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Monday, 23 October 2017

On VW, Piech, China, glum markets and Yogi

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Anthony Peters tries, mostly in vein, to find something to cheer us up.

The second oldest rule in the book is that one man’s risk is another man’s opportunity – the oldest rule, in case you were wondering, is that the only perfect hedge is a flat book – but there is a feeling abroad that there is currently more risk than opportunity. Thus, I suspect, a lot of folks out there will be clamouring to invoke the oldest rule.

This is not a nice time to be in the markets. The Volkswagen thing has rattled confidence in both equity and credit markets – I received a one-liner this morning from a credit hedge fund which very simply read: “Is VW going bust?” to which I equally simply replied: “Nope. 80bn net debt; 20bn can be done. Will hurt but it won’t kill. Stock wiped by 30bn; looking cheap now but still better to stay away”.

The board meets today and it looks very much as though it might decide that the buck does stop at Martin Winterkorn’s desk. Could Ferdinand Piech be planning a come-back? Makes Downton Abbey look like Enid Blyton.

China’s September Manufacturing PMI which was released early this morning didn’t help matters either at 47.00, below the 47.5 which had been forecast and below the 47.3 in August. News from Brazil is all but encouraging as the Petrobras corruption fiasco creeps ever closer to the Presidential palace. Good news is hard to find and what would in the past have been deemed to be good news, namely the decision by the Fed to postpone the inception of the tightening cycle was not taken well by asset markets.

I know things aren’t great and that the miserable commodities market is being held up as a reflection of all things evil in the global economy but things aren’t all that bad. Or are they? Copper, one of the most “real” of commodities, is trading a scrap above US$5,000 per tonne on the London Metal Exchange. This is above – just – the 200 day moving average and thus there is still some hope.

I don’t know where I take it from but I feel that the situation in China isn’t as bad as some financial markets would have it. Yesterday was another big red one in Europe and the US but China today, even on the back of the weak PMI, the Shanghai Composite is only down (at the time of writing) by just over 1%; in the greater scheme of things, and in light of recent volatility, that’s nearly as good as unchanged. Also, please let me repeat that we are still in the process of deflating a mindless stock-price bubble in Shanghai and the index is still up by 35% on a year-over-year basis.

Meanwhile, all the old chestnuts are still around. The issue of recapitalising the Greek banking system will begin to surface again now that the elections are out of the way. This will be one of the first tasks to face Euclid Tsakalotos who has been reappointed by Prime Minister Tsipras as Finance Minister.

Tsakalotos is credited with having secured the third bail-out package but to quote Winston Churchill; “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. We forget that Greece, even the parts of it which are prepared to dig deep and get on with some hard work, are still hamstrung with desperate capital controls.

The FOMC meeting of last week had kept the flies off the bride for a few weeks and the VW scandal has taken over the headlines but of the manifold problems which have faced markets and economies since the beginning of the year, I don’t think one would need the whole of one hand if one were to try to add up which ones have been settled.

Finally, I note the passing of Lawrence Peter “Yogi” Berra, legendary Baseball catcher and coach. I frequently quote his brilliant one-liners. He will surely be remembered best for his “Déjà-vu, all over again” quip, but for me the masterpiece was the one which applies to us and our business more now than at any time in the years I’ve been in the City which is “If you come to a fork in the road, take it”.

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