Tuesday 22 December 2015

Christmas 2015

I'm leaving tomorrow for what I hope will be my first real vacation in 2015. My goal is to spend 7 days without working (and even without checking email), starting from midnight tomorrow, December 23rd. I have no idea if I can manage this, but I intend to try. I'll plug in again around December 30th or 31st to deal with some admin, and then take off again until January 4th.

To everyone out there on FB: Thank you for sharing a very challenging year. It panned out pretty much as I expected, and 2016 looks to be as turbulent if not worse. I've lost track of the airline segments flown in 2015, and the hotel nights booked, but it was a record.

In September 2015 we silently marked the 20th anniversary of the consultancy three partners founded in Athens in 1995. Today, I've closed 20 years with Navigator, through some very good times and some very bad ones. I've seen and worked in the Greek boom and bust; the Russian / East Asian crash of 1998-1999 and the dramatic economic resurgence from 2000 onwards; the 1999-2000 dot.com crash; the accession of Cyprus to the EU in 2004; the massive wave of investment into CEE/CIS to 2009; and several other financial cycles, not least of which was the synchronised 2008-2009 crash that we are still going through.

These 20 years have been the greatest learning challenge of my life, and I’m grateful to the clients and partners that have placed their trust in me and enabled me to become who I am. Next year I'll be reflecting some more on this and on some stories from my adventure consulting days.

On a personal note, September 2015 is also noteworthy because I was given a second chance by a very special person and I intend to make the most of it.

I am profoundly grateful for my family, both the clan that lives in Athens as well as those living in Paris.  And I am grateful to my friends who keep the light burning here on FB, at the odd BBQ or bar crawl in Athens, and all over the world whenever we meet.

I wish everyone a Merry Christmas and a Happy New Year. ΧΡΟΝΙΑ ΠΟΛΛΑ.

Non semper erit aestas.

Monday 14 December 2015

Waiting for the next crash?

I've been working all day yesterday except for a short walk to Staples for printing. But the impression I have is of an overwhelming sense of complacency, where consumers pay nosebleed prices for extremely low quality. Part of this is location: I'm on Central Park South and the tourist hordes are unabated. But as we teeter on the edge of the next financial crash, I wonder how long this sense of entitlement will last.

I posted this on Facebook this morning and was suitably challenged by my Facebook friends to explain myself. Here's my take in more detail. 

Some points as to why I believe the markets are close to crashing (again):

1.     The commodities supercycle has ended, or at least gone into reverse. Most commodities have seen a 50% price decline (or more) over the past 12-18 months. Declining commodity prices are a signal of industrial demand contraction.

2.     Shipping indices (BDI) have been following them down. I sideline oil tankers, which are being used to store crude (contagno) as opposed to actively transport it.

3.    Brent hit $ 37.78 today. Low energy prices are wreaking havoc. GCC sovereign wealth funds are starting to pull investments in hedge funds, PE funds and everywhere else. Saudi Arabia is forecast to have a deficit of 15% this year, if not more.

4.     The oversupply of hydrocarbons and anaemic industrial demand mean that energy prices are set to remain low going into the future.

5.     Given the high leverage of most households and companies, I don’t see this translating into a great consumption stimulus.

6.    Only 3 US companies retain AAA credit rating status, if I have my information correct. More US companies are being downgraded than are upgraded.

7.     Equity valuations are now overvalued again, in nearly every OECD market, and certainly in the US.

8.    Too much of GDP in key markets remains propped up by property and other bubble-type expenditure (e.g. property prices in the UK and Germany).

9.    China will be hit by the negative impacts of over-investment for years to come. This means yet more price dumping in everything from solar panels and ceramic tiles to clothing, ICT components and everything else. This means some better times for consumers, but it primarily means worse times for western manufacturers.

10.  The US is set to end QE and start raising interest rates. The ECB is maintaining or expanding QE. As the US raises interest rates, money will theoretically see allocation adjustments out of equities into Treasuries and bonds. This is very theoretical. In fact, I believe that the pricing incentive or price signal in most portfolios and markets has now effectively been destroyed by central bank activity and an oversupply of funding chasing too few real equity or property investment opportunities for alpha returns. 

11.  I also believe that the monetisation of pension funds is a major factor in the oversupply of investment funds, or the mismatch of funds chasing too few opportunities for alpha returns. Ditto algorithmic trading. As a result, I am no longer certain equity prices are a real signal of corporate performance, at least not in most OECD markets.

