Sonntag, 31. Mai 2009


Lately, just about everything seems to be going wrong for Mexico:

- It started with collapsing oil revenues. Not only did the oil price collapse (an event that will probably be temporary), but much more worryingly, oilfield output is declining at ever steeper rates.

- Exports to the US have fallen sharply, and workers' homeward remittances are also dropping.

- American multinationals have slashed their investment budgets, and are repatriating as many profits as they can to strengthen their balance-sheets.

- Escalating gang warfare among drug traffickers has claimed 6,200 lives last year, and some cities (most notably Ciudad Juarez, across the Rio Grande from El Paso, where 1,800 people have been killed since January 2008) are so unsafe that thousands of troups have been moved in, and nobody dares to venture outdoors after nightfall.

- And if all this wasn't already enough, swine flu shut down Mexico City for several weeks, and has caused the country's tourism industry to collapse. As of late May, occupancy rates in major tourist destinations are still down by more than half compared to last year, even though prices have been slashed by 50 % and more.

Latest forecasts now project 2009 GDP to drop by 8.5 %.

Edit: According to latest news, the US now insists that US citizens travelling to and from Mexico carry a passport. This is expected to deal a further blow to the economies of border towns such as Ciudad Juarez, as most Americans don't even have a passport.

Samstag, 30. Mai 2009

Arcandor's Real Estate

Der Spiegel has an interesting snippet regarding the ownership of Karstadt's department store locations:

Noch stärker belastet wird der Konzern durch die vergleichsweise hohe Miete für fünf Häuser, die Karstadt bis 2003 an die Oppenheim-Esch-Fonds verkauft hatte. Allein für die Immobilien in Potsdam, Karlsruhe, München, Wiesbaden und Leipzig werden jährlich 20 Millionen Euro fällig. Einer der größten Fonds-Zeichner ist Thomas Middelhoff selbst. Am Warenhaus in Potsdam haben er und sein Frau zusammen sogar gut 23 Prozent gezeichnet. Während Middelhoff den Karstadt-Mitarbeitern schon in seiner Amtszeit erhebliche Beiträge zur Sanierung des Konzerns abverlangt hatte, blieben die Mieten bislang unangetastet.

So ex-CEO Middelhoff invested lots of his own money into buildings previously owned and now rented by Arcandor. In other words: If Berlin bails out Arcandor, the ex-CEO may turn out to be one of the main beneficiaries, as the rent payments will keep flowing. (Not to mention that it sounds like a massive conflict of interest for a CEO to personally buy buildings from the company he's running...)

German Executive Compensation

According to the FT, Germany's parliament has in principle backed a law which will make decisions on executive compensation more transparent, introduces caps on bonuses linked to "freak share price movements", and makes it easier for shareholders to sue members of the supervisory board for approving unreasonable pay packages.

I don't know the exact details (I only read the FT article), and presumably they are still subject to change anyway (as the law hasn't been enacted yet), but in general, I think this is a very good idea.

Arcandor's Top Management

Everyone agrees that Arcandor has been a mess for quite a while. Even politicians keep saying that employees shouldn't suffer for all those management mistakes that have been made, so they are acknowleding that management hasn't exactly been doing a great job.

I thought it might be interesting to take a look at top management compensation. According to the latest financial statements for the year ending 9/08, this is what the CEO (Thomas Middelhoff) earned:

- Total compensation: 4,239,000 €

- Of which "variable compensation for short-term incentivisation", more commonly known as "bonus": 2,642,000 €

All 7 board members together received a total compensation of 19,869,000 €.

Assuming a full-time Karstadt sales person receives an annual salary package of 30,000 € or so, Thomas Middelhoff's package alone would have been enough to pay the salaries of 141 sales people. The 7 board members together received as much as 662 sales people.

But I suppose high performers need to earn a good salary.

And of course Arcandor achieved very commendable performance: The financial statements (which were published barely 6 months ago) show that Arcandor lost only 1.3 bn € in equity during the financial year for which the compensation was paid (740 m € net loss, the rest was stuff not booked through the p+l for various reasons).

But the section "to our shareholders" (signed by Thomas Middelhoff) starts by saying that Arcandor has performed well, has increased its "adjusted EBITDA" (who cares about net profit or changes in equity, the only thing that matters is "adjusted EBITDA", yeah!), and has been improving its performance consistently over the last four years. The management has done "a lot of things right", but has also "made some mistakes". What kind of mistakes? Well, mistakes regarding "communication", which "confused the capital market and the press".

He ends the section by saying that the restructuring and refocusing of the company has been successful, so he can now leave to pursue other challenges. Results in the upcoming year (i.e. the currently ongoing year) will improve further compared to the already significant improvements achieved in the previous four years.

So the only mistakes he made were "mistakes regarding communication", huh? Well, in that case I suppose he fully deserved his bonus, and we should all thank him that he managed to turn the company around so well, thereby limiting the required bank guarantees and KfW loans to only 850 million Euros.

Does Scraping Old Cars Lead to Reduced Energy Use?

In the comment section of a previous post, reader Taurus ponders the effect of the car scraping bonus on overall energy use.

Here are my thoughts on this topic:

- The car scraping bonus subsidises 2 million new car purchases with a total amount of 5 bn €.

- Assume half of those new cars would have been bought anyway, whereas the other half was bought earlier than otherwise intended, reducing their useful life by 10 %.

- Assume the lifespan of a car is 150,000 km, i.e. a reduction by 10 % equals 15,000 km.

- Assume that the new cars consume 1l/100km less than the scraped old cars (my new Toyota replacing a 14 year old car of a similar category needs roughly 1l less).

- Assume that the energy needed to produce a new car is 23,000 KWh (based on calculations made by Volkswagen for a VW Golf).

How much fuel is saved by the scraping?

1 million cars * 15,000 km * 0.01 litres saved = 150 million litres of oil saved

How much energy is needed to build the new cars ahead of normal schedule?

1 million cars * 23,000 KWh * 10 % of lifespan = 2.3 bn KWh of additional energy used

Based on current prices, 150 million litres of oil cost roughly 50 million Euros on the world market. 2.3 bn KWh for industrial use cost around 200 million Euros.

=> Based on the assumptions I used, the scraping bonus leads to significantly more energy use, not less.

You can play around with the assumptions (e.g. the average car bought under the scraping bonus is smaller than a VW Golf and therefore needs less production energy; also, if people trade down to smaller cars, the savings on fuel consumption may be bigger), but I don't think you can come up with a realistic set of assumptions that implies significant net energy savings.

More Arcandor Babbling

Franz Müntefering has come up with an additional reason to save Arcandor: Not only are thousand of jobs at stake, no, it's even worse: Those thousands of jobs are predominantly held by women!

Two questions:

1. Is he aware that sexual discrimination is illegal?

2. Is he aware that the crisis is mostly hitting sectors dominated by male workers? (car/truck industry, machinery makers)

Freitag, 29. Mai 2009

Experiences with the Car Scraping Bonus

I finally decided to scrap my 14 year old car and buy a new one.

Talked to various car salesmen, and also asked them if they are happy about the smashing success of the Abwrackprämie (the 2,500 € car scraping bonus). Contrary to my expectation (surely at least the car dealers should be happy about it, right?), their answers varied between lukewarm and very negative.

In particular, they all seemed convinced that this year's new business bonanza will equal next year's shortfall.

And they were complaining about the bureaucratic hassles involved. One guy told me that two of his customers had problems with their application being turned down for incorrect reasons (the bureaucrats claimed that the applications contained incomplete documents, even though the copies kept by the car dealer showed that the complete set had been submitted), and nearly all of them are still waiting to receive the money (apparently, the processing delays may take more than six months).

In any case, the bonus scheme led me to ditch my car a year or so earlier than I otherwise would have done. As a consequence, British and Turkish car workers have a slightly lower risk of being laid off (that's where the Toyota I am buying was produced according to the car dealer, though he was quick to emphasize that a few of the components were supplied by Bosch and other German suppliers).

But I still think it's a waste to scrap a perfectly good car with a used car value of roughly 1,000 €: Some guy in Romania or Lebanon would have been perfectly happy to drive my car for a few more years...

Donnerstag, 28. Mai 2009


I don't normally read the business section of the Sueddeutsche.

But today I happened to take a peek, and stumbled over a commentary entitled "A chance for Karstadt: Arcandor is more important than Opel, and there are reasons for government support".

So I took a closer look to learn what those reasons are:

- The first reason is that Karstadt alone already provides jobs for "more than 50,000 people", twice as many as Opel does. I see.

(I wonder if I should be finicky enough to mention that according to the interim financials, Karstadt had 23,627 staff as of 31/12/08 based on "full-time equivalents". 330 head-office staff will be retrenched until May, and there is a gradual head-count reduction in the department stores. So by now, they are probably below 23,000.)

- The second reason: In many small and mid-sized cities, Karstadt department stores are anchors preventing a "domino effect". If Karstadt stores - "essential inner-city magnets" - close their doors, German inner cities might turn into "American-style wastelands". In other words: If people can no longer shop at Karstadt, they will shop nowhere else either. In particular, inner-city pharmacies, bakeries and restaurants will have to close down. I see. Maybe government subsidies for those pharmacies, bakeries and restaurants are also called for? Just an idea.

- Thirdly, it is not clear that the "traditional department-store concept" has no future. No, "some people" actually see potential, because "some customers" like the Karstadt concept involving "everything under one roof with competent sales staff". And because of this convenient fact that "some people" actually like to shop at Karstadt, the amount of money needed to rescue Arcandor is much smaller than for Opel. I see.

- Point four: Arcandor is only in existential trouble due to the banking crisis. This is not explained further, but I guess the implied idea is that healthy banks would not hesitate to provide Arcandor with more money. I see.

