Arbitraging Luxury Brands

The WSJ reports that China is the world’s most expensive major market for the purchase of luxury goods, commanding the highest markups.

When price differentials become really large, not only will arbitrageurs enter, but a whole arbitrageur industry will emerge.

China’s daigou trade, which roughly translates as “buying on behalf of,” is an $81 billion business that specializes in parallel imports of everything from European luxury goods to Korean cosmetics, and even high-tech Japanese toilet seats. Regional price and tax differences make it cheaper to buy some goods outside China, which creates an arbitrage opportunity.

This is probably not sustainable. While stock prices are skyrocketing elsewhere, "Europe's luxury stocks are down 24% on average this year." Unless this arbitrage leakage can be stemmed, cross-country price differences will likely converge.

Betting Markets show President Trump's probability of winning fell by 3% after debate

Are heavy trucks a Nash Equilibrium?

Economist: America's love affair with big cars is killing them.

In America the average new car weighs more than 4,400lb (2,000kg) compared with 3,300lb in the European Union and 2,600lb in Japan. In 2023 vehicles weighing more than 5,000lb accounted for a whopping 31% of new cars, up from 22% five years earlier. As a London cyclist I find these numbers staggering—and scary. Our analysis shows that—aside from posing a risk to pedestrians and cyclists such as myself—the inflated weight is becoming a growing risk to the drivers of other, smaller cars. The fatality rate is roughly seven times higher when colliding with a heavy pickup truck than with a compact car.

Conservation of momentum also suggests that if you are driving a heavy pickup truck, your fatality rate is much lower. By analogy to a prisoners' dilemma, it appears that the equilibrium is to drive as heavy a vehicle as likely. 

 BOTTOM LINE: if you drive a heavy truck, I do better by driving a heavy truck, and vice-versa. In other words, we are in a Nash Equilibrium.

UPDATE: Why American Cars are so Big

Today the law mandates 40mpg. To increase efficiency, manufacturers had to use more complex engines, which made their cars costlier. To ease the burden on small businesses that relied on big vehicles, the government exempted “light trucks”, any vehicle that could be used off road and weighed less than 8,500lb (3855kg). That meant SUVs—typically among the biggest and least-efficient cars—were swept into the category and avoided the new fuel standards.

Because making light trucks held to lower environmental standards was more profitable than building small clean cars, automakers marketed big models, including SUVs, enthusiastically. They portrayed them as quintessentially American, embodying freedom, strength and adventurousness. By 2002 light trucks made up a bigger share of light-duty vehicle sales than cars.

Rent control, really?

 WSJ:  

By limiting supply, rent control leads to "housing shortages, underinvestment, tenant discrimination or falling property values." The most recent evidence comes from Argentina.

Since the law’s repeal, supply has reportedly rebounded and prices have fallen by double digits.

As Swedish economist Assar Lindbeck observed, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” No matter how many times we try, we can’t outsmart economic first principles.

BUT,

Rent control is in vogue among Democrats. President Biden in July proposed capping landlords’ annual increases at 5%, and Kamala Harris vowed to “take on corporate landlords and cap unfair rent increases.”

Marin residents say they care about affordable housing but don't act like it

Housing prices are prohibitively expensive because we enact strict zoning that prevents other people from building more of it. These restrictions on new supply drive up the price of housing. No where is this more evident than in Tiburon, just north of San Francisco, with its own temperate micro climate and beautiful views of all three bridges across the Bay. When owners tried to develop a property to create 43 single family homes, the project was stalled for decades by lawsuits filed by neighbors.  Recently the county purchased the property under the pretext that it would "preserve open space."

Jenny Silva of Sausalito, a volunteer pro-housing watchdog who's been monitoring the creation of housing elements in Marin, said ... "there’s a housing crisis, not an open-space crisis." She noted that 31% of respondents to the county’s 2023 Community Survey said housing should be the No. 1 priority, ... Silva called it “frustrating” that Marin’s latest budget then dedicated more than twice as much to open-space expenditures than to its affordable-housing trust: $11.23 million versus $5 million.

