Traffic Accident

Kobe ‘Steal’ – why this scandal could get much uglier

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Kobe Steel is the next in a growing list of Japanese corporates embroiled in data falsification. Kobe Steel has been supplying lower spec material to customers than advertised. In a sense stealing. Sure VW is no better in lying about its emissions but Kobe Steel has the potential to be more like Takata than Mitsubishi Motors in terms of impact. The issue here has to do with Kobe Steel products being in structures of aircraft, trains (including bullet trains) and cars. While much is being made of ‘little risk’ attached to these slightly lower spec products the reality is that ‘metal fatigue’ is calculated in the resesearch, development, testing and evaluation of such products.

For instance when planes are in the development phase FAA certification depends on making sure products can meet certain tolerances, cycles and stress tests. Once certification is granted, if subsequent production is met by sub-standard intermediate products unbeknownst to the manufacturer of the part then the trail becomes a much more serious matter. It is easy enough to determine which Honda’s had defective airbags as it is a specific part on specific models. Yet Kobe Steel steel products shipped all over the globe may have been used in different parts. Then those discrete parts would need to be traced to the next intermediate stage and then on to the finished part to which may be fixed to an airline on the other side of the world. Boeing is naturally not raising any alarms until they can assess the issue.

JR has already noted 310 sub standard parts in wheel bearings in its bullet trains which will be replaced at the next scheduled service. It is likely that the JR parts are over spec for the extra margin of safety.

None-the-less aircraft could turn into a much bigger problem. There is only one spec that is supposed to be met. Failure to meet it could cause planes to be grounded until parts are replaced. This could be massively costly as planes not in the air earning money cost millions on the ground. Not to mention the risk of the US government fining the company for reckless behaviour.

Kobe Steel has seen revenues track sideways for the better part of a decade. Profits have been all over the shop. Much like Toshiba tried to fiddle the books with one division in the hope that in time it would be able to put the money back and no one would notice. As for Kobe Steel, there was obviously a plan to try to boost profitability by lowering specs and charging prices for superior spec. Even then the contribution has been poor. Hardly surprising when the cash conversion cycle has exploded from 38 days a decade ago to around 82 today. To be faker most of the big steel companies have a similar CCC which hasn’t changed much over the last decade.

What we can be pretty sure of will be the soft touch of the local authorities. Even with such willful deceit, it is unlikely anyone will see inside of a jail cell or pay multi million dollar fines in Japan. However the tail risk here is the likes of Boeing who will extract every pound of flesh with the help of its authorities to rent seek from Kobe Steel if certain parts are found to be ultimately faulty because of negligence. This is not a staged Nissan-Mitsubishi Motors leak to force a cheap entry into the latter. Still, 37,000 employees at Kobe Steel will be seen as a sizable number to protect at a national level hence a limp wristed response to follow.

One final point. Do we honestly think that Kobe Steel can conduct an honest audit of its deceit? Surely flagrant data fiddling will be milled down to more acceptable cheating.  It is a time honored tradition to leak a bit, then a bit more so as to minimize the shame.

Until Japanese listed corporates face far harsher penalties for such malfeasance, it will be hard to shake off the cynicism that the corporate governance code has introduced anything more than mere lip service. That is OK if that is what Japan wants to project to the world that shareholders are not a priority.

Jack Miller walks away unscathed- how you might ask?

Aussie Moto GP rider Jack Miller had a huge off in Free Practice 4 at the French GP. Coming off the start/finish straight he lost control at 300km/h and was flung off after hitting a wall. Prognosis – shaken not stirred. A good advert for Dainese airbag leathers and AGV helmets.

Tesla recall – Tempting Extremely Serious Legal Action

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Exactly 1 year and 2 days ago I concluded that Tesla was tempting too much fate with its auto pilot function. I wrote along the lines that it’s Mario Kart type rainbow road auto pilot function was distracting so much so that owners were taking cellphone screenshots and videos while they were breaking the speed limit. Even worse Tesla CEO Elon Musk was encouraging its use and talking of its infallibility. I wondered whether his legal team had been consulted before he tweeted there were more such gimmicks on their way.

It now appears that Tesla has a 53,000 car recall on its hands and as predicted a class action lawsuit against it. While Tesla’s market cap may have exceeded the likes of Ford and GM it still doesn’t generate a profit. Car makers are the target of ambulance chasers. Toyota know a thing or two about that. How many traffic accidents in Toyota’s spiked after it was revealed they had a sticky accelerator when so few incidents occurred before.

Tesla’s autopilot has killed people who trusted it to save them. It so happens that the lawyers smell blood with a class action being launched as follows:

“The lawsuit, filed by law firm Hagens Berman on Wednesday in California’s Northern district court, said Tesla’s partial autopilot technology was advertised as safe and “stress-free,” but instead “is essentially unusable and demonstrably dangerous.”