- And finally: Metro's offer to merge Karstadt into Kaufhof is "bad style" because it involves "getting the assets at a cheap price and picking raisins". In other words: Instead of letting Kaufhof take over Karstadt with no taxpayer money involved, the taxpayer should help Arcandor with a 650 m € guarantee and a 300 m € KfW loan to avoid that Metro gets a good deal. I see.

Conclusion: I knew there was a reason why I don't normally read the Sueddeutsche's business section...

(By the way: Most Karstadt locations were sold to a Goldman Sachs real estate fund a few years ago. I wonder how much rent Karstadt is paying...?)

(Previous post on Arcandor)

Opel Update

According to the morning news, negotiations regarding Opel "have broken down" for the time being.

Apparently, "the American side" (not clear if that refers to the Treasury or to GM itself) has suddenly come up with "new demands" amounting to an additional 300 m €. And the German government wants the investor or the US Treasury to provide "adequate collateral" for the 1.5 bn € bridge financing, and such collateral has so far not been offered.

It's hard to comment without knowing the exact details. But it sounds a bit comforting that Berlin is at least trying to get some sort of collateral, instead of just handing out the money.

Though of course the dynamics of this kind of negotiation process usually include lots of posturing before the parties finally give in at the last minute...

Edit/Update: Today's FTD says that internal GM projections foresee an Opel/Vauxhall EBIT of -3 bn US$ for the full year 2009. I suppose that's a partial answer to the question "What do they need all those guarantees for?"

Mittwoch, 27. Mai 2009

Shanghai Hotels

It seems that Shanghai's high-end hotels are still struggling:

I just received a promotional mail from the Grand Hyatt, offering a Superior Room for a daily rate of 1,388 RMB. And they even throw in a food/beverage voucher worth 300 RMB.

A year ago, their standard room rate was 2,500-3,000 RMB.

You can call that deflation. Or you can call it desperation.

The State of Germany's Banks

Check out this interesting interview regarding the state of the German banking system, with particular focus on the Landesbanken.

(I don't agree with every detail, but overall it's a pretty insightful and knowledgable description. Picked up via Naked Capitalism.)

Edit: Verlorene Generation discusses the interview in detail.

Does Showing a "Net Profit" Mean You're Profitable?

Regular readers of this blog may have noticed that I don't particularly like the concept of "net income" when analysing a company's financials, and instead prefer to look at "change in equity" (excluding capital measures).

Bloomberg Magazine just ran an article in a similar vain, arguing that "net income" should be ignored, and investors should focus on "comprehensive income" instead (which is more or less the same as the change in equity excluding capital measures):

Apparently, the newly revised FASB rules now allow companies to keep "nontemporary loses" out of net income as well, thus widening the gap between the two concepts even further. This comes on top of gains and losses from retiree benefit plans, many derivative contracts and foreign currency fluctuations, to name just the most important items.

The article lists a few American companies where the gulf between 2008 net income and comprehensive income was particularly wide:

General Electric: +17.4 bn $ vs. -12.8 bn $
Citigroup: -27.7 bn $ vs. -48.2 bn $
MetLife: +3.2 bn $ vs. -12.1 bn $
IBM: +12.3 bn $ vs. -6.1 bn $
AT&T: +12.9 $ bn vs. -3.8 bn $
Boeing: +2.7 bn $ vs. -6.5 bn $

(For the last three, the major part of the discrepancy was due to funding problems on their defined-benefit pension plans, which had large equity exposure.)

With discrepancies as large as these, what meaning can "net income" possibly have? It's little better than "operating income", and it certainly doesn't tell you if a company was making money or not.

The Plight of Former Wall-Street Professionals

Bloomberg is running a heart-wrenching story about a former Wall Street economist who is struggling to make ends meet after being laid off.

Don't know why, but I somehow find it hard to empathize.

Let's summarize:

The guy in question is 61 years old, i.e. close to normal retirement age. During the 8 best years of his career, he earned 500,000 $ per year. For the rest of his career, he made 100-150,000 $ per year. In total, his career lasted 30 years.

So you'd think he has a nice-enough nest egg to simply retire, right?

Wrong. His nest egg is 720,000 $.

Why so little?

Well, for a start, even though the article says he "predicted in a published report the recession that would end his livelihood", he unfortunately kept his money in high risk investments, and lost 70 % of it (don't know what exactly he did with his money: the stock-market dropped less than 70 %, and anyway: Which sane economist puts 100 % of his retirement savings into equity at age 60?). In other words, he still had a very comfortable 2.4 millon $ in early 2008.

Then, there's the housing price crash: He plans to move to Vermont to save costs, but didn't manage to sell his New Jersey house for the 899,000 $ asking price. Instead, he had to accept 775,000 $. That's 14 % less than the asking price. Not too bad, I'd say. And in addition, we learn that he had bought the house with a 244,000 $ mortgage in 1990. Sounds like he still earned a decent return on the house. So what is it again that he's complaining about?

But maybe the real problem is that according to Bloomberg, 500,000 $ a year is hardly a great salary: We are told such a paltry sum "provided scant cushion against prolonged unemployment or career upheaval".

Yeah, it's really tough to make substantial savings out of a gross income of only 500,000 $ (and in case you're wondering: His wife also used to earn an income before she was diagnosed with a chronic illness).

And in any case, earning a reasonably good salary comes with the downside of "locking you into a lifestyle": For example, when he got his high-paying job back in 1994, he went out and bought a new Jaguar, and remodelled the kitchen for 98,000 $.

And now, the poor man can no longer afford to buy books and has to go to the local library. And instead of eating out, the couple stays home and watches rented movies.

But the house they are renting in Vermont still costs 1,800 $ per month. Hardly a dilapidated shack at that price, I'd say. Oh, and we also learn that the only place where he takes risks these days is "at the poker table".

I don't know about you, but I don't feel particularly moved after reading this story. Must be because I'm cold-hearted, I suppose...

The Economic Effects of a Car Bail-Out

What are the economic effects of a car bail-out?

If (as everyone seems to agree) there is significant overcapacity in the industry, and if the government decides to prevent the collapse of a major industry player that would reduce overcapacity, the consequences are as follows:

- Industry profitability will remain lower as it would otherwise be, i.e. shareholders of all competitors (= car manufacturers selling cars in Europe) will suffer.

- Due to the delayed correction in industry capacity, there will be more jobs for an interim period (until existing players collectively reduce their headcount to an adequate level), i.e. car workers as a group will benefit.

- There will be more car-related jobs in the home country of the company that is bailed out (if it is allowed to fail, many of the cars will instead be produced by international competitors).

- Car buyers will profit due to higher competition (and therefore somewhat lower prices).

- Economy-wide structural adjustments will be delayed (i.e. the reallocation of labor resources from the car sector to other sectors will happen less quickly). If the economy is close to full-employed, this is bad. But if - as is currently the case - there is anyway a shortfall of overall demand and little hope of "alternative jobs" for laid-off workers in the short run, this doesn't matter much.

- Due to redistributional effects (labor gains, capital loses) and additional government deficit spending, there will be a positive effect on overall world demand, and in particular on domestic demand (as domestic production is protected at the expense of foreign production).

Oh, and I forgot the taxpayer, who will have to pay...

Dienstag, 26. Mai 2009

Las Vegas

Calculated Risk points out that Las Vegas, the all-American tourist destination, is suffering ever sharper declines in its "core business":

According to the Las Vegas Convention & Visitors Authority, the average Q1 room-rate was down 25 % yoy. Visitor numbers dropped 9 %, airport passengers 14 %. Convention attendance was down 29 %, and gaming revenues 15 %.

So total hotel revenues are down 32 % yoy (0.75 * 0.91 = 0.68).

Oh, and 2008 already saw a decline compared to 2007: Room-rates were down 10 %, and visitor numbers 4 %. So over two years, the decline in hotel revenues is 41 % (though for 2008, there is only full year data; Q1 was probably better than the full year, as the economic downturn only started to accelerate in late summer).

US Oil Consumption

According to the FT, experts expect Obama's policies to have a major impact on mid-term US oil consumption. Apparently, Obama wants to reduce US oil demand by "the combined consumption of France and Canada" (note: those two countries have a combined population equal to 30 % of the US!). According to some analysts, the change will be so big that "the US is expected to become a net exporter of petrol by 2023".

Yeah, right: The US currently produces 50 % of the oil it consumes, and domestic production is falling. So oil consumption would have to drop by more than half until 2023 for the US to become self-sufficient. Ain't gonna happen. (Unless of course prices rise dramatically enough to force people to consume much less.)

As of 2007, the US consumed roughly twice as much oil per capita as Western Europe. So obviously there is scope for a significant reduction. However, the way US society is organized, Americans will continue to use their cars much more than Europeans do. So all that can be hoped for in the mid-term is a switch to more fuel-efficient cars. Factor in demographics (population grows at nearly 1 % p.a.), and the fact that US oil consumption has already dropped 10 % from Q1 2007 to Q1 2009, and the conclusion is: Reducing absolute oil consumption much further will prove quite a challenge once the current crisis is over and the economy starts growing again.

(To be fair, I suppose the FT's "net exporter of petrol" claim was referring to refinery capacity, i.e. the US would still import oil, but would become a net exporter of petrol. Not that this has any relevance whatsoever.)

Nuclear Power

Much has been made of the apparent renaissance of nuclear power.

According to the FT, 388 new reactors are currently being planned or proposed, as compared to 436 reactors currently in operation.

However, once you look at the number of reactors actually under construction, things look decidedly less impressive: There are only 45, half of which in two countries (Russia and China).

The US, in particular, currently doesn't even have a single new project with a full construction and operation licence, and there's only one project with "permission to break ground" (but no full licence expected until 2011).

