Wednesday, August 22, 2012
One theme that is growing in our minds is that if Europe is a slow car crash then the reaction of the world's populace to the wealthy is a slow lynching.
TMM have always observed that every dictatorship needs an archaic law with draconian penalties that is never enforced. Well to be more exact, that is only resurrected to nail an individual that can't be nailed through traditional measures. In most emerging democracies such laws are normally covered by a general "against the state" catch all. Unfortunately the UK has repealed most of its ridiculous laws and hence Julian Assange is left filing visas to the Galapagos in an embassy in London instead of being done for riding in a taxi with no hay bale in the boot, or some such.
However, Italy and Greece have been successfully resurrecting ancient laws to nail the unfashionable (yet up to now untouchable) rich. Here the quaint and old-fashioned law being invoked, having been forgotten and lost in the mists of time, is called "PAYING YOUR TAXES". In Greece we heard last year of swimming pool ownership becoming a scent for revenue inspectors to follow, leading to pools being netted over and camouflaged from prying eyes in the sky. In Italy, in a masochistic piece of self flagellation, the revenue inspectors are targeting the owners of super-cars, in particular owners of their very own icon that sports a stallion. The persecution of Ferrari owners has become so severe that Italians are selling them in their thousands as this mark of prosperity becomes a Shakespearean "damned spot". We have even seen the effects of this first hand as a friend of TMM has just picked one up for less than the price of a new VW Polo.
TMM imagine that Ferrari are doubly knobbled by this. Not only will sales be hit due to the general austerity, but the global second-hand prices also get hit by this exodus driving down prices and reducing their status even further. A vicious value collapse. What is more, NOT owning a Ferrari becomes a sign of financial acumen. It's natural that fashions change and indeed the fashion of ostentatious wealth is already being decried by many young in the West. A friend of ours who, after years of toil, has saved enough to buy his dream car but has just been branded a loser by his son (control tested, it was only due to the car). Aspirational purchases nowadays reflect less the wealth of the owner but more their percieved cool or intellect. The fashion of austerity has already arrived in the west but TMM are debating how and if this will translate to fashion changes in the East.
Asia has always been a bastion for
bling conspicuous consumption. Whether it's cultural norms like gold and silver at Indian weddings or China's recently found love of high end watches ( described by John Hempton ) it's been quite a bull market. TMM think that the reason you buy luxury stuff is signalling "look at me, I'm loaded, gimme a table!" which matters when your wealth is not well publicised because either you don't want it to be (i.e., you stole it) or because it's some obscure rent extraction exercise like a clove monopoly.
Signalling works if it has no costs (aside from the $50k to buy that iced out monstrosity on your wrist) but if you are in an environment where people think the rich person’s wealth is ill-gotten and rule of law gets a bit loose or capricious, it can get expensive very fast. TMM think that rising ire against the rich over the impoverishment of the middle class in DM and stagnation of wages in EM is going to make selling luxury pretty hard going forward. Now TMM note that Richemont was a widow maker these last few months but results from Chinese jewellery retailers like Hengdeli are telling in that inventories are piling up. TMM think its time to call out channel stuffing as exactly that and look harder at shorts in this space.
Richemont: "Why aren't you buying as many watches? I won't hit my sales target."
Shop: "sales have dropped, whaddya gonna do about it?"
Richemont: "Cut you off as a dealer and not give you the super dooper reverse cowgirl Patek Philippe tourbillon made entirely of endangered species and platinum infused with the blood of South African miners."
Shop: "Ok, I'll buy some just this quarter or else I'm in big trouble."
So where does this leave us. Basically we want to short traditional luxury companies not only on falling disposable incomes, but also because we expect their very fashion to fade as a display of ostentatious wealth itself becomes unfashionable and attracts unnecessary attention. We reckon this has started in the West and fashions do tend to travel West to East. We have very rarely seen the reverse.