When "Auto-Pilot" is Not Auto-Pilot

Autonomous cars have quite a ways to go.  Tesla has for years had an auto-pilot feature on its cars that is not exactly true to its name.  It appears they were beta testing tens of thousands of cars on customers and collecting data from the cars to improve performance and autonomous performance.  Unfortunately, for one customer in Florida whose car could not tell the difference between the white side of a semi and the sky, that meant an early death.

News out today suggests the government believes Tesla's "Auto-Pilot" system was at least partially at fault, which I wrote about many months ago. 

http://financialspiltmilk.blogspot.com/search?updated-max=2016-09-30T09:24:00-07:00&max-results=7&start=14&by-date=false

Now I make no predictions on the outcome of the suit as lawyers will sue whenever they have the least bit of evidence - or even none- to support their position.  I am an attorney and see this all the time.  Still, the government finding the Tesla Auto-Pilot at least potentially at fault will likely lead to some liability.  Well, using 70,000 or so customers to beta test your system may have its consequences. 

By the way, the House passed legislation recently to advance autonomous car testing throughout the U.S. and I expect the Senate to follow suit.  We will see.  Either way, the federal government taking some control over the regulation of these vehicles will certainly speed up their deployment.

"LOWER" Act

The Administration is working on a RAISE Act that makes it more difficult for low wage foreigners who do not speak English to enter the country legally and get a job.  While I support efforts to stop illegal immigration, I am not a big fan of raising the bar on legal immigration.  My ancestors are all immigrants and the United States is a melting pot and I believe benefits from it.  In my view, our strength is in no small part from our diversity.  OK - political speak done.

But I do not think it is political speak to note the RAISE Act is ill considered and especially now is not the time.  I truly think and assume our President will reconsider the Act given current circumstances.  And by current circumstances I am referring to Harvey and Irma.   I wrote twice in August on this site on how low wage labor was being pushed out due to Administrative policies and driving up housing costs and how the participation rate on those here legally in the U.S. was the lowest in decades.  That was before we were hit by two massive hurricanes.

Also, since then I have learned of a study attributing a fifth of the low participation rate of those young males legally in the U.S. to drugs, which is truly sad:

http://www.newsweek.com/one-five-men-leave-workforce-due-opioid-epidemic-so-drugs-are-stealing-jobs-661395

Either way, we will need a lot, and I mean a lot, of workers to deal with housing repairs and the like in Texas and Florida.  Setting up a procedure to legally admit them and vet those already here for legal citizenship, or at least legal work, makes abundant sense to me.  But hey, what do I know.

Jobs, Jobs and More Jobs - But Who Will Fill Them?

Well, Bloomberg had a nice article this week on how greater enforcement of immigration laws is having an impact on housing prices.  Surprise!  Yes, the prices are going up as the price of labor is going up significantly and tariffs on lumber are not helping either.  Good news if you are a legal resident of the U.S. doing construction work as wages are going up, but bad news if you are a construction company or someone wanting to buy a house.  Difficult balance, but as I wrote in December shortly after his election, President Trump's policies will increase minimum wages whether he intends to or not.

https://www.bloomberg.com/news/features/2017-08-28/trump-s-immigration-crackdown-is-making-new-homes-more-expensive

Yes, it turns out folks from across to border are heavily involved in the construction industry - not to mention numerous other areas of hard labor.  Requiring them to come in legally makes sense, but raising the bar with the RASIE Act to their entry, does not make sense in my book.  Certainly not with the already low unemployment numbers.  Perhaps we can lure some Millennials back into the job market with higher pay, but I do not see that as being something that will happen to any significant degree. Last I checked there are a lot of hard labor industries actively looking for qualified workers and coming up short.