According to the Daily Mail, the British government just announced 11 potential sites for new reactors. But no investment decision will be made before 2011, and the first new reactor may come on stream in 2017 at the earliest. If the British government decides to provide massive subsidies, that is, because the industry argues that it won't be interested in building any new reactors without such subsidies.

And while China is building or planning more than 20 new reactors, this will apparently only increase the proportion of nuclear-generated energy from 2 % now to 3-4 % by 2020. Not exactly what you'd call a "major breakthrough".

Capital vs. Labor

According to Destatis, Germany's Q1 GDP data confirms that capital income is in free fall, whereas labor income continues to hold up well:

Compared to Q1 2008, labor income is up 1 %, whereas capital income is down an unprecedented 21 %.

(For comparison: In Q4, the numbers were +4 % for labor income, and -6 % for capital income)

Montag, 25. Mai 2009

The Opel Saga Continues

The preliminary bids for Opel came in a few days ago.

At first glance, there are only two possible interpretations:

a) The bidders are unreasonable and want all the upside without taking any risks
b) GM Europe is in extremely bad shape, i.e. the upside is so low that nobody in his right mind would take any risks

It's hard to say which of those two interpretations is more appropriate, as no stand-alone financials of GM Europe are available.

But the terms sound bizarre indeed (based on FTD print edition):

Magna (the "preferred bidder", whatever that means) wants 4.5 bn € loan guarantees, 1.5 bn € bridge financing, 3 bn € of pension liabilities to be taken up by the taxpayer, and additional guarantees on the equity investments to be made by Magna and its Russian partner Sberbank (Magna would take 20 %, Sberbank 35 %).

- It's not really clear why the equity portion of the investment ("up to" 700 m €: What's the "up to" supposed to mean anyway?) should be "guaranteed by the government". Surely, an investor has to take some sort of risk. Otherwise, he's not an investor at all.

- As for the pension liabilities: Aren't they covered by some sort of assets? Machines, factory buildings, inventories, whatever? If not, Opel must have significantly negative equity. (Does it?)

- And regarding the 4.5 bn € loan guarantees and 1.5 bn € bridge financing: What exactly are they needed for anyway? I thought Opel is selling lots of cars lately, courtesy of the German car scraping scheme? Still not enough to earn sufficient cash-flow? (And by the way: What would be the terms? The government would charge for the guarantees, right? Or does Magna expect to get it for free?)

Presumably, the deal does not only cover Germany. It also includes the various GM Europe plants in other countries (most notably Belgium, the UK, Poland, Spain and Russia), but excludes Saab. But funnily, only the German government is considering to provide government guarantees and bridge financing. Nothing is being heard about British, Belgian or Spanish government guarantees.

Der Spiegel argues that the "new" Opel would be to a large extent controlled by the Russian government (the majority owner of Sberbank, which would hold 35 % of Opel). As Russian customers don't like to buy Russian cars, and Opel is already quite popular in Russia, a kind of German-Russian joint venture would be the only practical way to create a semi-Russian "national champion". Fair enough. But if there is sooooo much obvious upside, then why does the German government have to guarantee everything...?

Anyway: We don't know Opel's financials (apart from the not very reassuring Q1 announcement of GM Europe, which showed an EBIT of -2.0 bn US$ for just three months, though I assume this includes Saab). But we can take a quick look at Magna and Fiat:


- Magna lost 1.3 bn $ of its equity in 2008, while sales dropped 10 % compared to 2007.

- It lost a further 300 m $ of equity in Q1. Sales were down nearly by half compared to Q1 2008.

- In spite of this, net equity is still comparatively strong: 7 bn $ as of 3/09, or 60 % of total balance-sheet size. Only a small portion of this is goodwill, the rest is tangible assets.

- Chrysler accounts for 11 % of Magna's sales. It is currently unclear what effect Chrysler's insolvency will have on Magna (will the business disappear? will the receivables be paid?)

- GM (North America + Europe) accounts for 19 % of Magna's sales. So GM's insolvcency would have a major impact on Magna's financials. And in any case, expected production cuts at GM's North American plants are expected to have very substantial effect on Magna's operations in Q2 and Q3, and possibly beyond.

=> Magna has a comparatively strong balance-sheet, but cash is in short supply, and the mid-term business outlook rather uncertain


- Fiat actually increased sales a bit from 2007 to 2008, and posted a profit of 1.7 bn € for the year 2008

- However, equity was down slightly, as Fiat not only paid a sizable dividend (546 m €; their only excuse for this: It happened in the first half of 2008, before the economy crashed), but also took 1.1 bn € of expenses directly to equity.

- In Q1 2009, a further 500 m € of equity was lost.

- The remaining equity of 10.6 bn € still sounds sizable. However, deducting 7.2 bn € of intangibles and 2.5 bn € of tax assets leaves practically no tangible net assets.

- What's worse, inventories and financing receivables keep edging up, causing a drain on available cash.

- Up to now, this was handled via increasing debt (23.4 bn € as of 3/09, up sharply from 18.0 bn € in 12/07), but clearly the finances cannot support any more debt beyond current levels.

=> Fiat's balance-sheet is much weaker than Magna's. However, its business position is probably a bit stronger (Q1 sales were down "only" 25 % from Q1 2008, as Fiat sells mostly small cars, and is not present in the collapsing US market).

Samstag, 23. Mai 2009

Various GDP Data

The Economist believes that China's 6 % yoy GDP growth is not overstated, and that drops in electricity consumption and tax revenues can be explained by special effects. In particular, lower electricity use can be explained by a sharp drop in heavy industrial output. So why does Xinhua tell us that even the "six most energy-intensive industry sectors" increased production by 2.3 % yoy in Q1?

Singapore came out with a massive revision of its annualized Q1 GDP contraction from 19.7 % to 14.6 %, thereby reminding everybody that preliminary data cannot be trusted. The yoy drop was revised to "only" 10.1 %.

Taiwan's Q1 GDP declined even more than Singapore's: Down 10.2 % yoy. So the title "worst performance of all developed countries worldwide" probably goes to Taiwan.

Mexico's Q1 GDP also declined a massive 8.2 % from Q1 2008. Most important reasons for the drop were declining exports to the US, and lower remittances from Mexicans working in the US. Swine flu only started in April, so Q2 is likely to be even worse.

Freitag, 22. Mai 2009

Where are the tourists?

According to news reports, Spain's tourist arrivals are sliding fast:

- In year-to-April, foreign tourist arrivals fell 12 % yoy.

- Arrivals at the Costa Blanca (especially popular among depreciation-hit British tourists) are down 22 %.

This link provides details for the various Spanish airports and for different source countries (for some reason, arrivals from the US are up 6 %, whereas arrivals from pretty much anywhere else are down).

To fill the empty planes from the Spanish mainland to the Canary Islands, local residents now receive a 30 % ticket price subsidy, says this report.

Companies in the tourism sector are also feeling the pain:

- NH Hoteles saw Q1 room revenues drop 16 % yoy, and suffered a 48 m € loss for the quarter.

- Iberia also saw revenues drop 16 %, and lost 93 m €.

Meanwhile, Turkey, Egypt and Tunisia recorded strong growth in tourist arrivals due to their weak currencies. So apparently, people aren't staying home. They simply choose to go elsewhere...


Lenovo's financials for fiscal 2008 ending March 31 are out. Q1 2009 (= Q4 of their fiscal year) is pretty dismal:

- Compared to last year, sales revenues are down 26 %.

- They don't provide a sales breakdown by region. But they do tell us the change in "PC shipments":

* China: +4 %
* Asia Pacific: -32 %
* North America: -19 %
* Europe -13 %
* Worldwide total: -8%

- As shipments are down 8 %, whereas revenues are down 26 %, average unit prices apparently declined by 18 %.

- Lenovo gained market-share in China (total industry shipments were down 0.1 % yoy in the Chinese market).

- Particularly in China, customers increasingly went for low-price products, i.e. China sales revenues probably declined 15-20 %, in spite of the reasonably-looking 4 % increase of "shipments".

- Lenovo lost 268 m US$ in the quarter.

- There is no profit breakdown by region for the quarter. But the full year results show negative operating results for all regions except China (in total: -450 m $), whereas China was profitable (+350 m $).


1. The worldwide PC market is very weak (as in: contracting sharply by all measures).

2. China's PC market is weak (as in: at best stagnating in volume terms, and dropping sharply in value terms). Whatever it is that Chinese consumers are buying, it certainly isn't computers.

3. Lenovo may be a global player, but a struggling one, and has to subsidise its foreign operations with Chinese profits.

Mittwoch, 20. Mai 2009

Where's the Money?

Ever wondered what people in certain professions earn? Well, Destatis collects data on pretty much everything, including the gross income of "Freiberufler" (a German term for people that maintain a "private practice" instead of being employed by a company), as reported to the tax authorities.

For the year 2004 (you might want to add 10 % inflation for a 2009 equivalent), the following are average reported earnings:

Notaries: 209,305 €
Patent Lawyers: 154,488 €
Dentists: 119,639 €
Medical Practitioners: 117,770 €
Tax Accountants: 84,036 €
Wirtschaftsprüfer (CPAs): 82,664 €
Lawyers: 62,311 €
Veterinarians: 47,483 €
Architects: 36,128 €
Writers: 31,370 €
Journalists: 22,671 €
Interpreters: 20,920 €

(Note: I used the table referring to those with more than half of their total income from this activity. If everyone is included, the average drops, but I figure "part-timers" distort the picture and should be excluded.)

(Thanks to Der Spiegelfechter for directing me to the data)

More on the Solar Industry

In a recent post, I discussed the (somewhat disappointing) financials of Q-Cells, Germany's largest producer of solar cells.

