Bull & Bear
March 2017
Bull and Bear
Issue No.2
EBS.Invest
EBS.Invest Ressort News
Dear Readers,
Inside the Issue
EBS.Invest Ressort News...P.1 On the Upcoming Crisis in Financial Markets...P.2 Setting Direction for the Next Decade: Volkswagen...P.5 Need for a New & Different European Union...P. 7 Is Bitcoin Currency of Future...P.9
The first issue of Bull & Bear released last semester generated a tremendous response and a lot of positive feedback. The initiative of relaunching the newsletter was challenging indeed for us in the editorial team and we owe it to the entire EBS.Invest group for their continued support to make it possible. At the same time, we are glad to have sparked off interest and motivation among the EBS students and were happy to find enthusiastic people approach us with ideas and articles for our initiative, which you will find inside the pages of this issue. Last month, EBS.Invest hosted a highly interesting keynote by Mr. Andre Stagge, currently Senior Portofolio Manager at Union Investment. He spoke at lenght about his investment strategies and gave tips to the students on how to go about implementing them in real life. We would like to take this opportunity to thank him again for taking the time to give our motivated members a chance to learn from him. This month, EBS.Invest will be hosting Dr. Christian Funke, Founder and CEO of Source for Alpha on the 3rd of March. For those of you who missed out on our last event and want to gain that extra edge in learning more about investments, the event will take place on EBS Schloss Campus in K4 rooms at 13:30 hours. We hope you enjoy reading the second issue of Bull and Bear. For any further ideas and feedback, please drop us a mail at research@ebsinvest.com and we will promptly get back in touch with you.  Best Regards, Editorial Team 1
March 2017
Issue No.2
EBS.Invest
Markets International
On the Upcoming Crisis in Financial Markets: How the Grey-headed Flying Fox will bring down the World Economy Almost a decade after the global financial crisis, the financial markets today are standing at the edge of a precipice waiting for the bubble to burst again. Where the trigger will come from, nobody knows. In Part I of this series, we look at A Curious Case of Two-Legged Pink Elephant.
As I was walking back home from the university last week, I saw a two-legged pink elephant gleefully dancing about on the road. Surprised? Well, do you believe that a two-legged pink elephant cannot exist? In writing one of the highly influential books of this century, Nicholas Taleb starts off his work The Black Swan against the backdrop of how people back in the days believed that a black swan could not exist. And then they discovered the continent of Australia. Now I ask you to rewind your life back by a minute and think of two words – paradigm shift. The two-legged elephant in question here was an animated video playing on my smartphone, the other possibility being that someone painted the elephant pink because it’s the carnival season. Going further ahead, I could also tell you that in a million years all elephants will be two-legged, pink in colour and bet a million Euros to anyone who can prove otherwise. ‘Evolution, my dear Watson. Evolution’, as Sherlock would have said. 2
March 2017
Bull and Bear
Issue No.2
EBS.Invest
Markets International
The reason I took the case of two-legged pink elephant is because on that same day as I was standing by the coffee machine, a friend of mine came out of his finance class and asked me I had any predictions about the next big crash in the financial markets. You see, that’s the fundamental issue in predicting future, anyone can claim to predict the financial crisis and stand vindicated when the crash happens, just like our twolegged pink elephant. Now I’m one of those really careful blokes who checks twice before crossing the street though the signal is green, gives random answers even on anonymous surveys and carries an umbrella even when weather the forecast predicts sunshine for the entire week ahead. Tasked with the monumental challenge of predicting the next financial crisis, one would expect me to mince my words and think thrice over. I mean, just last week one of Bank of England’s leading policymakers put out a statement saying it was impossible to predict a recession let alone a market crash. But given the urgency to reach out for coffee, I answered with a date – October 24, 2019, give or take a year.
Remember, remember! The twenty fourth of October, The Crash panic and plot; I know of no reason.
