Friday, July 13, 2012

The Dismal State of Luxury

Once again talk of a slow down in China, this will have an impact on both Australia and Canada with brand new infrastructure being built for peak Chinese demand. While I was in Australia everyone spoke of a two speed economy, one speed is the booming mining economy and the other is the slow speed economy which is everything else. However some who are in the mining industry are already looking for new jobs as they say that in two years time the infrastructure will be built and there will not be any jobs. Aivars Lode

By Nin-Hai Tseng, Writer               July 13, 2012: 5:00 AM ET

Combine the European crisis with a slowdown in China and you've got a recipe for a weaker luxury market.

More window shoppers on Rodeo Drive.

FORTUNE – For the past two years, sales of Louis Vutton bags, Dior perfume and the like have been one of the few bright spots in retailing. But momentum in the world of all that's luxurious has begun to wane some, as evidence builds that even the most resilient consumers might not be able to avoid implications of Europe's ongoing debt crisis combined with a slower growing Chinese economy.

On Wednesday, British luxury fashion house Burberry Group Plc led luxury-goods stocks lower after reporting sales that missed analysts' estimates. Sales for the first quarter rose 11% to $634 million, short of expectations for a 13% gain. Although the results weren't considered anywhere near disastrous, and a Burberry executive said the company continued to see "an enormous amount of opportunity" in China, it didn't exactly ease jittery markets.

Some analysts and investors fear this is just the beginning of slowing high-end sales. Burberry's results came the same day Cartier, the luxury watch and jewelry brand owned by Compagnie Financiere Richemont SA, said it is seeing less appetite for its high-end watches in China, a key driver behind the recent boom in luxury watches.

"After a phenomenal year last year, there's been a bit of a slowdown in mainland China," said Cartier CEO Bernard Fornas, at the company's factory Wednesday as he unveiled its latest innovation, a concept watch, called the ID Two, that uses less energy. Similar to Burberry, Fornas isn't worried about Chinese consumers in the long-run.

"When you talk to the people over there, they are all waiting for a new president to come in," he added. "That will fuel the economy with fresh money and lower interest rates."

But that remains to be seen. In the years following the Great Recession, demand for all things luxury in the U.S. surged in tandem with gains in the stock market. For those who could afford it, posh and extravagance wasn't altogether impractical, as rallies in the equities market made affluent consumers more confident about spending. But that hasn't been enough to sustain appetites for life's finer things, as luxury sales have generally slowed down for the past several months.

In May, MasterCard Advisors SpendingPulse reported that luxury sales, excluding jewelry, climbed 1.8% in April from a year earlier, after gaining 6.7% in the first quarter and 13% in the fourth quarter. Although spending on luxury has bumped up some recently, Michael McNamara, vice president of SpendingPulse, which tracks credit card, cash and check transactions, said robust sales seen in 2011 will be difficult to repeat this year.

High-end jewlers have been particularly vulnerable. In May, Tiffany & Co. (TIF) cut its fiscal year sales and profit forecast after reporting lower-than-expected first quarter earnings. This was driven by several factors, including concerns about Wall Street layoffs and cooling demand from Asia, a big contributor to the global luxury market.

David Schick, managing director at Stifel Financial, said he expects that softer sentiments for luxury will carry over globally as economic growth across Asia and Europe slow. "That's going to damage higher income consumer sentiment," he says.

China's slowing economy has already put pressure on retail sales in Hong Kong, where many Mainland Chinese stand in lines stretched down several city blocks to shop for luxury brands. Sales rose 8.8% in May from a year earlier to $4.6 billion, the smallest gain since September 2009.

A diamond may be forever, but demand for it has a much less certain lifetime.

Correction: An earlier version of this story incorrectly stated that Burberry sales for the first quarter rose 11% to $634 billion. It is $634 million.

Thursday, July 12, 2012

Author Claims Electric Vehicles Are a Green Illusion

Maybe not so green after all. Aivars Lode

To hear automakers and environmentalists tell it, electric vehicles (EVs) are the greenest and cleanest solution to personal mobility. But in his book Green Illusions: The Dirty Secrets of Clean Energy and the Future of Environmentalism, author Ozzie Zehner argues that EVs are more symbolism and marketing than environmental and fossil-fuel saviors. And in many cases, EVs are actually worse for the environment than traditional gas-powered vehicles.

To prove this, Zehner, a visiting scholar at UC Berkeley, points to what he views as the fuel-inefficient process of manufacturing EVs, and claims that they don’t make a big difference in greenhouse-gas emissions. He also contends that electric cars won’t protect the U.S. against future oil price fluctuations, as many claim, and that it’s a fallacy that prices for EVs will fall as the technology matures. He also maligns tax subsidies and government spending that support EV production as misguided. But two well-respected alternative powertrain reporters take issue with most of Zehner’s and the book’s arguments against EVs.
Although an academic, Zehner has deep Detroit-area automotive roots. He attended Kettering University (née General Motors Institute) in Flint and then worked for GM for five years, along with a stint in advanced vehicle development at the company’s Opel division in Europe for three years. Originally from Kalamazoo, Zehner completed grad school at the University of Amsterdam, where he studied the sociology of science and technology. “My research was looking at how technologies are taken up in society — their benefits, limitations and unintended consequences,” he says. “But cars have always remained a big interest of mine.”

