Dear Donald - Bankruptcy is NOT an Option for the U.S. and Our Tax Dollars Are NOT OPM (Other People's Money)

Several of the financially/economically oriented sites I follow are vociferous Trump fans.  Some of this was perhaps for social issues, but I believe primarily it was for economic reasons and certainly there was a fair amount of dislike for Hillary and the norm mixed in.  I do not wholly (or for that matter much at all) agree with their positions in support of Trump on the economic front, and some of them seem to be shifting a tad away from their strong support too given some post-election shifts by the Don, so let me explain why. 

Before I dive in, note that if you have read my missives in the past you realize I am no big fan of our current economic state built on a house of cards supported wholly by low interest rates and earlier by QE.  I think the Fed has done us a disservice of propping up the economy, including many companies that deserved to die.  So if we enter into a recession right after the Don takes office it is not on him.  But given his intent to drop taxes and do fiscal stimulus, I do not expect an immediate recession, just a much worse one after he kicks this can down the road.

http://www.zerohedge.com/news/2016-11-28/welcome-hooverville


You see our economy is limping and my solution to the problem is quite simple.  It is called a recession..  We are on the threshold of another recession.  Recessions are the washing machine of the economy.  They clean out the crap, the companies that do not deserve to survive, and thereby allow the other companies that are struggling against low interest rate debt funded zombie companies to finally break loose of the chains and survive.  The economy is bogged down with debt and worthless companies built on debt and we need a good recession to wash out the junk.  And when - not if - that occurs, that is when Donald needs to do his infrastructure program and tax cuts - NOT NOW.  So my one big issue with Donald is timing on some of his plans I like.  He needs to save his ammo for when it makes sense and not use it all now, before a recession, to prop up dead companies further and exacerbate the recession that is coming.  If he does it all now, he will have no ammo when he needs it, and worse yet he will shoulder us with even more extreme debt at significantly higher interest rates making recovery a very slow and painful process.

Trump wants to slash taxes for corporations to benefit domestic companies and attract more business to the U.S.  He wants to impose trade tariffs and tear up existing trade deals.  He opposes any significant increases to the minimum wage.  He wants to deport millions of illegal immigrants to improve the job availability for Americans.  He wants to punish China for monetary manipulation.  He wants to spend a trillion or more over 10 years on infrastructure to spur more jobs and reduce unemployment.  He wants to increase military spending.  He wants the Fed to keep interest rates low.  And several other things all of which supposedly be paid for by an improved economy. Let's get a tad more perspective on some of these in the overall scheme of things.  I do not intend to tackle them all in this one post, but will cover some points now and others as I go.

Debt is Gonna' Come Knocking

We have already seen interest rates climb significant since the Don got elected and if he does half of what he says, they will climb significantly more, which adds even more fuel to the Feds desire/need to increase interest rates, as we recently saw with their latest boost.

http://www.zerohedge.com/news/2016-11-22/stocks-have-priced-nirvana-where-debt-doesnt-matter-best-luck

And debt will only be exasperated by increasing rates, which seem inevitable.  You see the interest rates hurt both the government (i.e. taxpayers) and corporations, both of which have a pile of debt.  The U.S. is pushing $20 trillion and servicing that debt at historic low rates has been not that big of a deal.  But if the rates increase to around 5%, then we can be looking at around a trillion dollars in interest a year just to service existing debt.  Add a few trillion onto the pile for tax reductions and infrastructure and the government's hands are financially tied and it will not be able to do much once the recession does hit.  But hey, didn't Donald say he was going to reduce debt?

https://www.bloomberg.com/news/articles/2016-11-22/fed-hike-is-certainty-for-bond-traders-as-market-odds-reach-100

http://www.forbes.com/sites/leesheppard/2016/11/13/trumps-tax-plan/#526ff1c01110

http://fortune.com/2016/10/17/donald-trump-tax-plan-jobs/

We Are Ignoring the Participation Rate

So let's look at some facts here.  First, unemployment is at 4.9%.  Now this is pretty clearly due to two factors.  Number one, the participation rate, i.e. those wanting or looking to work, is down to 62.8%. Number two, service sector jobs.

http://cnsnews.com/news/article/susan-jones/

The participation rate means nearly 100 million people who could or should be working are not even looking.  This is the lowest participation rate in decades.  And it is weighted toward younger workers (or non-workers as it is).  So why aren't they working?  There are indeed plenty of jobs out there, but they are mostly service sector low paying minimum wage type jobs, not the factory jobs.  The former has grown substantially under Obama and the latter has gone down.  One way to increase the participation rate is to increase minimum wage for these service sector job, but Trump is against doing so to any significant degree.  The other way is to create more higher paying jobs, which Trump is obviously focused on doing.

Now it may seem obvious that if we increase the number of higher paying jobs in the U.S., like factory jobs, then the participation rate may go up.  So let's think about this, you give companies in the U.S. tax incentives to stay here, you charge them tariffs if they move jobs overseas, you give them trade protection by tearing up trade deals and imposing tariffs on foreign companies and you expect more higher paying jobs.

Well, a lot of U.S. companies export their products overseas and tearing up the trade deals will lead to tariffs against them by foreign countries, making it harder for them to sell their wares.  Moreover a strengthening dollar will increase the effective price of U.S. produced goods sold overseas.  The yen, for example, has fallen against the dollar by 11% since Trump got elected, meaning Japanese produced goods are 11% cheaper in the U.S. and U.S. produced goods are 11% more expensive in Japan.  How is that going to help U.S. companies that do a lot of exporting?  The FANGS had some really bad days following Trump's election, though they have recovered since.  And U.S. companies are not just going to shut down foreign plants.  They will still use those to manufacture products for foreign markets and not have to pay a U.S. tariff.  There may be incentives to build more in the U.S. for the U.S. market, but that will be limited in my view because the exchange rates will give plenty of incentive to produce overseas, even if there is a tariff.

Look at Carrier Corp.  Trump claims victory in convincing them to stay in the U.S. and not build a plant in Mexico, thereby saving 5000 U.S. jobs.  Well, this victory cost the Indiana taxpayers $7 million in tax breaks to Carrier and Carrier promptly raised its prices after the decision.  Yep, a real win/win there.

Getting back to the participation rate, I note a significant percentage (based on the age of those not participating) of the participation rate is simply people not wanting to work.  

http://www.zerohedge.com/news/2016-12-21/number-millennials-living-home-mom-reaches-75-year-high

People who would just as soon stay home in their parent's basement or live off welfare.  Getting these folks to take any new factory jobs or infrastructure jobs is going to take some pretty high wages.  But rest assured, factory wages (and service sector wages) will have to go up as we are shipping a few million illegal immigrants out of the country and building a wall to keep them out, so companies that are already dealing with a 4.9% unemployment rate will be desperate to get workers and have to pay significantly more.  Trump may be wholly against raising the minimum wage but his economic plans will do plenty to raise wages, and prices, and inflation.

To the extent companies cannot raise prices to offset the increased wages because foreign companies have a massive exchange rate advantage, there goes those tax incentives out the door (assuming companies do not simply spend the saved tax dollars on dividends and buybacks like they did with money borrowed under the Feds low rates).  Prices will also have to go up, increasing inflation, increasing interest rates, increasing dollars needing to service debt and decreasing profits.  Yep, sounds like a good plan.

Don't get me started on the whole Social Security picture and how those illegal aliens, if we make them pay taxes instead, are actually quite beneficial to aiding our terrible demographics as the baby boomers retire.

I think this covers a couple of the major points.  More to follow, including what will other countries do to us when we tear up treaties and impose tariffs and does a country that already spends more on the military than then next 10 countries combined really need to spend more, especially when we are becoming more isolationistic in our foreign relations?

1/3/17 Update

Following up on the above, here is a nice piece by Lance Roberts, who covers well the debt piece of the pie and what Trump faces.  Unfortunately, Trump's infrastructure, tax cut and military spending plans will increase debt, which I fear will come back to bite us worse when (not if) the recession does come.  And at the government level, by the way, a lot of our debt has been purchased over the years by countries that Donald is likely going to piss off or already has.  Always a good plan.

http://seekingalpha.com/article/4033815-trumps-4-percent-gdp-will-remain-elusive?ifp=0&app=1

Here We Go Again

The GDPNow forecast for the 4th quarter surged today to 3.1%, largely on the strength of auto data, and we all know auto sales are doing amazingly well.

https://mishtalk.com/2016/11/04/gdpnow-4th-quarter-estimate-surges-to-3-1-on-strength-in-autos/

But wait, why are auto sales doing so well?  Maybe it is the fairly massive inventory build?  Could it be the incredible incentives being offered?  Perhaps the 0% interest 0% down offers?  Perhaps the 72 month loans to anyone who can fog a mirror?  Does this sound a tad like housing did 8 years ago?  You decide, but in doing so you might want to take a glance at some data on repossessions - that with modern tech are quite easy to do as they can track your car's location and open it easily.

http://www.zerohedge.com/news/2016-11-02/more-signs-strong-us-consumer-emerge-auto-repossessions-soar

Whether the auto industry continues or not, I am going to make a forecast, just like last quarter, that the GDPNow number for the 4th quarter in three months will be half of what it is today.