It's time to work backwards in time and see why that date holds a significance if the greatest crisis of our times indeed does strike the global economy. And in my attempt to do so, I will first take you through the current prevalent theories by the forecasting ‘pundits’ spread out over this and the next issue before getting moving on to the forecasts for the economic and financial stress factors that I see developing in the markets and finally tell what role the grey-headed flying fox has to play in all this.
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March 2017
Issue No.2
EBS.Invest
Markets International
Will the Law of Seven Strike again? In my Ethics class the other day, I was learning about what a number is and had an interesting discussion on how there are no good and bad numbers. However, if you look at the last three major crises that have hit the world, all of them share one thing in common. They occurred in the seventh year of that decade. Black Monday? 1987. Asian Financial Crisis? 1997. Global Financial Crisis? Started off in 2007. Looking at the pattern, it becomes clear that markets are already stacked up like dominos this year and only need that one trigger point that will send them tumbling down the hill. The ghost of Mark Twain could come back to haunt the markets Long buried in his grave, one could say that the late American author poses the least amount of threat in stirring up trouble in the markets. Or does he? Ask anyone who is invested in the stock markets about Mark Twain effect and they will hold their breath and tell you about the phenomenon of historically low returns in stock markets during the month of October. The previous crashes of 1929, 1987 and most recently in 2008 were roughly in the month of October. In his novel Pudd’nhead Wilson published way back in 1894, Twain wrote - ‘October. This is one of the peculiarly dangerous months to speculate in stocks’. Though Twain might seem appear to be a futuristic genius, it is simple psychology at play here. Since some of the largest market crashes in history have occurred in October, investors tend to generalize the risk and when everyone starts selling, a crash turns out to be a self-fulfilling prophecy. There’s also a theory wherein the traders who close their positions before summer holidays in optimism come back to their desks in September and panic after looking at economic data leading to downswing in the markets. One must also note that some of the major economic and political events across the world occur during the period from May to October which all adds up to the that above data they get to deal with. In an article dealing with markets where numbers and logic rule the game, I’ve haven’t given you any. In the next part of this series, I will bring in the numbers, data, statistics and all that my friend from finance asked for. But I will leave you here with this warning by Disraeli – ‘There are three kinds of lies: lies, damned lies, and statistics.’
Abhilash Indresha Gangananghatta is the Head of Research at EBS.Invest e.V and is currently pursuing Master of Science in Management. He is also an active ultramarathoner and muses about economics, strategy and financial markets over quadruple shots of espresso.
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March 2017
Bull and Bear
Issue No.2
EBS.Invest
Business National
Setting direction for the next decade: Volkswagen is trying to change On November 22 2016 Volkswagen presented a new company strategy called “Transform 2025+”. The damage has been done by manipulating emission data. Is the new strategy enough to bring VW back on the road?
Volkswagen CEO Matthias Müller thoughtful: The future is looking…umm… bright?
After on the 19 September 2015 Volkswagen AG confessed that 11 million cars worldwide have been affected by manipulative software that hides the true emissions of their diesel cars, the media echo was enormous. This had a big impact on the image of the VW brand and Volkswagen as a whole. In Q1 and Q2 of 2016 the brand VW sold 8% less cars in the US and 16% less cars in Germany, compared to the same period in 2015. Worldwide sales have been stable (decrease of only 1%). VW changed its CEO and set out to change. On 22 November 2016 the company presented a new strategy for the future called “Transform 2025+”. With this VW hopes to gain back trust and to succeed in the future. At the beginning of the strategy’s presentation Herbert Dries, Brand-CEO of VW, talked about the current situation at VW. He painted a negative picture and mentioned low margins, low productivity, low internal agility, internal bureaucracy, long time ignorance or late
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March 2017
Issue No.2
EBS.Invest
Business National
adaption to important trends and changes in the industry (e.g. SUV-Boom). He said that VW will change completely. Obviously, the determination of the organization’s goals has shown that the strategy of VW has to change drastically to reach them. The number one goal of the new strategy is to become market leader in electric vehicles by 2025. This is remarkable, considering that in comparison to other car manufacturers, even others from Germany, Volkswagen seems to be a few steps behind in electric mobility so far. Of course, this has to change in the near future dramatically. At the Consumer Electronic Show (CES) 2017 in Las Vegas, Volkswagen presented the “I.D”, a full electric concept vehicle and a foretaste of how Volkswagen imagines its own future. Volkswagen will not be present at other car trade shows in 2017 though, due to a newfound cost sensibility, since big and expensive lawsuits are hanging above Volkswagen like the sword of Damocles. The implementation of the strategy has also been started recently, as