Any way you look at it, new home prices are high and perhaps going higher while sales are suffering.  Not good if your overall goal is to boost the economy.  Not good if you are looking to buy a home or sell a home.  Home sales generate not just profits for the builder and jobs for the construction workers, but folks that buy a new house look to furnish it and buy all the stuff (a/k/a the junk in my house) that helps support numerous industries.  What is good for home sales is good for the country and right now the sales are not looking so good, both with new homes and existing homes.

https://mishtalk.com/2017/08/23/new-home-sales-plunge-to-lowest-annualized-pace-in-three-years/

I also heard a report on the radio this morning that labor, once you include benefits and the like, for auto manufacturing is well below 10% of the cost in Mexico of what it is in the U.S.  Fortunately, most of the cost of cars is not in the labor but manufacturers are not idiots.  If politics force them to build in the U.S., they will simply automate more.  The U.S. needs to focus on jobs of the future, not jobs of the past.  Then again, there seem to be a lot of jobs going unfilled in construction and similar hard labor areas.  Given the participation rate in the U.S. is at the lowest levels seen in decades, perhaps the focus should be on why.  Instead of going to college perhaps more schools should focus kids on different career opportunities, like plumbing, framing, electrical, roofing or the like.  Just sayin'.

Why It May Be Time to Worry About Household Debt

So I see this article today on why we should not worry about household debt:

https://seekingalpha.com/article/4099560-worried-household-debt

As the argument goes, while household debt is at record levels, no need to worry as GDP is up significantly as well.  The author includes nice charts apparently seeking to show how an increase in household debt this past quarter of a mere $114 Billion (yes, that is with a "B") is nothing to worry about.  This is apparently despite the fact that flows of credit card debt into early and serious delinquency have increased over each of the past three quarters, which is a trend not seen since 2009.  Hmmm, what was happening in 2009 I have to wonder.  And increases in auto loan delinquencies, especially in sub-prime, are also on the rise.

http://www.calculatedriskblog.com/2017/08/ny-fed-household-borrowing-grows.html

This "there is no need to worry" article goes on to cite stats, taken from the St. Louis Federal Reserve site FRED, to substantiate his claim.  He notes that while liabilities have surged, so too have assets.  He notes that the overall quality of the debt, as in credit scores, has improved, which also should lead to less worry, and brushes off the point that mortgage loan standards have improved significantly while standards for student loans (due to government guarantees) and, especially, auto loans, have deteriorated.  He notes the latter two are only 20% of the overall debt.  Fortunately for us, he ignores that this only equates to about $25 Trillion (that is with a "T) of total household debt.  Did I mention credit card debt deteriorating as well? 

He fails to mention that the vast majority of increase in GDP is going to the top 10% of income earners with the bottom 90% barely moving in GDP since 1980 in inflation adjusted terms. Income disparity is over the top as is the inability of those in the bottom 90% to service debt.

http://www.motherjones.com/politics/2016/12/america-income-inequality-wealth-net-worth-charts/

The author finally - at the behest of others - does include a chart from the FRED site on median income versus debt, which shows the slight decrease over the past few years in household debt relative to median income, but you might observe that the improvement there is not nearly as defined as the improvement in total  GDP versus debt.  Moreover, it shows median income versus debt only back to levels around 2006, shortly before the worst recession since the Great Depression. 

Point being, be careful in understanding the stats you are being shown.  Indeed, if you look back just a few years before 2006, say to 2002, we are today nearly 50% over the median income to debt levels then and almost 300% over levels shown in the chart for 1984 - go figure.  Sounds to me like nothing to worry about - don't you agree?  Or perhaps not.

Finally, let me note that due to the mortgage debacle in 2008, the mortgage debt is still below where it was in 2008, meaning that the "record" debt today is slanted more toward credit card, student loans and auto.  Last I checked, at least the auto and credit card debt tends to be a significantly higher rates per annum than mortgage debt and needs to be paid off - or at least should be paid off - in a much shorter timeframe than 15-30 years. 

Debt is worrisome and not to be ignored as it was a decade ago. Do not get me started on corporate debt.  Whatever happened to the advice from our parents to save money, pay off debt and live within our means?  Well, that is a story for another day.