Two of Q-Cells' major competitors have now also released Q1 results. The contrast between the two couldn't be starker:

- Ja Solar, China's largest producer, is suffering even more than Q-Cells: Revenues have collapsed from 164 m $ in Q1 2008 (143 m $ in Q4 2008) to only 34 m $ in Q1 2009. Their gross profit (i.e. before allocation of selling, general, admin and r&d expense) is -21 m $, and total loss for the quarter is 28 m $. They are far from bankrupt (equity is 670 m $), but the revenue collapse is quite shocking.

- Meanwhile, First Solar, the biggest US producer, is doing perfectly fine: Q1 net sales were 418 m $, up from 197 m $ in Q1 2008. And profits are skyrocketing: 165 m $, after 47 $ in Q1 2008. The rest of the industry is struggling to break even, and First Solar achieves a gross profit margin of 40 %. Amazing, isn't it?

I'm no expert on the solar industry. Maybe the product portfolio of these companies is different and not comparable. But it sounds to me that all of them are active in mass-market photovoltaics. How can it be that the industry complains about unprecedented hardships, but one company continues to post record sales and record profits? (Not a rhetorical question. I simply don't know the answer.)

Dienstag, 19. Mai 2009

HSH Nordbank doing "better than planned"

HSH Nordbank just published Q1 financials. Well, sort of. They actually published a shortish press release with some condensed financials. It's not really noteworthy, except for this particular bit:

The press release trumpets "HSH Nordbank Q1 better than plan", and goes on to say that the pre-tax loss of 188 m € is 60 m € better than initially planned by the bank.

Sounds good, right? Well, except that this "plan" which they massively outperformed has - to my knowledge - never been published. I searched all through their webpage, and couldn't find any old document which shows us their plan. So the public was never told what they were aiming for. They still don't disclose the plan now, i.e. we still have no idea what they are aiming for in Q2 and beyond. But they tell us that they are very happy about outperforming their plan: "Hey, what's a sizable loss, as long as it's better than what we secretly feared when we drew up our confidential plan, right?"

(Oh, and another detail, just to be finicky: While 188 m € is indeed the pre-tax loss, maybe it should be noted that the after-tax loss is 260 m €, because they had to book some additional tax liabilities. But of course the press release only mentions pre-tax, and you need to go all the way to the condensed p+l to realize that after-tax, the loss is actually much bigger than pre-tax.)

Behind the Scenes of Germany's Bad Banks

The FT print edition ran an interesting article today. It was entitled "Berlin forced to dilute bad bank scheme".

The FT claims that Berlin (as in: the finance ministry and the chancellery office) had initially wanted to "saddle taxpayers with hundreds of billions of Euros" to remove toxic assets from bank balance-sheets. But they were forced to change plans, because many parliamentarians from both SPD and CDU revolted and threatened to vote against the proposal. In the end, the government had to relent and proposed the amended version we know now (i.e. banks are responsible for losses of their toxic assets, and need to devote future profits to pay back any shortfall).

The story was apparently "privately confirmed" by government officials, though the finance ministry refused official comment.

(Here's a summary of the bad bank proposal)

More on Airports: Too much of a good thing...?

I recently wrote about the - in my view - unnecessary expansion of Frankfurt Airport. Here's some international perspective:

According to this BBC news report, Korea hast lots of "ghost airports", i.e. shiny new international airports that see hardly any passengers. Two examples:

- Yangyang International Airport was built 7 years ago at a cost of 400 m $ and can handle 3 million passengers per year. In 2008, only 9,500 passengers actually used the airport. From November 2008, commercial flights have been stopped altogether.

- Muan International Airport opened 2 years ago, and now operates at 3 % of capacity, handling 2 outgoing flights per day.

(According to the article, Korea has 14 major airports, 11 of which are losing money. Construction of a 15th was recently suspended shortly before completion due to lack of immediate demand. And a 16th airport is in the planning stage.)

I also recently wrote about China's increasing demand for planes.

Well, not only planes, apparently: According to this news report, China is going on an airport construction frenzy. Two examples:

- Chongqing wants to expand airport capacity from the current 10 million passengers to 60 million. (To achieve this, they want to spend 20 bn RMB, and build three additional runways. I assume the airport has one runway right now)

For comparison: China's biggest airport (Beijing Capital Airport) handled only 56 million passengers last year.

- Talking about Beijing: Next year, construction will start on a second Beijing International Airport. Why? Well, Beijing Capital Airport only has a capacity of 78 million passengers, and the second airport will add another 60 million. That's a total passenger capacity of 138 million. For Beijing alone.

For comparison: New York's airports (JFK, La Guardia and Newark) handled 109 million passengers in 2007. New York's metro population is larger than Beijing's. Hmmmm.

Montag, 18. Mai 2009

German Income Tax

Germans like to moan that income tax rates are too high. And considering a marginal rate of 44.3 % (42%+Soli) for "higher incomes" and 47.5 % (45%+Soli) for "really high incomes", this sounds plausible.

However, the amazing thing is:

The average tax-rate on labor income is only 10.7 % (as of 2006):

Sum of wages: 1,150 bn €
(Source: Destatis)

Sum of income tax deducted from wages: 122.6 bn €
(Source: Bundesfinanzministerium)

So either most employees don't earn very much, or they deduct lots of stuff from their taxable income...

In any case, the "critical taxable income" for an average tax-rate of 10.7 % is a bit less than 16,000 €. Per year, for a single person with no dependents. Taking into account normal deductions (social security, Werbungspauschbetrag), this equals roughly 21,000 € yearly gross. Or 42,000 € for a married couple with no kids.

I was surprised to learn that tax deductions for kids play a large role: In 2006, total income tax gross of Kindergeld was actually 158.1 bn € (13.7 % of total wages), and 34.9 bn € was deducted for Kindergeld. In other words, the average income tax bill on labor income is reduced by 22 % due to Kindergeld!

(Previous post on change in average tax-rates over last 20 years)

(P.S.: This post was inspired by a vaguely related post on the FDP's tax reform proposal at Der Spiegelfechter)

China's Skies

According to a Boeing executive, China will need to buy 3,700 new jet airliners over the next 20 years.

Current stock is 1,330, and it is projected to increase to 4,560 by 2027. In other words, an increase of 240 % over 18 years, or close to 8 % annual growth.

(For comparison: Lufthansa, one of the world's biggest airlines, currently operates 500 aircraft. That includes its subsidiary Swissair, as well as the small regional jets of its regional arms.)

Personally, I think this is not a realistic projection. China's air traffic will not keep growing at 8 % for the next 18 years. But of course it will grow, and quite substantially so.

Which once again leads to an inevitable conclusion: With all these additional planes and cars in China (and India, and Vietnam, and Indonesia, and...), where is all the oil going to come from? Much higher prices and crowding out of saturated markets (i.e. Europe, but also US) are sure to follow. The only question is: When?

Chinese Crystal Ball

So China's GDP grew 6.1 % yoy in Q1, and is speeding up in Q2.

Funny that the Ministry of Finance now reports a massive 10 % yoy drop of fiscal revenues in Jan-April. Sure, there were all sorts of tax rebates, and the profits of state-owned enterprises also took a beating. But a 10 % decrease in an economy that is growing at more than 6 %? That's... how shall I put it...? Unusual.

(It would be helpful if MoF provided a breakdown by source of revenue. But I'm not aware that they do.)

Sonntag, 17. Mai 2009

Bayern LB

Everyone knows that BayernLB is a disaster and has lost tons of money last year.

But how has the bank been doing in the longer run?

I took a look at their historical financial statements, as published on the bank's Investor Relations webpage all the way back to 2001.

BayernLB's RoE was as follows (in brackets: including changes to IFRS "Neubewertungsrücklage", which are not booked through p+l, but directly affect equity):

2008: -58.5 % (-76.8 %)
2007: 0.8 % ( -8.4 %)
2006: 8.3 % ( 8.2 %)
2005: 8.6 %
2004: 3.8 %
2003: 3.5 %
2002: 2.9 %
2001: 3.1 %
2000: 7.2 %

In other words: BayernLB never earned very much. In good years, it managed around 8 % RoE, but 2000-06 average was only 5 %, and cumulative profits over those 7 years were barely 3 bn €.

Then, it all evaporated: In 2007-08, 7.6 bn € of equity was lost.

(Note on methodology: IFRS from 2006 onwards, HGB up to 2005; RoE defined as "net profit / year-end equity". "Stille Einlagen" included in equity, and the "Vorabgewinnabführung auf stille Einlagen" is included in the net profit. Minorities are excluded.)

(Previous post on same subject)

Samstag, 16. Mai 2009

Chinese Tourists

According to China Daily, the Chinese are so scared of contracting swine flu that they refuse to travel abroad. For the first two weeks of May, tourist agencies are reporting a collapse of all outbound tourism, i.e. not just to the US and Mexico, but to any destination worldwide. For instance, tours bound for (decidedly low-risk) Hong Kong have seen bookings drop by 80 %, and even domestic tourism (i.e. within PRC) has been hurt.

Also, it can be quite risky for foreigners to travel to China right now: If any person on the same plane with you has a fever when passing through immigration, all passengers will be quarantined for a minimum of seven days in a hotel or hospital. And according to Shanghai Daily, all Shanghai hotels have now also been ordered to take every guest's temperature at check-in.

A Chinese ph.d. student who returned from the US and fell sick on the plane received extreme abuse on Chinese webforums, where posters called him a "traitor", "demonic" and "immoral", and recommended that his fiancee should call off the wedding, because he was responsible for bringing the illness into China.

So in light of all this, maybe the Chinese are just being rational when they decide to stay home (Quote China Daily):

Beijing resident Gao Jingying, 68, who changed her plan to visit Taiwan with her husband this month, said: "No one likes being isolated in a hotel for a week after returning from a trip that is supposed to be a happy experience."

