DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking:
(firmenpresse) - Silvia Quandt&Cie. AG, Merchant&Investment Banking / Miscellaneous
17.06.2010 18:09
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Silvia Quandt Research GmbH I Bernhard Eschweiler I
eschweiler(at)silviaquandt.de I +49 69 95 92 90 93 51 I www.silviaquandt.de
- Inflation versus deflation and the lessons from history
- The German fiscal saga will go on
- China's leaders know it better than the stock market
Finding the right policy mix
Economists are still divided whether OECD economies, especially in Europe,
are heading toward inflation or deflation. The rough consensus of a recent
online debate among eminent economists by The Economist magazine was that
deflation is the near-term risk, but that inflation is the long-term
problem. Anglo-American economists are generally more worried about
deflation, while economists in Continental Europe, especially Germany, are
more concerned about inflation. Respectively diverse are the policy
recommendations. Those worried about inflation favor the withdrawal of
super easy monetary conditions, while those concerned about deflation warn
against early fiscal consolidation.
History will tell who is right, but that may not be a repeat of history.
The two opposing views are shaped by two historic experiences: the German
Hyperinflation after World War I and the Great Depression. Both
experiences carry important lessons, but they also show that this time is
different. German Hyperinflation was the result of excessively lax fiscal
and monetary policy, which ended with the Reichsbank essentially
underwriting all government debt. The Great Depression, in contrast, was
the result of policy overkill, namely the simultaneous tightening of fiscal
and monetary standards in response to the stock market crash. Extreme
relations between governments and their central banks also characterized
both episodes. The Reichsbank, for example, was practically a department
of the finance ministry during Hyperinflation, while it was fully
independent during the Great Depression and, some argue, very
uncooperative.
The current post-bubble deleveraging smells more of deflation than
inflation. However, the large-scale financial sector rescue measures, the
massive monetary easing and the fiscal stimulus programs are proof that
policymakers have learned some lessons from the Great
Depression. That alone is reason enough to believe that another Great
Depression is unlikely. But the lessons from Hyperinflation are also not
forgotten. Running ever larger public deficits is unsustainable and
monetization of government debt is not a politically accepted option. That
is the reason why governments are starting to save and rightly so. Fiscal
consolidation will be negative for growth, however. Thus, central banks
have to cushion the impact of fiscal tightening and perhaps resort to more
quantitative easing, especially in Europe.
In short, the key lesson from both experiences is that combined fiscal and
monetary easing or tightening is unsustainable over time and leads to
either inflation or deflation respectively. The right middle path for the
current situation is a policy mix of fiscal consolidation and monetary
accommodation. Important is that policy-makers use the time to address the
underlying structural problems; otherwise they will follow Japan's
footsteps.
Fiscal tightening and easy monetary policy mean that government bond yields
will stay low. Ten-year German Bunds, for example, may inch below 2%. It
also means that currencies, like the Euro, will be soft, mostly versus
emerging markets. That is good news for profits of exporters, especially
in Germany. Low yields and perhaps better profits imply that stocks are
undervalued at current prices. The missing link is confidence and that may
not return quickly, given ongoing political uncertainty over the future of
the Euro area.
Back to the drawing board
The EUR80 billion saving package by the German government was successful in
one aspect: it demonstrated to the rest of Europe that Germany is serious
about fiscal consolidation. Unfortunately, the package failed to have the
same effect inside Germany. Criticism is coming not only from the
opposition, but also from groups considered close to the coalition
government. The key complaints are that the package is not socially
balanced and lacks tangible near-term savings. Many measures are too vague
and only scheduled to go into effect in two-to-three years.
The Silvia Quandt view is that the package falls up to EUR40 billion short
of the savings needed to bring the structural deficit close to zero by the
year 2016, as required by the constitution. This reflects both an
underestimation of the looming fiscal gap as well as likely shortfalls in
the proposed package. Not much will happen until after the summer break,
but a second round is guaranteed. So far, the government is trying to
avoid tax increases, which would be the better approach but is not the most
likely outcome. Already, pitches for tax increases are also coming from
inside the coalition. The debate promises to be heated and could put the
coalition at risk, but a compromise could also emerge with higher sales
taxes as well as higher income or asset taxes for the rich.
China's stock market and the economy
As if the problems in Europe are not big enough, markets have also to worry
about China, which has emerged as the biggest source of global growth. In
response to the domestic real estate bubble, the Chinese government has
started to withdraw its stimulus program. The Chinese equity market
reacted promptly, dropping more than 20% since March and spreading angst to
global stock markets. Does that mean the bullish China story is running
out of steam? Well, those who believe that the stock market knows where
the economy is heading should think again.
Looking back, China's equity market has been a poor predictor of where the
economy is heading. Between 2001 and 2005, the market slumped, yet the
economy accelerated. In late 2006 and 2007, the market played catch-up
with the economy, but overdid it and had to give back most of its gains
when the financial crisis broke out.
The equity market is also a poor vehicle to participate in China's success.
While real GDP rose 10% per annum over the last ten years, the stock market
gained on average only 9% per annum in nominal terms. The poor performance
of the Chinese stock market has much to do with its culture, which
resembles more a casino than a mature capital market. It also reflects the
dominance of banks and other state-owned companies, which are more often
used for policy objective than profit maximization.
