Restaurants - Something To Watch

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

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

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

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

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

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

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

Autonomous Cars - Issues Yet to be Addressed

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

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

Let me add a few other things

Regulations

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

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

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

Liability and Insurance

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

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

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

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

Auto Manufacturers

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

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

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

Raising the Minimum Wage, Without Raising the Minimum Wage

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

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

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

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

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

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

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

August 6 Update

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

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

Trump's Tax Plan Needs More Planning

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

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

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

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

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

Destroy All The Jobs

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

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

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

Lookin' Good Man

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

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

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

Doubts About Debt

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

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

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

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

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

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

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