Wednesday, August 22, 2012

Life's Little Luxuries

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 Unfortunately the UK has repealed most of its ridiculous laws and hence Julian Assange is left filing visas to the Galapagos in an embassy in London instead of being done for riding in a taxi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.


abee crombie said...

Hangdeli's results were interesting, still quite a bit of YoY growth. The lux sector is over-bought and near top of valuation (from the few companies I looked at)

but I dont think longer term the trend of people wanting to show off will change that much. Women always like nice stuff, and there are millions of douche bags around to buy overpriced 'status' symbol items. Sure the trends might change from watches and slick cars, to cool electric cars built be green nerds and iPhones, but people will pay, what else are they gonna do with their paper money?

CV said...

Depends on how you define luxury too TMM, I mean, (with respect and all), a brand new BMW 530i is seen as very luxurious by many people but is a bare necessity for many a market punter and broker in the City and NYC. (note, this is NOT what yours truly drive, far far from it!)

Soo, this is a moving target but and interesting thesis nonetheless. I actually agree.

Anonymous said...

C Says,
As narratives go that one looks a bit weak.
Appears to be a bit stretched to base it upon the fact that some hard up countries are out in force looking for easy pickings. If you were to say with global growth on the wane and some easy overleaveraged targets popping up in Asia ,which has been a bulwark for Lux ,now might be a good time to stop basing forward earnings estimates on prior years then I could go for that as a basis for correcting what has been a very lucrative cycle. Other than that though ,I'm with Abee,it's a tribal thing for people to aspire to be distinguished from the crowd.
Moreover the people most likely to be in that group don't come with wafer thin skin that cares that much about popular opinion. That is of course different from being in a localised group who have a taxmans target painted on their back and are taking temporary evasive action.

In a broad sense this concept has been in play for quite some time anyway. It's present every time a multi millionaire upsticks and relocates to Singapore because he knows his current enviroment makes him a potential target.Ditto Russia etc.

VandalsStoleMyHandle said...

This is true as far as it goes where the aim is to stick out, but in much of Asia the demand for luxe seems to be driven by the desire to fit in (eg Louis Vuitton bags).

- sent from my $600 iPhone

Anonymous said...

It's interesting and might be instructive to observe how Russians have evolved in this regard, e.g.:
Sure seems like there's a certain cyclicality.

Anonymous said...

You are bang on... Social pendulum at work here. Social dynamics greatly manipulate our "fashion" psyche.

Anonymous said...

SEPM says,

Hmm, I had TMM up as owners of Patek Philippe, until now. What is the choice of chronometer then? Rolex??

Anyway, around here high end watches are popular with foreign professional "ladies of the night" (being very subtle here...), much to the shock of the shops. The reason it turns out is that such watches are convenient means of transporting much wealth across borders back to their home countries.

The newspaper here very tastefully did not reveal the preferred brands by these connoisseuresses.

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When I began writing about this topic, I thought it’d be easy. I was going to start by saying that even though the vacation is months away or that long weekend getaway isn’t even on the books yet that there were a few things you could do to have some fun. I knew I had certain rituals to make a Wednesday seem special (it’s a bottle of champagne enjoyed with a roasted chicken), but when I posed the question of Facebook it became an entirely different post.

farmland investment said...

Swimming pools as a clue - gotta love that!

Polemic said...

Ostentatious Wealth Dump Watch - Expensive watches not being discounted in dealers? Ahh.. so this is where they are being dumped.

Bouygues CEO puts yacht up for sale at $85 mln "The state picked our pockets in the spectrum auction last year and a month later they smashed us with the arrival of the fourth mobile player," Martin Bouygues lamented at a news conference on Wednesday.

And if the wealthy aren't avoiding tax? Just introduce some new ones to hit them with --->
Nick Clegg has said that Britain's wealthiest people should face an emergency tax to avoid a breakdown in social cohesion as the country fights an "economic war" caused by a longer than expected recession."If we want to remain cohesive and prosperous as a society, people of very considerable personal wealth have got to make a bit of an extra contribution,......In addition to our standing policy on things like the mansion tax, is there a time-limited contribution you can ask in some way or another from people of considerable wealth so they feel they are making a contribution to the national effort? What we are embarked on is in some senses a longer economic war rather than a short economic battle.”

War and battle. Emotive words.  More reason to hide wealth.

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Polemic said...

Whoops Burberry -18% on sales warning ; so luxury goods not quiet so popular :-)

Oh dear how sad never mind...