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The Wall Street Journal is reporting that the Gucci blackface sweater incident in February has likely peaked the luxury brand’s sales and social media influence.

Data from Tribe Dynamics shows Gucci has been displaced as the top luxury company for social-media engagement in March, and by mid-summer, its quarterly sales plunged in North America.

In response, Gucci decreased its U.S. marketing last quarter to asses the fallout after the blackface incident that led to a social media backlash.

“We wanted to assess the evolution of the U.S. market, the reaction of the consumers after the issue we had in the U.S.,” said Jean-Marc Duplaix, the chief financial officer at Kering/Gucci.

Gucci contributes 60% of Kering’s revenue and 80% of the profit.

Investors started dumping Kering’s shares in April after the fallout. By late July, the company reported a 2% decline in North American sales, which extended the selloff into a bear market by late August.

Gucci was quick to pull the sweater from shelves and online stores earlier in the year, led to the company hiring a chief diversity officer. The brand has taken a massive beating on social media, and celebrities posted videos of themselves burning Gucci clothing. Rapper T.I. even told his followers on social media to boycott the luxury brand.

Some in the fashion world are questioning whether Gucci and its star designer Alessandro Michele have peaked.

“As innovative as Michele is, his style is becoming a little bit stagnant,” said Nicole Fischelis, who held positions as fashion director and creative director at Saks Fifth Avenue and Macy’s before starting her own consulting firm.

Gucci sells overpriced products to millennials, such as $300 wallets, $1,590 sneakers and $5,000 dresses. Millennials are susceptible to the company’s marketing thanks to social media and celebrity advertisement. Morgan Stanley estimates than nearly two-thirds of Gucci sales come from millennials.

Gucci has blamed some of its North American sales declines on a tourism slump in the U.S., where it derives at least 20% of its sales.

The Journal said Tribe Dynamics has warned that Gucci’s social media buzz and quarterly earned media value is in rapid decay:

“Gucci was overtaken in March by Chanel in the Tribe Dynamics ranking, which uses a proprietary metric, known as earned media value, to quantify the influencer content and consumer engagement a brand gets on social media. Chanel benefited from the social-media buzz surrounding the death in February of its longtime designer, Karl Lagerfeld.

Gucci’s earned media value fell by one-third in March from the previous month to $30.7 million. Chanel, which had an earned media value of $33.8 million in March, held the top spot again in April, lost it in May to Gucci and then won it back again in June with the two companies almost tied.

The drop in Gucci’s North American sales comes on the heels of four quarters of declining growth and tracks the brand’s waning social-media strength. Gucci in September 2017 hit an earned media value of $82.5 million, triple the $27 million it reached in July of this year, according to Tribe Dynamics. In the September 2017 quarter, Gucci sales rose 49% in North America.”

The demise of Gucci has been quick and swift thanks to the power of social media. The trend in quarterly sales in North America is expected to plunge even further as larger macroeconomic deterioration in the global economy gains momentum and wanes on consumer sentiment.

Authored by Charles Hugh Smith via The Daily Reckoning,

Financial bubbles manifest three dynamics:

The one we’re most familiar with is simple human greed, the desire to exploit a windfall and catch a work-free ride to riches.

The second dynamic gets much less attention. Financial manias arise when there is no other more productive, profitable use for capital. And these periods occur when there is an abundance of credit available to inflate the bubbles.

Humans respond to the incentives the system presents: If dealing illegal drugs can net $20,000 a month compared with $2,000 a month from a regular job, a certain percentage of the workforce is going to deal drugs.

In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:

1. Corporations can’t find any other more productive, profitable use for their capital than buying back their own shares (enriching the managers via stock options and the 10% of American households who own 93% of the stocks).

2. Thanks to the Federal Reserve and other central banks injecting trillions of dollars of nearly free credit into the financial sector, corporations can borrow billions of dollars to play with at near-zero rates that are historically unprecedented.

So borrow billions at 2.5%, pour it all into buying back your own stock and reap the gains as your stock rises 10%.

Recall the basic mechanism of stock buybacks: By reducing the number of shares outstanding, sales and profits go up on a per share basis — not because the company generated more revenues and profits, but because the number of shares has been reduced by the buybacks.

(Note to New Green Deal advocates: If corporations reckoned they could earn more by investing the $2.5 trillion in alternative energy projects rather than stock buybacks, they would have done so.)

As various sources have outlined, corporate stock buybacks have been the primary driver of higher stock prices.

This is driving the third dynamic of bubbles:

As the bubble continues inflating beyond any rational valuation, rational investors throw in the towel and join the frenzy. Once again, this willingness to abandon rationality is partly fueled by greed and also by a dearth of other more attractive investments.

A bubble economy is a sick economy, for bubbles are proof there is too much capital chasing too few productive uses for that capital.

The Fed and other central banks have created trillions of dollars, yuan, euros and yen for corporations and financiers to play with and, to a lesser degree, for homebuyers to play with via low mortgage rates and federal guarantees on mortgages.

As a result, the housing bubble is the one regular folks can play. And despite claims that it’s not a bubble because of organic demand, housing is definitely in a bubble, along with stocks and bonds, art, etc.

