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Volkswagen: The Biggest Company in the World?

One of the more peculiar stories of late in these times of turbulent financial markets is how, briefly, Volkswagen became the biggest company in the world. In the process, hedge funds around the world suffered losses estimated at over US$35 billion.

Over the last few years, Porsche has been building a stake in Volkswagen. By November 2007, the size of their stake had reached 31%, much of which was achieved by means of share options* rather than direct share purchases. Significant increases in the Volkwagen share price meant that these options delivered large profits for Porsche, prompting criticism that the company was acting more like a hedge fund than a car manufacturer.

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To Vote or Not?

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On the eve of the US election, occasional commenter here at the Stubborn Mule, Michael Michael, sent me links to a couple of articles on Slate on the merits of voting. Of course, as an Australian citizen, I don’t have the option of voting in the US election, but the issues raised are relevant to democracies around the world.

In the first, Don’t vote, Steven E. Landsburg argued that the chances of your vote determining the result of the election are so slim that it would make more sense to play the lottery. In the second, Vote!, Jordan Ellenberg responds with a detailed mathematical analysis (including a dose of Bayesian inference) to argue that the odds of affecting the result, while long, are better than winning the lottery.

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Dropbox

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I feel I am due for a break from the GFC* and so will instead return to the subject of Web 2.0.

Whenever I come across a new Web 2.0 site/application/service I cannot help but sign up. A quick search for the phrase “welcome to” in my gmail archives throws up about 100 messages, representing only some of the debris of this obsession: sites I have signed up for, explored briefly and mostly never visited again.

Among these, however, is a recent discovery that has quickly become an indispensable tool. Alongside gmail and google calendar, Dropbox is now one of my favourite examples of “cloud computing”. In a nutshell, it provides synchronised offsite storage in an extraordinarily seamless way. For a new service, still only in beta, it is very impressive.

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Australia and the Global Financial Crisis

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Over the last few months I have written a lot about the global financial crisis. My posts have focused on specific events as news has broken, ranging from a programming bug by Moody’s to the enormous US bailout plan and Government guarantees from Ireland to Australia. Here I will instead take a broader perspective and provide an overview of how the crisis has unfolded and, more specifically, how Australia came to be caught up in the mess.

A year ago, many commentators were extolling the idea that Australia’s economy had “de-coupled” from the United States and Europe, and would continue to be powered by the rapid growth of China and other developing nations. Concerns about inflation meant that interest rates were rising and many felt Australia would escape the incipient economic slowdown in the developing world. Events have instead unfolded differently. The Federal Government has taken the extraordinary step of guaranteeing deposits held in all Australian banks, building societies and credit unions and the Reserve Bank of Australia has delivered an unexpected 1% cut in interest rates, citing heightened instability in financial markets and deteriorating prospects for global growth. This was an extraordinary turnaround. It is, of course, the result of Australia becoming ensnared in the global financial crisis that began in mid-2007 and has intensified ever since. But how and why did Australia get caught up in a mess that started with falling property prices in the US?

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Collapsing Oil Prices

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The actions of Governments around the world to guarantee or recapitalise banks is starting to bring some stability to the financial sector, but markets are now expecting a worldwide economic slowdown and with it a dramatic decline in demand for oil. This has led to a collapse in the US dollar price of oil and, despite large falls in the value of the Australian dollar, even in Australian dollars oil has reached its lowest level this year.

Brent Crude Oil Prices*

On last night’s ABC news report, financial journalist Alan Kohler showed a chart of oil prices and petrol prices and questioned whether motorists were seeing price falls coming through to the bowser. This prompted me to revisit the regression model I have used in a number of previous posts. As I suspected, retail petrol prices as reported by the Australian Automobile Association (AAA) continue to track wholesale prices closely. While the AAA only publishes a monthly timeseries, they do publish a price each day supplied from FUELtrac, so I have also added a red dot on the chart showing today’s FUELtrac price. Contrary to Kohler’s conclusions, it is clear that petrol prices are falling in line with wholesale prices (in Sydney at least) and, subject to the fortunes of our dollar, it looks as though prices will be back below $1.30 per litre before long.

Sydney Petrol Price Regression Model*

*Data source: Australian Automobile Association, Bloomberg.

Come Back Keynes, All Is Forgiven!

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In current phase of the GFC* we are witnessing extraordinary Government intervention in the financial markets, with a host of countries providing enormous guarantees of bank liabilities, purchasing distressed assets or directly investing in ailing banks. Switzerland is the most recent country to follow this route, injecting around 6 billion Swiss Francs (A$8 billion) into UBS, gving the Government an estimated 9% stake in the erstwhile investment banking giant.

While the immediate aim of these moves is to save a financial system that is on the verge of collapse, there is also increasing concern that the ructions in the financial sector are a precursor to an extended global recession. This is also generating responses by Governments around the world. Here in Australia, the Rudd Government has announced a A$10.4 billion stimulus package, shelling out money to low-to-middle income families, pensioners and home-buyers.

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Couch Potatoes

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A colleague has lent me a copy of Oliver James’ book “Affluenza” and, while I am not far through it yet, it is scathing in its damnation of the effects of capitalism on individuals in society. At a time when capitalism is rapidly losing it shine on a global scale, with the financial sector collapsing around us, this individual perspective is an interesting small scale counterpoint to the large scale picture we are seeing on the news each day.

The thesis of the book is that an “affluenza virus” has spread thoughout English-speaking countries. This virus leads us to be obsessively focused on shallow material pursuits. At the same time, it leaves us anxious and prone to low self-esteem, addictions and depression as there is always someone with a faster car or a bigger cigar (to quote The Beautiful South).

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Income Inequality in Australia and the US

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A topic that the New York Times visits from time to time is that of income inequality. In the United States, the gap between the highest and lowest earners has been increasing over the last 80 years or so. A recent article returns to this theme and provides further insight into the trend. It cites research from the new book “Unequal Democracy” by Larry M. Bartels, which indicates that income inequality has increased far more under Republican presidents than under Democrats.

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Paralympics Medal Tallies by Population and GDP

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The 2008 Paralympic Games are now well underway in Beijing. Since my Olympic medal charts on Swivel proved popular, I have now created a data set for the Paralympics as well, which I will be updating regularly (source: Beijing 2008 Paralympics website). One of the topics I touched on during the Olympics was the influence of the size of a country’s population and economy on their performance at the Games. This topic did prove controversial with at least one reader and the links may be more tenuous for the Paralympics. Neverthless, I will risk revisiting the subject here.

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Weak Dollar and Australian Petrol Prices

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The world’s financial markets have shifted their focus from oil supply problems to the demand side of the equation. They appear to have decided that the US and European economies look so dire that oil consumption will collapse. As a result, oil prices have been in free-fall, barely staying above US$100 per barrel. If the recent hostilities in Georgia had taken place a couple of months earlier, oil prices would almost certainly have shot up. But with the shift in focus, they scarcely reacted to the conflict.

Unfortunately for Australian motorists, a weak Australian dollar is preventing the full effect of lower oil prices coming though to the price of petrol at the pump. Oil is not the only commodity to see price declines, not good news for the currency of a commodity producing country. More significantly, the Reserve Bank has started cutting interest rates and the dollar is moving down alongside rates. Since the end of July, the dollar has fallen almost as much as oil. The result, evident in the graphs below, is that oil prices have not fallen nearly as much in Australian dollar terms as they have in US dollar terms.

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