12.  So even without raising Fed rates, I’m not sure how much further current equity valuations can last. I believe we have departed from any real fundamentals in most cases. In certain categories, like tech start-ups, we are at the Web 2.0 crash point (similar to Web 1.0 in 1999-2000). Value is being destroyed, not created.

13. Emerging market growth is now very high risk and does not have the capability to offset the core problem of a decaying “developed market” consumer-driven economy. Too much BRIC growth was predicated on the commodities supercycle. Now, Brazil, China, Russia and later Australia, Canada and other supplier countries will start to feel the pain. Particularly in those countries like Canada and Australia that allowed a property bubble to develop on the back of commodity export-led growth.

14.  In too many countries, middle class disposable income has shrank on absolute terms, either due to wage stagnation, or due to high inflation in core spending categories (such as property) or due to predatory taxation by governments. Without a strong middle class, most GDP models don’t work. Most GDP models are based on about 70% household / consumer spending. The great crime of Central Banks and Ministries of Finance in most OECD countries is that they are not accurately measuring property, retail or catering costs accurately in their core inflation index, deliberately obscuring higher costs in the typical household basket of goods. Low inflation = low wage growth = low interest rates in the name of “economic stimulus”. Only it's not stimulus anymore, its something more akin to “voodoo economics”.

15.  Most OECD countries are dividing into a highly protected, permanent workforce with lots of benefits, versus an at-risk temporary workforce or contract workforce with no benefits. In most OECD countries, minimum wage is equivalent to wage slavery. In most OECD countries, young people starting their careers have no hope of getting onto the property ladder or even earning a living wage if they live in their national capitals. This is a form of inequality apartheid which kills motivation and penalises those who invest in their own education and play by the book.

16. Mega mergers are occurring again. This is a sure sign of high leverage chasing artificial returns. Most mergers destroy value.

17.  Finally, I see massive complacency everywhere. In the public sector. In the private sector. In the school system and higher education. In healthcare. In public security. In retail. Everywhere. Far too many people have become far too comfortable doing very little yet charging a premium for it. How long can this continue?

(c) Philip Ammerman, 2015

Thursday 10 December 2015

Thoughts on Schengen and Security

Charles De Gaulle Terminal 1 (c) Philip Ammerman, 2015

This afternoon I arrived in Paris after one month of continual travel. The last time I was here was November 13th, the day where 130 civilians were killed by ISIS terrorists.

After the November 13th attacks, President Francois Holland announced a “closure of the borders”, which in effect meant a temporary suspension of the European Union’s Schengen Treaty allowing passport-free travel between Schengen Member States. I say temporary, because today, less than one month after the measures were announced, there was no passport check for arrivals from Schengen countries.

My disbelief was heightened by the fact that two elderly ladies, apparently from Belarus, were visiting Paris for the first time and asked me where they should go for the immigration check. They were all ready: passports and documentation in hand, ready for the typical Soviet experience enjoyed by travellers to Belarus or Russia.

I think back to all the rhetoric we have heard and read over this past month:
  • “Europe is at war”
  • “We must improve our security”
  •  “We need better European cooperation”
  • “We must secure our borders”

and variants thereof. So where is this security? Either we are at war, or we are not. Either we need better security, or we don’t. Either we believe in verifying identity checks for people entering our border, or we don’t.

Instead, this appears to be yet another European political manoeuvre designed to evade responsibility and keeping public spending low.

Do we need border security? I would argue that we do:
  1. In both the Charlie Hebdo attacks in Paris, the assailants had an escape plan. Sherif and Said Kouachi were apparently heading for Belgium before they were intercepted. Hayat Boumeddiene by air to Turkey (via Madrid), and then over the border to Syria (before the attacks).
  2. In the November 13th attacks, the terrorists used Belgium as a staging ground and escape route for the operation. Salah Abdelsalam was actually stopped three times on his drive back to Belgium, result. Other members of the Molenbeek cell travelled several times to Syria and back.

