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Wednesday, 18 September 2013

“Light at the end of the tunnel”: the crisis is almost over! The question is only: exactly what crisis?! Part I

I'm thinkin' this is the right time,
I'm hoping you feel the same
Cuz that light at the end of the tunnel
Is the front of an oncoming train.

More and more Dutch government officials and MP’s, representatives of the social partners (i.e. employers and labour unions), economic pundits and government bodies, like the Central Planning Bureau, declare that the current crisis is almost over.

Although there are yet few greenshoots and unemployment will probably increase further for at least one year, there is nevertheless little doubt among all these people, that economic prosperity will return to The Netherlands next year. According to the CBP, there will be 0.5% of growth in 2014.

And yes, on Tuesday, 17 September 2013, aka Princes’ Day (the opening of the Dutch parliamentary year), even our rookie King Willem Alexander declared during his annual King’s speech that the crisis would be over soon. Here are the pertinent snips of this story in De Volkskrant:

´Since five years The Netherlands battles with the economic crisis’, according to the King. ‘The consequences are increasingly felt by the Dutch people, but there are cautious signals that the end of the global crisis is in sight. This creates a perspective towards recovery for our country. However, The Netherlands has to deal with specific problems, like:
  • the debt position of the central and local governments; 
  • the debt position of households;
  • the solvability and liquidity of the large, Dutch banks. 
In order to solve these problems, reforms are necessary, according to the Cabinet. These necessary reforms take time and resolve’.

When even the King declares that there is light at the end of the tunnel, while talking about the econonomic crisis which keeps The Netherlands in its grip, it must be the truth, right?! Nevertheless, I can’t help but wonder exactly WHAT crisis will be over soon?!

Unfortunately, I have a sneaky suspicion that all optimism, about the coming end of the crisis, is just hollow talk and that the 0.5% growth of the CPB might be founded on quicksand.

Of course you can and might accuse me of being a perma-bear, but hey: who has been right more?! The groundless optimists, who declared on many occasions during the past five years, that the crisis had almost finished? Or me and other perma-bears, who declared that the crisis might still last for a number of years, as almost nothing substantial has been solved yet. 

Therefore it seemed to me like a good idea to review the most important aspects of this economic depression (!), in order to pinpoint exactly which part of the crisis is indeed over.

I took a look at the following aspects: 
  • The economic and exports crisis
  • The crisis at the international stock exchanges
  • The euro-crisis
  • The banking crisis
  • The labour crisis
  • The housing and commercial real estate crisis
  • The governmental crisis, the social crisis and the crisis of trust 
The economic and exports crisis

There should be little doubt that the economic crisis in The Netherlands is not over yet.

The large companies and multinationals desperately try to keep their profits and yields-per-share at level, by drastically cutting costs, getting rid of excess personnel by the thousands and pampering their shareholders; a.o. through stock buy-back programs and bonus dividend payments. The national and local governments do the same, to stay within their strongly diminished budgets.

Stories about mass lay-offs and wage restraints / reductions at large companies and the government appear in the newspapers almost every day. At the same time, real success stories are very hard to find. 

The following lines about Philips, traditionally one of the strongest Dutch multinationals, are a tell-tale signal:

Royal Philips NV (PHIA.AE) starts a stock buy-back program and comes with increased financial goals for the period until 2016. The stock buy-back program starts in October and will last for 2 to 3 years. Further, Philips remains dedicated to the financial goals for 2013, in spite of the enduring headwinds.

For the years 2014-2016, Philips is aiming at an ebita-margin (earnings before interest, taxes and amortization) of 11-12%, where it earlier aimed for 10-12%. CEO Frans van Houten sees substantial possibilities for profitable growth towards 2016 and beyond. ‘Our Accelerate! program performs satisfactorily and will be continued in the coming four years.

Three remarks concerning these snips about Philips:
  • Companies which start to buy back shares or pay bonus dividends, are obviously clueless about more profitable ways to make usage of their cash money. When the expected yields of possible investments are so uncertain that companies rather buy back stock, this should be an alarm signal;
  • 11-12% of ebita margin for 2016, instead of 10-12% is not exactly a brave target, isn’t it?! It is a cautious, teeny-weeny increase of their former cautious profit target, measured 'before deduction of almost all expenses';
  • The Accelerate! program is not much more than a large cost reduction program. If you ignore the first, boasting lines in the following snippet from a Philips corporate investment proposition and just start to read the red and bold text, you will notice that Accelerate! is not much more than a means to cut expenses: 

The Accelerate! program is a comprehensive multi-year change and performance improvement program, and is being implemented across the organization to realize the value potential and speed up growth. Key initiatives have been launched to implement the Philips Business System and step up resourcing for growth, granular strategy execution, value delivery to customers, and to adapt the culture and reward system. Initiatives include a EUR 1.1 billion cost reduction program which is expected to be completed by the year 2014.

At the same time, the crisis in Small and Medium Enterprise is still palpable. Tens of thousands of small and larger shops, companies and freelancers are clinging on to life by the skin of their teeth, while thousands of others simply default.

Hundreds of thousands of workers don’t see their wages increase at all and sometimes even decrease, in spite of the fact that (85% government-driven) inflation is eating away their purchase power. The whole situation in the Dutch economy has written the word DEFLATION all over it.

And what about the exports?! That is where the growth for 2014 should come from, according to the CPB! Well, things are somewhat improving in the south of Europe (the PIIGS zone), but the slightest drawback there will be enough to blow this process skyhigh.

And the USA?! Bernanke’s statement today that there would be no tapering yet, says more than enough about the still awkward situation in the US economy.

Besides that, in my series about the BRIC’s (see this article and its follow-ups), I argued that Brasil, Russia, India and China will probably also not be the most obvious customers for growing Dutch exports, in spite of the (blatantly rigged) Chinese economic growth figures.

So the $100,000 question remains: if Dutch export grows in 2014, who will be the new customers then?! Your guess is as good as mine

The crisis at the international stock exchanges

“Crisis at the international stock exchanges?”, you might ask! 

"Why is there a crisis? The exchange rates in the US are litterally higher than ever and also in The Netherlands, we enjoy the highest stock rates, since the crisis started in 2008?!"

Then my question to you is: “Isn’t that strange?” Isn’t it strange that the stock rates move towards all-time-highs, while the performance of the US, Asian and European economies shows lackluster growth at best? 

And can’t that have something to do with the near-zero official interest rates, the boundless protection of the Euro by the ECB and the seemingly neverending QEIII program of the Fed in the USA?

And don’t these programs lead to the ample availability of nearly free investment money, for those who do have access to it, like hedgefunds, banks, pension funds and private equity corporations?!

And is this almost free investment money not building stock, bond and debt bubbles of epic proportions nowadays? 

At well-informed and critical blogsites, like Minyanville and, all signals are turning to orange these days. These were all sites, that saw this credit crisis coming well before it started in 2008. Beware…

This short series will continue tomorrow...

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