So, if not the stock market where else should one look for direction? The
best bet is China's leaders. The workings of the Chinese government remain
an enigma, but its messages about the direction of the economy have been
consistently reliable. In 1994, when growth and inflation were in the
double digits, the government said it would engineer a soft-landing.
Nobody in the West thought this was possible, but it happened. In 1997/98,
everyone thought China had to devalue, but its leaders said no and they
didn't. After the bursting of the dot-com bubble, China watchers predicted
agreat deflation, but the government pumped up spending. Similar happened
again in the recent crisis.
To be sure, one should not believe everything Chinese leaders say. But
China's leaders retain a large degree of control over the economy and are
not afraid to use it. Thus, it seems more likely that China will stay on
the growth path. Yet, someone will have to pay for the bubble excesses.
That may well be the banks, in which case the stock market may not be so
wrong after all.
Company disclosures
Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)
in combination with the German regulation concerning the analysis of
financial instruments (Finanzanalyseverordnung) requires an enterprise
preparing a securities analysis to point out possible conflicts of interest
with respect to the company or companies that are the subject of the
analysis. A conflict of interest is presumed to exist, in particular, if an
enterprise preparing a security analysis:
(a) holds more than 5 % of the share capital of the company or companies
analysed;
(b) has lead managed or co-lead managed a public offering of the
securities of the company or companies in the previous 12 months;
(c) has provided investment banking services for the company or companies
analysed during the last 12 months for which a compensation has been or
will be paid;
(d) is serving as a liquidity provider for the company's securities by
issuing buy and sell orders;
(e) is party to an agreement with the company or companies that is the
subject of the analysis relating to the production of the recommendation;
(f) or the analyst covering the issue has other significant financial
interests with respect to the company or companies that are the subject of
this analysis, for example holding a seat on the company's boards.
In this respective analysis the following of the above-mentioned conflicts
of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt&Cie. AG, and its affiliated
companies regularly hold shares of the analysed company or companies in
their trading portfolios. The views expressed in this analysis reflect the
personal views of the analyst about the subject securities or issuers. No
part of the analyst's compensation was, is or will be directly or
indirectly tied to the specific recommendations or views expressed in this
analysis. It has not been determined in advance whether and at what
intervals this report will be updated.
Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate
the shares of the companies they cover on an absolute basis using a 6 -
12-month target price. 'Buys' assume an upside of more than 20 % from the
current price during the following 6 - 12-months. These securities are
expected to out-perform their respective sector indices. Securities with an
expected under-performance to their respective sector index are rated
'avoids'. Securities where the current share price is within a 5 % range of
the sector performance are rated 'neutral'. Securities prices used in this
report are closing prices of the day before publication unless a different
date is stated. With regard to unlisted securities median market prices are
used based on various important broker sources (OTC-Market).
Disclaimer This publication has been prepared and published by Silvia
Quandt Research GmbH, a subsidiary of Silvia Quandt&Cie. AG. This
publication is intended solely for distribution to professional and
business customers of Silvia Quandt&Cie. AG. It is not intended to be
distributed to private investors or private customers. Any information in
this report is based on data obtained from publicly available information
and sources considered to be reliable, but no representations or guarantees
are made by Silvia Quandt Research GmbH with regard to the accuracy or
completeness of the data or information contained in this report. The
opinions and estimates contained herein constitute our best judgement at
this date and time, and are subject to change without notice. Prior to this
publication, the analysis has not
been communicated to the analysed companies and changed subsequently. This
report is for information purposes only; it is not intended to be and
should not be construed as a recommendation, offer or solicitation to
acquire, or dispose of, any of the securities mentioned in this report. In
compliance with statutory and regulatory provisions, Silvia Quandt&Cie.
AG and Silvia Quandt Research GmbH have set up effective organisational and
administrative arrangements to prevent and avoid possible conflicts of
interests in preparing and transmitting analyses. These include, in
particular, inhouse information barriers (Chinese walls). These information
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affiliates may have access from a business relationship with the issuer.
For statutory or contractual reasons, this information may not be used in
an analysis of the securities and is therefore not included in this report.
Silvia Quandt&Cie. AG and Silvia Quandt Research GmbH, its affiliates
and/or clients may conduct or may have conducted transactions for their own
account or for the account of other parties with respect to the securities
mentioned in this report or related investments before the recipient has
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herein may fluctuate and/or be affected by changes in exchange rates. Past
performance is not indicative of future results. Investors should make
their own investment decisions without relying on this publication. Only
investors with sufficient knowledge and experience in financial matters to
evaluate the merits and risks should consider an investment in any issuer
or market discussed herein and other persons should not take any action on
the basis of this publication.
Specific notices of possible conflicts of interest with respect to issuers
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indirectly, in the United States of America.
Frankfurt am Main, 17.06.2010
Silvia Quandt Research GmbH17.06.2010 18:09 Ad hoc announcement, Financial News and Media Release distributed by DGAP. Medienarchiv atwww.dgap-medientreff.deandwww.dgap.de---------------------------------------------------------------------------Unternehmensinformation / Kurzprofil:
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Datum: 17.06.2010 - 18:09 Uhr
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