...the breakdown of the “grande narrative”
to re-quote post-modernist commentators. Download of an iPhone
application at a moment of dire need may create closer personal
relationships between (wo)man and machine, and so ultimately more
emotional support and so connectivity, than that of fair-weather
friends or agenda driven associates.
Each time a desperate informational or
physical need is met by a product or service there is in the consumer
a reactionary joy akin to a worrisome broken-down motorist stood on
a cold, dark road, then seeing the lights of the recovery service
truck. At a basic, powerful level, a satisfied need equals advantage
and happiness, an unsatisfied need equals disadvantage and
unhappiness. The ability to produce the former should be a prime
modus operandi for all consumer facing companies.
This possibly an unrecognised process
of societal transformation which has uncomfortable overtones.
However, the upside – if it may be
called such - is that new social groupings have and are being formed,
centred around a 'like-me' perspective; that identity being of course
brand(s) centric, fashion centric, and massively influenced of course
by cultural / media promotion which merges the once independent
interests of the teenager, twenty-something, thirty-something, with
that of a mirrored corporate cultural and product offering.
During a period when society as was
across western Europe is undoubtedly fragmented with strains upon
many inter-relationships, when the 'grande narratives' of family,
state and religion fail to unify, the aforementioned metaphor lays
the contextual foundations for a world of far greater corporate
orientated personal reliance. With it, a sense that corporations will
have to take on greater corporate social responsibility, themselves
through affiliated agencies, to create a form of responsible
capitalism.
Melded Ideologies & Expanded Corporatisation -
The late 19th and 20th
centuries saw ructions of socio-economic and thus political
ideologies, the forces essentially creating triangularity of
ideological choice between Conservatism, Liberalism/Socialism and
Communism, the democratic model that emerged reflecting each to
varying degrees, but obviously ultimately after 1945 seeing a split
between the mixed market economy of democratic Western Europe and a
centrally planned CCCP led Eastern Europe.
The 1989 collapse of the Communist
ideal demonstrated the power of western democratic capitalism as the
most effective force for social progress, the edicts of Adam Smith et
al highlighting how it law-bound competition better serves the human
instinct for progress and betterment. But of course the 2008
financial crisis – like its 1929 predecessor - with subsequent
collapse of living standards for millions ((if not billions) across
western Europe, has naturally called into question the disadvantages
of the capitalist model...at least in its most voracious form. The
'equal and opposite force' has been a call to far greater socialist,
and in some quarters, communist values.
In reaction to this public call,
political representation of the left (as in France) and right (as in
UK) has had to steer a new course of centralism (as seen in Germany
for many years) to both quell public anger and to also critically
avoid the rise of true national socio-fascism or indeed a revived
communism. When President Hollande backs necessary budget cuts and
understands the long-term need for raised short-term unemployment,
and Prime Minister Cameron talks of a 'Big Society' it is evident
that there is no alternative to new centralist ideals and actions.
However, given the fact that western
governments are increasingly financially strained through those
necessary austerity measures, and the fact that western consumers are
themselves deleveraging it is obvious to investment-auto-motives that
the new economic power and thus social power lies in the hands of
large corporations...and thus the socio-economic remedy of
'supply-side' economics, ideally assisted by a 'Reaganomic' political
regime.
The trend towards the 'corporatisation'
of western society has in effect been under-way for some time, with
commerce initially seeing to increasingly immerse itself into
cultural phenomena through social event sponsorship, and its decision
to become far more proactive in humanitarian ideals, most notably
through corporate philanthropy.
As such, in an overtly simplistic
'readable' manner, investment-auto-motives has named the process:
“Triangulation to Square the Economic Circle”.
The three primary aspects being:
1) Historical economic ideologies of
'left' and 'right' largely debunked, over-taken by socio-economic
commercial and policy pragmatism
2) Recognition of a much reduced role
of the state, its sprawling divisions, agencies and quangoes, given
the untenable cost burden to western society
3) Rise of principles based
'corporatisation', with a closer coupling of banking and industry to
create new value from 'under-managed' firms and new firms; and
greater autonomy for companies which demonstrate the three pillars of
self-sufficiency, the profit motive and 'extended' CSR (viewed in
steady long-term climb of share price)
The accompanying diagram – viewed
top-right corner (for the length of this web-log) – simplistically
demonstrates how this shift of traditional macro-economic
perspectives may occur.
The 'Triangulation Effect' within
politics seeks to demonstrate that the renowned tri-partite model
bounded by the 3 primary ideologues of: Conservatism/Republicanism
(pro-Hayak) vs Liberalism/Socialism (pro-Keynes) vs Communism
(pro-Marx), has been effectively forever 'condensed' by the events of
2008. Those extreme points of view replaced by a necessarily
narrower, less complex 'middle road' system which requires both
greater 'input vs output' (ie value creation) accountability for all
productive activities.
The 'Circularity Effect', which
displays the relationships of the the people, government and
commerce, highlights a near-term re-centring and mid-term rightward
shift of economic bias, as western government states shrink – so as
to only focus resources on the truly needy (elderly and disabled) –
and a new powerful and greater economic dialogue grows directly
between the corporate world (as a supply-side economic actor) and the
consumer world (as a demand-side economic actor).
