Traffic Accident

What next?

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The Queensland Government has decided to remove ‘gender’ from licenses going forward after ‘pressure’ from the LGBTI community.  In what can only be described as a politically correct own goal by the Dept of Transport & Main Roads, surely the best way to pander to all of those minorities would have been to offer the choice of the 63 genders that are available. Imagine the amount of tax dollars we can waste on new sensitivity training for police to make sure that the can ‘protect and serve’ feelings. Or maybe that is the aim to create more state jobs?

What is a poor highway patrol officer (usually operating alone) who pulls over a driver over for speeding on the highway to do? What if he thinks the driver is over the limit when questioning him/her/zie? The bearded driver who looks male can pull out the genderless card and accuse the officer of using the wrong pronoun and request that an LGBT police officer administer any breath test procedure. In fact the driver might just claim an injustice has been served.

So will highway patrols be forced to carry a male, female and LGBT officer on pursuits with a fourth ‘independent observer’ from the Australian Human Rights Commission to ensure that feelings of drivers aren’t hurt?

We keep on being told diversity is our strength. Indeed it would be true were it not for repeated state indoctrination. We only need to look at how celebrating diversity works in places like California where one can be jailed for simply using the wrong pronoun. Welcome to the slippery slope.

Kathy Griffin’s most hilarious black humour yet because the truth really hurts

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Kathy Griffin has made a video pleading for networks to put her on shows and value her two Emmys. It is perhaps the funniest thing she’s ever done in comedy given she is being serious about how inhumanely the system that she’s made $20mn out of is now treating her – blacklisted as she calls it. Watch her go through the routines of how she is a woman and deserves to be paid as much as men if she gets another go. She should consider herself lucky to get a 30 second snippet on an unknown local network for free such is her poor form and complete lack of understanding of why no one will touch her because networks know audiences won’t bother watching and no advertisers will back her. Perhaps she needn’t have abused Aussie breakfast TV hosts with “you’re full of crap”. She openly admitted she showed no remorse for what she did yet now begs for forgiveness because her brand of apology is unaccepted by the main. Pass me the Kleenex.

Tesla – terrible Q3

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Tesla’s Q3 2017 results came out last night and were in a word terrible with a capital T. Tesla reported an adjusted, non-GAAP loss of $2.92 per share, far worse than the expected loss of $2.27, which was more than double the $1.33 loss in Q2. The chart above tabulates the cash flow progression from the CMR report published Monday. While Tesla claimsit has $3.5bn cash in the bank it has more than $3.9bn in accounts payable liabilities! Tesla continued to burn piles of cash on the factory floor. Q3 cashburn was a record $1.4 billion ($16 million per day): much higher than the $1.2bn forecast.

Im our report we said that production issues were the one area that will catch Tesla out. In the car game, production efficiency is everything- the promises to make 5,000 Model 3s every week by December is now a goal likely pushed out til March 2018 at the earliest as “production hell” bites.

Musk blamed suppliers for having to push back the delivery schedule again, He said,

to date, our primary production constraint has been in the battery module assembly line at Gigafactory 1, where cells are packaged into modules. Four modules are packaged into an aluminum case to form a Model 3 battery pack. The combined complexity of module design and its automated manufacturing process has taken this line longer to ramp than expected. The biggest challenge is that the first two zones of a four zone process, key elements of which were done by manufacturing systems suppliers, had to be taken over and significantly redesigned by Tesla.”

The amusing thing about this quote is that Tesla is somehow telling (presumably Panasonic) how to do mass manufacturing. That is telling in itself – the rookie telling the amateur.

Also in our report we noted 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.

Tesla expects capex of $1 billion in Q4 which is mainly for milestone payments on Model 3 production equipment and Gigafactory 1. So cash burn continues.

Tesla promised to redirect “our best engineering talent to fine-tune the automated processes and related robotic programming…and we are confident that throughput will increase substantially in upcoming weeks and ultimately be capable of production rates significantly greater than the original specification.” What??? Why weren’t the engineers working on that before. The whole point of mass production is to stamp out the bugs before a conveyor belt is turned in anger. Tesla, true to rookie form is doing everything back to front.

