What Porsche's profits tell us about the financial crisis
By
Associate Editor
David Stevenson Jan 23, 2009
Print this article
Did you see last night's BBC Money Programme about Porsche?
With the news headlines crammed with financial disaster, it'd hardly be surprising if you chose to give this a miss.
But it's worth taking a closer look. Because it contains valuable lessons about how this crisis came about - and some pointers as to why Government attempts to bail everyone out might just make everything worse...
Porsche made most money from markets, not cars
The big news story about Porsche last year of course, was when hedge funds took a pounding betting against it in October. The hedge funds had been short-selling Volkswagen shares that they didn't own, betting that the share price would go down.
When Porsche revealed that it owned, or had positions in more than 74% of VW shares, the hedge funds scrambled to get hold of scarce shares to close their positions, which pushed the share price up more than five-fold, briefly making VW the world's most valuable company.
The hedgies lost between €10bn and €40bn in the scramble, says the BBC. The VW share price has since come back down, and Porsche said it made no profit from the squeeze.
It was an eye-catching story at the time. But what's really interesting about Porsche is the fact that in the year to 31 July, way before all this happened, the car maker actually made six times as much money in the stock market, mainly from trading in VW, as it did from making cars.
Now, Porsche's long-term aim is to take over VW, so it's not just playing around in the markets for fun. But it shows just how deeply entrenched the financial world has become in every part of the modern economy.
With so many playing the market, it had to end in tears
And this is one reason why we're all in such trouble now. When people and companies start to think they can make more money out of playing markets, than by doing the things they've proved they're good at, it had to end in tears.
Once solid lenders such as Northern Rock used to make money by taking savings at one rate, then lending them at a higher one. But that wasn't exciting enough – it didn't enable them to grow fast enough. So they started getting involved in wholesale markets and complex derivatives – but we all know how that turned out.
It wasn't just banks or corporations. Ordinary householders started to treat their homes as cash machines. Every year, you could 'earn' more money through the rising value of your home, than through your salary. It's little wonder that property speculation took off around the globe.
And behind it all, governments and central banks, lead by the US Federal Reserve, kept reassuring us all that it was fine. There were no bubbles – and if there were, we could clean them up after they burst.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
But now the bubbles have burst, and the authorities are finding that cleaning up is much harder than they'd ever expected. US house prices are falling at their fastest in at least 18 years, while fewer homes are being built since the US government started keeping stats in 1959. Meanwhile, in the UK, repossessions are up 92% on last year, with one British family losing its home every seven minutes.
Government 'cures' are making things worse
So to try to make the depression go away, the Americans have slashed the cost of borrowing to almost nothing, are printing lots of extra cash, and are planning to spend trillions of taxpayers' dollars. Britain is following suit.
But this 'cure' is exactly what caused the problem in the first place. Now that investors and companies have realised the dangers of abandoning their day jobs to punt on the markets, it'll take more than the Governments have got to wind the clock back.
And in the meantime, we're just digging an even bigger hole for ourselves. Even without President Obama's new $800bn-plus stimulus plan, the US budget deficit will hit $1,200bn this year – or 8.3% of national income – while the country is already servicing debts equal to a mind boggling 368% of GDP.
So "cranking up spending even more is the last thing the US should do", says the Telegraph's Liam Halligan. "Excessive government largesse is never a good idea. The demand boost takes time, the inefficiencies are enormous and the scope for cronyism bigger still. Obama's plan's utter folly".
The same applies to Britain, where the national debt has already reached its highest since 1978, and where even the government admits it is set to soar by over 80% over the next five years.
In other words, we'll have loads more debt, but a huge risk that there'll be nothing much to show for it – except loads more debt.
As we said yesterday, to survive as an investor these days you need to follow where the government spending goes (see How to profit from US government spending for more). But for the economy as a whole, it could do much more harm than good – the latest British banking bail-out has already hammered the pound for example (for more on this, see our latest issue, out today – you can get your first three issues free here ).
The days when easy money could cure all ills are long gone. Unfortunately, it looks like governments are going to learn that the hard way.
Our recommended article for today
It is only a matter of time before oil returns to a bull market. A bottom may have been reached, so is now the time to get back into the black stuff?
Published in
Economics
| More
articles
by
David Stevenson
Related articles
-
By Matthew Partridge, May 24, 2012
-
By Phil Oakley, May 23, 2012
-
By Matthew Partridge, May 22, 2012
-
By John Stepek, May 21, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.