Thursday, August 30, 2007

Advice to Germany: "Stick to Manufacturing"

Pssssst. You. Herr Doktor Finanzenarbeiterwirschafter. Yes You. Come here. I've got a bit of advice for you (and anyone else of Germanic lineage that sees themselves in the mold of Soros , Tudor Jones, Cohen or Kovner

Nothing personal but....


Errrr....that's all.


rakuten said...

Well, as far as manufacturing expertise and lack of financial expertise is concerned Japan and Germany seem to be rather similar. Should be interesting to see if the Japanese banks, especially the regional ones have put a few subprime skeletons in their closets in their quest for high yielding instruments.

On a more German (ie pedantic) note, the word Finanzenarbeiterwir(t)schafter doesnt exist and even if it did exist it wouldn't make sense. Sounds good though...

Why is it that even the educated portion of the anglo saxon world is still not able to come to terms with the fact that while they have won the military confrontation they have not dominated the economic confrontation to a similar degree ?

People with your level of intelligence should stand above such expressions of Schadenfreude , its annoying enough to be exposed to this anachronism in the tabloids on a constant basis.

Welcome to the global village :-)

"Cassandra" said...

Thanks for the comment. The post was tongue-in-cheek, and I fear you misinterpreted my sentiments which were admitttedly oblique to those who don't me well.

Rather than schaudenfraude, the spirit that drove the comment was one of disappointment, manifesting itself in abuse by stereotyping. You see, I admire modern Germany (and the Germans). And as you suggest they have much in common with the Japanese, whom as everyone knows by now, I also have a love-hate relationship with.

Financially speaking, I admire the Calvinist streak of Germany: generally low corporate leverage, suspicion of households with resepct to debt, public policy that prices and taxes negative externalities while subsidizing positive ones, and taxes consumption rather than subsidizing and encouraging gearing. It's not without fault, but who what or where is? I just believe it is on a more sustainable and less coarse capitalist path than other systemic alternatives, particualrly the American model.

So it was suprising to see LBBW and yesterday WestLB taking massive hits given the more general sobriety, coupled with generally conservative lending and borrowing policies. for a couple of bp's. I would have been far more sympathetic were they leveraging to invest geared surpluses in trades where capital were flowing downhill (Turkish Lira or BRL carry etc.), but US subprime trash that virtually all sober-minded folk - especially anglo saxons - understood was toxic is, I must say inexcusable, and disappointing. I will admit to ocassionally bought stuff I didn't full understand (reg-D stuff) some of which went pear-shaped, I've never been snookered on a geared basis in my bread-and-butter i.e. the things I am getting paid to know better.

Finally I sprechen nicht Deutsch, but admire and am envious of the way one more or less create precise words or phrase-turns that eliminates ambiguity while providing (potentially) colourful allusions.

Judging from the "cheapness" of some regionals (0.6 to 0.7x book and 12x forecast earns, even with no organic growth providing a real earnings yield with room to boost eps via buyback far in excess nearZIRP or JGBs or similar), the market may be saying they do. But such amterial non-public leakage is less obvious in Japan than elsewhere.

I hope that explains where I am coming from. Tnx again for the comment.


rakuten said...

Dear Cassandra,

Thank you for the exhaustive answer (relative to the short posting being discussed) and the clarification. As you said it seems I have misinterpreted your sentiments, sorry about that. I do enjoy reading your blog otherwise and I am glad we could clarify this issue.

I do admit that I may be overly sensitive to any hint of Schadenfreude when it comes to poor German econimic performance because both FT and Economist keep on playing this card and I find it very much out of place. I am fortunate to have lived in many countries and thus have very little tolerance for parochialism and misguided patriotism.

I am afraid I may be contributing to the widely held belief that "We(Germans) dont do humor"
Only partially true though, few people enjoy the Fawlty Towers - Don't mention the war episode. more than I do...

As for the regionals, not my specialty and certainly already cheap on valuations as you pointed out. Hard to find profit oriented management though. When rates started going up I was more than surprised to hear from many managers that while they had to raise deposit rates (because of competition..) they would not be able to raise lending rates as much (because of competition..). A somewhat not textboook like answer. Again, not my specialty but I only liked a few of them. Suruga has found a profitable niche but valuation bit high. Musashino Bank has good positioning in Saitama/Chiba area, ok management and relatively attracctive growth prospects in this region ..