When you create trillions of dollars, yuan, euros and yen out of thin air, you create the incentives to inflate bubbles. When your real economy is sick and offers few productive uses for all this excess capital, that only adds fuel to the speculative fire.

Here’s the problem: All bubbles burst, regardless of other conditions. Creating more trillions won’t change this, adding more gamblers to the casino won’t change this, claiming a bubble economy is healthy won’t change this and promising a trade deal with China won’t change this.

All of America’s bubbles will pop, and sooner rather than later. The stock market moves a bit faster than the housing and bond markets, but the bubbles that are visible in every market will all burst, much to everyone’s dismay.

We can add a fourth dynamic of bubbles: Nobody believes bubbles can burst until it’s too late to get out unscathed.

A Freedom of Information (FOIA) lawsuit filed on Monday by Judicial Watch against the Department of Justice seeks all records of communications regarding Felix Sater – a former Trump organization official known to US intelligence as “The Quarterback,” who was recently confirmed to be an informant for both the FBI and CIA. 

Sater went from a “Wall Street wunderkind” working at Bear Stearns and Lehman Brothers, to getting barred from the securities industry over a barroom brawl which led to a year in prison, to facilitating a $40 million pump-and-dump stock scheme for the New York mafia, to working telecom deals in Russia – where the FBI and CIA tapped him in the late 1990s as an undercover intelligence asset who was told by his handler “I want you to understand: If you’re caught, the USA is going to disavow you and, at best, you get a bullet in the head,” according to BuzzFeed. 

Sater reportedly “began working with the Federal Bureau of Investigation in 1998, after he was caught in a stock-fraud scheme.” It was Andrew Weissmann who, as supervising assistant U.S. attorney, signed the agreement that brought Sater on as a government informant. Federal prosecutors wrote a letter to Sater’s sentencing judge on August 27, 2009, in an effort to get him a lighter sentence: “Sater’s cooperation was of a depth and breadth rarely seen.” –Judicial Watch

Sater also spearheaded the failed Trump Tower Moscow scheme with former Trump attorney Michael Cohen according to the same report (which BuzzFeed walked back months later, saying instead that the project was Cohen’s idea). 

Judicial Watch notes that “The Mueller report mentions Sater more than 100 times but fails to mention that he was an active undercover informant for the FBI/CIA for more than two decades. In 2017, Sater was the subject of two interviews conducted under a proffer agreement with Mueller’s office according to page 69, footnote 304 of Mueller’s report on his Russian collusion investigation.”

As such, their lawsuit seeks all communications with Sater – including the FBI’s 302 interview reports and offer agreements between Mueller and Sater. 

A Sater Setup?

Interestingly, Judicial Watch chief investigative reporter Micah Morrison noted in June that “Beginning in late 2015, Sater repeatedly tried to arrange for [Trump attorney Michael] Cohen and candidate Trump, as representatives of the Trump Organization, to travel to Russia to meet with Russian government officials and possible financing partners.”

The Trump campaign appears to have rejected Sater’s attempts – however the Mueller report notes that “Sater and Cohen continued to discuss a trip to Moscow” into the spring of 2016 – and tried to arrange a meeting between Putin and Trump. 

So we’re clear – and FBI/CIA informant attempted to arrange a meeting between Trump and Putin right as “Russiagate” began heating up – perhaps in an effort to take Trump down for the so-called “deep state” he worked for. 

“Was a Russian real estate deal being pushed on the Trump Organization part of a set-up by a FBI/CIA informant?” asked Judicial Watch President Tom Fitton.

As we noted last March of Sater’s assistance to the US government: 

During the course of his work for the agencies, all unpaid, BuzzFeed confirmed the following exploits: 

• He obtained five of the personal satellite telephone numbers for Osama bin Laden before 9/11 and he helped flip the personal secretary to Mullah Omar, then the head of the Taliban and an ally of bin Laden, into a source who provided the location of al-Qaeda training camps and weapons caches.
• In 2004, he persuaded a source in Russia’s foreign military intelligence to hand over the name and photographs of a North Korean military operative who was purchasing equipment to build the country’s nuclear arsenal.
• Sater provided US intelligence with details about possible assassination threats against former president George W. Bush and secretary of state Colin Powell. Sater reported that jihadists were hiding in a hut outside Bagram Air Base and planned to shoot down Powell’s plane during a January 2002 visit. He later told his handlers that two female al-Qaeda members were trying to recruit an Afghan woman working in the Senate barbershop to poison President Bush or Vice President Dick Cheney.
• He went undercover in Cyprus and Istanbul to catch Russian and Ukrainian cybercriminals around 2005. After the FBI set him up with a fake name and background, Sater posed as a money launderer to help nab the suspects for washing funds stolen from US financial institutions.

And how did he get bin Laden’s sat phone numbers? He tricked his Northern Alliance source into believing he would become the “Alan Greenspan of Afghanistan” – running the country’s federal reserve after the U.S. invasion. 

Sater said he set up Delaware LLCs in the US — for the “Bank of Kabul” and the “Bank of Afghanistan.” He registered websites to convince the Northern Alliance source that he was serious about his intentions, going so far, he said, as to print out the corporate registrations, adorn them with ribbons, and use a wax stamp to make them seem more official. He said he mailed the documents, and a satellite phone, to the source.

