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