Restaurants - Something To Watch

Here is a negative piece on how foot traffic at restaurants was down a good bit in July.

https://www.nakedcapitalism.com/2017/08/wolf-richter-worst-restaurant-recession-since-2009-dings-inflation.html

I am not wholly agreeing with the doom-and-gloom title as one month does not a recession make, but it is an area to watch.  I similarly saw an article this week where one chain, Applebee's, is reversing course on trying to change their menu and stop advertising to get millennials in the door.

Some of this undoubtedly relates to the same problem afflicting retail stores.  They are way overbuilt.  I saw a piece this week noting the U.S. has five times as much retail space per capita as Europe, which is the main gloom causing all the store closings given on-line sales - which many point to - are only still 8% of retail sales and Amazon (the store closing Devil) is less than a fourth of that amount.  Nope, it seems we overbuilt retail and in my view overbuilt food establishments and now are paying the price.  The "build it and they will come" motto, is not quite working out too well.  Apparently not for Dick's Sporting Goods, whose CEO described retail as being in panic mode, and this for them is despite the relatively recent closure of Sports Authority,.

http://www.zerohedge.com/news/2017-08-15/dicks-ceo-retail-industry-panic-mode

The reason I am focused here on the restaurant numbers (versus retail) is that a lot of the job growth in this recovery has been in service sector jobs like waiters, bartenders and the like.   Indeed, manufacturing has declined, government hiring is not strong, so the vast majority has been in the service sector.  If that reverses, so will the reduced rate of unemployment, which is highly distorted anyway due to the participation rate. 

Again, just an area to watch.  Not worth sleep over just yet.

Autonomous Cars - Issues Yet to be Addressed

Another contributor to TalkMarkets that I follow, Mish Shedlock, has been posting for years on autonomous vehicles.  I have posted several times myself but not as extensively as him.  He has a new post today on GM announcing a test fleet of vehicles they will use with their own employees.  Mish's piece on this is well done and I recommend it:

https://mishtalk.com/2017/08/11/gm-tests-fleet-of-46-robocars-in-sf/f

Let me add a few other things

Regulations

Mish mentions the regulatory side, but has not in my mind given it the time it deserves.  Regulations on autos are still mostly done at the state level (licensing, speed limits, inspections) and while most states have been grappling with regulations for autonomous cars (around 20+ have regulations and over a dozen more are considering them ), the resulting regulations are all over the board - which in my view is a key part of the problem.  Last I checked cars tend to traverse state lines, so inconsistent regulations between adjoining states that make the vehicle stop in its tracks at the border are not going to be well received by the autonomous taxi passenger trying to get to the airport. 

Nonetheless, a lot of safety regulations, like airbags, are traditionally done at the federal level by the Department of Transportation, so there is precedent for the Feds taking over - like it or not.  And while the National Highway Traffic Safety Administration issued "guidelines" for autonomous cars, those "guidelines" are not getting the job done.  We need uniformity in this area. 

Due to these issues, it seems Congress is looking at the problem and perhaps may take action (don't get me started on whether the current Congress can take any action, but they are at least looking at it).  Recognizing the need for uniformity, the Senate published bipartisan principles outlining what the regulations might look like, and a House subcommittee approved an autonomous vehicle package making it easier for regulators to act.  The Act talks in terms of "preemption," which is government speak for states to take a back seat (pun intended) as the Feds are taking over.  The focus is also, like most state regulations, on autonomous vehicle testing requirements more than their actual final rollout and daily use.  Still, a step in the right direction.

Liability and Insurance

Beyond regulation, there is the whole liability/insurance issue.  Expectations are for vehicular accidents to in time go down significantly.  Even for cars with drivers the accidents should go down as they have fewer terrible drivers to deal with and avoid and if they are terrible drivers themselves the autonomous vehicles can react and avoid accidents with them virtually instantly. 

Auto insurers are facing an unprecedented change over the next decade or so, so if you are invested in them make sure they are preparing for the new future.  If accidents go down even 50%, and higher is predicted, rates will go down drastically.  People, especially in urban areas, will not even have cars and have no need for insurance. Thus, the number of vehicles insured should go down significantly. 