Two former Justice Department officials said Sater took these steps without the FBI’s knowledge or authorization, telling his handlers about it only after the fact. –BuzzFeed

We have a feeling that even if Judicial Watch is successful in their legal action, all we’re going to learn from the US government about Felix Sater is [redacted]. 

Submitted by Michael Every of Rabobank

Speaking Crudely

I can’t recall how long I have been banging on about rising geopolitical risks and how these presented a myriad of pressure points, any one of which ‘breaking’ would see markets move wildly. Well, it seems that one of the most old-fashioned and predictable of these, Middle East tensions, has re-emerged literally with a bang: over the weekend there was what was either a drone or a missile attack on key Saudi oil facilities that may have taken down up to 50% of output. The crown jewel of the Saudi oil industry has just been shown to be highly vulnerable to attacks that might have been carried out by low-cost, low-tech drones that will be almost impossible to prevent from occurring again.

The market implications speak for themselves: Brent surged 21% in early trading, the biggest intra-day move since 1991. (Which also involved the Middle East, of course.)

US Secretary of State Pompeo has already stated that Iran was behind this attack, while US President Trump has tweeted “there is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!” Knowing the deep, bitter, and long-standing Saudi-Iranian rivalry, whom do you suppose Riyadh will point the finger at here now it gets to do so?

If it is Iran, or Iran acting from Iraq…expect real regional fireworks. A 21% move in Brent might be small in those circumstances.

If it is the Houthis in Yemen (albeit backed by Iran) this would be a sign that the US and Saudis are not looking for full escalation at this moment. Yet is that likely now that the Saudi and global oil complex has been directly targeted? And, geopolitically, will the US still be willing to meet with Iran now that is has upped the ante…or will it be forced to by this ‘crude display’ of regional force?

We face sharply binary potential outcomes, and Trump has already tweeted that it is “Fake News” that he was willing to meet the Iranian president with no preconditions. Yes, we have ridden through lots of these kind of issues of late, and each time all returns to normal and markets have ended even higher. But if that doesn’t occur here in the world’s leading oil complex then the other scenario is terrifying. Do you really want to go Risk On today?

Back to markets. Trump has also announced the release of oil from the US strategic petroleum reserve, which the market was perhaps expecting given that the spike of 21% had already been moderated to “merely” 13%. Nonetheless, against this backdrop there is surely going to be a higher geopolitical risk premium built into the entire Middle East oil complex until matters are properly resolved.

What does that mean for other markets? Knee-jerk it is risk-off FX will stay better bid (JPY, CHF,…USD?); oil exporters will benefit (RUB); and oil importers will suffer (INR, etc.) And how about for central banks and rates markets? Consider that despite the fact that the markets–like ourselves, but later to the party–still see plenty more rate cuts coming ahead, recent US data, including last Thursday’s CPI and Friday’s retail sales, helped see a huge swing in 10-year yields. In the US this was from 1.47% to 1.90% despite the fact that the Fed is tipped to cut 25bp to 2.0% this week alone.

If we now have a threat of Middle East war and a much higher oil price, albeit with a lag once the strategic reserve has been depleted, where does that leave our monetary guardians? Will they really be worrying about oil pushing us into a wage-price spiral now that unemployment is so low – in which case rates need to rise, and devil take the stock and housing markets? Or will they see that in a globalised world a higher oil price is a lower real wage for most workers, in which case the stock and housing markets are already going to take a hit and will need the support of lower rates? I wager the latter: in which case, the almighty yield swing we saw last week is likely to be partially reversed immediately – on a risk-off basis alone.

Indeed, even before this all transpired there were other risks that pointed in the same direction. For example, with recent US data suggesting that the US economy is doing fine, surely the odds were rising on Trump needing to stir the pot on the trade-war front in order to ensure that rates come down as quickly as he would like? If this oil shock doesn’t do the trick, that trade shock will have to. Again, that is crude real politik – but welcome to the real world.

Meanwhile, other headlines today also don’t line up with the sunny market assessment we saw priced in last week.

In the UK we have heard suggestions that the next trick for the ‘Rebel Alliance’ in Parliament will be to push for the full repeal of Article 50 – on the premise this whole Brexit matter needs to simply be “sorted out”, and then the “real business” of politics can continue “as normal”. Yet genies rarely go back into bottles like that and Brexit increasingly IS politics as the UK party system breaks down. Indeed, an opinion poll published yesterday shows the Tories, despite bleeding members to the Lib Dems and suffering the worst press of any administration in memory, are widening their lead with 37% support to Labour’s 25% and the Lib-Dem’s 16%. The Brexit Party still has 13%, meaning half the voting public is in favour of the (off-the) cliff-edge tactics being pursued. PM Johnson has pledged to defy a parliamentary no-deal ban if he cannot get a deal,…and has compared himself to The Hulk–who gets stronger the madder he gets–wanting to break the chains of the EU: that the day before he sits down to discuss Brexit with Jean-Claude Juncker. How crude this is too.