“Unwittingly, buyers of the affected vehicles have become beta testers of half-baked software that renders Tesla vehicles dangerous if engaged,” the lawsuit says.”

Tesla cars with the Autopilot 2 features were first sold in October 2016. The first generation of the system was first unveiled in 2014. The Autopilot 2, or Enhanced Autopilot, feature costs consumers $5,000.

That is the problem with Tesla. It is a victim of its own self created bubble. It promises everything but delivers realities far removed from those dreams. Quality control is still an issue and the endless stream of subsidies has to  have an end date.

Tesla  is valued at 18x more than Mercedes Benz. Musk mentioned how he recently discovered how important production efficiency was. That is much of his battle. Even if he irons out his product glitches the incumbent makers have decades of experience in mass production, distribution and a swathe of new product lining up to challenge the space  Tesla has opened. Don’t forget Toyota sold its stake in Tesla. After  lifting the hood on its technology Toyota realized it was an empty shell. Let that sink in.

Why the broking industry doesn’t get it and the regulator gets it even less

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I’ve had the opportunity to speak to numerous brokers in recent weeks and the sad fact remains much of the strategy is stuck in yesteryear. The idea that hiring more analysts and promoting a full deck colour brochure of their supposed ‘depth’ to clients is somehow more important than the content they can actually provide in a dumbed down compliance constrained world. The game has changed. The regulator has even less understanding than the brokers when it comes to understanding client needs. The buy-side investment community is also becoming highly resource constrained. To have to waste countless hours on admin to set a price on increasingly valueless research does them no favours.

Don’t be fooled by Smart Karma or Research Pool or any other 3rd party research aggregator. It is the same dumbed-down research bundled into a convenient pricing structure. I’ve looked into the economics and unless a research provider has a huge following the returns on contributing to these third party platforms is next to worthless. The more mouths to feed, the less return. On top of that the platform has no real control over what goes into it. It is a convenience store but in that vein, the nutritional value remains relatively low.

The simplest form of strategy is to set up ‘Special Forces’ type research teams. These teams don’t write rated research but charge on a ‘per mission’ basis. Take GLG. They have no broking license but carry out bespoke requests. Why aren’t brokers following this model? It is insane to hire more in sales, research and trading when the regulator is squeezing the traditional proposition to zero.

Two questions:

Did regulators actually ask smaller scale institutional  investors what they needed before they imposed rules which will dramatically increase their cost of doing business, the very opposite of the goal the regulator thinks its rules will create?

Are the traders of risk willing to take any risk to fill a gaping hole the very people they proclaim they serve are crying for?

What I see is more of the same. The bunker mentality. Conforming to outdated models to keep their inflated salaries alive for as long as possible pandering to internal politics to survive. Badgering clients to fill in irrelevant polls which serve no purpose but the promise of magical commission dollars in the future to their out of touch bosses at HQ. Some brokers even publish “the best of research” weeklies as a sort of self-appraised quality control mechanism to push on clients. Let’s think about that. If all research was properly screened before being published there would be no need to tell clients that this is the tiny fraction of research that isn’t (supposed) rubbish. It is actually confirming client’s worst fears – sell-side brokers aren’t listening  (as usual).

The gig is up. Regulators are even more clueless. Instead of trying to provide a marketplace where smaller boutiques can survive they drive the cost of compliance to such a degree that in many cases the teams of internal watchdogs swamps the investment decision makers. That’s right! The hottest ticket in finance is in compliance. A headhunter told me the network of compliance officers is so tight across firms there is almost a deliberate ‘insider’ matrix among them which encourages them all to switch firms to keep driving up their ‘collective’ remuneration. The people in charge of preventing scams are in fact the biggest operator of insider trading!

We’ve countless examples of how inept regulators are. Bernie Maddoff the biggest of them all. Despite multiple investigations and the clearest set of breaches presented to them they failed to uncover a $65bn fraud. Many regulators by background are lawyers meaning they are full of theory but devoid of real world practice. Regulators would be better off hiring convicted traders to hunt down fraud and illegal behaviour. As it stands they are as clueless as ever thinking more biting regulations will help the market. Wrong. Free it up but raise the penalties for actual wrong doing. I’ve never met an investor who doesn’t want to keep a useful broker alive. That’s why the payment skew is like it is. It isn’t just about Michelin 3-star meals and strip clubs. All the regulator has done is make an uncomplicated system almost unworkable. Although if brokers woke up to the fact that providing ‘special forces’ that clients directly requested and paid for they’d fill a gap which the regultor would have no answer to and make the iTunes research fintech companies obsolete overnight.

MiFID 2 will be the crowning glory of regulatory failure. MiFID 3 will be here before we know it as evidence of the catastrophic bungle it’s predecessor already is before it is in effect. Then again it is an EU directive – that ought to have told us something.