Anyway, if things don't normalize soon, this will be very bad news for China's travel industry, as well as for non-PRC destinations receiving lots of Chinese tourists (Hong Kong and Singapore come to mind).

Some Music

In case you haven't yet heard of Merle Hazard, his songs are absolutely hilarious:

Merle Hazard's website

(Hat tip: Verlorene Generation)

Germany's Bad Banks

So this is how Germany's bad bank proposal is supposed to work:

- A bank can create a bad bank as a subsidiary

- It transfers toxic assets to the subsidiary

- The subsidiary issues a bond to its mother company

- The bond is guaranteed by Soffin (i.e. the German taxpayer)

- The bank has to pay an "adequate fee" for the guarantee

- From its dividends (if any), the bank has to make payments to the subsidiary stretched out over the next 20 years to cover any arising shortfall

- If the bank's payments are insufficient (i.e. the bank simply doesn't earn enough money to fill the hole), the taxpayer will be on the hook

What it boils down to is:

Is the "adequate fee" for the guarantee high enough to compensate the taxpayer for the risk?

As there is no objective way to determine the "adequate fee", the fee will probably end up taking into account each bank's ability to pay. Those banks with good ability to pay (i.e. comparatively low risk) will probably not make use of the facility, as they have other ways to find financing. Whereas those banks that really need the facility will be unable to pay enough.

(In any case, it seems lawmakers were worried that banks might not be able to afford the required fee, as the law explicitly allows fees to be paid by issuing new shares. Doesn't say anything about how those shares would be valued, though.)

And one thing I don't quite understand:

Why create a complicated structure (a bad-bank-SPV issuing a bond, transfer of toxic assets to SPV based on a valuation, a long-term repayment schedule from bank to SPV), if the effect is more or less the same as a direct taxpayer guarantee for the bank itself?

In addition, there's the incentive issue: A guarantee means that upside goes to shareholders, and downside is picked up by the taxpayer. Though this is probably more of a theoretical problem, as semi-government banks in the current environment probably won't dare to aggressively play the system. And anyway, problems might also arise from the opposite direction: Politicians asking "rescued" banks to do them favors, i.e. to keep troubled borrowers alive...

For reference:
Previous post on this subject
Post on Verlorene Generation
Post on BlickLog
Post on EconBusinessGermany

Freitag, 15. Mai 2009

Q-Cells & the Solar Industry

It's amazing how quickly a high-flying industry can come crashing down to earth.

Producing solar cells and selling them in Germany sounded like a business model that can't fail: The German government guarantees generous minimum prices for solar-generated electricity. Interest-rates are down. Prices for solar panels are down. So you'd expect sales to go through the roof. In normal times, anyway.

But for the moment, people aren't buying. Financing may be part of the reason. A degree of saturation among potential investors another. Add slumping sales in the other big European market, Spain, where the government has decided to sharply reduce solar subsidies, and you have a recipe for an industry shake-up.

Market leader Q-Cells has just released its Q1 financials. Revenues are down 17 % from Q1 2008 (German revenues were flat, while export revenues dropped 40 %). Inventories are up sharply. And the quarterly loss (394 m €) is larger than revenues (225 m €). OK, it's not as bad as it looks, as the loss is due to the disposal of a previous acquisition (M&A is such a great way to stay busy and lose lots of money...). But even after eliminating this one-time loss, Q-Cells barely broke even due to a rapidly eroding EBIT margin caused by much lower prices.

Other industry players are doing even worse:

Solon, a producer of solar modules, saw sales crashing from 162 m € in Q1 2008 to just 38 m € in Q1 2009. Quarterly loss was 19 m €.

And Manz Automation, an industry outfitter, saw Q1 sales shrivel to 16 m € after 39 m € in Q1 2008, and recorded a loss of 5 m €.

All of these companies are solidly financed with a lot of equity, and all expect the market to pick up soon. Though if anything close to previous profit margins will ever return is rather questionable, considering fast-growing production capacity and increasing international competition, not least from China.

( For a previous post on the subject click here )

Donnerstag, 14. Mai 2009

US Retail Sales

A post at Egghat's blog drew my attention to US retail sales. I knew they were bad, but had somehow missed the extent of the carnage:

Acording to the US Census Bureau, total retail sales in the 4 months to April are down a massive 10 % compared to 2008.

These are nominal numbers, so it's no surprise that the weakest figures are gas station sales (-34.6 %). But it's not just lower gas prices (and anyway, you'd expect that money saved on gas is spent on something else, right?).

Here's a list of the other major categories:

Car dealers: -22.7 %
Furniture stores: -14.3 %
Building materials & garden equipment: -11.2 %
Electronics & appliance stores: -6.9 %
Clothing stores: -6.1 %
Nonstore (incl. internet & mail order): -5.8 %
Miscellaneous retailers: -4.9 %
Sports, hobby, books and music: -2.2 %
Food & beverage stores: 0.1 %
General merchandise stores: 0.5 %
Restaurants & drinking places: 1.7 %
Health & personal care stores: 2.8 %

Pretty bleak, huh?

Basically, everything except food and healthcare is in freefall.

(A side note: Department stores, currently struggling to survive as a category in Germany, are also very weak in the US. They belong to "general merchandise stores", and their sales dropped 6.7 %, whereas "Supercenters" - i.e. Walmart - posted strong growth).

Mittwoch, 13. Mai 2009

Frankfurt Airport

While we're on the subject of air travel:

Fraport, the listed operator of Frankfurt Airport, is eager to start the construction of a new runway. The legal battle isn't over yet, but they are already in the process of clearing the forest ahead of schedule.

According to their Q1 financial report, they will invest 7 bn € into the new runway and a new terminal building.

No idea why they are in such a hurry:

Passenger throughput is down sharply: -9.2 % yoy in the year to April. Long-haul routes are down even more, with North American routes losing 14 % and Far Eastern routes losing 13 %.

However, the FTD reports that Fraport is worried about competition in the Gulf (I suppose that means Dubai), and needs to provide more capacity once travel volumes start booming again (expected from mid-2010 onwards). Going forward, Fraport expects travel volumes to increase at 4 % annually, in line with long-term historic averages.

Roland Koch called the beginning of construction activity a "historic day", and was happy that the "next generation" will get "a chance to compete internationally".

I cannot understand why so much money is being spent on infrastructure that will not be needed. It is absolutely impossible that German air traffic will see high growth-rates during the next few decades. Not enough people, not enough economic growth, and not enough kerosene.

EADS / Airbus

Airlines worldwide have been recording rapidly falling passenger numbers, and even steeper drops in air cargo volumes.

So it's no surprise that airplane orders have plummeted. Still, the extent of the decline is enormous:

In 2007, Airbus received 1,458 orders.

In 2008, it received roughly 900 (420 of which in Q1).

And in Q1 2009, it received 22.

Oh, and the 22 are gross of cancellations. After deducting those, net new orders in Q1 2009 amounted to... 8 planes.

For the full year, Airbus still expects "up to 300 gross orders". Hmmmm. Am I being overly finicky, or does "up to" imply they might well be receiving hardly any order at all in Q2-Q4? After all, 22 also falls under "up to 300".

(Figures quoted from FT print edition)

But at least Airbus is doing better than Boeing. According to this article, Boeing has received -1 orders net of cancellations in the year to April. Airbus managed to get another three net orders in April, bringing its total net orders until April to 11 (gross orders rose to 30).

Of course the existing order book is still full enough to allow normal production volumes for several years. However, all those new planes will increase the supply of unneeded planes even further, so it's hard to see why demand should pick up anytime soon.

A look at the EADS Q1 financials is far from reassuring:

- EADS posted a small profit of 170 m € (after 293 m € in Q1 2008). However, "comprehensive net income" including "changes in fair value of cash flow hedges" showed a loss of 702 m €.

- Equity is a healthy-sounding 10.3 bn €. However, 11.2 bn € are intangibles (nearly all of it is goodwill, i.e. justified by expected future profits from operations), and 3.2 bn € are deferred tax assets (also useless if there are no profits). So if those future profits don't materialize, equity is far below zero.

- Then there's inventories: They are up 2.5 bn € in just 3 months, to 22.1 bn €. These are mainly unfinished planes, and if customers pay for what they ordered, it's no problem. However, the present state of the airline industry makes you wonder if all the customers will remain solvent.

- And finally, there appears to be a major problem with the "A400M airlifter program", a large military program. Worst-case, the order could be cancelled, and EADS would have to refund 5.9 bn €. It's not clear what the p+l effect of such a cash-refund would be, but my guess is, it would be enormous. But even if it doesn't come to that, possible penalty payments of 1.4 bn € are mentioned, and in any case "significant negative income impacts may still have to be accounted for in future periods".

In short, I wouldn't want to be an EADS shareholder.

(Oh, and if you think I'm being too negative, you might want to consider that China is committing 20 bn € of capital to compete head-on with Airbus and Boeing from 2016 onwards.)

Dienstag, 12. Mai 2009

Changes in German Income Tax from 1990 to 2010

Reader Taurus provided a link to an interesting study published by the Bund der Steuerzahler (Association of German Taxpayers).

The study compares the income tax burden in 1990, 2005 and 2010.

It concludes that low and very high incomes have enjoyed a significant lowering of their tax-rate, whereas the middle and upper middle class are being taxed ever more heavily.

Some examples for different annual taxable incomes:

8,078 €:

8.4 % average tax-rate in 1990
0.0 % tax in 2005, 0.1 % tax in 2010
=> 99 % less tax in 2010 compared to 1990

16,157 €:

14.7 % in 1990
10.7 % in 2005, 11.1 % in 2010
=> 24 % less tax in 2010 compared to 1990

64,627 €:

27.5 % in 1990
30.2 % in 2005, 31.0 % in 2010
=> 13 % more tax in 2010 compared to 1990

807,841 €:

50.7 % in 1990
43.2 % in 2005, 45.4 % in 2010
=> 10 % less tax in 2010 compared to 1990

The "critical income-bracket", which saw an increasing average tax-rate, goes from 29,000 € to 112,000 € annual taxable income. Above and below this bracket, the average tax-rate went down.