Image: The University of Nebraska Press.
The main focus of the automotive portion of the book is to shift attention away from the amount of fuel used to power EVs once they’re on the road to what’s required to manufacture them. Zehner maintains that the manufacturing of EVs negates their environmental benefits, particularly the mining and processing of the copper, aluminum and rare earth metals used to construct the car. “All of those are very energy-intensive,” Zehner told Wired. “So it ends up taking a lot of fossil fuel to build an electric car.”
To support his point, Zehner notes that aNational Academy of Sciences study found that roughly half of the energy used over the lifespan of a car is expended during its production, and that fuel consumption while driving — one of the biggest perceived environmental advantages of EVs — is the only part of the equation. “A lot of studies concentrate on whether or not it’s better to use gasoline or recharging electric vehicles,” Zehner says. “But when you look at the whole fuel cycle — from constructing a car to disposing of it — NAS concluded that the environmental damage from electric vehicles is actually greater than that from gasoline vehicles because of manufacturing. Sixty percent of the energy input comes from the manufacturing,” he adds, “and that’s where you’re going see the larger trade-off between using gasoline and other types of [fuel].”
But Nick Chambers, who has written about EVs for outlets ranging from The New York Times, asserts that Zehner’s claim that EVs are much more energy intensive to manufacture is “ridiculous,” and that estimates on how much energy is consumed in their creation are dubious at best.
“The energy intensity for manufacturing anything large like an automobile — electric or not — will be very high,” he says. “If anything, EVs and conventional cars are equally energy intensive during construction and are starting from the same point at the time of delivery. Because of this, the only energy usage numbers that matter in terms of comparison are what happens after delivery of that car — and that’s where EVs win.”
Green Illusions also seeks to dispel what Zehner says is a common misconception that electric vehicles are more expensive because they represent cutting-edge technology. “There’s an impression that technological advancement will lower costs in the future, and I would expect electric vehicles to go down in cost in the future as well,” Zehner says. “But I’m not sure how large those gains will be because there’s already been a lot of research into motor technologies, and the motors are already pretty efficient and they’ve been economized for quite some time in other industries. But you still don’t get away from the fact that you have to use copper and aluminum in the chassis, magnesium and rare earth metals in the magnets. There’s no substitution at this point or even on the horizon for any of those materials.”
Chambers says Zehner’s consideration of the initial R&D costs for EV production overlooks a major point. “Most estimates place the cost of the battery pack in an EV like the Nisan Leaf at roughly 45 percent of the entire cost of the vehicle,” he says. “If the cost of that battery can be brought down by even 10 percent, the cost of the vehicle changes by about 5 percent – a number most automakers would kill to be able to achieve. Try getting those kinds of gains in a conventional combustion vehicle. You can’t because the materials sourcing and construction of the engine and entire drivetrain are close to being fully optimized at this point. Barring some kind of incredible leap in manufacturing technology, the cost of construction of conventional cars has essentially plateaued.”
John Voelcker, editor of, agrees, saying that “in general, the auto industry is exceptionally good at squeezing cost out of complex, high-quality electromechanical devices produced in volume. The same will apply to plug-ins.”
“It’s not quite as grim as some would have you believe.”
– John Voelcker
Chambers adds that if Zehner was correct, the cost of the battery packs wouldn’t have dropped so dramatically. “A few years ago, EV batteries were costing roughly $900 per kilowatt-hour,” he says. “Today they are around $400.” Estimates by numerous analysts have that cost reduced to about $250 per kilowatt-hour by 2015, notes Chambers. “So we’ve already seen the cost drop by more than 50 percent in the last few years and, if predictions hold true, we’ll see a 70 percent drop by 2015. If, as Zehner says, batteries cost so much because of their fossil fuel intensive construction, how can they drop in price so quickly even as the cost of oil has risen?”
Chambers also points out that Secretary of Energy Steven Chu recently claimed that an electric car will cost $25,000 in 10 years time.
Voelker adds that while electric-motor improvements will come slowly, batteries for EVs are by far the biggest cost. “Auto-scale lithium-ion cells should fall at about 7 percent annualized, but not in linear fashion,” he says. “That doesn’t help this year, but 10 years hence it puts you in some interesting places.”
Regarding Zehner’s contention about the environmental and monetary costs of EV manufacturing, Voelcker points out that there are two types of electric motors – one uses rare-earth metals and one does not. “There is a great deal of research going into e-motors in general, particularly in the [non-rare-earth] category,” he says. “It’s not quite as grim as some would have you believe.”
In Green Illusions Zehner also points to the public funding of EVs in terms of government subsidies, tax incentives and infrastructure, calling them wasteful. “American taxpayers as well as those in other countries give these vehicles priority parking, special freeway lanes and rebates even though there’s no evidence they’ve done anything positive for the environment in return,” he says. Zehner acknowledges that EVs do help reduce air pollution in urban areas. “But not very much,” he adds, “because you need a lot of them to create much of an impact.”