BOTTOM LINE:  Marin residents say they care about housing but don't act like it. Instead, they have "revealed a preference" for open space which increases their own property values. But they are not the only ones (see previous blog posts on housing).  

NFL Teams as Franchisees

The NFL had been the only large US sports league to prohibit private equity firms from owning teams. Beaton and Gottfried at the WSJ report that this prohibition is slowly being removed.

The National Football League, the most lucrative league around, has long barred firms from owning a piece of its teams. Its policy was simple: team owners should be actual people, not corporate entities. That meant eschewing the free-flowing cash infusions from institutions that now line the pockets of owners in the National Basketball Association, the English Premier League and Major League Baseball, among others.

Now, after years of discussions, that’s finally changing.

At a meeting Tuesday afternoon, NFL owners passed a new policy that will allow them to sell up to 10% of their teams to a select group of preapproved firms. It removes the last major hurdle to the flood of private capital sweeping through the sports landscape, which now has firms circling the college game and others amassing portfolios of pro franchises.  

Why such severe restrictions on private equity ownership? Possibly, this is a way to keep franchisees interested in maximizing league profitability and not just club profitability. It has long been suspected that club owners are willing to sacrifice some of their profits to generate more wins and, perhaps, a championship. (An exception that still chaffs me is the McCaskey's dismantling of the 1985 Bears immediately following their Superbowl victory, but I digress.) This seeming "over-investment" in team quality improves quality of play throughout the league enhancing fan engagement across the board and so makes all the teams more profitable. It is feared that private equity firms would be too interested in the club's bottom line to keep up these investments.

 

America innovates while Europe regulates

NYTimes reluctantly admits that "overregulation and weak governance in Europe may undermine the continent’s future."

Europe softened the harshest edges of capitalism, provided safety nets and in important ways has exceeded the United States in well-being. European infants are less likely to die than those in America, childbirth is less dangerous in Europe than in the United States, and Europeans live longer.

But

...Europe is struggling today. The U.S. economy last year grew six times as fast as in the European Union, 2.5 percent to 0.4 percent.

[NOTE: Using rule of 72: US income will double in 29 years; EU income will double in 180.]

...The United States abounds with tech successes like Apple, Google and Meta, but there isn’t a single European company on one recent list of the world’s top 10 tech companies by market capitalization.

Related: Why are there so few unicorns in the EU?

Rents fall ==> new supply falling ==> rents will increase

 WSJ:

Apartment Construction Is Slowing, and Investors Are Betting on Higher Rents 

For more than a year, apartment renters in many cities have been getting some relief from price increases because of the enormous amount of new supply being delivered by developers.

Now, big investors are betting that downward pressure on rents from new supply is coming to an end and the market is shifting back in landlords’ favor. At the heart of their reasoning: the critical metric of new construction starts, which began slowing last year and now are falling even further.

Apartment developers are stepping on the brakes, especially compared with the building frenzy in the early years of the pandemic. Across the country some rental-construction projects are getting stalled, as developers struggle to obtain the financing needed to complete them. Other investors are pivoting to more lucrative alternatives.

...

Most apartment developers today build high-end units for middle- and upper-income households, which have little impact on the affordable-housing shortage. Lower-cost rentals—the kind most in need by low- and moderate-income households—remain scarce and are rarely built without a government subsidy.

Social Security and Medicare are screwing our grandkids

NYTimes:

Under almost every president since 1980, 80 percent of the real growth in domestic spending has gone to Social Security and ... Medicare.

For Example: 

...A 65-year-old couple with average life expectancy and average household income (about $90,000 in 2023) who retires in 2025 would require $1.34 million to finance their benefits, even though they had paid only $720,000.

Younger workers are paying taxes to support generous benefits to retired ones.

So ..., younger generations are more likely to fall into lower-income classes than their parents or grandparents. Nearly a half century ago, it was the reverse. ...

As a result, "...older folks parading in golf carts [while] twentysomethings [are] paying onerous student loans and living with their parents This is F***ed up. 

[Note: this blog limits profanity to this topic.]