"Cassandra" said...

Though brief, I would have thought I'd have provoked a few others to retort. Oh well...

For what it's worth, it is precisely that they are so cheap without profit oriented managements (with current yields 150bp> ST depo) that I see attractive risk vs. reward opportunity. Potential catalysts (you can attribute your "p%" to them) include: persistent buybacks and float shrink with obviously excess capital; consolidation (easy >25%++ for the cheapies); expense saving from consolidation; actual re-orientation towards goosing-up ROE; The downside: ummmm large (and fatal) undisclosed sub-prime exposure and so forth. Does Zaitech still live??!!?

Anonymous said...

Hello Cassandra,
some reasons why your advice might be right.
1. Germans abhor inflation of any kind after the mark became worthless two times in a century (1923 and 1948.)Without inflation (used in an austrian/monetarist sense) it does not pay that much to move money around.

2. Psychologically, the German National Myth, Nibelungenlied,
contains nothing like chutzpah. The chancellor of the Nibelungs, Hagen Tronje, asked the wife of the invulnerable Siegfried where he has a weak spot. After getting the answer, Hagen stabs Siegfried in the back on a hunting trip. The motivation for this deed is to keep the old order alive. Keeping the old order was a more important motive then to dominate the world. This brief excerpt uses German interpretations of the Nibelungenlied, the English Wikipedia entry is somewhat different.

In more modern times the Philosopher Kant formulated a “boy-scout-like” ethic.
In my opinion this are not the traits that make someone survive in today’s financial markets.

3. On the other hand, Germans copied the best powers that were or are around since the aftermath of the 30-year war that ended 1648 and left Germany far more devastated then WW1 and WW2 together; seventy percent of the population died at that time.
Other countries moved forward big time, to close the gap Germany copied them. An example could be Friedrich the Second, King of Prussia, (the Brits called him the great) spoke perfectly French (to copy Louis XIV of France) but a terrible German.
This attitude should work for today’s financial markets, but this trait is less known outside of Germany.

4. Financial Stars or ‘”legendary investors” are uncommon in Germany; the last “Boersenguru” was the Hungarian-born Andre Kostolanyi who died around 2000.

So, the picture is not really clear, as always in economics.

A more pointed answer to your exclamation would be:
If you financial guys stop subsidizing Japanese exports with the artificially low Yen we stick to manufacturing.
Anyway, your post made me think and provoked this philosophical answer.


OldVet said...

Organically earned money means you're free to take all the winnings or all the losings, and not having to listen to advice from 25-year old Wunderkinder. It's worked out pretty well for old Deutschland over time.

Unfortunately your best potential customer for machine tools is too busy primping in the financial hall of mirrors, sometimes called "The Fun House" in carnivals. The US is locked in an unhealthy dependency with both Japan and China, who provide the funds cheaply to buy their stuff. In essence, US financial markets are mere conduits for the Chinese and Japanese elites to pass through money back to their respective manufacturing bases.

They're buying their own stuff, and counting on a frivolous consumer and devious US politicians to pay them back one day. When push comes to shove in the American panorama of financial priorities, that bet by China and Japan may not look very good.

weichristineliao said...

I found this post vy amusing :-)

Gavekal's daily report on why German banks got hit hard in this US credit crunch:

"...Quite insightfully, Bill Gross recently explained the credit crunch as a massive game of “Where’s Waldo?” He pointed out that the main problem is that no one knows where all of the “toxic” CDO’s, MBSs, ABSs… are hidden. This, in turn, has led to the general distrust in the credit markets and an abrupt reduction of loanable funds…. So where is all this toxic paper?

Common sense tells us that those who are most likely to take on toxic assets are those who are working in the most over-banked markets. After all, if a bank executive hopes to justify a hefty bonus for himself, he better deliver on growth. If his market does not lend itself to such growth, well then, he has to get creative—possibly at the expense of financial prudence. Today, there is no better example of an over-banked market than Germany. As such, we would not be surprised to see this credit crunch expose several weak links there (state-owned Landesbank Sachsen and West LB are already on the list)..."


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