Thursday, August 30, 2018

Online Transaction Fee Could Level Retail Playing Field

Abandoned Malls Are A Canary In The Coal Mine
This article is the second of a part-two series about the retail closings that are occurring across the country and a suggestion as to how we can blunt the damage they will leave in their wake. The fact is store closures are set to accelerate, this comes with a hidden cost to society that the average person fails to internalize. An "Online Transaction Fee" could go a long way to level the playing field between online retailers and its brick and mortar brethren. A charge on all online purchases of just a few percentage points would add a bit of competitive fairness to retailing while halting the demise of many of the brick and mortar stores that line the streets of American communities.

People often forget that the brick and mortar stores suffer several expenses not fostered upon online companies. Whether it is the cost of maintaining landscaping, ensuring safe ingress and egress or providing a parking lot for customers these costs rapidly add up. Staffing for longer hours for the convenience of customers often results in being open when foot traffic would indicate a store should be closed and even dealing with security and shoplifters is another expensive burden. Over the last few years, stores such as Target and Macy’s have even had to face a slew of dishonest shoppers trying to sneak defectives products purchased online back as exchanges and trading them for a fresh unbroken product. I have seen this costly abuse recommended by several online shoppers that see this as an "easy fix" while simply brushing aside the ethical issues it creates.

An online transaction fee is a very big proposal and while like most Americans I'm not a lover of any kind of tax, it may be just what is needed to halt the damage flowing from this shift in how consumers shop. This would also help many small businesses across America remain in operation. The revenue from such a fee would be sent to local governments in the area where the sale originated or goods are shipped. Rather than getting stuck on the details of something that will most likely never occur we should instead think about what kind of community and world we wish to live in and how best to preserve the nature and quality of the life we seek. The ugly reality that store closures are set to accelerate is a cancer on America. Large retailers as a group are collectively set to lock the doors for the last time at thousands of stores this year.

The sad fact is America has far more retail space than it needs. The country now has roughly 24 square feet of retail space per capita, more than twice that of Australia and 5 times that of the UK. Much of it has been built in recent years using low-interest money as investors rushed to build malls and shopping centers under the premise that if they built it "they would come" but the shift to buying from online retailers such as Amazon and overbuilding has broken this decade's proven formula. A number of retailer bankruptcies and the culling of unprofitable stores has been emptying storefronts and malls and exacerbated the glut of American retail space. This retail real estate carnage is continuing this year with breakneck speed and no signs of slowing up, 2018 will easily pass 2017's record of 105 million square feet emptying out.

2018 store closures
2018 Retail Store Closings (click here to enlarge)
Sadly, most politicians have a poor grasp of business and are more interested in pandering for votes than trying to create more sustainable communities. Washington lawmakers have shown little interest in addressing the issue of how online shopping plays into the overall economy other than initially granting it some rather large advantages. This has been followed by state and local officials going over the top in competing for what they call new industries and jobs. This often results in special tax breaks, deals, or incentives for companies such as Amazon in exchange for investing or locating a facility in their area. In the long run, this hurts and weakens companies already located and competing in their market but that often gets brushed aside.

In the last few years, department stores like Kmart, Macy’s, Sears, and JCPenney, and retailers including Best Buy, Payless, BCBG, Abercrombie & Fitch, and Bebe have decided to close dozens of locations and cut back on future expansions. In earlier 2018, the fall of the once massive Toys 'R' Us name should have drawn more attention. With more than 700 U.S. stores the Toys “R” Us chain was a prime example of just how much retail real estate has changed in just the last decade. When KKR & Co., Bain Capital, and Vornado Realty Trust took over the company in 2005, the buyers justified the $7.5 billion price, in large part based on the supposedly valuable properties that came with the deal. The drop in the value of these properties has only started and in the future will have a gigantic effect on the economy.

Much of this space across American cities is located in the large shopping malls that once flourished in commercial zones of suburbia and now sit empty and abandoned. While some of the empty storefronts will be re-purposed many will not. Sadly, America has created a bureaucratic obstacle course to rehabbing buildings adding a great deal to the cost and making demolition more appealing. Between meeting new regulations and codes dealing with the Americans with Disabilities Act (ADA) and other issues building owners often choose to simply tear down the structure and rip up the parking lot which is also required as part of the demolition. This reduces the often huge tax burden while they try to recoup part of their investment while selling off the land.

