Poverty

Tesla – reports of only 345 deliveries of Model 3 in November

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Seems that Tesla has only managed to make 345 Model 3s in November. A far cry from the promises to make 5,000 Model 3s every week by December. At the Q3 results the goal was pushed out til March 2018 at the earliest as “production hell” bites. Note that no single mainstream auto supplier is on Tesla’s deck which tells us how little faith they have in the company. Auto suppliers run on the smell of an oily rag and after so many bad experiences won’t accept dealing with auto makers who may jeopardize their own future. Recall how many auto suppliers almost went to the wall (many were in Chapter 11) after the tech bubble collapse at the turn of the century.

The other news is that Norway is ending Tesla subsidies and Germany has now disqualified Tesla Model S subsidies as the cars breach the €60,000 threshold. Finally a government that thinks it’s not advisable to give the well heeled tax breaks when it’s the battling insurance salesman Manfred from Bremen living paycheck to paycheck whose taxes to register his clapped out 1983 VW Golf diesel pay for it.

The shares have languished and even the hype of the new products and outrageous deposits has not converted into a ramp up. Q4 is likely to be a shocker at this rate. When will the faithful eventually pull the plug? Maybe Tesla should gamble the deposits on Bitcoin to see if they can lever cash flows that way?

When it is citizens that require sanctuary

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For all the loony decisions that are out there, how can jurors in a San Francisco court possibly acquit a person that was deported 5x for multiple felonies and awaiting a 6th deportation before he ended up murdering a citizen, Kate Steinle in 2015? The court ruled it wasn’t murder but an accident because he didn’t intend to fire the gun. So even if the perpetrator, Jose Ines Garcia Zarate, didn’t intend to discharge the weapon in her direction he was none-the-less in possession of a weapon in a manner that had a risk of killing someone intentionally or not. It is irrelevant whether the bullet ricocheted. Steinle is needlessly dead. Not even a manslaughter charge and the taxpayer funded the defence.

For all the arguments supporting sanctuary cities, how little care for actual taxpaying and law abiding citizens can there be if convicted felons get hit with a feather duster while friends and family members end up being traumatized for life as a result? While he may face 3 years jail for possessing a stolen firearm, what society do people want when sentencing is so lenient for people who aren’t even legally allowed to be there?

Which again begs the question of illegal immigrants or refugees seeking asylum. If they are fleeing oppression or any place where their lives might be in danger, what on earth are these people doing trying to be anything other than grateful, courteous and law abiding individuals? Then you have to question the sanity of some Californians thinking these people deserve voting rights! Hmmm.

Even Zarate’s actions are dismissed as being a minute percentage it doesn’t prevent the fact that any country should maintain strict control of its borders and focus on helping those truly in need rather than turn a blind eye to those that exploit the social and economic generosity of others.

While some will no doubt use the Las Vegas shooting as a yardstick, the major difference is that the shooter purchased guns legally and was a citizen. That doesn’t justify what happened rather a shortcoming in gun laws that allowed bump stocks. If enough Americans don’t like it then they’ll force the change. Sloppy Immigration policies where poor screening and even worse border protection is self evident then that in and of itself is no less important a discussion to protect citizens of any country.

Gold Coin vs Bitcoin – just go on a crypto blog and invite a fatwah by criticizing it

The Bitcoin debate rages again. I’ve been asked more times by friends about whether to buy Bitcoin in the last 3 months than I care to remember. This video is about as telling as it gets about understanding raw value. At the moment Bitcoin pricing is as random as a Lotto ball dispenser although only higher numbers are being drawn for now (despite the 20% flash crash yesterday, shows panic is a server outage away). My answer to them is I wouldn’t touch it with a barge pole but everyone’s risk is their own. I answered along the lines below.

As a contrarian investor, this video warms my heart. When everyone seems to love something it tends to be a sign that ‘greater fool theory’ is alive and kicking. The video shows a woman unwilling to trade a stick of gum for a 1oz gold coin. If there was ever a better example of mean reversion, this must be it. Mark Dice did a similar video with people asking if they wanted a Hershey’s chocolate bar or a silver bar. Everyone chose the Hershey’s! While I am sure the response on Wall Street would elicit a different response it shows how few people understand the value of barbarous old relics.

The biggest issue with Bitcoin or any other crypto is that it is mined in cyber space. Do you ever wonder why you need to update your Norton anti-virus software every other day? Yes because some criminals are phishing/hacking your data trying to rob you blind. That’s just the amateur cowboy stuff by the way.

