Juggling Dynamite

As we discussed in Further thoughts on the emissions Scandal, the VW fraud is of epic proportions and will have compounded costs over at least several quarters for the company and Germany’s (therefore Europe’s) leading sector. See, New VW CEO: brace for ‘massive cutbacks’. Germany has been the critical engine for a moribund Europe over the past decade, and the growth trajectory of both was weak before this story broke.

The company now has the need to not only recall and redesign its cars, but also to repent, reform and massively rehabilitate its public image.  The people buying VW products believed that they were making fuel-efficient, lower pollution choices.  The attraction was a feel-better-brand with state of the art technology.  People trusted VW.  The breach of that trust makes this fraud particularly incensing to the millions who were duped.  It also means that it will take a seismic shift for the company to reform itself.

There is enormous opportunity here. For VW to make amends for the pollution that it lied about and rebuild as an authentic brand, it should leapfrog slow-moving competitors and double down on zero emission vehicles now.  German engineering with affordable, electric engines is the perfect opportunity for VW to become trustworthy once more.  See:  More reasons to embrace electric cars and Even more reasons to embrace electric cars (as if we needed more).  Lead and the people will come (back).

Steve Kalafer is furious. After 23 years selling Volkswagens at his dealership, Kalafer reckons he has never seen anything as bad as the German automaker’s rigging of the emissions levels on its clean diesel vehicles.

“This fraud makes Madoff look like the minor leagues,” Kalafer said from his dealership in Flemington, New Jersey. “It is the biggest fraud I have ever seen in all of business. Over $300 billion of these products have been sold in Europe, $15 billion [in]the United States. That dwarfs Ponzi and Madoff combined.” Here is a direct video link.

Weakening economic data continues to undermine the case for a 2015 US rate hike (despite naive hopes of the Fed). The U$ rally (underway since 2008) has responded with consolidation over the past couple of weeks. This on top of Middle East/Russian tension has given commodity shorts a reason to cover, and the energy sector has staged a dramatic bounce off recent lows. But this is all financial market jostling. In the real economy each oil spike is self-defeating, as higher prices spur a resurgence of output on to a market drowning in supply and wanting in demand…and storage.

As explained by Goldman analyst Currie (below), in the aftermath of over-production booms where easy credit has spurred wild-eyed speculation, durable price bottoms are not reached until ‘believers’ capitulate, throw in the towel on rebound bets, and finally move whatever capital they have left to the sidelines or other sectors.  We have not seen this yet in energy.  Every rally to date has brought another burst of hope–and production.

“The risk of $20 is driven by what we call a breach in storage capacity, meaning that you have supply above demand, you fill every storage tank on planet earth and then you have nowhere to put it,” Jeff Currie, head of commodity research at Goldman told CNBC from the annual Oil & Money conference in London.”(Then) supply has to come down in line with demand. The only way you get that correction is prices crash down to cash costs, which for a U.S. producer, is somewhere around $20 a barrel.” Jeff Currie, global head of commodities research at Goldman Sachs, says the risk of crude oil reaching $20 a barrel is driven by “breaching storage capacity. Here is a direct video link.