The reasons for this strange development are fourfold:

1. The constitutional court ordered the German government to stop taxing the "Existenzminimum" (minimum income required to live).

2. The top-bracket was lowered from 53 % to 42 % (+Soli) and then raised again to 45 % (+Soli) for very high incomes (>250,000€).

3. You'd expect that lower taxation of low and very high incomes also implies lower taxation in the middle. However, to make up for the tax-base erosion caused by the tax-free minimum income, it was decided to increase marginal tax-rates. As a consequence, middle-income earners (those not earning enough to make substantial savings from the lower top-bracket rate) did not profit at all.

4. German tax-brackets are not inflation-indexed. In other words, somebody receiving pay hikes equal to inflation keeps reaching ever-higher tax-brackets, i.e. his after-tax salary rises less than inflation. It doesn't make a huge difference from one year to the next. But over time, small effects accumulate.

(Note: In the study, the 2010 income is compared to adjusted 1990/2005 income taking into account that average incomes grew at a rate of 2.3 % p.a.)

Montag, 11. Mai 2009

Does a falling oil price boost the world economy?

According to the FT's Lex Column, the falling oil price provides a much bigger economic boost than all the various fiscal stimuli combined (or, as Lex puts it: "government handouts are peanuts by comparison").

The calculation goes like this:

- 2008's average oil price was 100 $/barrel

- This year it's likely to be around 50 $/barrel

- Based on total consumption, the world saves roughly 1,600 bn $

That's a lot of money.

Germany, for instance, saves 50 bn $ (35 bn €), as it consumes roughly 3 % of the world's oil. 35 bn € equals 1.5 % of GDP. Lots of additional money in consumers pockets.

But is it actually correct to say that "the world saves 1,600 bn $"?

True, oil consumers save 1,600 bn $.

But oil producers lose the same amount of revenue.

It's by definition a zero-sum game as far as income is concerned.

For the world as a whole, there can only be a net demand boost if the marginal savings rate of oil consumers is lower than the marginal savings rate of oil producers.

Let's see:

Some oil producing countries have large cash reserves. Saudi-Arabia, the Gulf countries and Norway can afford to cut spending much less than their revenue shortfall. They anyway didn't know what to do with all their 2008 oil revenues.

But others, such as Russia, don't have this luxury. They need to cut, and cut badly. And as a consequence, the world's exports to Russia have plumemted. They wouldn't have plummeted if the oil price had stayed at last year's levels.

As for the US and the UK, which produce a large proportion of the oil they use: Consumers save money on their oil spending. But they also lose money because oil-producing companies in their 401k have lower profits and a lower market-value. True, those that hold a lot of shares probably have a higher marginal savings rate than those that don't. But that's a secondary effect.

And when analyzing total demand, we also need to take into account that oil companies are cutting back on expensive exploration of new fields, as such investment becomes much more risky and less profitable at a low oil price. Fewer investments equal less demand.

And last but not least, consumers in most countries are pretty worried about the future right now. So their marginal savings rate on "windfall gains" is probably rather high.

In short, the net demand boost from lower oil prices can only be a small fraction of those impressive-sounding 1,600 bn $. For a country like Germany that exports lots of stuff to Russia and the Middle East, the positive effect is probably quite small (especially if consumers keep the oil savings in their pockets instead of spending them). And for all major oil-producing countries, it is clearly negative.

Sonntag, 10. Mai 2009

Heiner Flassbeck's Buch "Gescheitert"

(German special-interest, therefore in German)

Heiner Flassbeck, ex-Staatssekretär unter Lafontaine, rechnet in seinem Buch "Gescheitert" mit der deutschen Wirtschaftspolitik ab. Neben einer Menge durchaus sinnvoller und durchdachter Argumente vertritt er eine zentrale These, die ich beim besten Willen nicht nachvollziehen kann:

Wenn die Tarifparteien in den letzten 10-20 Jahren stärkere Lohnerhöhungen vereinbart hätten, dann hätten wir laut Flassbeck jetzt nicht nur einen geringeren Außenhandelsüberschuß, sondern auch eine sehr viel dynamischere Wirtschaftsentwicklung und weniger Arbeitslose. Das Fordern und Praktizieren von Lohnzurückhaltung sei der Kardinalfehler schlechthin von Politik und Gewerkschaften gewesen, und würde zeigen, daß diese von Volkswirtschaft im Gegensatz zu Flassbeck keine Ahnung hätten.

Das mit dem Außenhandelsüberschuß ist klar: Wenn die Wettbewerbsfähigkeit Deutschlands ggü. den andere Euro-Ländern sinkt, weil die Löhne hier stärker steigen, dann sinken die Exporte und steigen die Importe. Also weniger Außenhandelsüberschuß.

Aber mit der Behauptung, die deutsche Wirtschaft wäre dadurch dynamischer geworden, habe ich ein Problem: Wieso bitte sollte das so sein?

Es gibt bei Lohnerhöhungen zwei Möglichkeiten:

1. Im Extremfall werden die Löhne voll übergewälzt, und alle anderen Preise in der Volkswirtschaft passen sich entsprechend an, so daß nominal alles entsprechend teurer wird. In diesem Fall passiert in einer geschlossenen Volkswirtschaft gar nichts. In einer offenen VW mit fixen Wechselkursen sinken die Exporte und steigen die Importe. Dies führt zu weniger lokaler Produktion und sinkender Wirtschaftsleistung. Das Gegenteil von dem, was Flassbeck behauptet.

2. Aber Flassbeck geht ja davon aus, daß keine vollständige Überwälzung erfolgt, sondern die Reallöhne steigen. Ob bzw. inwieweit das stimmt, könnte man durchaus diskutieren. Flassbeck tut dies aber nicht, sondern scheint es für völlig selbstverständlich zu halten. Nun gut, folgen wir ihm bei dieser Annahme. In diesem Fall passiert folgendes:

- Die Arbeitnehmer haben ein höheres Realeinkommen und erhöhen ihren Konsum.

- Die Kapitaleigner haben ein niedrigeres Realeinkommen und senken ihren Konsum.

- Es ist zu vermuten, daß Kapitaleigner im Durchschnitt eine höhere Sparquote haben als Arbeitnehmer, der Konsum wird also unterm Strich etwas zunehmen.

- Gleichzeitig sinkt die internationale Wettbewerbsfähigkeit: Die Exporte sinken, die Importe steigen.

- Ausserdem wird es für deutsche Firmen attraktiver, Produktion ins Ausland zu verlagern, und für ausländische Firmen unattraktiver, in Deutschland zu produzieren. Auch längerfristig sinkt damit die Produktionskapazität in Deutschland.

Wir haben also insgesamt zwei gegenläufige Effekte: Etwas mehr Konsumnachfrage durch Umverteilung von Kapital zu Arbeit (was tendenziell ähnlich ist zu einer Umverteilung von "oben" nach "unten"), und eine verschlechterte internationale Wettbewerbsfähigkeit, die sich mittelfristig durch Produktionsverlagerungen noch verstärkt.

Wieso sich Flassbeck so sicher ist, daß der Umverteilungseffekt überwiegt, bleibt sein Geheimnis.

Schauen wir uns ein paar Zahlen an:

Erhöht man z.B. die Löhne um 5 %, und geht man davon aus, daß nur 3 % "übergewälzt" werden, die Kaufkraft also um 2 % steigt. Diese 2 % wären also eine Art Umverteilung hin zu den Arbeitnehmern. Wenn z.B. deren Sparquote um 10 Prozentpunkte niedriger ist als die der Kapitaleigner, würde dies die Konsumnachfrage um 0,2 % der Lohnsumme erhöhen, also um erheblich weniger als 0,2 % des gesamten Konsums.

Ich würde mal davon ausgehen, daß eine Erhöhung der deutschen Löhne um 5 % die Wettbewerbsfähigkeit der deutschen Wirtschaft in einem Maße senkt, daß der Außenbeitrag um mehr als 0,2 % zurückgeht. Der Nettoeffekt wäre dann negativ.

(Möglicherweise argumentiert Flassbeck implizit anders: Vielleicht denkt er, daß die Lohnerhöhung vorab erfolgt und sofort konsumwirksam wird. Der Effekt für die Kapitaleigner tritt dagegen erst mit Zeitverzögerung beim nächsten Bilanzstichtag ein, so daß sie ihren Konsum zunächst nicht senken. In diesem Fall würde der Konsum um bis zu 2 % der Lohnsumme steigen (im Extremfall von Sparquote = 0). Das würde dann zusätzliche Produktion auslösen, und damit auch zusätzliche Arbeitsnachfrage. Eine Positivspirale kommt in Gange. Aber warum bitte soll das so sein? Warum sollten die Kapitaleigner nicht antizipieren, daß für sie weniger übrig bleibt, und ihren Konsum entsprechend nach unten anpassen? Schließlich sind Unternehmer doch davon überzeugt, daß höhere Löhne schädlich sind. Insofern würden sie doch automatisch davon ausgehen, daß höhere Löhne den Wert ihrer Unternehmen senken. Was ja auch plausibel ist, da sie ja sowohl durch Umverteilung als auch durch geringere Konkurrenzfähigkeit am Weltmarkt unter Druck gerieten...)

Nun kann man durchaus der Meinung sein, daß der Außenbeitrag weniger hoch sein sollte, das Deutschland mit anderen Worten mehr von seiner Wirtschaftsleistung selbst konsumieren sollte. Dies kann durch Lohnerhöhungen durchaus erzielt werden.