Gold needs to be dug out of the ground with considerable effort. The thing that spooks me about crypto (without trying to sound conspiracy theorist) is that state actors (most top end computer science grads in China end up working in the country’s cyber warfare teams), hackers or criminal minds (did you know 70% of top end computer science grads in Russia end up working for the mob (directly or indirectly) the value of coins in the system could be instantaneously wiped out at the stroke of a key. We’ve had small hiccups ($280m) only last week. So as much as the ‘security’ of these crypto currencies is often sold as bulletproof, none of them are ‘cyberproof’. Just like your home software, crypto at every stage has to constantly update its protection to prevent vulnerabilities and it is naive to think it can keep a 100% safety record.

It only takes one serious hack to bring most if not all the crypto down as vulnerable. In order for Auric Goldfinger to crush prices in Gold he’d need to smelt lead bars and paint them, were any left over from the pail and brush used on Jill Masterson. Gold is one currency that governments often threaten to confiscate (India springs to mind). Imagine if North Korea turns Bitcoin into the state currency?

I have just been on a Bitcoin forum and the insults being hurled at disbelievers has all the hallmarks of Tesla share ownership. It is a religion. Not an investment. I was accused of having no idea on crypto to which I argued 90%+ of those that own it probably don’t either. So having owners in Bitcoin or other cryptos knowing a tiny fraction of the risks means they’ll stampede faster than the servers can process data should ‘bit hit the fan’. One crypto ‘expert’ tried to tell me that artwork has no value as it is not tradable. It is tradable, just illiquid. I argued that the latest sale of DaVinci’s artwork fetched $450mn or 45,000 bitcoin. Storage costs aside over the long run I’ll have a Leonardo thank you!

As Mark Twain said, ”It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

My assessment is that the fascination of those around me about Bitcoin suggests that many of the fan base are punters trading on the greed of others. It has no underlying core value other than those prepared to pay more for it. That indeed is the tenet of all investment but like most manias, the risk/reward ratio can turn on a dime (no pun intended). At some stage the fall out from crypto will be ugly. As financial pundits know

the market can stay irrational longer than you can stay solvent”

If everything is so great then why is our political scene so broken?

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Queensland’s state election said it all. Both the incumbent parties lost massively even though the incumbent Labor Party looks like holding on to power. While Pauline Hanson’s One Nation party looks like it fared poorly in terms of seats it still got 13.8% of the vote from 1% in 2015. Forget the headline results but think of what the political turmoil In local, state and federal levels is telling us more broadly.

Think logically about it all. If the economy is booming, jobs are abundant and prosperity is on the march then there is little need for governments to be running deep deficits let alone facing hung parliaments and acts of desperation. Surely the incumbent governments of the day can laud their own achievements and their constituents would happily keep returning the status quo. The majority should continue to be happy. More by rights should be winners in such a world of record housing prices, steady wage growth, low unemployment and 25 years of economic growth as experienced in Australia.

Yet PM Turnbull turned on many of the traditional supporters of the conservative wing of his Liberal National Party (LNP) coalition who turned their back on him to hand Labor the victory in Queensland. Not so fast Prime Minister. They didn’t leave the party. The party under your incompetent stewardship left them. At all levels the LNP is divided. There are some quarters suggesting that the Nats may split from the Coalition in the next election in Queensland to leave the stench of the Liberal Party to themselves. This is when personal ambition trumps wish to serve a nation.

While the LNP was handed the most valuable and recent lesson of the disaster that was the Rudd-Gillard-Rudd internal factional knifing during their time in power, it completely buried its judgement and started following a left leaning press, weak poll numbers and copied Labor’s folly. Now we have a hung parliament (not withstanding the dual citizenship fiasco) with chronically weak and misguided leadership. One that tells voters that they have no clue rather than introspection that the party may indeed be the problem.

It used to be said that Australia enjoyed the most stable politics in the Asia Pacific region. That encouraged foreign investment and gave Australia low interest rates, a superior credit rating and a regulatory platform that ensured trust (important for corporations), the envy of many nations. Yet inside a decade we have had 5 (soon to be 6) prime ministers which has thrown that ‘reputation’ in the toilet. In a world where international capital is more mobile than ever and asset prices are peaking, instability in government eventually carries severe financial market penalties.

For Aussie banks, levered up to the gills with inflated mortgage books on their balance sheets, such things have negative implications for the 40% reliance on global wholesale credit markets to fund themselves in the face of a tightening US interest rate cycle. Do not underestimate the negative connotations of a federal government that has lost its way, no matter which major party is in power. Where the average Aussie can’t bear anymore on the mortgage, a third admitting they can’t pay the home loan if they lose their job for 3 months or more. Almost 1,000,000 Aussie households would be in severe mortgage stress if rates moved 150bps(1.5%). Think of the spill-over effects on consumption which would only lead to a recession and lay offs, exacerbating a cycle, all the while bashing the currency making international funding even more biting. If only we had a stable government that had a decent fiscal position to weather that storm. Oh, that is right we squandered that in 2008.