The insurance market will need to shift to product liability insurance for the manufacturers, who will face product liability exposure (assuming no regulatory protection).  But you also have all the companies supplying electronics, GPS signals, programing and similar attributes to the autonomous vehicle operations that may be at risk.   They will need insurance, so the market will respond and it is worth watching to see what insurers are first to the market in this area.   Cyber risk insurance, for example, has over the past few years become a multi-billion dollar market, so insurers would be wise to be looking at this new evolving market as well.  Still I do not see the insurance protecting manufacturers and other related companies will generate anywhere close to the premiums that car insurance generates today.  Insurance premiums are based on risk and risk is tied to historical losses, so if the accident, or even theft, rate goes down dramatically, premiums will have to follow or companies will simply self-insure. 

As a side note, cyber risk insurance may help supplement premiums quite a bit in this autonomous area.  Autonomous cars, driven by computers and hooked into the internet, are at danger of being hacked.  The risk of a terrorist hacking some cars and driving them off cliffs or into each other, might just lead the manufacturers to seek cyber risk insurance protection.  At least they would be wise to look into it if it exists.

Auto Manufacturers

It is no secret that several auto manufacturers are fast and furious in their dive into the autonomous vehicle market.  GM, which Mish discusses, is relatively new it seems to the game and the car shown in Mish's article is just plain bugly.  Others, like Volvo and Ford, have been working on it for a while.  And you obviously have the new kids on the block (relatively speaking), like Tesla and Google, trying to capitalize. 

For traditional car companies this is a must in my view.  Autonomous vehicles will allow someone not too many years from now to hit a button on an app on their phone and have an autonomous car of their choosing there in minutes to take them where they please.  No need for a car, much less two or three, sitting in the garage.  No need for car payments.  No need for car insurance.  No need for car maintenance.  No need for washing or polishing or cleaning out the car.  NICE!

Car sales in theory will be cut drastically as will manufacturer profits - unless they can replace the sale profits with profits from people paying for cars to pick them up and take them where they need to go.  Thus, the rush into the market.  Deciding which companies will succeed and which will fail is key to investment results.

Raising the Minimum Wage, Without Raising the Minimum Wage

I noted in December after Trump's election that one problem I foresaw with his position against illegal immigrants and building a wall was the low unemployment and the high non-participation rate by legal citizens of this US of A.  The unemployment rate at the time was 4.9% and has since dropped to 4.4%, which is quite low, and the participation rate has bounced around a bit but is about the same, which also is extremely low - it's lowest in decades.  In short, my position was that we likely need a lot of these illegal aliens to fill the jobs. 

Don't get me wrong, I am not in favor of people entering the country illegally and certainly any who commit crimes need to be dealt with, but the reality is there are a lot of jobs out there these folks are filling that are not being filled - or wanted - by legal residents.  I am more in favor of allowing more folks from outside the country, be it Mexico or elsewhere, to come in legally with proper vetting.  And I suspect plenty of employers agree, especially some in the construction trade, agriculture and service sector.

Thus, I was a tad surprised this week when the Administration announced its RAISE Act that is reportedly designed to reduce the issuance of green cards, i.e. legal immigration, by 50% and that by its very terms targets immigrants who do not speak English and would fill low wage jobs.  Hmm, what immigrants would that be?

The surprise to me is that the Administration is targeting low wage jobs.  Nearly all the job growth in the U.S. for the past couple of years has been service sector jobs, which are low minimum wage type jobs, perhaps with tips.  We are talking waiters, bartenders, checkout clerks, cooks, maids, bus boys (which I did one summer and do not recommend) and the like. Not high paying jobs.  But as President Trump mentioned in announcing the new RAISE Act, it will eliminate a lot of competition for low paying jobs, effectively making employers pay more for U.S. citizens to fill those jobs.  Which means we are not raising the minimum wage, but the RAISE Act will RAISE the effective minimum wage.