A new report by real estate research firm Reis states that shopping malls had not been this empty since 2012. The vacancy rate at regional and super-regional malls in the U.S. reached 8.6 percent in the second quarter of 2018, this is a jump from 8.4 percent in the prior quarter. The increased vacancy rate is simultaneously occurring while online retailing giant Amazon continues to acquire a more significant share of the consumption pie. According to Reis, the vacancy rate of malls could significantly jump over the next several years. Even Credit Suisse believes 25 percent of shopping malls will have to shutter their doors by 2022 if shoppers continue to move online and mall traffic declines,

An online transaction fee could level the field. A charge on all online purchases of say three percent could go a long way to halt the demise of many of the brick and mortar stores that line the streets of American cities. Forgetting the massive amount of real estate taxes these stores pay which flows directly into the support of local police and fire departments as well as maintaining roads and such is a big disservice to the companies that also employ our friends and neighbors. These stores are where we go when we need something really fast or that has to fit just right. As a final argument as to why we should support local stores, it should be noted that we the people will be forced to pony up more dollars in local real estate taxes as their contributions drop and local services are cut.

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Footnote; The link below will take you to part one of this article. Below that is another link to a post about how the USPS has sold retailers and businesses out to gain a few dollars in revenue that might not even reduce the amount of money they lose.


Tuesday, August 28, 2018

War On Drugs Continues To Be A Costly Failure

Public views and attitudes continue to shift concerning the cost of America's decades-long war on drugs. The program has garnered a great deal of criticism over the years because funding for law enforcement is often based on the number of arrests made and the amount of property seized. This means the easiest way for local police to up their numbers and boost their careers is to target low-level drug offenders. To achieve this police have been accused of routinely relying on untrustworthy informants, conducting dangerous home invasions on flimsy evidence, framing suspects, and committing perjury. As the war on drugs continues each year more people have become addicted to drugs and the overdose rate continues to increase. Ironically much of this stems from an opioid epidemic fostered upon us by the big pharmaceutical companies and the very doctors we trusted to care for our health.

How much does the war on drugs cost?  Enforcing the war on drugs costs the US more than $51 billion each year, according to the Drug Policy Alliance. As of 2012, the US had spent $1 trillion on anti-drug efforts. In 2016 there were 1,572,579 arrests in the U.S. for drug law violations:

Years ago even recently deceased Sen. John McCain indicated his views towards legalizing marijuana were evolving. During a town hall meeting in Phoenix, Arizona McCain is reported to have said  "Maybe we should legalize. We're certainly moving that way as far as marijuana is concerned. I respect the will of the people". If McCain had taken a softer stance on marijuana as a Presidential candidate back in 2008 he would have drawn more of the youth vote and might well have won the election and become President. We can only hope that John McCain’s words on marijuana legalization have encouraged more Republicans to be more open-minded on social issues and follow suit.

Currently, use of marijuana for medical purposes has been legalized in 30 states and eight states and the District of Columbia have adopted expansive laws legalizing marijuana for recreational use. There are numerous reasons that Republicans should support marijuana reform. Republicans in general support state’s rights, smaller government, and want to stop wasteful spending. The war on drugs has been far too costly. We can surrender, redefine the enemy, or change our tactics, but it is clear that victory is not in sight. After the U.S. government spent over $15 billion dollars in 2010 on the War on Drugs at a rate of $500 per second victory remains elusive. To that figure, we can add at least another 25 billion dollars of spending by state and local governments. In the last decade, due almost solely to the surge in drug-related arrests, U.S. prisons are massively overcrowded and underfunded.

Rehabilitation In Prison Is Largely A Myth
It is important to remember the rehabilitation aspect of incarceration is slim to nil. Marijuana constitutes almost half of all drug arrests, between 1990–2002, marijuana accounted for 82% of the increase in the number of drug arrests. In 2004, approximately 12.7% of state prisoners and 12.4% of Federal prisoners were serving time for a marijuana-related offense. President Carter's fear voiced in 1977 that penalties for drugs are doing more damage than drugs themselves rings true.