One Nation in Australia, AfD in Germany, Party for Freedom in The Netherlands, Front National in France, 5 -Star Movement in Italy, Fidesz in Hungary, FPO in Austria, the Sweden Democrats, Vlaams Belang in Belgium,  Progress Party in Norway, Trump, Brexit…these patterns aren’t random. It isn’t just populism but protest votes to establishment parties that aren’t delivering. While we are constantly told how great our lot is, sadly the gap between haves and have nots is widening globally. Politicians who are ditching political correctness and making waves on publicly uncomfortable issues are thriving. Why could that be?

Donkey (informal) votes in Australia have seen numbers soar from 2.2% in the 1950s to over 5.0% in the 2016 election. Some electorates in NSW saw as high as 14% informal votes. These are powerful messages in a country that has compulsory voting, which has slid to 90.9%.

The sad reality is that the electorate is making louder noises every election that things are not pointing in the right direction yet the muppets are still being returned to their box seats on a dwindling majority. Why? Because not enough voters are heeding the warning signs that are sounding in front of them. Of course politicians still continue to sell comforting lies backed by ever more unaffordable promises to keep themselves in power for as long as possible when we all need to be facing the unpleasant truths that will happen whether we like it or not.

Indeed those deplorables who voted One Nation might have spurned the LNP but not without good reason. In time, they will be viewed as the wiser ones. Not because they necessarily believe in Pauline Hanson’s platform but because they believe in Turnbull and Shorten’s even less. It all rings like a Premier League football coach making a litany of excuses for his team’s woeful performance that ignores the fact that the collection of individuals have absolutely no cohesion as a team. All the fans can do is bury their heads in their hands until the point they can’t bear to watch another game until the coach is sacked.

Houston we have a housing problem

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Yes, Australian banks are the most levered to the Home mortgage market. Over 61%. Daylight comes second followed by Norway and Canada. US banks are half the Aussies. Of course any snapshot will tell us that prices are supported by immigration and a robust economy. However when Aussie banks are c.40% exposed to wholesale markets for credit (Japanese banks are around 95% funded by domestic depositors) any turn around in global interest rates means Aussie banks will pay more and eventually be forced to pass it on to tapped out borrowers. The Reserve Bank of Australia kept interest rates flat while tacitly admitting its stuck

A study back in March showed that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “ there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

The problem for Aussie banks is having so many mortgage loans on their books backed against lofty housing prices means that we could face a situation of zombie lending. The risk is that once the banks mark-to-market the real value of one house that is foreclosed upon the rest of the portfolio then starts to look shady and all of a sudden the loss ratios blow out to unsustainable levels. So for all the negative news flow the banks cop for laying off staff while making billions, note net interest margins continue to fall and when confidence falls out of the housing market, the wholesale finance market will require sizable jumps in risk premiums to compensate. Indulge yourself with the chart pack from the RBA on pages 29 & 30 where net margins are 50% lower than they were in 2000, profitability under pressure, non performing loans starting to rise back toward post GFC levels…call me pessimistic but housing prices to income is at 13x now vs only 7x when GFC bit, how is that safety net working for you?

Some may mock, but there is every chance we see a semi or total nationalization of the Aussie banks at some point in the future. Nobody will love the smell of napalm in the morning but then again when the Vic government is handing out interest free loans to the value of 25% of the house price for first home buyers you know you’re at the wrong point in the cycle. Maybe TARP is just short for tarpaulin.

Crime in Japan – Yakuza, the Police and other crime

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CM – Crime in Japan – Yakuza Police Other Crime

Once again, due to numerous requests see the above link for the full report and the summary below.

In our Crime in Japan series parts 1 & 2  we covered the jump in crime resulting from seniors breaking into prison and the rapid breakdown in the nuclear family leading to a surge in domestic violence and child abuse. In this report we cast our focus on the resources of the police and whether the change in crime is impacting their ability to hunt down Yakuza (gangsters), thwart drug use and possession, prevent murder and stop the leap in financial crime where insurance fraud alone is up 2,000% in 6 years and suspicious transactions breaking new records.

