The world turned to China over the last decade to provide global growth, and as China slows the world is relying on Germany and the United States to take charge of the global economy.
The world is facing a global slow down, and at some point there will be a straw that is going to break the camel’s back and cause global recession. As we approach an American government shutdown, FED interest rate hikes, global government debt, and the free falling commodity prices we keep packing more on the back of the camel.
History often points to singular events as turning points that shape events. The assassination of Archduke Fanz Ferdinand causing the start of World War I, the bombing of Pearl Harbor bringing the Americans into WWII, and for fellow Cubs fans Steve Bartman interfering with a foul ball in the 8th inning of Game 6 of the 2003 NLCS all are marked events that become defining moments in history. All these events and many others become written into history as the turning point, the singular straw that breaks the camel’s back and becomes the falling domino that starts a chain of events that snowballs into a historic event. History likes to study the spark and not the fire, what history often forgets is the buildup and fallout of these singular events.
The two bright spots in the otherwise dim world economy of late have been the United States and Germany. The VW diesel scandal at Volkswagen is a very real problem for the world economy, and could become the straw the breaks the camel’s back, and the spark that sets fire to a global economic turning point.
The auto industry is a major source of income for the German economy, as 1 in 7 German workers are employed in some shape or form by the auto industry. The American economy is not as reliant on the auto sector as a source of economic output as we once were, and as the German economy is. However, as the US has exited the Great Recession, years of decreased auto demand has created a car buying frenzy in the US and around the world which has been very important to GDP and global economic health. In American auto sales are up for 6 consecutive years, marking this one of the longest growth periods of auto sales in American history and helping pull the country out of recession.
The VW Dieselgate story plays out like an evil genius plot in a James Bond movie. What is at the heart of the story is a simple line of computer code that helped VW defeat EPA regulations in their 2009-2015 “clean diesel” models. With defeat code the vehicle’s onboard computer is able to detect when an emissions test is taking place and during testing emit less pollution. When testing is not taking place the car reverts to its normal and pollutes more than the defeated emission test show. The software or extra pollution in and of itself it not the problem, but it is the outcome that will become the turning point of global history.
Volkswagen has come forward and has admitted that 11 million cars have been sold worldwide with the illegal software. The CEO of VW stepped down on Wednesday, and fines in America alone could surpass $18 billion, with VW already setting aside $7.2 billion for fines and creating large dealer incentives to weather the PR storm.
In the first half of 2015 VW surpassed Toyota as the world’s largest auto maker. Toyota, who suffered $1.3 billion of fines for their own scandal in 2010 from concealing and making deceptive statements over safety issues, knows all too well what can come from media attention and bad PR. Unlike Toyota and in credit to VW they have taken full responsibility. Unfortunately for VW, as shown by American’s track record on their willingness to forgive sports stars from everything from steroids to Deflategate, we seem to be as lenient to lies and cover-ups as we are to those that accept responsibility and admit mistakes. Americans are however fickle, forgiving and forgetting somethings, and hanging on to others harder and longer than would seem necessary.
Volkswagen stock has at the low lost over 30% of its market value from the scandal. From fines and thousands of lawsuits that are likely to pile in, you do not even need basic math to figure out that earnings at VW will take a hit. Regardless of the stock price the market expects VW will suffer a major sales downturn. With Germany propping up the EU a hit to their auto sector will hit their GDP, which will greatly affect the fiscal, monetary policy and stability of the EU, and thus the world.
We know that for the most part economics is a zero sum game, when one person loses someone wins, and when one firm loses sales another firm gains. However what is truly at risk is that customers lose trust in the auto industry as a whole or that governments around the world place costly and difficult regulations on automakers which increases cost and lowers global auto sales regardless of the maker. With decreased auto sales commodities will take further hits as unlike software, iPhones, or social media, cars take A LOT of resources and commodities to build.
From the raw material input of making cars to the energy that cars burn, this scandal could really be that historic turning point in what becomes the battle of what fuels automobiles use for years to come. Just like the VCR vs. Beta battle that played out years ago, this scandal could shape the gasoline vs. diesel vs. electric fuel battle.
Over 50% of the European car market is owned by diesel fuel, will buyers switch to gasoline, or electricity as the fuel of choice, or will diesel demand continue? New CAFE standards are driving down oil demand. More efficient cars decrease worldwide demand for oil used as automotive fuel. Regardless if VW scandal causes short-term economic pain to the globe, it will cause very long lasting gains and pains for other industries, manufactures, energy producers, and national economics for decades to come.
In 1914 people didn’t know, think about, or cared about Archduke Fanz Ferdinand until they were wrapped up in a World War. Someday we may look at the VW Dieselgate scandal as a major turning point in world economic history. VW adds one more straw to an already full load of straw on the camel’s back. The VW sandal could be the straw that breaks economic camel’s back, and it could become the very spark that starts a fire and changes the automotive, commodity, and energy industry for generations to come.
****The above article is an excerpt from EQS Trading’s Weekly Publication on the Commodity Markets called “Signals” which we write and publish every Monday. EQS Trading also publishes a daily “Trade Signals” email that provides in-depth “short” and “long” recommendations and trade strategies for the commodity market with entry prices and stop loss levels.
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