Did I Mention . . .

there are a host of issues surrounding regulation of autonomous cars and if left to the states the automakers are going to have a mess to navigate?  Oh yeah, I think I did back in July in my Driving Me Crazy post on autonomous cars:

http://financialspiltmilk.blogspot.com/2016/07/driving-me-crazy_97.html

There I noted:

Driver's licenses are issued at a state level, driving laws are at a state level, required insurance is at a state level and liabilities for accidents are determine under individual state standards.  Giving a lot of this control over to the federal government is not going to be an easy sell.  Can you imagine Texas giving this up?  But it is something that has to be uniform to work and it will not be uniform on a state level.  Thus, Volvo, for one, has been pushing the federal government to regulate this area and not leave it to the states.

http://www.digitaltrends.com/cars/volvo-urges-u-s-government-to-regulate-autonomous-cars/

There is enough money and societal benefit at stake that it will likely eventually happen, but it will be a long and painful journey.

Well, the painful process of state regulation is taking hold.  You see the NHTSB recently released guidance for the states but is leaving regulation up to them.  And I am sure that will work out quite well, because if you are making autonomous cars programming them to navigate cities, foul weather and the like is nothing compared to trying to navigate differing laws in 50 states.

Recently the following article was posted in Insurance Journal noting objections by Google and others to new California regulations being proposed for autonomous cars:

http://www.insurancejournal.com/news/west/2016/10/20/429908.htm

You can find the bill and its Legislative Counsel's Digest for your digestion here:

https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120SB1298

And if you read the bill it has a host of wonderful provisions that lawyers are going to love as they will get to fight over these in courts for years to come.  For example, "Autonomous Vehicle" means any vehicle equipped with "Autonomous Technology" and "Autonomous Technology" means "technology that has the capability to drive a vehicle without active physical control or monitoring by a human operator."

Let's consider these fine words in the context of the 70,000 Teslas that the company seems to be beta testing with or on its customers.  The cars have Tesla's "AutoPilot" feature.  Now from what I have read, the human driver is supposed to monitor at all times "AutoPilot" is engaged and not, for example, be watching a movie on his iPad.  The driver also apparently has to touch the wheel every now and then so the car knows the driver is most definitely not just watching a movie.  I mean, seriously, how on Earth could someone watch a movie and still occasionally touch the steering wheel.  So certainly Tesla will argue that its "AutoPilot" does not qualify as "Autonomous Technology" under the proposed bill.  Indeed, the bill is for companies testing their autonomous vehicles, not those foolish enough to sell them and let their customers take them on the road even if data from these customers is helping the company refine its technology.  Oops, did I say technology?  I meant something else because the Tesla autonomous stuff is not by any means Autonomous Technology; at least not under the bill language.  And beta testing through your customers is not really testing in the sense the bill means, is it?

But Google on the other hand, who is carefully testing its autonomous cars with technicians and drivers and who has only had one minor fender bender in many years of testing is going to bear the brunt of this bill, which no doubt was prompted by wrecks and fatalities involving Teslas.  Folks at Google have to be fuming.

Excuse Me, Can I Have a Little Privacy Here

So one of the fun features of autonomous cars is that they will be recording everything.  Kind of like the black box in airplanes but here it is just a computer saving data on what you are instructing the car to do and what it is recording from sensors.  So let me ask, are you going to be allowed to instruct your autonomous car to exceed the speed limit?  If you can and do, do you automatically get a ticket?  Will our speed limits even apply to the superior technology of autonomous cars and do they need to?  I can see these cars being programmed to drive at the safe speed for the conditions, whatever that is.  Oh, so many questions so few answers.

Either way, the car will definitely track where you have been, when you got there, how long you were there, when you left and where you went.  Your personal life will be anything but autonomous, but hey, your car is autonomous so who cares. 

One of the issues with the regulations will be the extent to which the government, as in police, have access to your vehicle information without following that little warrant thingy, which requires a court thingy and requires a reason justifying the search thingy. 

Do you even realize currently if you have a late model car there is likely a tracking device in your car tracking where your are?  Probably not, but hey, it is an excellent device for all those sub-prime auto lenders to find your vehicle to repossess it should you miss a few payments. 

You entered the 21st century and just checked any privacy at the door.  Heck, if you are reading this, someone, if they want, can retrace everything you have done on your computer today or ever.  Sure, deleting the history on you internet searches can hide the porn searches from your wife or husband, but it is still there, waiting to be found.  Sleep well . . .

 

My Toaster Is a Terrorist!!

Many folks in the Eastern US and apparently in Europe know full well of the recent attack that severely slowed or virtually shut down the internet for certain popular sites like Amazon, Twitter and PayPal.  The botnet DDoS attack was basically millions of internet connected devices (Internet of Things "IoT") all connecting or sending messages in at the same time. 
http://blog.rackspace.com/internet-of-things-why-connected-toasters-and-other-smart-home-devices-matter

Apparently, such wonderful things as toasters, cameras, refrigerators and the like are all now being connected and they are easily hacked to install malware that allows them all to send signals or requests at the same time.  Tens of millions of such requests can shut down a web portal, like Dyn. 

https://krebsonsecurity.com/2016/10/hacked-cameras-dvrs-powered-todays-massive-internet-outage/

And yet, a few years from now we are all supposed to trust our lives to autonomous cars.

By the way, if you have noticed your internet connection at home slowing down otherwise, perhaps it is because you have so many IoT devices connected, all of which will eat a tad of bandwidth.    How good is that connected toaster, doorbell or pool vacuum looking now?

Ding, Ding, Ding - We Have A Winner!

Well, we finally got there.  GDPNow from the Atlanta Fed puts the 3rd Quarter GDP now at 1.9% annualized rate, half of where they started the 3rd quarter forecast at 3.8 %, just as I anticipated when they first put out their 3.8% figure.  And the fun part is the forecasting (or retro-casting at this point) is not over with.  They will continue regular adjusting this month and then occasionally providing revised figures going forward.  All of which I suspect will make the now 1.9% forecast look optimistic.  Perhaps a 2% target is proving a tad too much for the Fed.  After all, we are following the Japan playbook which now for a few decades has proven itself highly flawed and incapable of delivering the results that Keynesian economists predict.  Not sure why such economists are unwilling or incapable of seeing what is slapping them in the face.

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

But it gets better.  Apparently dear Janet is reportedly considering letting rates sit where they are despite the economy running "hot" - yes, you read that right - as inflation targets are not being met.

http://www.bloomberg.com/news/articles/2016-10-15/yellen-s-talk-of-hot-u-s-economy-extends-october-long-bond-rout

Has she seen corporate profits sinking for the past six quarters?  If that is a "hot" economy, I would hate to see a cold one, though I fear I will in the very near future.

But Perhaps I Am Wrong - 10/28/16 Update

It would seem that the economy had a bit of an uptick in the third quarter, as reported by Bloomberg:

http://www.bloomberg.com/news/articles/2016-10-28/u-s-economic-growth-rebounds-on-boost-from-exports-inventories

Indeed, GDP rose at an annualized 2.9% rate, well above the GDPNow current forecast and above analyst expectations of 2.6%.  I note that .6% of that is due to inventory build, which while supporting GDP this quarter may dampen it next if that inventory is not sold, but still a solid advance so far.  Looks like Janet will get to raise her rates after all.  Wagers still seem to favor December over November for when that should happen.