Ggf. würde man dadurch tatsächlich den momentanen Lebensstandard in Deutschland etwas steigern, da ja mehr von der Wirtschaftsleistung konsumiert wird, anstelle Forderungen ggü. dem Ausland aufzubauen.

Aber die Behauptung, daß dadurch gleichzeitig auch die Wirtschaftsleistung steigt und die Arbeitslosigkeit sinkt, ist durch nichts belegt und m.E. ausgesprochen unwahrscheinlich. Sie wäre allenfalls plausibel (und auch dann nur in ziemlich geringem Maße), wenn man von sehr starker Konsumsteigerung durch die Umverteilung ausginge (d.h. die marginale Sparquote der Arbeitnehmer ist sehr viel kleiner als die der Unternehmer), und gleichzeitig von eher schwachen Effekten in Bezug auf Außenhandel und Produktionsverlagerung.

Insofern mag zwar durchaus richtig sein, daß in den letzten Jahren in Deutschland zuviel gespart und zuwenig investiert und konsumiert wurde. Mehr Konsum und weniger Ersparnis hätten wohl durchaus mehr Wachstum ermöglicht. Durch staatlich verordnete stärkere Nominallohnsteigerungen hätte man dieses Ziel aber nicht erreicht.

Auch Flassbecks "empirisches Argument", daß die Löhne in vielen anderen Ländern dynamischer gestiegen sind, und diese Länder auch stärker gewachsen sind, beweist gar nichts: Zunächst ist es "Henne vs. Ei", denn die Löhne sind dort ja vielleicht gestiegen, weil das Wachstum höher war, nicht umgekehrt (das widerspricht nicht der richtigen Flassbeckschen Beobachtung, daß in den meisten Euro-Ländern die Lohnstückkosten stärker gewachsen sind als in Deutschland: Wenn z.B. in Spanien die Immobiliennachfrage so stark steigt, daß dies die ganze Wirtschaft mitzieht, dann können durchaus die Löhne steigen, weil die Nachfrage in Spanien hoch ist. Aber es besteht kein klarer Kausalzusammenhang, daß höhere spanische Löhne das spanische Wachstums verursacht haben). Und speziell was die USA betrifft, das westliche Land mit den höchsten Wachstumsraten, so ist ohnehin altbekannt daß die Reallöhne der Unter- und Mittelschicht dort schon seit Jahrzehnten stagnieren.

Sorry, Herr Flassbeck, nicht überzeugend.

Samstag, 9. Mai 2009

Warren Buffett

Berkshire Hathaway's Q1 accounts are out. And they aren't pretty:

- A net loss of 1.4 bn $.

- "Core business" actually managed a decent 1.8 bn $ profit. Unfortunately, 3.2 bn $ were lost on "investments and derivatives" (including the infamous "high-yield default contracts", the stuff that killed AIG).

- Unfortunately, the 1.4 bn $ isn't the whole story: Including various stuff that didn't go through the p+l (again "investments and derivatives"), net equity was down a massive 6.5 bn $.

In other words, shareholders lost 6.5 bn $, or 6 % of net equity.

However, we are asked to note that from March 31 to May 7, the market value of the equity portfolio rallied, and achieved a gain of 5 bn $. So as of May 7, the "non-p+l" stuff is at break-even again, and "only" the regular 1.4 bn $ loss remains.

That's a relief. So only 1.4 bn $ are gone after all.

Well, hopefully only 1.4 bn $. Because the report also mentions that Berkshire experienced further (unquantified) losses under its high-yield credit default contracts.

( Previous post on Berkshire Hathaway's 2008 results )

Germany's Oil Consumption

How much is Germany's oil consumption affected by the crisis?

To analyze this question, we need to break down Germany's overall oil consumption into its main components. Based on analysis I did a year ago using 2006/07 data, this is a rough outline:

1. 30 % gasoline used by cars
2. 20 % gasoline used by trucks
3. 6 % airplanes
4. 3 % shipping
5. 13 % heating of private residences
6. 15 % petrochemical industry
7. 15 % other industrial use (heating/energy/asphalt/lubrication)

Let's go through it one by one:

ad 1: gasoline used by cars

Roughly 1/3 is commuting to work. The number of jobs has so far hardly decreased, though shorter hours and mandatory holidays have been introduced by some manufacturers. Decline in commuting-related car-use should be moderate (1-2 %)

The rest is private use. As overall private consumption has been stable, I would assume that private car use hasn't declined either. So let's assume no change here.

ad 2: gasoline used by trucks

The volume of transported goods has contracted sharply, though domestic transport was far less affected than international. Let's assume a 5-10 % reduction of total truck use.

ad 3: Airplanes

Airplane passenger traffic is down 10 % yoy, though the number of flights has decreased less (load factors went down instead). Air cargo is down much more, but is comparatively less important. Let's assume 5-10 % total reduction.

ad 4: Shipping

International shipping volumes are down sharply, possibly as much as 20 %. Domestic shipping is less affected, but rather unimportant. Let's assume 15 % reduction.

ad 5: Heating of private residences

Presumably unchanged. Based on anecdotal evidence, it seems that many people are filling up their tanks more than they usually would, to make use of low prices. But not sure if that translates into a significant inventory build-up. Let's assume constant use.

ad 6: Petrochemical industry

Plastics are mainly used for/by packaging (33 %), construction (25 %), car industry (9 %), electronics industry (7 %), furniture/household goods (8 %). A significant part of German production (more than 1/4) is exported. I understand that the big chemical companies (BASF, Bayer, etc.) have significantly cut back production, though consumer-goods packaging and the construction industry aren't affected particularly badly so far. Let's assume an overall reduction of 10-15 %.

ad 7: Other industrial use

Considering the sharp drop in overall manufacturing, a reduction of 10-15 % sounds appropriate.

=> So what does this all add up to?

Quite a large number: A massive 4.8 - 7.8 % reduction in total German oil consumption compared to pre-crisis level.

More on Fiscal Deficits

Some more on fiscal deficits:

According to The Economist, China will run a deficit of only 3.5 % in 2009. Not sure if this is up-to-date. It sounds extremely low (as tax revenues were down sharply in Q1, and the stimulus measures are substantial). If the figure is correct, then China is among the most fiscally conservative countries worldwide. Especially as countries with high growth potential can afford much larger deficits than those with hardly any growth potential such as Germany or Japan.

And Hong Kong still projects a budget surplus of 2.4 %. Strange. No idea how they manage to do that. Hmmm. The Economist might have gotten some of the figures wrong, as it also projects Hong Kong's GDP to grow by 5.4 % this year. No way! (Shame on The Economist for publishing sloppily maintained tables!)

As for smaller European countries, some of them stick out as unusually thrifty:

The Netherlands are still expecting a budget surplus of 0.2 %. That's rather amazing, considering a current account surplus similar to Germany's, and a high export ratio. (Edit: I suspect The Economist is again publishing wrong numbers: According to a recent Forbes article, The Netherlands will see a budget deficit of "more than 3 %" this year. What's this world coming to, if you can't even trust The Economist anymore?)

Norway's projected budget surplus is an incredible 10.5 %. Current account surplus stands at 10 %. I guess it helps that Norway is a tiny country with only 4 million people and lots of oil.

Finally, there's Switzerland, which also has a huge current account surplus, and projects a moderate budget deficit of 2 %.

Freitag, 8. Mai 2009

Fiscal Deficits

It has been widely noted that the "originators" of the current crisis - i.e. the US, Britain and Spain - are suffering less in terms of GDP contraction than "virtuous" Germany. According to The Economist's latest projections, 2009 GDP will contract as follows:

USA: -2.9 %
UK: -3.7 %
Spain: -3.3 %
Germany: -5.2 %

The obvious reason for Germany's below-average performance is the steep decline in Germany's current account surplus, whereas the other countries are helped by declining current account deficits.

But there's a second reason: Fiscal deficits.

There's been a lot of discussion about who provides the largest stimulus, and how to properly calculate the size of the different stimuli. But a very simple and straightforward thing to do is to simply look at projected budget deficits in % of GDP. The Economist has the following numbers for 2009:

USA: -13.1 %
UK: -12.3 %
Spain: -9.6 %
Germany: -4.4 %

Aren't those numbers simply unbelievable? The US is taking on additional debt equal to 13 % of GDP, and the UK 12 %. And in spite of this totally unprecedented volume of deficit spending, and a massive improvement in their trade balances, their economies are still only expected to contract a little bit less than Germany's.

I'm not saying it's wrong to run these fiscal deficits. They have to do something to soften the blow to their economies. But it tells you something about the size of the underlying problem. And I must say I find it a tad bizarre how Krugman and others still seem to be saying it's "not enough". How can a 13 % deficit possibly be "not enough"?


The best thing you can say about Commerzbank's Q1 results is that their loss is smaller than AIG's. Apart from that, what can possibly be positive about a quarterly loss of 0.9 bn € (1.3 bn €, if you choose to eliminate the one-time-gain from the disposal of Cominvest) and an additional -1,1 bn € of "sonstiges Periodenergebnis" (which doesn't go through the p+l, but still lowers the remaining equity)...


In normal times, these would be considered dismal numbers:

- AIG posted a Q1 net income of -4.4 bn $

- Factoring in "unrealized depreciation" and "fx losses" (both didn't go through the p+l), the loss widens to -7.0 bn $

- And in case you take the view that their additional Q1 tax credits may never be used for lack of future profits, you get -8.2 bn $

But hey, AIG lost 62 bn $ in Q4 alone, so what's another 7 or 8 bn $...

( Previous post on this topic.)

Donnerstag, 7. Mai 2009

Asian Exports

April export figures are out for Taiwan and Korea.

Taiwan posted a 34 % yoy drop, nearly as bad as during Q1. Exports to the US, China and Rest of World were all down 34 %.