Tesla proves autonomous vehicles have a LONG way to go

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I’m not a believer in autonomously driven vehicles. This idea that a computer, if pre programmed, can outsmart a human. Sure, the raft of new safety features (auto brake assist) and lane assist control etc can help in situations when people cruising at brain dead slow speeds are busy texting and checking FB. Yet, there is a point where these systems are dangerous. I have driven cars with them and there have been times where the car outputs are the exact opposite of my inputs. It is unsettling and downright dangerous so I tend to switch these aids off. This excerpt from the Tesla Owners forum on FB shows how the latest and greatest auto-pilot function is flummoxed by such a simple situation. Read on.

Found a bug in 8.1 the hard way. Ruined two rims after 15 minutes of use.
That’s what happened yesterday: I started the AP on a smaller street with a sidewalk with a curb on the right. There was no line on the street next to the curb, but a line for bicycles on the sidewalk. The AP then suddenly pulled right, as it was irritated by the line on the sidewalk and ignored the curb. The rims touched the curb before I was able to react, even though I had my hands at the steering wheel…I already posted this in a German group yesterday and some people told me they had the same situation, but were able to react before it was too late.”

The idea that people put complete faith in auto-pilot systems is a worry. By the same token more advanced systems are supposed to use inbuilt algorithms to determine whether to swerve away from the kid on a BMX bike doing skids on the sidewalks toward the edge of the kerb braking as late as he dares and an old lady on a crossing 5 meters further on. The system may choose to sacrifice you the driver, err sorry passenger. While there is no doubt autonomous systems will continue to get better, would you prefer your airline pilot to be limited to a computer software program only or would you prefer a human in the cockpit who can assess the situation in real time?

Maybe I’m too analog. A fuddy-duddy that refuses to accept the future. I don’t think I’m alone but one day more people will grow tired of an app-driven existence. Life will become too boring and they’ll soul search for more tactile experiences. I was tinkering in the garage on my bikes fitting new parts, tyres, cleaning chains and doing oil changes. There is a something to be said about zen and the art of motorcycle maintenance. I was completely at peace after completing these analog tasks because it requires a focus that can’t be found in a 15 second swipe of an app.

15% off your final taxi ride on one condition

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It seems that the funeral parlor industry is trying to help encourage the elderly to give up their drivers license by offering 15% off their final taxi trip. There has been a sharp increase in fatal accidents caused by the elderly over the last decade and as a result this has caused the Japanese National Police Agency headaches as to how to curtail the problem. The Mainichi Shinbun reports

“NAGOYA (Kyodo) — With traffic accidents involving elderly drivers becoming a serious problem in Japan, initiatives are spreading to encourage seniors to voluntarily give up their licenses if they feel their driving is becoming erratic.

Heiankaku Co., a ceremony service company in Aichi Prefecture, started a 15 percent discount from March 1 at its 89 funeral homes within the central Japanese prefecture for people who hold proof, issued by police, that they have returned their licenses, as well as for their family members and close relatives.

People residing outside the prefecture can also receive the discount, according to the company, which has teamed up with a local police station to promote the initiative.

Drivers aged 75 or older accounted for 13.2 percent of fatal traffic accidents in Aichi in 2016, up from 7.7 percent in 2007, according to the prefectural police.

Some of those accidents involved elderly drivers confusing the gas and brake pedals or mistakenly putting the vehicle into reverse.

The return rate of driver’s licenses for elderly drivers was 2.15 percent in 2015 in Aichi, the 32nd lowest among Japan’s 47 prefectures.

Similar efforts are under way in Osaka Prefecture, western Japan, where elderly drivers who return their licenses are receiving discounts for goods and services at local shops and funeral homes.

Such measures appear to be having an effect, with Osaka having the highest return rate for licenses at 5.41 percent in 2015.”

 

Trump’s tax returns – the biggest danger

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MSNBC’s Rachel Maddow claims to have President Trump’s tax returns. Apart from the legality of such leaks, the question remains whether he’s done anything illegal. If he’s used every legal loophole to his advantage to AVOID taxes then good on him. If he’s abused the sysyem and EVADED taxes then that is a problem and the law should be applied appropriately. The question is what level of detail has Maddow got? A couple of pages of his ‘1040’ or his entire filings? I would imagine his tax filings are complex enough littered with tax loss carry forwards, write-offs, deductions and so on.

The risk is binary.

If he is only shown to have avoided tax then it will be a non issue and the Democrats will bury themselves deeper in the politics of envy. Voters didn’t care much for the original leak during the election campaign.

If Trump is charged with tax fraud and impeached be careful what you wish for. The amount of market chatter I hear from the same pundits who said he had no chance of winning the White House are the ones believing his tax cuts aren’t yet priced in.  That was priced in a while back but such are global markets clinging to any hope things don’t fall apart that deposing the one person that is fueling it will cause massive risk on.

For all of the hero status Maddow expects to garner she may end up doing the greatest disservice. That doesn’t condone illegal activity rather exposing what happens when the inevitable Chinese whisper problems rear up because we’re all US tax code experts.