Binky Spurt

Just a quick note as this seems a bit entertaining to me.  The things you hear about gold prices are all over the place from it being the wisest investment on earth to gold being as worthless as coal these days.  Decide for yourself which is right for the long term.  One thing that is clear is that for the short term the price tends to swing widely, like over 3% down yesterday, in part tied to expectations on Fed rate hikes because rising rates lowers the price of gold.  And yes, oddly enough expectations recently have been growing for a December rate hike despite the GDP forecasts progressively going down for the U.S. and the world, whether you look at GDPNow as I recently did, or the IMF, which just slashed its 2016 GDP prediction for the U.S. from 2.2% down to a meager 1.6%. 

http://www.zerohedge.com/news/2016-10-04/imf-slahses-us-gdp-gowth-outlook

Not exactly the growth target the Fed is looking to achieve, yet expectations for a hike are on the upswing and gold is slumping in part because of it.

http://www.zerohedge.com/news/2016-10-04/gold-tumbles-below-1300-yen-crashes

Indeed, today Bloomberg carried an article on how the Deutsche Bank AG Chief Global Strategist believes the drop in gold will continue and it is 20 - 25% overpriced.  According to Binky - yes, his name is Binky - while rate hikes might have an impact, the real driver of a reduction in gold will be a recovery in global growth!  Yes, you heard that right, the economies of the world can prepare to rejoice as a growth spurt is on the way.  Let's officially name it the Binky Spurt!

http://www.bloomberg.com/news/articles/2016-10-05/gold-looks-25-overvalued-according-to-deutsche-bank-s-chief-global-strategist

And you can see why, with a chief global strategist like Binky, that Deutsche Bank is doing so well. Yep, time to sell any gold you might have.  Take that ring off your finger now and hawk it while it is still worth something.  After the Binky Spurt it will be too late. 

We'll see how this call works out for Binky.

10/7/16 Update

Since the initial post above, Binky seems right.  Gold has continued to drop, some economic news was pretty good and expectations of a Fed increase in rates were rising.  That is until today.  Today the BLS jobs number came in at 156K (below what the elite prognosticators were predicting) and the unemployment rate increased minimally to 5.0%.  So now the jury is out on what the Fed will do in December.

http://www.zerohedge.com/news/2016-10-07/payrolls-rise-156k-missing-expectations-unemployment-rate-rises-50

As one might expect, this is giving a bit of a bump to gold.

http://www.zerohedge.com/news/2016-10-07/gold-leads-bonds-bleed-jobs-miss-sends-rate-hike-odds-tumbling

Which may be due in part to our friends at Goldman saying that demand for gold remains high and intact, so a significant drop in gold prices seems unwarranted.

http://www.zerohedge.com/news/2016-10-07/golds-sharp-drop-strategic-buying-opportunity-goldman-sees-physical-demand-intact-ch

But I am sure Binky will stand firm in his convictions on this as the global economy is certainly ready for a spurt and all this other stuff is just noise. 

GDP Update

Back on August 9, I noted that the Atlanta Fed at their GDPNow site had given a preliminary forecast of third quarter GDP of 3.8% annualized.  I referred to it as Grossly Distorted Prediction and noted I would be surprised if the GDP was ultimately half that for the quarter, i.e. 1.9%.  Well, as of today, the Atlanta Fed is down to 2.4% and dropping fast.  They will continue to post third quarter numbers through October, so I might make my guesstimate after all.

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

October 3 update

Now down to 2.2% after a dismal construction spending report today. 

October 7 update

2.1%

Gentelmen, Start Your . . . Lawsuits!

Well,  it was just a matter of time.  Tesla has been sued for a fatal crash in China allegedly involving its AutoPilot feature.

http://fortune.com/2016/09/15/tesla-autopilot-crash-china/

The lawsuit seeks very little monetarily and is reportedly designed primarily to just bring attention to the problems with the system.  Tesla claims there is no way to know if the AutoPilot was engaged due to the car being too damaged in the crash.  On the other hand, in the more recent fatal crash in the Netherlands, Tesla confirmed AutoPilot was not engaged and officials are not refuting it.

http://phys.org/news/2016-09-dutch-police-probe-fatal-tesla.html

Tesla agrees, however, that the fatal crash in Florida this year was with AutoPilot engaged, but asserts the driver was not using it properly.  Moreover, it claims to have now issued a software upgrade that eliminates the issue that resulted in that crash.

I have reported before on the likelihood of lawsuits over this.  Whether the China suit goes anywhere is anyone's guess.  Either way, others will follow.

I have read some commentators' views that lawsuits are not that likely as the legal liability is not that easy or cheap to prove.  Experts will be needed and will be expensive and state-of-the-art defenses may be available.  All true, but never underestimate the drive of the plaintiffs' bar or its resources.  Moreover, some expert will see the light and realize they can make a nice living testifying in these cases.

One might argue that different approaches being taken to autonomous cars provides plenty ammunition for an expert.  For example, Google is designing Level 4 cars with no steering wheel and no chance for human intervention.  It believes the interaction between a human driver and somewhat autonomous features can only lead to problems.  And just maybe Tesla is proving that to be true.

Now I understand that Tesla has plenty of warnings a driver has to go through to even engage AutoPilot, that the driver still has to touch the wheel occasionally, that they are regularly doing upgrades, yada, yada, yada . . . All these yadas probably add up to a nice defense against the driver of the Tesla who is injured or killed.  But what about the first time the Tesla plows into another car or people?  It will eventually happen.  Tesla will point the finger at the "driver" and the lawyers will point the finger at the deep pocket and the expert will say it is simply foolish to have the autonomous/human interaction as it creates too many variables.  Poof, there it is.  Mind you, these cars likely are safer than those with drivers in full control, but I still think Tesla is conducting a dangerous experiment.  No doubt in doing so they are collecting enormous amounts of data with which to tweak their software, which is perhaps enough economic incentive for Tesla to take this chance.  Only time will tell.

Show Me The Money

Now autonomous cars are coming whether you like it or not and some entities hope to make a lot of mullah off of them.  But there are several categories of companies where you have to scratch your head.  Car manufacturers, for example.  Sure, they will make these cars and sell them, but the obvious eventual plan here is that individuals will no longer own a car or at least no longer need to own one.  They will simply summon an autonomous car from Uber or Ford or whoever when they need it, specifying why they need it so an appropriate vehicle shows up.  They will then be taken to their destination and the car will proceed to its next pick-up.  Instead of sitting idle 95% of the time, the car will be in use the majority of time, perhaps getting maintenance and such during the slow nighttime shifts.  Overall, far fewer cars will be needed, perhaps only a third as many.

Let's conservatively assume the number of cars needed only goes down 50%.  Well, now you have 50% less for parts suppliers to supply, for manufacturers to build, for insurers to insure, etc.  Indeed, car retail will largely disappear as it will simply be large corporate fleets of autonomous vehicles serving the public, so say goodbye to your local car dealer.  That is a whole lot of missing jobs and dollars - and a whole lot of empty retail parking space that is no longer needed.

Let's say you are Ford.  Ford has indicated it is focusing on building autonomous cars for hire, not for private sale.  This makes a good bit of sense as it leaves control and upkeep of these sophisticated machines in the hands of a few companies that know what they are doing.  Now it is not clear to me if Ford is going to work with the likes of Uber or whether it may launch its own fleet.  The latter makes sense to me.

The approach of selling these autonomous cars to individuals seems financially unwise. The cars may cost more and have a higher per vehicle profit but if you are making half as many, your profits go down.  And liability - absent legislative intervention - is shifting largely to the manufacturer.  So you have lower sales profits with which to pay what will likely be enormous premiums for liability insurance.  Not per se a good business model.

So why not make your profit simply offering the cars you make for hire.  People sign up with Ford and get charged per trip.  Ford makes its money from this without ever selling a vehicle retail.  It has fewer factories to maintain, fewer workers to pay and a regular income stream moving people around.  Perhaps not the profits it is seeing from selling cars today, but it has to do something to fill the void that is coming.

And there will be voids for a lot of different businesses to fill if they can.  Any wonder that those national car insurers are now emphasizing in adds their other services like loans and such?  Perhaps they are seeing the writing on the wall.  After all, studies predict car insurance premiums are going to go down 60% over the next 15-20 years and 80% over the next 25.  We are talking about $200 billion in premiums, 80% of which might disappear in relatively short order.  Ouch!

http://www.latimes.com/business/la-fi-agenda-driverless-insurance-20160620-snap-story.html

These are interesting times my friends.  In an upcoming post I will endeavor to note some of the key benefits to autonomous cars beyond the safety benefits.  For example, that two car garage might make a nice playroom for the kids.

 

How's That Workin' Out For Ya?

Well the banks brought us the sub-prime housing debt crises a mere nine years ago so the government - after saving their collective arses - has effectively regulated and/or fined them to the point of no profit.  Just ask Deutsche Bank how that's working out for them.

http://www.zerohedge.com/news/2016-09-19/deutsche-bank-extends-losses-near-record-lows-significantly-undercapitalzied-even-wi

Given their stock is trading at around a tenth of what it was back then, I am thinking not so well.  The stockholders, i.e. investors who "benefited" from these loans are not doing so well either.