I am not particularly sold that reducing competition will get folks into the job market in masses.  The participation rate, according to the bureau of labor statistics, is at 62.8%, which is low.  I think most are not working because they do not want to, and some perhaps due to the drug epidemic in this country.  Raising the minimum wage a couple bucks is not in my view likely to alter that significantly. Either way, I believe the RAISE Act will have a lot of push-back from businesses as it will make filling low wage jobs nearly impossible.  In the long term, this merely leads employers to do as much as the can to automate and get rid of employees.  It is happening left and right in stores, restaurants, factories and soon taxis and long-haul trucking, with autonomous vehicles.  The Administration may foster wage increases in the short-term but likely will lead to lots of unfilled jobs and pushing employers to automate - and thus eliminate jobs - in the mid-to-long term.  We will see.

Let me add, however, that there has been, as noted in the linked Bloomberg article, a slight uptick lately in participation rate for low paying jobs, so there may indeed be some light at the end of this tunnel.  Obviously this is not due to the RAISE Act, but some attribute it to increased minimum wages in various states.  Whatever the cause, increased participation by US citizens is a good thing but we have to wait and see if immigration policies will have the impact they are designed to have or, alternatively, whether they simply leave a lot of employers in need of workers and/or paying a lot for the workers they can hire.

https://www.bloomberg.com/news/articles/2017-08-04/americans-on-lower-rungs-get-relief-as-labor-market-strengthens

August 6 Update

Much of what I said in my post above is today in an article in Bloomberg, which similarly notes the already tight labor market and trends toward automation.  They add that increased pressure on wages may simply push more companies to shift plants and jobs overseas to lower wage countries.  Either way, seems the Senate is not likely to pass the bill (or any bill), so it looks like no RAISE in the immediate future.

https://www.bloomberg.com/news/articles/2017-08-05/immigration-curbs-may-be-wrong-way-to-boost-weak-u-s-wage-gains

Trump's Tax Plan Needs More Planning

I attach a very good article that walks through some of the benefits and downfalls of Trump's proposed tax plan.  While cutting the rate for corporations is well publicized (and last I checked Trump and his family have a number of corporations), a less well publicized aspect is that many of the wealthiest folks with pass-through incomes will also only pay the 15% rate.  And those who do not have pass-through incomes can legally alter their job structure to be eligible for pass-through treatment.

http://www.europac.com/commentaries/damn_deficits_huge_tax_cuts_ahead

Pass-through income, by the way, is simply a structure where you have, let's say a LLC, and the income passes through it to the owners, like in a law partnership that operates as a LLC.  The LLC is not taxed the pass-through income as the partners/owners are taxed individually.  But under the Trump plan, they get to enjoy the 15% corporate rate even if they are making millions per year.

This all sounds great if you are the beneficiary, but the real point of the attached article is the massive deficits that will occur as most taxes in this country come from the few at the top who will benefit from this new reform - you know, like the billionaires that put it together. 

I highly recommend reading the attached as I will not summarize it all here.  Let's just say the ultimate cost to the country can be devastating.

Destroy All The Jobs

I posted some time ago on the prospect that increased automation in factory, auto-related and service sector jobs will lead to millions less jobs and perhaps the need for a more socialistic society.  I am not a fan of socialism, but if the jobs are gone what else is left?

Well, as pointed out in the attached article, we have been here before.  Farming jobs, for example, occupied 90% of the population a couple hundred years ago and now, at least in the U.S., only 2%.  Factories have been going through automation for decades.  And despite all the jobs that have disappeared over the years, new ones have shown up to replace them.  Indeed, if you look at Elon Musk and his various enterprises, which includes autonomous cars, they now employ around 30,000 people, which is not bad.  So perhaps there is hope for my kids to have jobs.  No one knows what the jobs will be 20 years from now, but maybe, just maybe, they will be better.  Either way, a good point made in the attached article is that it is foolish to fight progress in an attempt to preserve jobs that are no longer needed.  Yes, we have to plan for the change and allow time to adapt, but it is happening whether we want it or not.

https://mishtalk.com/2017/03/04/does-technology-destroy-jobs-if-not-what-does/#more-44478

Lookin' Good Man

I am in the islands for vacation and just checkin' in from time to time, but from what I can see, everting is lookin' good man!  The stock market soared - and I mean soared today - based undoubtedly on a subdued speech by the Don last night.  Dow now over 21K - OMG!  And it is all comin' up roses.

