Gentelmen, Start Your . . . Lawsuits!

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

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

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

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

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

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

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

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

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

Show Me The Money

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

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

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

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

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

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

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

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

 

How's That Workin' Out For Ya?

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

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

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

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

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

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

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

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

September 20 Update

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

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

Coming Up Roses!

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

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

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

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

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

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

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

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

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

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

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

Feeling the Pinch(ion)

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

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

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

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

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

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

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

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

https://mishtalk.com/

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

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

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

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

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

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

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

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

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

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

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

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

Ubeonomous?

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

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

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

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

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

Anyone Need a Driver?

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

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

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

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

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

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

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

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

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

 

I'll Take The Over

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

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

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

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

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

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

Perhaps Mexico Wants the Wall

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

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

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

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

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

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