But fear not, where banks fear to travel today (or are barred from doing so), others are happy to fill in the void.  I mean, with a third of the world's sovereign debt with negative-yields and stock markets at lofty valuations, where else is a hedge fund going to get any returns to justify their exorbitant fees than to step in where others will not go.  And so they are steering their clients' money into fun-filled commercial real estate loans.  Nope, no risk there.

http://www.bloomberg.com/news/articles/2016-09-19/shadow-lenders-step-in-for-banks-facing-u-s-property-warnings

Or high yield corporate debt is the place you oughta' be, so they loaded up the debt and move to Beverly.

https://mishtalk.com/2016/09/18/credit-spreads-widen/

Looks like there are going to be a lot more arses in need of help.  But if we bail them out too, who is the arse then?  Here we are folks, different debt, same old problem. 

September 20 Update

Just passing on a bit more about Deutsche Bank that I just ran across from Mish Shedlock.  More of the same:

https://mishtalk.com/2016/09/20/is-deutsche-bank-cooking-its-derivatives-book-to-hide-huge-losses/

Coming Up Roses!

So everyone seems to be wondering whether the Fed will raise rates when it meets September 20-21.  The "official" data points have been mixed as of late, but the Fed thinks things are going pretty well.  Indeed, Janet at J-Hole noted that the economy is "nearing the Federal Reserve's statutory goals of maximum employment and price stability."  Yeah!

Of course good news is bad news as the thought of the Fed perhaps raising rates this month is not what the market wants, especially on the heals of Draghi and the ECB doing nothing this week.  And thus, the market dropped a tad on Friday, like a little over 2% tad.  Mind you, not because the economy sucks, but because, as Bloomberg puts it, "central banks signaled reluctance to extend stimulus." 

http://www.bloomberg.com/news/articles/2016-09-09/no-stimulus-no-peace-as-stocks-end-two-month-snooze-with-plunge

You see, everyone knows the economy sucks even it if it not catching the headlines daily but they are willing to ignore that as long as the Fed is serving up drinks and catching the tab.  But the Fed is likely second guessing things a bit and wants to raise rates, knowing it needs a buffer to play with in the next recession, but it cannot justify a rate increase if the economy sucks.  So according to the Fed, it does not suck and everything is coming up roses.  The true irony here is the market is bombing because the Fed might raise rates when the market should be bombing because the economy sucks, yet the excuse for the Fed possibly raising rates is that the economy is just honky dory.  Got that?

Now you won't hear that the economy sucks from Hillary who needs to ride Obama's coattails, but on this I have to agree with Trump who has been pointing the finger at the Fed for propping up the economy.  Now he says it is to make Obama look good and sway the election. I do not think they are per se doing it to sway the election or to make Obama look good; they are doing it to make themselves look good and they refuse to admit the utter failure of their policies.  They refuse to admit the economy is on Fed life support and nothing they have done has improved it fundamentally.  Indeed, the fundamentals are disastrous.  Don't believe me, look at the stats, many of which you can find in this nice article from Bloomberg:

http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash

The focus of the article is on the cash position of many companies worsening significantly the past couple of years, suggesting the share buybacks and dividends that have propped up share prices on failing companies are coming to an end.  As the article notes, the top 10% of the S&P 500 has plenty of cash, but that lower 90% not so much.  And it is shrinking fast - down from $447 billion at the end of 2015 to a mere $385 billion at the end of the second quarter.  If my math is right, that is nearly a 14% drop in half a year.  Oops.

But the article has a host of other nasties in it, like:

• S&P companies have posted negative growth for the past six quarters;
• Earnings in the last quarter were the worst since 2011;
• Dividends and stock buybacks equaled 128% of earnings this past year;
• New stock buyback announcements are down $115 billion this year;
• Median debt in the S&P 500 is $5.43 billion, it's highest eeeevaaar; and
• The debt to earnings ratio is at its highest since 2003.

Debt to me is a major issue.  Easy credit exists at the moment due to central banks and investors having no place to earn a decent return without turning to the corporate debt market.  But if rates go up, creditworthiness goes down and liquidity dries up, there are going to be a lot of companies unable to roll-over their debt.  Time is approaching to give the devil his due.

But other than all that, Janet is right, everything is coming up roses!

Feeling the Pinch(ion)

While it gets a fair amount of press, the financial woes of the nations pensions do not seem to get as much attention as they should from the government and the Fed.  Let me qualify that.  The pension issue is not getting enough attention other than from those politicians that are in jurisdictions that can no longer ignore these obligations and kick them down the road.  Illinois and Chicago in particular are nice poster children for the problems that are gradually being visited upon more jurisdictions.  There are a host of reasons for the issue with the principal one being politicians knowingly not funding pensions and using the tax money for more immediate needs.  After all, if you are in office four, six or eight years, why take the pain yourself when you can hoist it upon some politician down the road. 

Another reason for the underfunding is that pensions regularly rely on getting unworldly returns on their investments.  Expectations of 7%, 8% and higher are common.  Guess what happens when those expectations are not met or are lowered?  Well, the Governor of Illinois just found out:

http://www.zerohedge.com/news/2016-08-27/illinois-taxes-rise-500-million-after-teachers-pension-fund-cuts-returns-assumption-

Just a reduction in expected return from 7.5% to 7.0% has given him a whopping half a billion dollar shortfall that taxpayers of Illinois now need to make up next year.  Let's clarify that; it is one that the remaining taxpayers will have to make up next year.  You see, it seems Illinois and Chicago are losing some taxpayers.  Last year Chicago lost more than any other metropolitan area in the U.S.

http://www.chicagotribune.com/news/local/breaking/ct-chicago-population-record-loss-met-20160324-story.html

And as Illinois as a state is losing them left and right - at a rate of 1 resident every 10 minutes.

https://www.illinoispolicy.org/press-releases/illinois-losing-residents-at-a-rate-of-1-person-every-10-minutes-new-report-from-il-policy-institute/

Which means there are going to be fewer folks to pay that bill, which means the incentive for more to leave just increased, and so forth and so on.  For more details on the woes of Chicago and Illinois, I recommend Mish Shedlock who lives there and follows it closely.

https://mishtalk.com/

But Illinois is not alone.  With an aging population of baby boomers, this is a common issue throughout the U.S.  It is also one that low interest rates are not helping in the least.  Pensions have no safe alternatives for a decent return (thank you Fed) and are forced to take unnecessary risks with their investments.  These risks over the past 8 years have not been too painful as the markets, at least in the U.S., have continued to grow.  But what happens when the inevitable happens and the markets finally revert?  Those 8% or 7% return rates go up in smoke.  Indeed, a 40% or more correction as many (like Buffett, Ichan, Soros, Gross, Rogers) are now predicting would wipe out these expected returns for many years.  As John Hussman, Ph. D. notes, this overdue reversion to mean likely will lead to an overall return over the next decade of 0%. 

http://www.hussman.net/wmc/wmc160815.htm

Last I checked, that is a tad below the lowered 7% expectation for Illinois.  Let's see, if half a percent means half a billion in increased taxes then another 7% reduction means . . . time to move.

But where do I go, how will I live?  The U.S. as a whole has roughly a nice trillion in unfunded public pensions just waiting to go bust.  But not every state is in the same (sinking) boat.  Illinois, Connecticut, Kentucky, Alaska and my fine state of New Hampshire lead the list in the percentage of unfunded obligations, but there are states like Wisconsin and South Dakota that are 100% funded and a few warmer states close behind, like North Carolina and Tennessee. 

http://money.cnn.com/2015/07/14/retirement/worst-state-pensions/

All this leads to more bad news for our good friend Janet.  She wants to raise rates, she needs to raise rates, but doing so - especially when other countries are going in the opposite direction - is darn near impossible.  I have no sympathy for her situation as she made her own mess and now has to live with it.  My problem is that we all have to live with it. 

And Another One Down . . . Another One Bites The Dust

Well, the Tesla PR machine has got to be cranking up and working overtime these days.  Now another "Autopilot" accident in Texas is making headlines.

http://www.bloomberg.com/news/articles/2016-08-19/tesla-owner-in-autopilot-crash-won-t-sue-but-car-insurer-may

Here the driver was not paying attention as the car was on autopilot on a route where he had used it multiple times before.  Yet, for some reason (that I am sure Tesla will explain well) it failed this time.  The "driver's" injuries are minor and he apparently is not intending to sue, but his insurer who will have to pay for the damage to the car gets to subrogate to his rights and sue for him and it looks like they may do just that.  Should be interesting to watch though something tells me Tesla may just settle this one quietly (and confidentially).

