Economist 4/3/15

  1. Chinese government’s anti-corruption drive began in 2012 when President Xi Jinping took office, but it is only in the past 18 months that the campaign has really begun to hurt the luxury industry. Earlier this year, LVMH, a luxury conglomerate, reported its first fall in operating profits for five years. Gucci, another rival, is also feeling the pain: full-year revenues for 2014 fell by 1.1% from the previous year to €3.5 billion.On March 30th Prada announced that profits for 2014 had dropped by 28% from the previous year, to just €451m ($484m). It is the first time that the firm has reported a drop in annual profits since it was floated on the Hong Kong Stock Exchange in 2011.
  2. Press reports about sharp rent rises in big cities prompted Germany’s two biggest parties, upon forming a coalition in late 2013, to attempt to turn into law the irresistible proposition that everyone should be able to put a roof over their head without hardship. The result is a “rent brake”, due to be applied later this year, which limits increases in prices. As with all price controls, it is likely to lead to a black market, while crimping supply.Germans buy cars, not houses: just 46% of Germans own their homes, the lowest rate in the European Union. But the idea that this nation of renters is being squeezed by greedy landlords is not borne out by the data.In the former West Germany (for which data go back furthest), apartment size per inhabitant has more than doubled since 1956-57, from 18 to 39 square metres. Meanwhile, throughout Germany, the proportion of net pay spent on rent has stayed constant for 30 years, at about 23%.Rents have only climbed significantly and consistently in Germany’s biggest and most prosperous cities like Hamburg and Berlin.There is already a law in place that limits rent increases under an existing lease, based on local housing costs. The brake concerns new leases: it prevents landlords from charging rent that is more than 10% above the local average for a comparable property.Economists are almost united in opposing the brake.It is likely to deter renovations of dilapidated properties, since they must be lavish to justify higher rents.By meddling in a healthy market Germany’s politicians are pumping up their own popularity but not the country’s prosperity.
  3. Hedge funds can be traced back to the 1940s, when an unassuming man named Alfred Winslow Jones set up an investment structure that allowed him to bet on both rising and falling prices and to charge a performance fee.They are pooled pots of money that are open only to “sophisticated” investors, and which tend to use complex strategies and instruments. Initially, their aim was to produce a positive, or absolute, return in all markets by going short (betting on falling prices) as well as going long (relying on rising prices).In practice, many hedge funds now eschew hedged strategies in favour of a wide variety of other approaches.Traditionally, they earn “2 and 20”: an annual charge of 2% on the capital under management, plus a 20% performance fee assessed on profits earned (often over some threshold return).. Hedge funds hate being compared to their peers, but the average fund has underperformed a traditional mix of 60% equities and 40% Treasury bonds in recent years.
  4. Bids to curb sales of the most powerful guns and largest-capacity magazines failed. Congress even refused to expand the number of gun-buyers checked for histories of crime or severe mental illness—though 90% of Americans support such checks. In March this year federal regulators dropped a bid to ban a type of bullet that can pierce body armour, of the sort that police often wear, after 285 Republican and seven Democratic members of Congress objected.The National Rifle Association (NRA), a deep-pocketed group with 5m members.The gun lobby’s winning record is because it is so good at whipping Washington politicians into line. After Newtown a few states moved to curb sales of the deadliest weapons. Since 2012 five states have expanded background checks on gun buyers, closing loopholes left by Congress.But many more states have relaxed firearms laws.Often, gun-lovers hew to a familiar conservative line: that crime is deterred when upstanding citizens pack heat. Florida is debating a “school safety” bill allowing superintendents to choose staff or volunteers with police or military backgrounds to serve as armed school guards. Iowa is pondering a law that would let children younger than 14 use pistols and revolvers (with adult supervision, legislators hasten to add). Republicans in Arkansas want to allow armed judges in courtrooms.The fieriest arguments of 2015 involve “constitutional carry”—the claim that the constitution’s second amendment is the only permit Americans need, allowing citizens to carry a concealed or visible gun without any licence, checks or training. Such laws already exist in Alaska, Arizona, Arkansas, Vermont and Wyoming. Legislators in Kansas just approved a version. So did lawmakers in West Virginia and Montana.
  5. Apollo began without great fanfare in 1972, but it is now a big noise in the global tyre industry. It has an annual turnover of $2.2 billion from seven factories in three continents. Like other emerging-market companies, Apollo has bought businesses in rich countries to dilute its dependence on its home market and to bolster its brands and technology. The proposed takeover of Pirelli, an Italian tyremaker, by ChemChina is the latest example of this wider trend.But Apollo claims it has given as well as taken. Its operations are efficient by world standards, and after it bought Vredestein Banden, a Dutch tyremaker, in 2009, it widened profit margins at its factory.The company now sells 1m Indian-made tyres a year in Europe.Apollo had much to teach Vredestein about efficiency. At the Limda plant there is a visible zeal for Japanese-style kaizen, continuous small improvements that add up to significant gains. Apollo runs contests to spur its workers to come up with cost-saving ideas; trophies for the best ones are on display.In the same year it bought Vredestein it invested $500m at its Chennai plant to meet growing demand from Indian lorry-makers.But these days sales in India provide just 55% of Apollo’s profits.

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