Korea looks better at first glance, dropping only 19 % yoy. However, Korea's biggest export good is ships, which are usually ordered years in advance and therefore still hardly affected by the current crisis (as long as buyers placed firm orders and don't default on them). And ship deliveries are up 40 % compared to last year, whereas most other stuff is declining much more than 19 % (e.g. cars -42 %, computers -44 %, semiconductors -26 %, machinery -35 %).

In short, so far there's no sign that world trade is reviving. And if China's economy is improving, it sure is doing so without buying more Taiwanese or Korean stuff.

Oil - Update

Since I sold oil on Monday, the price has shot up by another 5 %. It's now up 12 % in barely one week. The futures curve has also flattened, and now only prices in an increase of 10 % until year-end.

At the same time, there is ongoing news flow about continued weakness of demand, and according to this article (hat tip Naked Capitalism), the world is quickly running out of storage capacity for all the excess oil that is being sold by oil-producing countries. And the FT (print edition) tells us that oil tanker rates continue to fall.

According to the WSJ, the IEA expects 2009 oil consumption to drop by 3 % compared to last year. And Bomlat has a table on US oil consumption, which shows a massive Feb 2009 drop of 13 % as compared to two years ago.

So why is the price up so sharply?

It seems that the market is interpreting vaguely positive economic data from the US (or should I say "somewhat less negative economic data"?) as an indication that the world economy is recovering, and oil demand will begin to increase.

I'm not sure what to think. If demand starts to increase, I'm convinced that oil will go up very substantially, and quite quickly. But I'm not exactly sure where demand will go in the short run.

(This is an update on this post.)

Mittwoch, 6. Mai 2009

Germany's Car Exports

There's been a lot of press coverage about the beneficial effects of Germany's car scraping bonus: German car sales are up substantially compared to last year. And while most of the cars sold are cheap foreign models, it is usually emphasized that at least VW and Opel are profiting quite a bit.

So what is the state of Germany's car-industry?

Unfortunately not good at all.

According to the SZ, German car production was 34 % lower yoy in April. And that's based on number of cars, not on value. Taking into account that cheap VWs and Opels are doing well, whereas expensive cars are doing really badly, the value of produced cars probably dropped 40-50 % (my guesstimate).

The main problem is exports: April exports were down "nearly by half" volume-wise (data by value is not yet available). And based on Destatis data, Jan/Feb exports were down 44 % in value-terms.

In fact, the drop in car exports is the single biggest reason for the steep drop in German GDP projected for this year:

In 2008, exports of cars and car parts accounted for 18 % of German exports (according to Bundesbank data). That's 7.2 % of GDP. Of course not all of this is value-added, as some components and commodities were imported. So let's say 6 % of GDP net of imports.

An assumed drop of 40 % (quite possible, based on an actual drop of 45 % in the first 4 months) therefore lowers German GDP by 2.5 %.

In other words: If we are expecting a GDP drop of 6 % in 2009, roughly 40 % of this drop is due to the decline in car exports.

That tells you something about the importance of cars for the German economy, and the extent of the drop in foreign demand.

Unintended Side Effects

The FTD reports that West Africa's car-market is collapsing: Most of the cars sold in Benin and neighboring African countries are very old used cars imported from Europe, and in particular from Germany (it is estimated that 40 % of cars sold in Benin are produced in Germany, and nearly all of them were imported as used cars). Very few of these cars sell for anything close to 2,500 €.

Unfortunately, Germany is paying a scraping bonus of 2,500 € for all old cars. And many other European countries have introduced similar schemes (though none are as generous as the German one). As a result, the market for used cars with a value of less than 2,500 € has suffered terribly. And Africans can't find affordable cars anymore.

(To be fair, the FTD article may exaggerate a bit: In the beginning, it talks at length about a Berlin-based car exporter who has been unable to export a single car for months due to lack of supply; but towards the end of the article, the manager of a shipping company "only" sees a drop of 20-30 % of used cars shipped to Africa. So maybe the effect is smaller than the article wants to insinuate...)

Consumer Goods

Consumers worldwide are beginning to cut back on non-essentials:

As discussed a few days ago, Starbucks has been suffering.

The Adidas Q1 financials aren't exactly pretty either:

Fx-adjusted sales compared to Q1 2008:

Europe: -5 %
Asia: - 6 %
North America: -17 %

Adidas doesn't expect an improvement for the rest of 2009.

(The report specifically mentions that revenues were down in both Japan and China, and in all major European markets. As for the US: The Reebok brand has been struggling for a while, so they probably lost market-share there. I left out Latin America, which actually grew 31 %, but that appears to be due to aggressive market-entry in Brazil and Argentina, where new subsidiaries were set up.)

More on German Pensions

According to press reports, the German government has passed a resolution that pensions can never be cut in nominal terms.

If the pension formula says they should be cut, the cut is postponed until later, i.e. it is netted off with future pension increases. Not that noticeable pension increases are terribly likely anyway, unless inflation picks up sharply:

During 2004-2008 (i.e. for 5 years), pensions increased by 1.65 %. Not per year, in total: There was no increase at all in 2004-06, 0.54 % in 2007 and 1.1 % in 2008.

During the same time, consumer prices increased 10 %.

In other words:

It took only 5 years for purchasing power to be eroded by 8.3 %.

And don't forget: In recent years, the number of pensioners hasn't increased all that much. The aging process will accelerate dramatically after 2010.

So pensioners will be lucky if the purchasing power of their pensions doesn't drop by more than 1-2 % p.a. (I'm assuming inflation will be at least as high; if it isn't, financing constant nominal pensions will be rather difficult.)

It won't be funny for the pensioners, and it will lead to rapidly swelling numbers of welfare recipients. But nothing much can be done about it, unless Germans decide to have a lot more kids (and even if that ever happens, we need to wait for 20-25 years until those kids finally start working...).

( Previous post on same subject )

Dienstag, 5. Mai 2009

The Amazing Business Model of Web 2.0

Today's internet is an amazing thing:

This blog contains no advertising, and yet it is totally free, including an archive of all previous posts. I have a free Yahoo e-mail account with unlimited storage. A free Flickr account. A free Facebook account (which I never use). I can use an endless number of free forums, where archived discussions dating back 5 years or more are still fully available. I hardly use YouTube and never used Twitter, but lots of other people do, and for free as well.

So what, you might say: After all, how much can it cost to run a highly-automated website?

Quite a bit of money, as it turns out:

According to this article, YouTube is burning money like crazy:

Despite a 41% share of the video market, Credit Suisse analysts Spencer Wang and Kenneth Sena project YouTube will only pull in $240 million in revenue this year. That's up 20% from 2008. But ... the costs of running YouTube are astronomical: About $711 million, with $360 million in bandwidth charges alone.

How come a successful business is losing so much money? Can't they simply run more ads? This article thinks they have no chance:

This half-billion dollar loss comes after more than a year of feverish experimentation in various forms of advertising, cross-product embedding, licensing and partnership deals. YouTube is adamant that ultimately they’ll find an advertising solution ... to reach profitability. Looking at the math, it doesn’t seem likely ... Presumably, the videos YouTube is already monetizing represent the best content available, with diminishing returns as they reach deeper and deeper into a repository rife with copyright violation, the indecent, the uninteresting, and the unwatchable .. It seems safe to assume that YouTube’s traffic will continue to grow, with no clear ceiling in sight. Since the majority of Google’s costs for the service are pure variable costs of bandwidth and storage, and since ... no greater economies of scale remain, the costs of the business will continue to grow on a linear basis. Unfortunately, far more user-generated content than professional content makes its way onto the site, which means ... non-monetizable content is growing geometrically as compared against the monetizable content that YouTube really wants and needs to survive. ... less and less of YouTube’s library will be revenue-contributing, while the costs of delivering that library will continue to grow.

YouTube is owned by Google, which so far picks up the tab. And while Google can in principle afford it (Q1 2009 financials seem as healthy as ever), shareholders won't be thrilled to keep subsidizing a business that loses so much money.

And it's not just YouTube: According to The Guardian, US data centers accounted for 1.5 % of total US electricity use in 2005 (that doesn't include end-user PC electricity use). Due to rapid annual growth of 10 % and more, the figure is projected to reach nearly 2.5 % by 2010. 2.5 % of all the electricity used in the US - that must certainly cost a bundle. Not to mention the cost of all that hardware.

Meanwhile, even some former stock-market darlings are beginning to struggle: Yahoo's Q1 2009 revenues were down 13 % yoy, and profits were down 78 % (to a mere 118 m US$).

Remember GeoCities? Yahoo paid 3.5 bn $ for it in 1999, and is unceremoniously closing it down now, says this article.

Then there is MySpace, currently owned by Rupert Murdoch. According to this NYT article, MySpace has made a profit of 200 m $ in 2008. Sounds good. Unfortunately, the profit is due to 900 m $ guaranteed revenues from Google. The contract is up for renewal next year, and Google is apparently quite unhappy with the revenue generated from MySpace. So the odds are the contract will be cancelled or renewed at much less favorable terms.

And Facebook? Nobody know how much money it is losing, but it is definitely burning money.

This NYT article argues that Facebook is currently taking off in the third world. User numbers (and therefore costs) are increasing very fast. Unfortunately, most of those third world customers are not particularly interesting for advertisers, so revenues can't keep up. A snippet from the article:

Facebook said last month that it was on track to become profitable next year. But as it did, Gideon Yu, Facebook’s experienced chief financial officer, left the company. Three people familiar with the internal maneuverings at Facebook said Mr. Yu objected to such a rosy projection as the company was struggling to finance its expensive global growth.

It may well turn out that the days of ever-expanding free web-applications are numbered. Except, of course, for the solidly profitable Google search...