Suit or not, this is three "Autopilot" accidents in just about as many months.  Fortunately for the "driver" and Tesla, no fatality here.  If there were, Tesla's claim in May on having a better fatality record than regular cars may have been at risk. 

So Tesla, we have to ask, how is this beta test of 70,000 "Autopilot" cars working out for ya?

Ubeonomous?

On a related note, Uber is going to conduct it's first real in the market test of driverless autonomous technology in Pittsburgh.  Well, not really ""driverless" as these "autonomous" vehicles will have "professionally trained engineers" in the driver's seat with their fingertips on the steering wheel just in case.  Indeed, the WSJ notes there will be two Uberites in the car making sure all goes well.  Obviously for such a beta test of truly autonomous vehicles this is wise - and apparently legally required.

http://www.bloomberg.com/news/features/2016-08-18/uber-s-first-self-driving-fleet-arrives-in-pittsburgh-this-month-is06r7on

Indeed, unlike Tesla's beta, I view the Uber test as likely a brilliant marketing ploy.  You have undoubtedly a host of Millennials and others just dying to be able to brag to friends that they have ridden in an autonomous car.  And getting to do so with a trained professional or two making sure you are safe is all that much the better.  From the linked Bloomberg article, it appears it will be random on whether someone getting an Uber car will get an autonomous vehicle, meaning those wanting the experience may need several rides before having the experience.  Those wanting the experience who have not downloaded the Uber app now have more incentive to do so, leading to more Uber customers.  Indeed, you may well have some folks traveling to Pittsburgh just to see if they can get a ride in one and they may have to do multiple Uber trips to get an autonomous car ride.  Caching!

Now this beta is likely to be quite limited in terms of time and rides, but hey, it is already getting headlines from Bloomberg and WSJ so Uber must be lovin' it.  If all goes well - which it should with two geeks at the ready - I suspect you will see these Ubeonomous cars in other cities in the near future for further testing and PR.  Building a base of people who have ridden in autonomous cars with no incident is a necessary step in getting consumer acceptance, and this is a wise way to do it.

Now if they can simply program the cars to automatically locate and go after Pokémon Go characters, they will really generate business.

Anyone Need a Driver?

It just so happens that the day this Bloomberg article came out announcing the Uber market test in Pittsburgh I was flying into Pittsburgh.  At the airport I simply took a cab into Pittsburgh and had a nice conversation with the driver about how Uber is driving him out of business.  He is only 35 but ready to hang it up.  His fares are higher and he cannot compete with the convenience of the Uber app, where customers can track their ride. 

On the way back out the next day I had seen the article so I used Uber to the airport, though did not luck out and get a new Ubeonomous treat.  I had to settle for a rather clunky old Buick.  The driver had seen a couple of the autonomous cars around but was not worried.  He could not conceive of how they would deal with traffic and finding the right drop-off location at the airport, which for Uber cars is a different location from other cars.  While both valid points, both will be overcome in time, if not already. 

Ford and GM have already noted these Uber/taxi type applications will be their initial focus for autonomous cars, so it is just a matter of time for both the taxi driver and the Uber driver to be looking for jobs, though the taxi driver probably much sooner.  Apparently many former taxi drivers are simply becoming Uber drivers, according to my driver, so they get to lose their job twice.  You have to ask, what are all these unemployed truck, taxi, Uber, bus and limo drivers going to do to the employment situation in the U.S. and around the world over the next 5-10 years?  Or maybe it will be 10-15 or 15-20 or more.  It may take a while but it is coming.  Then what?

So factory jobs have been in the process of automating for decades and that is continuing.  Now service jobs – be it check-in at the airport, ordering a meal at the fast food joint, the concierge at the hotel, basic lawyer and accounting functions or almost anything else – are being automated.  And service jobs are what a lot of the factory workers shifted to when the factories closed.  Look at the numbers since the last recession.  Employment in factories is actually lower today, so all the job growth Obamarama likes to boast has been in the service sector, a/k/a the lower paying service sector.  Don't believe me, look at the stats, which conveniently you can find nicely summarized right here:

http://www.firstrebuttal.com/challenge-for-the-market-pros-ceos-and-phds-read-and-answer-the-last-sentence/

If you do not have time to read it all, let me highlight the passage of importance to my point here.

What this means is that while part time and minimum wage jobs have kept up with working population growth there remains a 5% gap overall and that gap is directly within the breadwinner job sector.  Again this means there are proportionately 10M fewer breadwinner jobs for working age people in America today than in 1999.  This is an objective mathematical fact (we like these).  And so when people say “well the jobs market is just transitioning to different types of work” you can say yes, in part that’s correct, to part time and minimum wage work.

And by "breadwinner" jobs, he means those that pay the big money.  Of course we can fix those lower paying service sector jobs by boosting minimum wage a lot to give those employers even more incentive to automate faster. 

It’s good for Obama that he only gets two terms as those service sector employment numbers are going to be taking a turn for the worse before you know it, even without another recession.  If only we could automate Congress and the President; that’s one spike in the unemployment rate we would all like to see happen.

 

I'll Take The Over

In the linked article Mish Shedlock, a major proponent of automation, posits that millions of long haul trucking jobs will vanish due to automation by the 2022-2024 timeframe.  He queries readers whether they agree or thinks it will be sooner or later.  I am taking the over but let me qualify my vote.  Hey, I am an attorney and we caveat everything.

https://mishtalk.com/2016/08/16/ford-targets-2021-for-mass-market-self-driving-car-2021-a-near-certainty/

I do believe, as Mish suggests, that Interstate highways are a much easier obstacle for automation to overcome.  For certain areas of the country where foul weather is not common, highways are well marked and long stretches exist without urban areas and congestion, automated trucking is much more likely to occur earlier in time.  Still, I think it will be quite limited at first and will not lead to millions of jobs lost.  Most trucking, I assume, is in more congested areas of the country as that is where the goods ultimately need to go.

You also have the need to get regulations in place.  As I noted in my recent post on automation, product liability claims can quickly cripple manufacturers if they deploy a host of vehicles before they muster regulatory protections and caps, which could easily take to 2022 or longer to get into place.  A semi tractor and trailer loaded with goods is a massive vehicle and a single multi-vehicle accident caused in part by such a vehicle can easily lead to tens of millions in liability - and in the right (or wrong) state, perhaps even hundreds of millions.  I have been involved in such litigation and it is not pleasant.  It will only take a few such accidents to set the industry back for years.

Ford, GM and others seem to be shooting for 2021 or so for fully automated cars.  Ford, I think wisely, is shooting for the ride-share or taxi market first, where individuals will not own the vehicle or need any training.  The vehicles will have no human involvement in the operation.  In a true Level 4 car, attempted human involvement increases the odds of an accident, so keeping humans in the back seat removed from any meddling is logical.  Letting riders experience the new technology one ride at a time in a taxi might ease them into acceptance.  And the manufacturer or operator of a fleet is better able to properly maintain the autonomous vehicles in operating condition and insure they get appropriate upgrades. Still, I am sticking to my guns on this one and not expecting fully autonomous cars beyond small scale beta testing any time before say 2030.  The technology will be there sooner but the other obstacles will take longer.  For more details, please visit my earlier post "Driving Me Crazy."

http://financialspiltmilk.blogspot.com/2016/07/driving-me-crazy_97.html

Perhaps Mexico Wants the Wall

Mr. Trump has made some great fanfare over his claims that he will make the President of Mexico, Enrique Peña Nieto, who I might add is quite the dapper don, build a wall and pay for it to keep illegal Mexican immigrants from crossing the border into the U.S.  Well, Enrique may have good reason to build the wall, but it is not to keep Mexicans in Mexico but rather to keep those greengos from Estados Unidos (U.S.) from illegally coming into Mexico.  You see, despite the booming U.S. economy President Obama touts constantly, the reality is that for higher paying manufacturing jobs, the U.S. ain't the place to be.  Mexico, my friends, is where the jobs are! 

According to the linked article, Mexico cannot hire enough workers to fill the new factories being built there and billions are being spent to build even more.  Indeed, they are even offering workers new cowboy boots as an incentive to join the workforce.  And nothing spells desperation like free cowboy boots.

http://www.zerohedge.com/news/2016-08-15/mexico-labor-shortage

So the kinfolk said "Jeb move away from there." Said "Mexico is the place you ought to be." So they loaded up the F150 diesel and they moved to San Luis.  Pitosi that is.  Swimming holes, cowboy boots!

Okay, I may be exaggerating a tad to suggest U.S. workers will sneak into Mexico to take their jobs.  That is actually not likely because the jobs there are only paying a measly $3.29 an hour, which is why they are moving the jobs there.  I mean why would a U.S. laborer work for only $3.29 an hour there when you can collect government benefits here and sit around talking about how you used to make $24 an hour before Ford or GM closed your local plant.  Heck, that bartending job serving your former co-workers pays more than that.