At the time Carter put forth the following recommendations to address the abysmal failure of the War on Drugs policies:
  1. Decriminalized the possession of less than an ounce of marijuana and add a full program to treat addicts.
  2. Remove mandatory minimum sentencing and “three strikes you’re out” laws.
  3. Don’t rely on controlling drug imports from foreign countries. It doesn’t work and is responsible for a terrible escalation in drug-related violence, corruption and gross violations of human rights in a growing number of Latin American countries.        
  4.  Experiment with legal regulation of drugs and thus take away the power of organized crime.

America Puts Way Too Many People In Prison
A 2008 study by Harvard economist Jeffrey Miron has estimated that legalizing drugs would benefit  taxpayers $76.8 billion a year in the United States — $44.1 billion from law enforcement savings, and at least $32.7 billion in tax revenue ($6.7 billion from marijuana, $22.5 billion from cocaine and heroin, remainder from other drugs). It is true that many law enforcement lobby groups don’t want to end America’s war against drugs which has cost $1 trillion and counting, but that’s because they’re the reason it’s so expensive. In 2010, a full two-thirds of federal spending on the drug war, $10 billion, went toward law enforcement and interdiction.

Law enforcement rank and file know the truth about the drug war’s profligate and ineffective spending, since marijuana prohibition drives the drug war, these huge costs would end when federal cannabis law changes. Currently, the lawyers, law enforcement officers, and prison systems are the biggest beneficiaries of these laws. Sheriff Tom Allman in Mendocino County, Calif., helped permit, inspect, and protect local cannabis farmers in 2010 and 2011. When asked why, he said: “This county has problems: domestic violence, meth, poverty. Marijuana isn’t even in the top ten. I want it off the front pages so I can deal with the real issues.” All this tends to feed back into the idea that laws that are considered unfair and unevenly enforced weaken trust and faith in our legal system.

With much of the drug war centering around marijuana it has been a slap in the face of the American taxpayers that have spent a fortune on what many see as a misdirected program. The drug war has resulted in trillions of dollars being wasted and misallocated. The governments spending on this program also has devastating human costs that far outweigh the damage caused by drugs alone. Ironically drug prohibition essentially provides a monopoly and price supports for organized crime. By forcibly limiting the supply of drugs while demand remains relatively constant we have increased the profitability of drug trafficking. America needs to end wasteful government spending on the drug war and have the much needed national dialogue about ending prohibition and refocusing resources on health-centered approaches to drug use.

As for adult use and how it might change if marijuana laws are relaxed, the numbers are mixed. A 2011 University of California at Berkeley study, for example, showed a slight increase in adult use with legalization in the Netherlands, though the rate was still lower than in the United States. When the United States’ 40-year-long war on marijuana ends, the country and society are not expected to radically change, but we will see a great deal of drug cartel profits move from the criminal economy to the taxable economy. I'm not advocating marijuana and other drugs become totally unregulated only that a more realistic mature attitude towards them be adopted. Some of the taxes from drug sales should be used to educate people on how not to abuse drugs and the dangers of addiction. It is time we grow up and end this costly war that damages so many young lives.

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Footnote;  Below is a post that delves into how the 1930s propaganda film "Reefer Madness" greatly influenced a whole generation and the laws towards marijuana.

Monday, August 27, 2018

China Unflexible Path Forward Guarantees Conflict

This is the second part of a two-part series which explores why China is on a one-track path and blind to other options going forward. The first part, which is linked at the bottom of this article, argues China has little intention of altering its course and will concede nothing in future trade talks, as a state-run economy its business model is geared to expanding by crushing the competition. It can be argued that China's unflexible path forward guarantees conflict and this is one of several reasons they represent more of a threat to America than Russia. Understanding the core nature of China is important to comprehend the lack of flexibility ingrained in their system. This comes in the ideology that directs its actions. China is still very much a communist country, and the Chinese Communist Party (CCP) controls everything. From indoctrinating children with Party slogans to requiring companies with more than 50 employees to have Party liaisons, the military and other areas of the country have similar programs.