Chamber calls the idea that EVs don’t help reduce emission because there aren’t enough on the road a “laughable” statement. “Every new technology starts of with too few instances to make an impact,” he adds. “The whole point is to encourage technologies that do make a difference, and hopefully they catch on.”

Zehner says that instead of automakers, governments and consumers pouring large sums into getting a small numbers of EVs on the road, putting the money into initiatives he sees as more effective, such as more stringent emissions monitoring, would be more effective. “It’s something that has been used in Europe: remote monitoring stations set up along freeway entrance ramps that monitor emissions particulates from vehicles and identify vehicles that are giving off a lot of smog.” he says. Pictures of the license plates of offending vehicles are snapped and officials send notices to owners to have their cars repaired or pay a fine. Zehner claims that 20 percent of cars of the road are responsible for 80 percent of air pollution problem. “So what they’re trying to do there is get those vehicles off the road,” Zehner says. “Electric cars can help a little bit, but it’s a very expensive way to achieve that kind of small advantage.”
Voelcker says he can’t envision the same situation applied in the U.S., given recent voter rebellions against speed cameras. “They’re starting to get voted out town by town in a number of places,” he says, “so remote emissions monitoring is going to be tough. Remember that states with any auto inspection at all besides emissions are a distinct minority. It’s a good way to clean up the ‘gross polluters,’ but those are rare in Rust Belt states and more common in California, which has a much longer tail of old cars.”
Perhaps the strongest case for EVs is to lessen the country’s dependency on imported oil. “That’s a fascinating argument, but it probably won’t hold,” Zehner maintains. “And the reason is because if oil prices – or energy prices in general – become more volatile or go up in the future, the cost of buying an electric car will also go up because it takes so much fossil fuel to build. That’s why it probably costs more to build an electric car today than it would have 10 years ago.”
“Electric cars can help a little bit, but it’s a very expensive way to achieve that kind of small advantage.”
— Ozzie Zehner
Given the cost to manufacture EVs – and the instability of fuel prices to power them – Zehner claims the vehicles won’t counterbalance increasing energy costs. “And, unfortunately, you run into that problem with a lot of energy technologies that are promoted as being a hedge against oil price volatility,” he says. “But it’s difficult to say because [power for] an electric car is drawing from a lot of different fuel sources. Some of the energy is coming from coal, some of it is coming from natural gas or nuclear and some of it from oil. In the future, if petroleum costs go up, there will be a lot of substitution, which will raise the cost of other fossil fuels as well. And so over the long term, we can’t see electric cars as being much of a hedge against increasing oil costs – maybe for very short periods, but not long the long run.”
But Chambers says the point is not really protecting against oil price volatility, but ensuring national security by relying on domestically produced energy. “No matter what fuels the power station — solar, wind, coal, hydro, natural gas — that electricity is usually produced at a mostly local level, and in the worst case came from a few states away,” he adds. “That’s the hedge: Even if things go bad around the world, our country stays secure because our fuel stays secure. Also, our electricity costs are largely insulated from the global demand for oil and there’s no reason to assume that would change as more and more people drive electric cars. Electricity costs may rise over time,” Chambers adds, “but usually in tune with inflation – and definitely not in tune with whatever oil-producing country is having a war at the time.”
In Green Illusions Zehner pushes for government to put more money into public transit projects that will affect many more people before backing EVs that he believes benefit only few.
“If we’re looking at ways to decrease the energy use in the United States, building more walkable and bikeable villages and cities and towns of various sizes would be a better funding priority than subsidizing electric vehicles,” he says. “It would certainly help people if the federal government spent more money on building highways. But I’m not sure if it’s really justified over the long term because it’s just delaying an inevitable crunch that will occur. And when you end up paying for all the infrastructure costs and having to maintain the highways and bridges in addition to subsidizing the cars, it’s a very expensive proposition. Right now, highways and roads represent almost all of the transportation budget and only a very, very tiny fraction is spent on bicycling or bicycle transportation infrastructure, and even that looks like it’s going to be potentially wiped out with the next transportation bill.”
But this is a big country, and bicycling or even public transportation isn’t going to help the folks in rural communities who have to travel long distances to get to work or to buy food and other necessities. Notwithstanding predictions that the U.S. population will become more urbanized, Zehner acknowledges that his advocacy of public transportation and biking infrastructure won’t work outside of urban areas. But he also asserts that EVs won’t help in rural areas either. “I think people that live in rural areas are just going to be stuck with higher fuel costs in the future,” he says. “I don’t really see a way around that. But I’d just like to point out that electric vehicles are probably not going to be a solution either.”
“He’s right that electric cars won’t be suitable for rural drivers,” says Voelcker. “But we now have 1 billion vehicles on the planet, and by some estimates, that will double by 2050. There’s a large opening for zero-emission vehicles. And just as we now pick vehicles in a 2- or 3-car household by body style – the Suburban if we’re taking the soccer team, the Corolla if we’re going to the grocery store – we’ll start to have multiple powertrain types and use them according to the needed duty cycle.”
“If you’re like 63 percent of all American households,” Chambers adds, “you have two cars in your driveway. Eighty to 90 percent of the time those cars sit in your driveway or are parked somewhere outside the home and the other 10 to 20 percent of the time they drive less than 40 miles per day. There is a very small percentage of the time that most people actually drive more than 80 miles in a day. But with two cars one of them could easily be electric and the household would never know the difference – except in drastically reduced fuel costs, maintenance costs and never having to go to the gas station again.”