Point being, however, that Mexico has a labor shortage so the incentive for Mexicans to illegally cross the border is somewhat lessened.   Seems Trump will have to hire his golf course workers elsewhere, assuming others can pass the ideological exam for mowing his greens.

But I Was Told I Could Take a Whizz . . .

Last month I posted on issues involving autonomous cars.  The debate continues.  Now a Tesla has had an accident in Beijing, which fortunately involved no injuries, unlike the recent fatality in Florida involving a Tesla.  The owner of the vehicle in Beijing did not have his hands on the steering wheel and claims he was told by sales staff that it was a self-driving car.

http://www.reuters.com/article/us-tesla-china-crash-idUSKCN10L0P4

Tesla, of course, denies responsibility saying the drivers are told to keep their hands on the wheel at all times and that the "autosteer" or "autopilot" feature, which is what Tesla has apparently been calling it, is only meant as an "assist" feature.  Certainly, I have no doubt that the warnings you have to punch through to enable the autopilot feature say just that, but according to this driver and some others in China, that is not exactly what the sales people were saying. 

We can debate whether this programmer at a tech firm who had the wreck should have known better, but certainly if someone this tech savvy can make such a mistake, imagine how dangerous these features can be for less savvy folk.  And let me add, referring to the feature as "autopilot" or "autosteer" ain't going to lessen the confusion any as many folks will associate autopilot with the feature pilots engage to go take a whizz.  Word to the wise, don't try going to the bathroom in your Tesla by engaging autopilot. At a price tag of around $145,000, however, it should come with a bathroom

This reminds me of a story my father once told me.  He was in the RV industry and they had an incident where one elderly person driving a motorhome engaged the cruise control so he could go back to relieve himself and, as fate would have it, he wrecked.  Or, I guess more accurately, the cruise control wrecked. 

Gee, is it possible folks buying cars  need training on all this new fangled stuff?  Is it possible that an owner's manual and some pop up warnings are not enough for everyone?  Is it possible Tesla is engaging in a marketing disaster by rolling out these vehicles too soon and without proper training?  You decide.

For added reading, here is a piece from Bloomberg where the author praised the autosteer feature of the Tesla he "drove" for eight hours but nonetheless noted a couple of near death situations he only avoided by being at the wheel and attentive.

http://www.bloomberg.com/news/articles/2016-08-10/i-just-drove-8-hours-on-tesla-autopilot-and-lived-to-tell-the-tale

I think I will stick to my stick shift and enjoying the drive for now.

Don't Laugh

Grossly Distorted Prediction (GDP)

The GDPNow forecast brought to you by the fine folks at the Atlanta Fed is based on formulas.  Some adjusting is done but a at the end of the day if you feed crap into the formula you get crap out.  And thus, as of August 5, 2016, the formulas forecast third quarter GDP at an annualized rate of 3.8%. 

https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1

Hold it.  Keep holding it.  Don't you dare laugh. Okay, what the hell, go ahead and laugh.  This forecast should be from the Federal Reserve Bank of Denver, if there were one.  At least there you have a reason to be high.

 Really, they are trying to be accurate but look at the crap they are given.  I mean did you see the recent jobs numbers with the slight adjustments by the BLS?  Feel free, apparently, to drop the "L."

Here we are a few days later and thankfully the Atlanta Fed has taken the forecast down a notch to 3.7%.    I for one will be surprised if the quarter ends with a reading even half of where they are presently.

[8/12/16 Update:  Forecast revised down to 3.5% due to underwhelming retail sales numbers]

Wish I Had Thought of That

I posted a few weeks ago on the concept that with rising automation and utilization of robots to replace human jobs, perhaps socialism is inevitable.  It was not a recommendation, just a question to chew on.  Well, one billionaire sees the same problem but has a different possible outcome to consider. 

http://www.bloomberg.com/news/articles/2016-08-04/mexico-s-richest-man-wants-a-three-day-workweek

I think Mr. Slim has an idea worth real consideration.  While at first blush it seems like paying someone a full salary for three days a week of work is foolish, is it any more foolish than supporting him through social programs for not working at all?  If there is simply not enough work to employ everyone 40 hours a week, better to have them work some and have some skin in the game and self-respect than not working at all.  Sure, there are some wrinkles to work out, but I think it is worth serious consideration.

A Pence for Your Travel

Apparently since Brexit, travel has surged in Britain, which many are attributing to a weakened pound.

http://www.zerohedge.com/news/2016-08-09/brexit-bonanza-international-visitors-uk-jump-thanks-weaker-pound

Well, that could well be the main culprit, but perhaps, just maybe, tourists consider Britain to be the safer travel destination in Europe at the moment.  After all, it is balking at refugees while many countries who accepted refugees are having repeat issues with terrorism and other crime.  Certainly the terrorism has to be putting a damper on travel plans to France, but other crimes are getting a lot of press and likewise are dissuading tourism.  For example, rape and sexual assault are at extreme levels in many European countries.

http://www.zerohedge.com/news/2016-08-09/germanys-migrant-rape-crisis-spirals-out-control

So why wouldn't you want to vacation instead in a place that just got cheaper and is arguably safer?

Who Are You Voting Against?

This is perhaps the first election I can recall where probably the majority of votes cast for either side  are likely to be more a vote against the opponent than for a candidate.  Polling results a few months ago showed nearly half the voters to be more voting against someone than for someone and with events since then I suspect it is a higher percentage today.

http://www.reuters.com/article/us-usa-election-anti-vote-idUSKCN0XX06E

This is especially the case for Trump, who seems to be "cratering" in the polls:

http://www.bloomberg.com/politics/articles/2016-08-05/-trump-is-cratering-new-polls-signal-deep-trouble-for-republican-nominee

It seems voters are having some Trumpidation in supporting the golden hair wonder.  His off the cuff insulting remarks may not be working as well as they used to.  And Hillary suits the old lawyer joke quite well on "You know how to tell when a lawyer is lying? Her lips are moving."

So I have some sage advice to both candidates as they proceed in their campaigns.  Four little words I once heard a mother lovingly say to her child who was being a tad disruptive.  Donald and Hillary - "Shut the Butt Up!"  Talking, speeches, tweets and the like are simply driving more voters away from you.

Jobs Here, Jobs There, Jobs Everywhere!

Well, that's two months in a row that the fine folks at BLS have shocked us with blow out jobs numbers.  Expectations among "economists" were in the range of 185,000, with the top end prediction around 240,000, but just like last month the BLS shocked to the upside with a reported 255,000 in job gains.  And they revised prior months and added another 18,000 jobs there.  It's time to party!  And indeed, it looks like the market is set to do just that with futures up nicely as we head into the opening bell.

http://www.bloomberg.com/news/articles/2016-08-05/payrolls-surge-as-u-s-hiring-gains-broad-based-for-second-month

Now a cynic might suggest that someone is painting the tape for the upcoming election.  Thank goodness I am not a cynic and I can sleep at night and fully buy into the numbers the BLS is spewing. 

And the good news spew does not stop there. Look as well at wage growth, up a respectable .3% from the month before.  Take that cynic!  Though you should ignore that somehow tax withholdings on wages for July were mysteriously down 1.0% YOY despite all the new jobs and wage increases.  I mean, that must just be an anomaly or taxes going down, right?

http://www.zerohedge.com/news/2016-08-04/ahead-tomorrows-jobs-number-big-red-flag-tax-withholdings-slump

Now on the market reaction.  Yes, it looks like we are going to see a nice bump this morning but then, then, then it may just occur to some that dear old Janet has no real reason to justify not raising the rates at the next Fed meeting in September.   Sure, I am sure some economic disaster in some foreign land will give an excuse or two, but holding pat will be extremely difficult for her to justify with back-to-back incredible jobs numbers.  Certainly the price of gold, down over 1% as I write this, suggests someone anticipates a rate increase is in our future.

Noon Update

Looks like Bloomberg is once again reading my blog and following my lead on financial topics of interest:

http://www.bloomberg.com/news/articles/2016-08-05/fed-comfort-in-upbeat-jobs-data-doesn-t-guarantee-september-hike

A Penny Saved is a Penny Wasted?

