Of London 2012, Super Mario's kryptonite, Beemers and dark Knights
Well, I am back after three full weeks away from the markets and it will be fun trying to catch up on events and sentiment. I have had long breaks in the past but they have always been marked by my trying to remain in close touch with the goings on. Not this time …
It might be a function of age, it might be a function of experience. “Plus ça change, plus c’est la même chose”. Or maybe it’s: “Rien a changé, ça reste la même chose”.
I did of course make the perfunctory phone calls to chums on both sides of the business but, whereas in the past, I would have listened to their assurances that I was missing nothing and then dig deeper, this time I took them at face value and returned to whatever I had been doing, not least of all watching some of the Olympic Games or “London Twenty Twelve” as they insist on calling it here and I admit, unashamedly, that I too have caught myself roaring at the television. I would of course love to see more sincere patriotism and less vociferous jingoism but that is a forlorn hope and I shall, nevertheless, try to enjoy the rest of the games for what they are and not moan about what they could be.
So, looking from the distance, I have three singular “tall trees” which caught my attention.
So Super Mario popped into the phone box, slipped on his blue Lycra suit with red cape and re-emerged without realising that someone had sewn some green kryptonite into the hems.
The first is, not surprisingly, ECB President Mario Draghi’s “We will defend the Euro with whatever it takes…” which just had to remind one of the Churchillian “We will fight them on the beaches….” We Brits did as he asked us to and then spent the rest of the 40s, all of the 50s and the 60s and most of the 70s recovering from the experience.
So Super Mario popped into the phone box, slipped on his blue Lycra suit with red cape and re-emerged without realising that someone had sewn some green kryptonite into the hems. The past three weeks have once again been long on rhetoric and short on action but there is nothing new there. The Western authorities have spent five years assuring us all that we are not another Japan which has been struggling for fifteen years to find a way out of its deflationary cycle and despite all the loose monetary policy has been going nowhere in a hurry. One might say that they have been rearranging the debt-chairs on the Titanic (ooof!).
The second event was BMW’s Q2 results. Of course they were pretty decent in the greater scheme but the fizz has gone out of the performance. If you break down the numbers, you discover that the only really profitable parts of the business remain in the high value added end of their range. In other words, so long as they can pump out big cars and Rolls Royces to China all will be well but not even they can make money in the volume car market. If BMW can’t, then what hope for Renault, PSA, Ford and GM, not to mention FIAT whose figures are flattered by their very smart, rock-bottom investment in Chrysler?
Both French car makers have considerable downsizing to perform over the next couple of years which may prove to be a serious headache for President Hollande – the one of retirement at sixty and of the thirty five hour week. GM’s Bochum plant is as good as gone but I suspect that, if given the chance, the powers in Detroit would be quite happy to bury Adam Opel AG alongside its erstwhile Swedish cousin, SAAB. I have been writing about overcapacity in the automotive sector for as long as I can remember but the credit boom kicked the issue into the long grass as ever more people used money they did not have to buy cars they could not afford. BMW’s results remind of another are due a “shrink to fit” diet.
Thirdly and finally, I was very sad to hear of the Knight Capital fiasco. While other brokers were busy trying to become investment banks, Knight stuck to its knitting and, in many ways, showed us what we should be doing by offering a fast, efficient and cost-effective service to its customers. A $440 million hole is a disaster and probably a terminal one too. I have friends at Knight in New York and I also know a few bods who work with them here in London. Their business model is different from ours so I wouldn’t call them competitors – or perhaps more honestly, they wouldn’t regard our little shop as competition – but I do know that they enjoy a remarkably good reputation for a brokerage. There is no doubt that the strength of their business will assure something of a future for the people but it is doubtful that it will be as an independent unit. That, to me, is a huge shame.
Many of the problems in our industry have been brought about by massive over-capitalisation. Knight Capital, sadly, will probably fall to the opposite.