Are investors starting to see through the charade? Shares were pounded 5% after market. Although some may draw comfort from better Tesla S & X production, Model 3 looks like a nightmare of Halloween. Maybe the next capital raising can be called “trick or treat”!

Ultra High Net Worth Individuals (by country)

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In an ever growing world of haves vs have nots, Elliman has released an interesting update on the statues of global wealth and where it is likely to head over the next decade. It suggests North America has 73,100 UNHWIs at an average of $100mn each or $7.31 trillion. To put that in perspective 73,100 North Americans have as much wealth as Japan & France’s annual output combined. Over the next decade they expect 22,700 to join the ranks.

Europe has 49,650 UHNWI also at the magical $100mn mark (presumably the cut off for UHNWI or the equivalent of Japan.

Asia is growing like mad with $4.84 trillion split up by 46,000 or $105mn average. In a decade there are forecast to be 88,000 UHNWIs in Asia.

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I am not sure what the World Bank was smoking when coming up with the coming forecasts I’ve rthe next decade but the figures smel fishy.  Then it all comes down to this chart.

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1) Political uncertainty? Everywhere you look – Trump, Brexit, Catalonia, Australia, France, Germany, Austria, Czech Republic, The Netherlands, Hungary, Poland etc etc

2) Potential fall in asset values – looks a very high chance of that. Current asset bubbles are almost everywhere – bonds, equities, real estate etc

3) Rising taxes – maybe not the US or Canada (if you follow the scrutiny over Finance Minister Morneau), but elsewhere taxes and or costs of living for the masses are rising

4) Capital controls – China, India etc

5) Rising interest rates – well the US tax cuts should by rights send interest rates creeping higher. A recent report showed 57% of Aussies couldn’t afford an extra $100/month in mortgage – a given if banks are forced to raise lending rates due to higher funding costs (40% is wholesale finance – the mere fact the US is raising rates will only knock on to Aus and other markets).

Surely asset prices at record levels and all of the other risk factors seemingly bumping into one another…

So while UHNWIs probably weather almost any storm, perhaps it is worth reminding ourselves that the $100mn threshold might get lowered to $50m. It reminds me of a global mega cap PM who just before GFC had resplendent on his header “nothing under $50bn market cap”. Post GFC that became $25bn then eventually $14bn…at which point I suggested he change the header entirely.

I had an amusing discourse on LinkedIn about crypto currencies. The opposing view was that this is a new paradigm (just like before GFC) and it would continue to rise ( I assume he owns bit coins). He suggested it was like a promissory note in an electronic form so has a long history dating back millennia. I suggested that gold needs to be dug out of the ground – there is no other way. Crypto has huge risk factors because it is ultimately mined in cyber space. State actors or hackers can ruin a crypto overnight. There have already been hacking incidents that undermine the safety factor. It does’t take a conspiracy theory to conjure that up. To which he then argued if it all goes pear shaped, bitcoin was a more flexible currency. Even food would be better than gold. To which I suggested that a border guard who is offering passage is probably already being fed and given food is a perishable item that gold would probably buy a ticket to freedom more readily as human nature can adapt hunger far more easily in the fight for survival. I haven’t heard his response yet.

In closing isn’t it ironic that Bitcoin is now split into two. The oxymornically named Bitcoin Gold is set to be mined by more people with less powerful machines, therefore decentralizing the network further and opening it up to a wider user base. Presumably less powerful machines means fewer safeguards too although it will be sold as impervious to outsiders. Of course the idea is to widen the adoption rate to broaden appeal. Everyone I know who owns Bitcoin can never admit to its short comings. Whenever anything feels to be good to be true, it generally is. Crypto has all the hallmarks of a fiat currency if I am not mistaken? While central banks can print furiously, they will never compete with a hacker who can digitally create units out of thin air. Fool’s Gold perhaps? I’ll stick to the real stuff. I’ll take 5,000 years of history over 10 years any day of the week.

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.