Wednesday, July 11, 2012

Australia is No Spain: Wayne Swan

After just returning from Australia, I would agree with this analyst. Aivars Lode

Australia's Deputy Prime Minister and Treasurer Wayne Swan has denied that Australia's economy is at risk of a Spain-like economic crisis, calling the thesis put forth by the former chief Asia-Pacific economist for Morgan Stanley, Andy Xie "absurd".
"It's absurd - the Australian economy and its economic fundamentals are very strong. On a yearly basis we are growing at 4 percent - we are going to grow faster than any other developed economy this year and next," Swan told CNBC on Wednesday.
"Let's go through the fundamentals - bringing our budget back to surplus in 2012-2013, low unemployment, strong job creation over time, a record investment pipeline in resources - half a trillion (dollars). What planet does he live on?" he added.
Xie, an independent economist with sometimes controversial views, argues that Australia is at danger of becoming the next Spain due to its reliance on foreign demand, especially from its biggest trading partner China, which he believes is decelerating faster than headline growth numbers suggest.
Australia's economy is heavily reliant on the mining sector, which accounts for 7 percent of gross domestic product (GDP) and half of the country's total export earnings.
"In Spain it was government bonds that attracted foreign money. Foreigners flooded Spanish bonds because they had high interest rates and were very attractive. That foreign money pumped up a property bubble," Xie told CNBC.
In the case of Australia, investors have been rushing to invest in the mining sector. Xie believes the bursting of Australia's mining boom could unwind that flow of money with disastrous consequences.
To top it off, house prices in some Australian cities have grown close to 10 percent annually in the past decade, leading to a wave of borrowing against home valuations. Household debt in the country has been around 150 percent of disposable income since 2006.
As China's demand for resources declines, Xie says that could have a knock-on effect on the property market.
"As global commodity prices come down, mining will decline and the property bubble will burst," he said, adding that a property crash will take down the county's banking system as well.
Xie sees a distinct parallel with Spain, whose economic crisis was triggered by a collapse of its overheated housing market, leaving domestic banks with billions of bad loans.
Australia's Strong Fiscal Position
But Swan argues Australia's flexibility to lower interest rates further alongside its strong fiscal position, with low levels of public debt at 8.9 percent of GDP, ensures that the economy is well positioned to weather a downturn.
However, Xie says that Spain's government also ran surpluses prior to the crisis - earning more in tax revenue than it was spending.
"During the (property) bubble, the Spanish government (also) ran surpluses. The economy was very strong but it (started) losing competitiveness and that's what we're seeing in Australia today."

Monday, July 9, 2012

Gold May Have Been Manipulated Like LIBOR - St. Louis Fed Starts Tracking London Gold Prices

Surprise, surprise. NOT! If you have been reading my blog. Aivars Lode

Posted by Jesse
at 10:38 PM 09 July 2012

What is set in London by a small group of relatively unknown individuals, affects wealth as a benchmark of value around the world, is tracked by the US Federal Reserve and the financial system, and may have been subject to manipulation by some of the big Banks, with the silent acquiescence of the government and their central banks?

Given recent revelations one would likely answer LIBOR, but an equally correct answer might be gold.

The St Louis Fed has added six daily gold prices in their FRED database. The prices are all from the LBMA.

They are the AM and PM gold price fix in Dollars, Euros, and Pounds.

Given the rather opaque and somewhat quixotic nature (100:1 leverage and volumes in excess of world production) of the trading at the LBMA, it would not surprise one at all if the gold price has its analogue in the LIBOR price-fixing scandal.