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?