You would think after a few decades of empirical proof from Japan the Central Banks of the world would wake up to the fact that John Maynard Keynes may have been wrong - or at least that his theories were best applied in very limited situations for short periods.  But no, now with over $12 trillion in government bonds paying negative rates and savers being punished left and right, Keynes is ruling the roost.  For a perspective on some of the ills of this approach, the linked article explains it better than I can:

https://mises.org/blog/keynesian-blessing-americans-are-broke

I just wanted to throw a little more gas on this fire.  If the whole goal of the Keynesian approach is to reduce or eliminate savings and get people to spend their money, doesn't the focus today have to be on the top 1% of the economic ladder?  After all, according to Forbes, the wealthiest top 1% in the world now hold 50% of the wealth.  In my book, this means they have a whole lot of mula they ain't spending and if they are not spending it and it represents half the net worth of the globe, well Keynes must be rolling over in his grave.  So maybe Bernie was right and the federal government needs to either tax the money away from the 1% and give it to the poor souls who will spend it or somehow force the wealthiest bastards to spend the dough and not hoard it.

Not saying I agree with this strategy because I think Keynesian economics is a bunch of idiocy based on economists who think they can predict, and thus influence, how people act.  Obviously they need to go back and try again as they are not getting their prognostications right.  Does the average Joe on the street really go out and spend more when there is inflation because whatever it is will cost more a month from now or, alternatively, delay spending when there is deflation as it will get cheaper?  Seriously?!!  Ask said average Joe what the CPI rate is or what the CPI even represents - or for that matter which CPI he follows - and you will likely get an blank stare. Ask Joe if he follows the most common CPI-U and let him define it.  If Joe is on Social Security he may actually know what CPI-W is, or at least that it is going nowhere, as his annual benefit adjustments are tied to it, but I suspect beyond that most folks have little idea.  Sure most can likely recite there is not a lot of inflation right now according to government stats, but most do not care.  What they care about is their rent going up, affording car payments and school loan payments.  Whether that crock pot they are wanting will cost $2 more next year or $2 less is not controlling their spending decisions.

But hey, what do I know.  I am not an economist.  I am, however, someone who would like to invest and plan my finances wisely and doing so is virtually impossible with the Central Banks and governments around the globe screwing with and distorting everything.

Update 8/3/16

Looks like Bloomberg sees the 1% holding the wealth to also be a problem for Janet.  They must be one of the handful reading this blog.

http://www.bloomberg.com/news/articles/2016-08-03/why-the-rise-of-the-one-percent-makes-janet-yellen-s-job-harder

Driving Me Crazy

We have seen an explosion in the past few years of developments toward truly autonomous vehicles.  Some predict fully autonomous vehicles to be ready for consumers by 2020.  But then along came the first fatal crash involving a semi-autonomous vehicle, a Tesla at that, and perhaps that timetable has just been pushed back a tad.  If you look a the issues involved in rolling out truly autonomous vehicles, it seems unlikely that we will see them outside of beta testing for quite some time.  Let's start with the recent fatal crash and look at some of the issues it highlights.

According to Bloomberg, Tesla has rolled out approximately 70,000 semi-autonomous cars since October 2014 in a massive beta test of sorts. 

http://www.bloomberg.com/news/articles/2016-07-01/fatal-tesla-crash-spurs-criticism-of-on-the-road-beta-testing

From the description at Bloomberg, these Tesla cars appear to be Level 2 cars, i.e. those that are largely automated (at least for certain driving) but where the driver must remain fully attentive.  It seems, however, that the driver who died and who supposedly was watching a movie at the time was treating the vehicle as Level 3, where the functions are sufficiently automated that the driver can safely engage in other activities but nonetheless can still take control if need be or desired.  Even within the levels you can have a host of variations, such as cars that fall into Level 2 in urban settings but elevate to Level 3 on a well marked interstate. Be it Level 2 or 3, this car still failed to avoid a fatal crash it should have been able to avoid.

In the fatal accident, a Tesla on a highway in Florida unsuccessfully tried to pass under the trailer of an 18-wheeler that had crossed the highway in front of it. It is believed that the car's electronic sensors mistook the white trailer for bright sky and failed to brake. 

In Tesla's defense, it claims its semi-autonomous cars had logged over 130 million miles before this fatality and that the average for regular cars is a fatality every 94 million.  Well, as we lawyers like to say - tell it to the jury!  And I am sure Mr. Musk or his company will have to do just that.

While the deceased is from Ohio, which has fairly conservative mid-west juries and verdicts, the fatal accident was in Florida, which has anything but conservative juries and verdicts.  Eight and even nine figure verdicts from single fatalities are not unheard of there.  Just last year one of those wonderful tobacco companies took a $23 billion punitive damage verdict in an individual wrongful death suit, which did get drastically reduced for constitutional reasons, but you get the picture - not a good state to be a defendant.

Well geez you say, they have to have insurance for this.  And geez I say, I am sure they do (though not for punitive damages).  But nothing like a fatality and perhaps a nice eight figure verdict to raise your premiums and with 70,000 such cars out there and more on the way, it's gonna' take a whole lotta' premium to keep this baby insured.  Because despite accidents and fatalities in these cars perhaps being rarer than in regular old jalopies, when they do occur it is almost for certain that the manufacturer will be held liable. Yes, manufacturers have always had some liabilities in, but most accidents are due primarily if not exclusively to driver error, not product defect, so the liabilities were fewer.  Indeed, almost 40% of vehicle fatalities are traditionally due to alcohol or drugs, but with autonomous cars they virtually all will involve some level of product defect.  In this accident, for example, while the "driver" himself may well have been partially at fault for watching a movie, there's no way Tesla is going to prove to a jury the car did nothing wrong.  Ain't happening my friends. 

And I suspect Musk might get whacked pretty good with punitive damages.  You see beta testing your vehicles on 70,000 end users is probably not wise, especially when many other manufacturers are refusing to do anything of the sort.  Likely other manufacturers are doing so for safety reasons and also they undoubtedly do not want the PR of a fatal accident like just occurred.  When such an experiment leads to the death of a 40 year old former Navy seal, sparks are going to fly and sales are going to drop.

This seems to be one of the big issues with autonomous cars, manufacturer liability.  It is probably not the thorniest but it is one that may well sideline the whole shebang absent a legislative solution, which will likely come eventually but will take a long time.  Ultimately, especially when all cars are autonomous, everyone predicts they will be much safer than cars today.  But if manufacturers are facing massive liabilities for every wreck, even if there are a lot fewer wrecks, they will not survive.  They must appeal for legislative relief along the lines of no fault protection and probably will need it on a federal level to be effective, but that poses a host of political issues to overcome.

You see torts and auto liability are issues traditionally handled on a state level with state regulation and common law.  Driver's licenses are issued at a state level, driving laws are at a state level, required insurance is at a state level and liabilities for accidents are determine under individual state standards.  Giving a lot of this control over to the federal government is not going to be an easy sell.  Can you imagine Texas giving this up?  But it is something that has to be uniform to work and it will not be uniform on a state level.  Thus, Volvo, for one, has been pushing the federal government to regulate this area and not leave it to the states.

http://www.digitaltrends.com/cars/volvo-urges-u-s-government-to-regulate-autonomous-cars/

There is enough money and societal benefit at stake that it will likely eventually happen, but it will be a long and painful journey.

But liability is just one issue.  Assuming they get uniform legislation, manufacturers still need to deal with the public attitudes.  You probably have around 70,000 owners of semi-autonomous Teslas now very hesitant if not outright refusing to use the semi-autonomous features that they can turn on or off.  Who wants to endanger their own lives or the lives of their families over a system that cannot tell a freakin' semi trailer from bright sky?

At least in Teslas some of the semi-autonomous features can be disengaged and the driver can take over.  That will not be the case for all autonomous cars.  Level 4 cars, like those being designed by Google, do not allow this.  There are apparently some thorny issues switching from auto pilot to driver control while cruising down the road and doing so in an emergency situation is even more problematic.  To avoid this increased danger, Google is not planning on giving the occupant a choice.  There will be no steering wheel. It is either the computer or nothing. 

Still, when the bugs are worked out the expectations are these autonomous cars will be a lot safer, saving probably tens of thousands of lives a year just in the U.S. IF they go into across-the-board use.  Now it seems odd we feel relatively safe driving ourselves or letting others drive us (though I cannot relax with my wife behind the wheel), but we do not trust autonomous or semi-autonomous cars that are safer.  Still, it won't take too many serious accidents to dampen the willingness of the public to trust a computer.  Computer problems, after all, are nearly a daily happening.  Half my draft of this article, for example, got lost yesterday when my computer crashed and went into the blue screen of death.  This happening while typing a blog post is a nuisance; it happening while going 70 mph down the highway gives all new meaning to the blue screen of death.