Indeed, rates of a Fed hike later this month just reached 80%, which must be tied to a rebounding economy, right?  Now I suspect part of this is Janet and others on the Fed not liking the Don and part of it is simply them making up for lost time to get to where they need some wiggle room when the inevitable happens. But either way, rates are likely going up, which means all that wonderful debt out there -see my last post - is becoming more expensive to maintain.

And then there is that whole GDP forecast thingy.  The GDPNow site from our friends at the Atlanta Fed was a mere month ago at a 3.4% forecast and today has notched down just a tad to 1.8%.   Seriously, falling like a rock. But hey, all is well, so go back to the beach and enjoy the waves man.  I know I intend to do so as there is not a thing I can do about it.

Doubts About Debt

I attach what I consider an absolute must read from Mish Shedlock, who I follow closely.  Like many other sites I visit I do so more for the factual information than the slant provided as I like to form my own point of view from facts.  In this case, Mish is dead on and his earlier points in the piece talk about debt at various levels, which I view as one of the major issues we face today and one that Trump's policies will exasperate, perhaps significantly.

https://mishtalk.com/2017/02/10/impediments-to-growth/

Perhaps it is old school, but I was raised being taught that the prudent financial thing is to save what you can early on so that you have the resources later to do the things you want.   Saving money was always in my childhood considered a good thing that everyone should do.  I started a savings account when I was like five years old and used to love to go to the bank and put in whatever I had, sometimes as little as a quarter.  Now I might add that my aunt worked there and always gave me a sucker when I showed up, so I had an ulterior motive, but I was saving.  And I guess I should add as well that the few hundred I saved in childhood was blown on one Spring break in college, but still at least I had it to enjoy.  I certainly did not need to go into debt on a credit card to enjoy Spring break, which made it a tad more relaxing.

Yet Keynesians like Krugman and Summers insist that savings is the devil and debt is salvation.  I think they should both come out and tell the world how much debt they have in relation to their incomes.  Do they know what it is like to struggle to make ends meet, to scrape together enough to make the minimal payment on a credit card, to be facing rates of interest on credit over 20%.  Seriously?  Now I admit I have a mortgage (refinanced at 3%) and I did a home equity loan at 3.25% last year, but the home equity I could pay off tomorrow with savings and would but for the low rate.  The freedom from the stress that I am not buried in debt is liberating and something everyone should strive to achieve. 

I know a vast percentage of people really do not have that luxury but I also know there is a vast percentage of people who can save if they want to but who choose not to do so.  They want to enjoy life now, not tomorrow.  They choose not to save and instead spend all they have now and their future earnings, in debt, for years to come.  The government and corporations are doing the same and this is a recipe for disaster.  No, the house of cards may not fall tomorrow or this year or next, but we have to at least stop building the house higher and perhaps start dismantling it before it falls.  Still, there is clearly no desire or plan to do so on a national scale or on a corporate scale or individual scale.

And what really does debt do for the economy?  It simply pulls future spending forward to today.  Eventually the Devil is owed his due and you have to pay for crap, you have to pay the debt.  Adding interest on top of the price tag only helps those charging the interest.  It is a drain from productive use of money and it is a stupid thing for anyone to advocate - in my humble opinion.

On a personal scale for my many, many readers (both of you), note that rates are on the rise and it is a wise time to reduce debt, increase savings and prepare for the next recession.  At least if you have some savings, when the recession comes you have the ability to take advantage of it.  Either way, anyone with low to no debt and savings I believe will thrive in the years to come. 