This then leads to the 'Squaring' (of
that Circle) by viewing the re-vitalised closer relationships between
a re-invigorated, far healthier, retail and investment banking system
(the present ring-fencing expected to diminish as financing needs
arise) and newly buoyant industry and commerce; itself growing closer
still to the consumer across all levels from utility to luxury
purchases (via the previous explanation of 'branded tribalism').
[NB the fact that Facebook is now
'experimenting' with ways to monetise its users personal data
demonstrates just one of the methods being used to grow the 'brand
tribes' model].
The Inevitable Case for Equities -
By historical norms, many corporate
equities are indeed, “down in the dumps” even after the mighty
rises from previous disfavour, seen across 2009-11, consumer
cyclicals perhaps especially so, and perhaps best represented by
under-appreciation of the auto-sector, rebounding markedly in the US
as it has, and still affecting even the best positioned European
players like Volkswagen, presently trading on a P/E of only 3.45.
Unlike certain government notes,
high-yield corporate bonds though presently low on defaults and much
sought in recent times are still exposed to the much mentioned 2015
financing wall. Thus mid-yield corporate bonds with a good
risk-reward ratio have been massively oversubscribed.
So there is a very strong case to be
made that the price of buying equity stakes in what are both
continually strong and value generative companies as well as
cyclically affected firms – various auto players reflecting both -
has never been so attractive.
Constant and compelling news-feed
regards the ever seismically shifting macro has arguably
over-shadowed the level of required attention towards the micro of
balance sheets, profit & loss statements and cash-books. And
critically where done so regards the positions of more fragile
entities – such as previously described Peugeot SA – such focus
has distracted from the true and immediate value of the strong:
possibly across all industrial and commercial sectors.
Cash is certainly ‘out there’ –
the liquidity holdings of the more readily visible such as: Morgan
Stanley, Goldman Sachs, Swiss Life Holding, Credit Agricole, Credit
Suisse, Standard Life, Legal & General and even Italy’s
‘Generali’ ably demonstrate the fact. Even under the necessary
regulatory intervention that separates retail & investment
divisions, investment-auto-motives believes that the banking sector
is fundamentally stronger than is generally believed, and will get
stronger yet as present cash cushions built-up from central bank
funds, external clients and incoming stock investors are added to by
growing retail holdings. The internal leverage levels will be much
reduced from the ridiculous levels seen pre-crisis, but cash levels
will be at record levels and will need to be directed to grow
national and western economies.
Though it may appear presently
distasteful, to do so, many banks will need to deploy such monies via
proprietary trading over the mid-term – even if partially
selling-off certain geographic units recently – with also a new
push towards fixed-income agreements with secure, wealthy parties (ie
the “global elite”) so that they may undertake share trading, M&A
and devise share accrual strategies that mesh both internal and
external client interests.
Yet there is obviously a vitally
important need to ensure attractive purchases, which means an
unavoidable process of liquidity drip-feeding into what are and will
be the most fit and able companies; many of which – arguably like
PSA – are having to undergo a slimming process to regain
competitiveness.
Add-in the sovereign debt turmoil of
Europe, the growth volatility of the US, the structural
re-orientation of China, Brazil and to a lesser extent India, and the
reason for that slow drip-feed of cautious capital into good purchase
opportunities, as and when they appear, becomes self-evident.
Conclusion -
The consequences of what has been
unprecedented global economic disruption are still being witnessed,
so the slow and steady approach by what is now a much (forced)
changed financial community is unavoidable. Real world conditions
altered the typical 'animal spirits' behaviour of once over-exuberant
financiers, far, far more so than public humiliation or regulatory
precedence.
But, much like the required
'Triangulation to Square the Economic Circle' it would be churlish –
indeed foolish – to maintain an unaltered philosophical financial
stance as real-world economic and financing conditions gradually
improve in time.
Ultimately, if any person that lives in
the western world is inevitably a de facto beneficiary of capitalism;
whether of Soros or Gates billionaire ilk, a captain of industry,
middle-manager, member of staff, high or low ranking bureaucrat,
high or low spending consumer, or indeed most obviously but
conversely a newbie financier or old aged pensioner.
But more obvious is the irrefutable
fact that more and more, many or possible all westerners will rely
upon pension schemes that directly draw income from investments in
companies that are emerging market orientated and thus draw of the
talents and productiveness of emerging market peoples and workers.
Thus, leading to a condition wherein
the people's of western society of whatever ideological persuasion
have become both the consumers of global goods and unwittingly become
the beneficiaries (and so 'capitalist bosses') of emergent market
workers.
Fact is that that western governments
will need to follow the Scandinavian and EM lead by creating new and
stronger sovereign wealth funds (SWF's) to alleviate the future
stresses upon internal and external budgets, so that the PIIGS crisis
– and the suffering of populations – may rarely happen again.
Thus even governments well-being will increasingly need to buy into
global capitalism via worldwide, regional and national firms.
Like it or not, no matter what your
social standing “we are all capitalists now”, and even more so
into the future.
That is not something to be confused
about, instead we should be 'Confucian' about how such generated
wealth can be best deployed. And to always remember that the most important things in life should never be ascribed a monetary valuation.