Certainly manufacturers are building backup systems and a default for the car to safely pull over and park if all goes wrong, but technology is not perfect and every accident will be blamed on the technology.  The more this happens the less folks will trust these cars to drive for them - despite them still being a lot safer than people driving.  Overcoming this psychology will be difficult and is not happening in the next few years as some predict.

Another issue manufacturers and others seem to downplay is the prospect for vehicles operated by computers to be hacked.  While manufacturers are undoubtedly jumping through hoops to insure security, there is no computer that cannot be hacked.  An individual or group with sufficient knowledge, time and resources will achieve this in time.  Perhaps it will just be a bored teenager getting the cars to communicate to each other about some traffic patterns that do not exist just for fun, or perhaps it will be terrorists driving cars off cliffs or into each other.  The stuff of fiction movies will eventually become reality.  And if you think a few accidents will hamper people's desire to use an autonomous vehicle, wait until the first successful hack gets publicized.  This issue is also a prime concern on the insurance side of things, where a recent survey found it to top the list for concern for risk managers:

http://www.bloomberg.com/news/articles/2016-07-19/cybersecurity-is-biggest-risk-of-autonomous-cars-survey-finds

You can chalk my pessimism up to me being an old fart who still enjoys driving a stick shift.  There may be some truth to that, but there are certainly strong pros and cons and I believe it will take a lot longer than most assume for us to go full throttle into fully autonomous vehicles.

Rand Corporation did an extensive study on autonomous vehicles, first released in 2014, which you can find here:

http://www.rand.org/pubs/research_reports/RR443-2.html

In it they identified a host of pros and cons to autonomous vehicles.  Despite being around 200 pages, it is worth the read.  It identifies a number of other considerations I have not addressed above.

Happy Independence Day - Britain!

A lot has been written on Brexit and whether it is good or bad for Britain.  I don't know enough to know for sure and from what I have read I believe no one really does.  Certainly there will be a lot of short term pain while everything is worked out, but I do see the initial drop in the FTSE has been overcome and then some, with a nice gain over the pre-Brexit level.  Go figure.

This market rebound could be largely due to the pound taking a dive, which will help exports and British companies that do so, but Brits are going to be paying a good bit more for imports, and last I checked they import quite a bit of what they consume, so this cuts both ways.  If I were a cynic, I might suspect that Central Bank interventions have had something to do with the FTSE and other markets having a rebound.   Either way, the market does not reflect Brexit to be another Lehman moment.  (For that we should be watching some of the European financial institutions that are setting new record lows)

Indeed, there is firm evidence that the Brexit move has already resulted in some tangible benefits for Brits.  Well, for at least one Brit anyway, David Cameron.  You see, he seems to be enjoying his new found freedom, lounging on the sofa with the occasional jaunt to the frig.  And the problems of the world are no longer his.  As he observed:

"I flicked on Sky News and apparently there was some unpleasantness yesterday which is absolutely none of my business anymore."

Here is one fellow making the best of it.  He is, after all, in an enviable position.  If all goes to hell in a hand basket he can say "I told you so" and if it all turns out for the best, well, he benefits with the rest of Britain.  Win/win and the abdication of any responsibility has to be refreshing for him.

http://www.thedailymash.co.uk/politics/politics-headlines/cameron-spends-relaxing-day-at-home-laughing-20160701110050

Let's just hope it works out this well for the rest of Britain.

While no one knows how it will work out, there is something to be said for more independence.  The countries of Europe are simply too different in their origins, politics and approaches to life to be combined to the extent they have been.  The turmoil over the past few years in Greece epitomizes how different the Greeks are from Germans in financial matters.  Are the French of a same mind as the Brits or Germans on politics, social issues and the like?  I think not.

For a nice piece detailing why a painful vote for independence made sense to one well-informed Brit, I refer you to this work by Ambrose Evans-Pritchard.  He seems to know of what he speaks:

http://davidstockmanscontracorner.com/brexit-fears-giant-hoax-or-calm-before-the-next-storm/

So as we in the States approach our annual celebration of independence from Britain, we watch the turmoil across the pond and wonder if some day Britain will likewise celebrate its own Independence Day.  And who doesn't like having another national holiday to take off from work!  See Britain, silver linings everywhere you look.

Apple Loses 100,000+ iPhone Customers!

In case you missed it, Apple's Chinese manufacturer of the iPhone, Foxconn, fired 60,000 workers and replaced them with robots. 

https://mishtalk.com/2016/05/26/we-need-new-labels-i-propose-100-robot-made/

Now if you figure that these workers and their families are all potential iPhone customers, or likely already have them and would be customers when it comes to replacing them, and that after being fired for robots they cannot afford such luxuries, then you can easily get to 100,000+ fewer iPhone customers.  Now they might secure other jobs, but as Mish points out in the linked article, these workers are in a city in China where thousands of other manufacturers are automating.  Moreover, companies are leaving China altogether as you do not need cheap labor if you do not need any labor, so automated factories are more efficient if they are built near the customers, like in Europe or the U.S.

For example, Adidas and other shoe manufacturers are gradually eliminating millions of shoe making jobs by building automated factories in Europe and elsewhere,.  So all those Adidas workers replaced by robots cannot afford iPhones and the 60,000 workers who made iPhones ain't going to be walking around in new sneakers either.

You see the problem here is that old supply and demand thingy is tied to those on the demand side of the equation having money.  The Central Banks around the world are kicking butt trying to get folks to spend money, which increases demand, which leads to more supply, which leads to more profits and which USED TO lead to more jobs, which leads to paychecks, which leads to more demand.  You take the more jobs aspect out of the equation and there is no money around to lead to more demand.  Indeed, you are stripping jobs and demand and taking the process in the opposite direction.  The whole capitalistic structure is shooting itself in the foot.  But hey, let the other companies hire people as we need to automate to enhance profits so that the 1% can be even richer. 

You tell me, how many iPhones and sneakers does that 1% need?

Obviously we cannot and will not stop progress in automation.  The challenge has been and will continue to be finding jobs for the millions that are and will be losing their jobs to machines.  For the U.S. it started as losing jobs to cheaper labor overseas, which is still an issue, but it is morphing into a global issue of losing jobs to machines.  We are getting more and more into a world where we do not need nearly as many people to supply the needs of the people.  This will be an ever increasing challenge for our "leaders," if you want to call them that.

Euuuuuu . . . I Smell Something Nasty

I won't repeat what is filling the wires everywhere you look about the EU and Brexit.  Rather, let me just note that the underlying problems with the EU structure, which in no small part led to Brexit, was not that difficult to see coming.  As I said in 2011::

"EU Splitting?

A full two years ago I posted a prediction that the EU will break up. I think I called it the time the EU losing the U. This was a post by me that got a lot of negative feedback then- as in it was an insane proposition. Let me simply say, I stand by my original proposition:

http://online.wsj.com/article/SB10001424052970204010604576592830020996482.html "

And this post was referring back to a prediction I made at the end of 2008 for the year ahead.  I guess as most men, I was a bit premature:

"EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010."

But alas, I must admit that my belief on the EU splitting was tied pretty much wholly to its financial structure.  Britain's vote was based on this in part no doubt, but I think the man or woman on the street is voting more for other reasons, like a desire to better control their borders and not wanting to cede as much control over their lives to the EU.  In scary times, folks like to have that old self-determination thingy, for better or worse, and letting the likes of Angela Merkel have a lot of influence over their lives was probably not sitting well.  And for Britain, I am thinking it is for the better - as apparently 52% of the people in Britain think as well.

https://mises.org/blog/brexit-individualism-nationalism-globalism-0

On the economic front, for example, you might have noticed a curious thing (curious that is for the Remain crowd); the UK stock market - FTSE 100 - was only down a tad over 3% (after an initial dive of 6%).  Indeed, it survived the day better than the DOW.  And compared to other EU stock markets, it ruled.  The German DAX 100 sank nearly 7% and the French CAC 40 was down a whopping 8%.  This could just be attributable to the pound dropping in a way Trump would describe as yuuuuge, which should strongly support UK exports.  I mean, they do have exports don't they.  Oh yeah, Rolls Royce is in Britain. They also make, uh, something else I am sure, like beer.  Whatever they make just got cheaper compared to most other currencies.

This is not to say the rest of EU will not impose trade barriers like tariffs and the like, but that is a two-way street and Britain did represent nearly fifth of the entire EU economy.  This will  indeed be interesting to watch. 

It will be especially interesting to see if other EU members follow the British lead, which I expect will indeed happen.  There are a bunch of unhappy voters in various countries it seems as elections in other parts of the EU over the past couple of years reflect a growing influence of the same type of sentiment the British populace just demonstrated.  Discontent voters are obviously making their voices heard on this side of the pond as well.  Interesting times.