Yesterday I attended an annual lunch in London that brings together the former board members of a now-defunct motor car company.
In matters automotive, and in that company, I am very much the Roman among the Greeks but it is also an event at which I learn much with respect to the ongoing issues, both technical and financial, in the world of cars. The soft US auto sales, reported on Monday, did not go unnoticed and their impact on the Trumpian masterplan was considered.
I later found in my mailbox a response to my comments on the weak numbers from an equity markets chappy who wrote “Well auto sales almost all fleet sales … organic numbers in the right brands for the likes of GM were good”. That sounds to me uncannily as though his own auto industry analysts had got their forecasts completely wrong and had been busily chasing the silver lining on a not very pretty cloud. If total auto sales are missing forecast by a full 5% then things are not good, right brands or wrong.
I do, however, have one takeaway I’d particularly like to share, not least of all in light of the improved output numbers for Tesla and the general excitement over the development in the electric/hybrid space. One of my lunch partners, former chairman and CEO of a global brand and now deeply involved in alternative propulsion research, pointed out something I’m sure only very few of us will have ever considered and that is the valuation of second-hand battery-powered and hybrid vehicles. The problem is easily defined. Nobody can predict the lifespan of a lithium-ion battery. The thumbnail life is 3,000 charges, which gives more or less seven years. But this is not a precise science. The first generation of hybrid/electric vehicles is now approaching that age.
FILLING UP WITH HEAVEN
Seeing that a replacement battery costs in the region of US$8,000, knowing when the battery fitted in the car will give up the ghost is pretty important and yet it could just as easily die after 2,000 charges as it could battle on for 4,000. This renders estimating the second-hand value of a hybrid or battery-powered vehicle a fairly random crapshoot and an issue that still has to be addressed. Anyone who has studied the auto sector knows that the second-hand value of cars is an important element in understanding the dynamics of the production/sales cycle and will therefore grasp the significance of the uncertainty which is embedded in the hybrid/electric space. One thing I’m pretty sure of is that stock pickers who value Tesla higher than Ford have not yet done that calculation.
Far be it from me to attempt to propose answers to any of the questions raised but it is interesting, nevertheless. Oh, and incidentally, there is as yet no known way to recycle lithium. Point that out to the electric solution nuts. In fact the most environmentally friendly car on the planet, believe it or not, from manufacturing through to recycling and all station in between is….drum roll…..the Jeep. Yes, the Jeep is the greenest car money can buy. Tell that to your Tesla and Prius fans…
DON’T YOU WANT ME
Meanwhile, France was exposed to a four-hour debate between the 11 presidential candidates. It’s extraordinary how many column inches have been wasted this morning in confirming the obvious, namely that Marine Le Pen stands no more than a snowball in hell’s chance of winning the presidency.
One correspondent questioned my certainty that Emmanuel Macron is a done deal by citing the inaccuracy of the polls in the UK referendum and the US presidential elections. I responded that whoever votes for Le Pen in the first round will most probably do so in the second too but anyone who has not voted for her in the first almost certainly will not suddenly swing for her in the run-off. Job done.
Meanwhile Bunds are having a second spring with the 10-year rallying back to 0.20% on the back of markets beginning to rule out the idea of the ECB following the Fed in its tightening cycle. Erkki Liikanen, governor of the Bank of Finland and member of the governing council of the ECB has been on the wires stating that “interest rates will remain low beyond the end of asset purchases. That is undisputed.”
Many questions remain as to how strong the recovery actually is. There has been a dichotomy for some time between sentiment indices and hard numbers and this is an issue addressed by Gavyn Davies, formerly of Goldman but now with his own firm, Fulcrum Asset Management. In an FT article titled “Global surveys or hard data – which are the fake news?”, in the context of nowcasting, he concludes that sentiment indices tell us far more than do hard data and that hard data are in fact prone to understate the performance of the economy. Thanks to PH for pointing me in the direction of the article and may I please recommend this as a valuable read.
FASCINATION
Finally, President Trump has expressed his views on Dodd-Frank and general over-regulation at the same time as the ESMA is trying to give us an understanding of how the ridiculously onerous MiFID II and MiFIR are supposed to work in practice. Trump has spoken of a severe “haircut” to regulation, which tries to micro-manage how banks perform their business. “We want strong regulation, but not regulation that makes it impossible for banks to loan to people that are going to create jobs,” he said. His use of the English language might be questionable, but the content is clear. We have long believed that the pendulum had swung too far one way and then the other. Now it looks as though it’s about to change direction again, or at least it is in the US. In Europe, on the other hand, the control-freakery continues unabated and the ESMA paper confirms this. Once again the leaden-footed EU is behind the curve.
For all their faults, the Yanks went through their banking system like a dose of salts in the aftermath of the financial crisis while Europeans were still busy behaving as though nothing was wrong. Now, nearly a decade on, the nasties are still crawling out of the woodwork in Milan, Frankfurt and a few other select mainland financial centres. Thus Europe is regulating for a crisis that happened 10 years ago while the Americans might just be about to bury the past and formulate the future.
It will be interesting to see which train a post-Brexit UK jumps on. Hope must be that British pragmatism will win out over European instinctive dirigisme and that the City will thrive on what made it great to start with.