Now, will we actually achieve better security with the current border force? Probably not. The French police’s failure to apprehend Salah Abdelsalam is the greatest indication of this. However, the system can and should be reformed to make it more effective:
  • Random vehicle checks and intelligence work have stopped vehicles with weapons in the past. Notably, a suspect was stopped in Germany with weapons, apparently en route to Paris;
  • The experience of Israel and the British Army in Northern Ireland indicate that random patrols, psychological profiling and other methods can be used successfully to flag suspects and break up potential attacks;
  • A better immigration control can also flag other criminals, notably criminals and victims involved in trafficking and other crimes; 
  • Since European cooperation in terms of intelligence exchange has clearly failed, there seems to be little alternative but to regain as much control over immigration as is possible, including through identifying entry/exit stamps to suspect countries such as Syria, Yemen, and other feeder countries. 
A state has a minimum responsibility to protect its citizens by protecting its borders. The current system, where this responsibility has been “shared” throughout the Schengen zone, is clearly not working.

The counterargument also runs that border controls are too expensive and will cause economic losses due to slowing tourist and traveller flows, or transport blockages. This is untrue. There are plenty of non-Schengen countries where normal immigration procedures continue. The United Kingdom is one such country: all arrivals pass through immigration, and the system works. On November 15th, when I left France after my last visit, the line at the passport counter that had been set up in a temporary structure took exactly 2 minutes.

If there are issues of cost, then I propose a € 5 levy on international airline, ferry, truck and bus arrivals as a means of financing enhanced security. I, for one, would be happy to pay this, and I’m flying usually once per week.

To conclude, I believe it is time to end Schengen and re-institute border control checks as well as random controls on highways and other transport locations. Given the speed with which terrorism, human trafficking and other forms of crime can now migrate throughout the Schengen zone, I see no point of continuing the current system.

What is remarkable to me is just how little European politicians are doing, or apparently understand the real threat we are facing. 

As I saw in Paris this evening, we have been promised security and enhanced cooperation, and yet there were no added security measures in place. Exactly how long is this situation supposed to continue? 

(c) Philip Ammerman, 2015  

Tuesday 8 December 2015

Another Useless Ritual: The latest riots in Greece

Kathimerini photo of the December 6th 2015 riots in Athens
Kathimerini photo of the December 6th, 2015 riots in Athens

Alexis Grigoropoulos was shot and killed in cold blood by a member of the Athens police force on December 6th 2008. The defendant and other members of the police initially attempted to cover up the unwarranted killing, but evidence and a lengthy investigation into the case proved otherwise. The Press Project has published a detailed assessment of the case in English.

Unfortunately, since that date, each anniversary of the Grigoropoulos killing has become an event in which gangs of young men roam Exarheia and downtown Athens, burning and destroying at will, until they are stopped by the legions of police mobilised to prevent any more serious incidents.

Unfortunately, legitimate peaceful marches to commemorate the killing are used by these “protesters” to gain cover. In the most recent events in Athens, thirteen people were arrested (as reported by Kathimerini).

The November 17th commemorations of the deaths of students at the Athens Polytechnic are another event that has sadly been commandeered by “anarchists”, who use the occasion of the march to the US Embassy to engage in the same pointless street battles with the police.

In both cases, the symbolism of the violence from the viewpoint of the perpetrators is obvious: they claim to be striking back against the front-line troops (the police) of an oppressive order. Yet in both cases, there is every reason to believe that this is a totally pointless ritual, devoid of any real meaning besides the internal requirements of the “resistors” and, on the opposing side, of “law and order”.

If the “anarchists” are really concerned with social justice, then they should be equally concerned with the large-scale property damage they inflict on blameless bystanders. Moreover, if they really want to bring about lasting political change, then it is obvious that short-term “insurrection” on predictable dates (December 6, November 17), is hardly the way to do this. 

These same protesters and anarchists, after all, have in the past entered politics, and become part of the ruling class, defended by the same forces of law and order that they used to spend time attacking.

These same anarchists have no alternative plan for real anarchy. By day, they study at university or work in the real economy. By night they riot, but only on specific occasions. Where’s the revolution?

There have been other countries in the European Union that have suffered far more under oppressive regimes in the recent history. Poland, Lithuania, and others have seen a far higher body count due to Nazi invasion and the subsequent Soviet occupation.

Most families in Lithuania, for instance, have seen a relative deported and disappeared in the Soviet Gulags. Yet in none of these countries do equivalent rituals unfold, where the useless and deliberate destruction of public and private property in the hollow name of “rebellion” or “resistance” has become an anticipated annual event.

There is something seriously wrong with a society that not only tolerates useless rituals, but ritualises them without question. Particularly in the absence of any logic or coherence as regards actual conditions in the real world.

© Philip Ammerman, 2015