only a few days before “Transform 2025+” was announced, Volkswagen made a round of dismissals of 30.000 employees public. The company instead wants to create 9.000 new jobs in the area of IT and E-Mobility. Those two sectors are key divisions for VWs new strategy. In the last months Volkswagen CEO Matthias Müller made some unfavorable comments and appearances in the media that might let observers be skeptical about his ability to transform the company. Müller said that consumers are on the one hand asking for electric vehicles, but are not buying them. Of course he did not elaborate on the problems at hand, which are that electric vehicles to date are often expensive and do not have a high range. He further said there will be no compensations for Volkswagen customers of Diesel cars in the EU. This made some customers angry and some people started questioning his ability to manage crisis
Jakob Kozak is the Head of Research at EBS.Invest e.V and is currently pursuing a Bachelor of Science in General Management. He is also the Co-Founder of SmartCare, a IT-business he founded with a friend. He also leads the sponsorship team for EBSpreneurship Forum 2017.
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March 2017
Bull and Bear
Issue No.2
EBS.Invest
Politics International
Need for a New and Different European Union The problems faced by European Union in these years and the changes in the international scenario demand a rethink of the European project.
The next 25th of March will be the 60th anniversary of the Treaty of Rome, where Belgium, France, Italy, Luxembourg, the Netherlands and West Germany laid the basis for the creation of European Economic Community (EEC), which later morphed into European Union (EU). In 60 years Europe has experienced a period of peace and unprecedented social and economic growth. The benefits of being part of EU were numerous and varied from economic and political progress to legal and human rights. Embracing over 510 million people from 28 countries (UK included) and thanks to the free movement of people, goods, service and capital within the internal market, it is currently the second largest economy in the world in terms of Gross Domestic Value (GDP), really close to the USA. Poorer countries such as Ireland, Spain and Portugal have experienced strong growth since they joined the EU, but the rich countries too have got enormous advantages thanks to, inter alia, the free trade and the removal of non-tariff barriers. The European Union has also pursued the interest of consumers, avoiding the creation of cartels and the abuse of a dominant market position within Europe and stipulating environmental treaties such as the one to reduce the pollution. Nonetheless, on its 60th birthday the European Union appears fragile and divided. Many countries in recent years have suffered a period of economic stagnation and high unemployment rate. EU institutions were unprepared for facing the financial crisis of
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March 2017
Issue No.2
EBS.Invest
Politics International
2007 and sovereign debt crisis of 2009. The migrant crisis starting in 2015 further added to its weaknesses. Among them there was also a small number of Islamic State militants, thus raising the fear of terrorism. Even in this case EU institutions are confirming their inability to find an effective and shared solution to the issue. On top of that, 52% of British voted to leave European Union by referendum. Since its inception, this is the first time a Member State has decided to withdraw from the Union. Furthermore, the Brexit vote has strengthened the Populist and Eurosceptic parties across Europe, which are struggling for the disintegration of the EU. The international situation also appears delicate and thorny now more than ever. The new American president, Donald Trump, is a wild card. With his pragmatism and unconventional ways, he is demonstrating since the first days of his presidency to respect his campaign promises. According to some economists, the possible protectionist turn wanted by Trump could trigger a trade war and lead to a global recession. In addition to that Russia of Putin, who tried to condition American election, is expanding its influence and aims to get back to the status of a global superpower as the Russian intervention in Syria points out. Lastly China, which is not yet a full democratic country, is continuing to expand its defense spending and its military budget is currently the second largest in the world behind the US. In such an environment, the EU, despite its great significance in geopolitics, has been rather passive. All this has put a big question mark on the structure and functioning of the European Union. As it is, it doesn’t work and will not have a future, it calls for a change. It cannot be anymore a German-French club, which imposes its rules. If EU wants to survive then it needs to complete its integration process, from a monetary union to a real political integration. This means for instance a common foreign, fiscal and economic policy, the European army and intelligence in the fight against terrorism and a joint issue of European debt instruments (Eurobonds). The goal is difficult to reach, but it is not a utopia. The young generations, who as the British referendum shows know which the advantages of integration are, can and must demand a new and different project of European Union from the political and economic class. Today, as 60 years ago, we need to be forward-looking and have the courage to redefine what it means to be a European 
Emilio Cipullo is currently pursuing a Master in Business Administration (MBA) and is a former management consultant focused on Financial Services. His biggest passion is the basketball team Juvecaserta.
