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 . . .