China Is All About Growing Stronger
Ranked high among the CCP’s many slogans is “Maintain maximum alignment with the Party’s Central Committee.” There is no doubt economic theft is a key component of the "Made in China 2025" program and others that feed into it. This was confirmed in a 2011 report by the U.S. Office of the National Counterintelligence Executive. The book “China’s Industrial Espionage” by William C. Hannas, James Mulvenon, and Anna B. Puglisi states that “each of these programs looks to foreign collaboration and technologies to cover key gaps” and encourages Western-trained experts to serve the CCP, either by returning to China or by “serving in place.” Let me be perfectly clear, this way of thinking completely permeates the way the Chinese think and a lack of legal enforcement of intellectual property rights only adds to the problem.

While it may appear both State-owned and private firms operate within China's economic system. This is mostly an illusion because the Chinese regime allowed some market principles to be introduced in China following economic reforms in the 1980s. In reality, the communist system does not allow for true private ownership and views all "tech innovation" as essential to its national interests. Thus, private and state-owned Chinese firms act in the interest of the Chinese regime when it comes to foreign investments in the high-tech sectors. This means behind the curtain the regime directs Chinese firms on where to invest and puts a priority upon the areas that benefit China the most over the long-term by increasing their ability to compete. 

Through, “Sovereign investment funds and governmental investment management companies" China plays a large role in foreign direct investment in the tech sector. This could be seen in JAC Capital's acquiring the Dutch semiconductor firm NXP in 2016. Fifty-one percent of JAC is owned by an investment vehicle of China’s State Council, the regime’s chief administrative agency. Also, private equity firms can also be used to fund foreign acquisitions. A Reuters report revealed that partial funding for California-based private equity firm Canyon Bridge’s $1.3 billion bid to purchase American chipmaker Lattice Semiconductor originated from the State Council. This is why in September 2017, President Trump blocked the deal, citing national security concerns. Developing the semiconductor industry is high on the Made in China 2025 priority list and China currently relies heavily on imported chips which is one of its biggest imports.

Research In China Is Hampered By Corruption
Adding to China's ability to steal tech innovation is that its people excel in education. There are more than a quarter of a million university students from China in America's colleges an almost five-fold increase since 2000. The combination of understanding American culture and the lack of independent innovation within China creates a bit of a void that tends to fuel this zealous culture of tech theft. The culture of rampant corruption in China is a big factor adding to the lack of quality research and development. This has forced programs of intellectual property theft to expand. As state funds flow through numerous levels of bureaucracy, Chinese money often fails to reach where it is slated to go or accomplish what is intended. The CCP is aware of this problem and in state-run companies, where there is little prospect of rising through the ranks without engaging in corrupt dealing, it’s common for employees to not apply themselves but rather just put in their time. 

As Chinese companies have been forced to compete for their bottom line the desire to move up the manufacturing food chain has grown stronger. China’s main strength in recent history has been its ability to crank out cheap manufacturing and low-cost goods. This means Chinese companies have had to compete heavily on pricing and they are often forced to reduce costs and cut corners on quality wherever possible. This has only added to the image that Chinese products are shoddily made. All the above factors has increased the CCP’s desire to create respected local brands and added pressure to maintain and ramp-up its already unflexible path forward in its attempt to break into the luxury goods and high-tech markets. When we combine this with China's attitude towards expansion and flexing its growing military might it is easy to envision the potential for conflict ahead.

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To bring up the first part of this series click on the link below.

Friday, August 24, 2018

Retail Closings Are So Common They Can Go Unnoticed

Retail stores closings have become so common they often go unnoticed. A new urgency and focus returned to the issue of the battering brick and mortar stores are undergoing with the announcement yesterday that the last Sears store in my city is going to shutter its doors. This is important and part of a much larger story. The problems that exist within what has been graphically described as "America's retail apocalypse" or the collapse of brick and mortar is that it extends past what many people see as retail and also has begun to take a toll on small business in general. Today small business is having its clock cleaned as they are forced to pay higher wages, comply with new government regulations and forced to compete with big businesses backed by Wall Street money.

Closings Will Have Huge Impact On Economy
Across America stand a sea of empty and under-leased buildings that once housed thriving businesses that provided Americans with good paying jobs. A close look at the details surrounding new job formation shows the growth is mostly in low paying part-time jobs and that many people have left the job market to retire early because their skills are no longer needed. To shed even more light on weak links in our so-called recovery we only need to take a closer look at auto sales and student loans. Today roughly a third of those buying cars are taking out sub-prime loans stretched out far longer than ever before and sadly, many young people are facing huge student debt that will affect their disposable income for years to come.