What He Said

I wrote some thoughts on issues with Trump's economic plans back in December and noted I would follow with more.  Well, here is a link to a nice piece by Nouriel Roubini, who last I checked had slightly better economic credentials than I do.  Now I do not always agree with him, but with respect to President Trump's economic policies we seem to see pretty much eye-to-eye.  His first few points are what I discussed in December and he nicely goes onto some additional observations worth noting.  Perhaps one of the biggest points worth noting today is that no one has any clue what Trump will do next and the absolute uncertainly of it all is not good for the economy, either domestically or internationally.  I think many folks voted for Trump for the very reason that he would stir the pot, but you never know what doing so might bring up from the bottom.

https://www.project-syndicate.org/commentary/trump-market-honeymoon-over-by-nouriel-roubini-2017-02

Who Needs to Raise the Minimum Wage When You Have Trump

Nice article today in Bloomberg on how challenging it will be to find enough legal workers to build the wall between the U.S. and Mexico.  It turns out a significant number of construction trade workers are illegal, which Trump (at least now that he is President) will not allow. 

https://www.bloomberg.com/news/articles/2017-01-26/trump-wants-to-build-a-wall-finding-workers-won-t-be-easy

So the question becomes, where will we get the workers?  Obvious answer, pay higher wages and train people to get them out of their parent's basement and into the work force.  Which is good for workers, but which drives up inflation, drives up the price of other construction, e.g. homes, and cuts into the profits of construction companies.  Wish I had seen this coming.  Wait a second, I think I did.  In a post just over a month ago I noted the following on the participation rate:

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 wrong, I am all for getting people jobs and increasing the participation rate, but it will have consequences that I think are being ignored.

Autotrociously Wrong Focus

Trump seems to have an almost unwavering focus on bringing automobile manufacturing back to the U.S. 

http://www.reuters.com/article/us-usa-trump-autos-idUSKBN1581CA

And he seems to be having some success.  Many auto manufacturers are committing to keeping  jobs in the U.S. and foreign auto manufacturers as well are committing to investing more in U.S. manufacturing facilities.  Problem being that at least in the short term sales in the U.S. are not looking so good and may have peaked for this cycle given all the cheap credit, 72 month loans and fog-the-mirror loan standards.

http://www.zerohedge.com/news/2016-11-08/

But it is not the end of this cycle that bothers me.  What Trump may not be focused on or perhaps not even aware of is that automobiles and how they are bought and used is in the process of changing.  We are in 2017 and autonomous vehicles are becoming a reality.  It will take a while and I am happy to debate how long it will take but it will happen.  One of the dynamics of this happening is that people will no longer need cars at all, or at least most will not.  Predictions are for a rather abrupt fall in vehicle sales as folks will be able to go into their app and have an autonomous car show up in 5-10 minutes to take them wherever they need to go.  No need for car payments, no need for car insurance, no need for car maintenance or to deal with the hassle of same.  The garage becomes a bonus/storage room.  Clearly this already exists with the likes of Uber, but when Uber no longer needs to pay a driver, and when the auto manufacturers themselves get into this game for survival (Ford is focusing on this area) then the cost of a ride will drop and make the math a bit of a no brainer.

When this happens, far fewer cars will need to be manufactured.  I have seen estimates of over 40% fewer in just the next decade or so.  This is based upon the fact that currently most cars sitting idle most of the time.  If you have an autonomous vehicle picking up and dropping off people virtually all the time, the number of cars needed is far fewer.  Yes, they will need to be replaced more often as they rack up the miles, but a lot of car replacement is simply due to age of the car, not mileage, so there will still be far fewer cars needing to be manufactured.  And if accidents go down drastically as expected, the need to replace cars for that reason also goes down.

So in my view Trump is focusing in the wrong area as the jobs in the area of his focus will in ten or so years be reduced significantly just by modern science.  And the reduction will start much sooner.

Of course there are similar issues with most manufacturing jobs.  They are being automated.  Just this week listening to Fox on the radio they were citing a study showing that 49% of the jobs that exist today could largely be eliminated with automation with presently available technology.  Many of these are service sector jobs but the initial focus has been and will continue to be on the higher paying factory jobs where Trump is focused.  These jobs are going away and not to other countries.  Trump is pushing on a string.  Certainly he will have some short term success as there are still plenty of these jobs around, but he needs to have a longer term focus.  Then again, he may not really care about anything at the moment beyond the next four years.  We will see.

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.