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March 2017
Bull and Bear
Issue No.2
EBS.Invest
Business International
Will Bitcoin be the Currency of the Future? Is the first kind of decentralized currency, there is no agency that controls this type of money. Born out of financial crisis, there was a necessity of a currency that does not depend on external factors such as macroeconomics and politics matters.
Created almost a decade ago in 2008, Bitcoin is the most famous crypto-currency. Being digital, there is no real money or gold that required to provide a base for its value. As a P2P electronic cash system, it requires the need to have two kinds of codes: the public, which as it name says is the code for every user, and the personal code that, which every user has individually. Therefore, if a user wants to get a bit-coin it is necessary to have both codes otherwise the transfer will never be fulfilled from one personal wallet to another one. What is interesting to note is that the Bitcoin is not supported by any entity or gold (many currencies are supported in the banks with gold) as mentioned before. It is based on computational power that solves mathematical equations. Thus, if a user wants to create a bitcoin, it is necessary to generate a mathematical formula in the computer that will create a bitcoin in a period of time. But, it is important to mention that there will be a certain limited quantity of bitcoins. To be specific, 21 million of bitcoins can be created, and each time the process of creating one bitcoin becomes slower. Consequently, at the beginning, when there were only a few, it was really easy to create them but at the same time price was not extreme. Today, there are too many bitcoins and so each time it takes more time to create them and the price is continuously growing day by day.
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March 2017
Issue No.2
EBS.Invest
Business International
For an overview of the value: In 2009 the price of one bitcoin was close to nothing. Even in 2010 it was less than 0.01 dollars. By 2013 the price of one bitcoin was around 100 dollars and in 2016 the price was around 600-700 dollars. Today, the price is hovering in the range of 750-920 dollar per bitcoin. Considering the increase of the value of this currency over this small time period, investing in the bitcoins seems like a sensible and smart investment decision. On the other hand, the increase of the value is not the only reason to use this currency. Another reason is because there is no regulatory entity that can control it. Even if every transfer is public for the entire user, the singular address of the handler is not identified. The reason is because there is no requirement by law to include personal information in each account. It must be noted that apart from the misuse of the privacy protection provided by bitcoins for illegal activities, it is highly criticized by the government because there is no insurance in case of any problem with the transferences. Because of the lack of control there are many cases in which some operators can get stolen. This is why it is important to keep the personal code of the wallet in safety, otherwise if it is stolen; no legal entity will be responsible for it. To conclude, bitcoin could be the future currency. Not only because of its perfection number in the market that will be exactly 21 million, but also because there is no necessity to trust in other third party that will ‘protect’ your money. Also as Wences Casares, owner and CEO of Xapo said: “We live in a world of 7 billion people and only 1 billion are currently able to have bank accounts and credit card, so what will happen with the rest?” That’s some thought for you to ponder over
Esteban Fernandez Leal is currently pursuing a Bachelor of Science in General Management and is passionate about writing. He is a trilingual basketball enthusiast and is actively interested in the issues of investment, IT and logistics.
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Bull & Bear