The Japanese National Police Agency (JNPA) has been the victim of budget cutbacks. Some 80% of the ¥3.2 trillion budget is spoken for by staff salaries. There are approximately 295,000 staff (including administration) but actual officer numbers have remained relatively stagnant at around 258,000. With an aging police force, retirees are putting pressure on hiring new recruits. Japan does have a low level of crime on a global basis and 197 police per 100,000 citizens reflects that.

Japan has budgeted approximately ¥232 billion to run its jails in 2016. The cost of incarceration runs to around ¥3.8mn per inmate which is around double what one could get through the welfare system. The theft of a ¥500 sandwich could lead to a ¥8mn tax bill to provide for a 2 year sentence. Courts are dealing out harsher sentences however drug related offences generally range inside 2 years behind bars. Many Japanese have been in the media crossfire for repeated drug offences and the courts have had no choice but to incarcerate them when ‘good behaviour’ probation periods have failed. Prison capacity has grown 50% in the last decade to meet the coming crime wave.

Drugs in Japan are an interesting topic. Meth was originally synthesised from ephedrine in 1893 by a Japanese chemist Dr. Nagayoshi Nagai. 26 years later, a pharmacologist by the name of Akira Ogata managed to turn it into crystalline form i.e. crystal meth.

When World War II got under way Japanese soldiers (especially kamikaze pilots) were given crystal meth (branded Hiropon) which not only kept them ‘wired’ but reduced hunger. As the war ended, Japan was left with excess supplies of Hiropon. Food supplies were few and returning soldiers added to the shortage. However little was known of the side effects and the government had an epidemic on its hands in the late 1940s. Luckily there is a solution being developed by the Japanese biotech company MediciNova (4875) which is in late stage trials in the US with a formula that weans drug users from their addiction.

One of the surprising statistics has been the trend in gangster (Yakuza) incarceration in Japan. While police have seen a surge in consultations (aka complaints) surrounding gangster activity, arrest rates have fallen by 30%. Is it because the police are so tied down by the surge in stalking, domestic violence, child abuse and larcenous geriatrics?

People with mental disabilities committing crime are also rising sharply, up 62% in the last decade. Apart from schizophrenia or medically diagnosed mental health issues, addiction to alcohol or substance abuse can also get an offender classified as mentally disable if they break the law.

Financial crime is becoming far more prevalent. From petty scams to sophisticated insurance and bank fraud, such offences are surging. Reported fraud related to bank transfers has doubled between 2010 and 2014 to 13,400 cases with the amount of money transacted surging 5-fold to ¥56.5bn.

Murder rates in Japan have remained relatively mute. The homicide rate in 2014 was 938 down from 1362 in 2006. As a ratio, Japan has 0.7 murders for 100,000 people versus 91 for Honduras (the highest) or 4.7 in the US. However Japan has not been immune to home grown massacres.

Foreigners as a percentage of crime in Japan continues its long downward march. Much of the crime is related to petty theft and visa overstays. Chinese, Vietnamese and Brazilians make up 60% of foreigner arrests in Japan. Foreigners as a percentage of inmates has also dropped sharply from 8% of the prison population to 5.5%. Chinese, Brazilians and Iranians make up half of gaijin inmates.

The incidence of crime continues to rise in Japan. As discussed in our previous reports we can see that crime rates (e.g. shoplifting, theft, child abuse, domestic violence, assault, stalking etc.), while small on a global scale, are rising at such a speed it seems to be taxing a police force struggling with worsening manpower issues. It would seem to make sense that despite growing reports of suspicious activity by organised crime, arrest rates are falling. Furthermore retiring demographics in the police force suggest that ‘street knowledge’ gained through decades of leads (e.g. informants) may not so easily be transferred to the new recruits. Throw financial fraud increasingly perpetrated by cyber criminals on top, perhaps the Police need to invest in sophisticated systems rather than just hire more cops on the beat? The face of crime has changed.

 

An eerily potent lesson for today

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In 2011 then Polish Central Bank Head Marek Belka spoke about why Eastern Europe understood austerity better than the West ever will. As our governments bloat budget deficits to avoid taking much needed reform and belt tightening he said of Western Europe….

“Because the people here still aren’t used to prosperity. Let me give you an example from my days at the International Monetary Fund. It was at a time when the Latvians had to implement a drastic austerity program, which caused consumer spending to drop by 25 percent in a year. I asked a Latvia negotiator how his country expected to survive this dramatic crisis. He said: What crisis? We had a crisis when the Soviets were sending us to Siberia. Here in Eastern Europe, many still remember why they were once poor, and they’re not afraid of reasonable reforms that are painful in the short term.”

Experience is a great teacher. It gives the test first and the lesson afterwards. Maybe time we prepare to be Latvians.