Returning to the store closings, while we are often saddened by these we are seldom surprised. An example of our reaction is how fans of Toys R Us expressed their sadness after it announced "everything must go" from its U.S. headquarters - including a life-sized statue of mascot Geoffrey the Giraffe. While the liquidation of the company's U.S. assets got underway to the despair of many on social media many people failed to notice that Toys R Us UK also announced that administrators had stepped in and all of its branches would close too. The U.S. closings resulted in lost employment for its 33,000 employees, this included 1,600 people at its New Jersey headquarters. Adding insult to injury, the state's two U.S. senators and a House colleague called on the chain's owners to "support" those workers any way they can.

Just across the street from my office sits one of the largest malls in Indiana where Sears was one of the original tenants back in the 60s. Both Toys "R" Us and a newly remodeled high-end department store, Carsons, that had only been open a few years have closed their doors in the last few months. Today few of us are shocked to hear that a store is closing even if it happens to be a mainstay of the area, however, as one by one these major stores, known as "anchor stores" close, it now appears the whole mall is in full-fledged liquidation mode as a result of being monkey hammered into submission by a wave of new reality sweeping across America. Paying employees more so they can spend the money elsewhere simply does not work.

2018 store closures

Closures Are Set to Accelerate

Last year more than 7,000 stores closed their doors, more than twice the amount of stores that opened in the same time period. Question is, with consumer confidence at record levels and the U.S. economy showing strength, why are so many stores having trouble? There are a number of trends at work behind America's retail apocalypse such as retailers taking on too much debt and our own government giving online retailer Amazon special tax treatment as well as the United States Postal Service delivering its merchandise at a discount. State and local governments are even putting packages together with special incentives to lure Amazon to build in their areas oblivious to the damage it will cause in coming years.

The fact is a bill is being created as a result of this assault on our brick and mortar retailers and it will come in many forms including defaults on loans and bonds as well as reduced property taxes for local communities. We can also expect a slew of empty buildings blighting our landscape and driving down the value of properties across the nation. With many traditional brick-and-mortar retailers having very heavy debt loads and looking at nearly $1 trillion of debt coming due over the next 3 to 5 years if the economy turns south this might only be the tip of the iceberg. These businesses both large and small are often viewed as the bedrock of our communities and with the closing of each one, a little bit of us goes with them.

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Footnote; This is the first part of a two-part series. The second will focus on the economic issues     surrounding retail closings and a suggestion that could level the playing field with online players.    Below is a link to an article about how the money-losing United States Postal Service has added to the decline of communities for a few dollars in revenue.
The second article of this series on retail closing has now been published and is located at the link below.

Tuesday, August 21, 2018

"This Time Is Different" - But Is It Really?

Efforts to justify the lofty levels of today's markets and especially the FANG stocks are sometimes difficult to comprehend. The general consensus prior to the election of Donald Trump as President was that his election would spell certain doom for both the economy and markets in general. Prior to the election, too many articles to count, appeared in the mainstream media denouncing Trump's proposed solutions to America's problems. Wall Street made it clear their choice was not to venture down the risky path he proposed. Surprisingly not only have stock prices continued to rise but many investors have taken the stance that more good times are ahead.

Now to the crux of this article. A read of the pdf file rather than the 2009 bestselling book titled, "This Time Is Different" has done little to convince me that this time is different unless you are talking about a few degrees or details. Sadly, periods of rapid credit expansion always end the same way and that is in default. The book written in 2009 by Carmen Reinhart and Kenneth Rogoff chronicles eight centuries of financial follies in which financial meltdowns have typically followed real-estate bubbles, rising indebtedness, and gaping deficits. Despite what those enthralled with our newfangled Modern Monetary Theory, also known as MMT, continue to claim, many of us still question just how well debt cycles can be managed.

Global Debt Has Surged Since 2008
Global debt has surged since 2008, to levels that should frighten any sane investor because debt has always had consequences. One thing that came across as you read the file is a strong pattern and similarity exists between many of the defaults that have occurred throughout history. In many ways, they mirror the situation developing today as debt continues to grow at an incredible rate across the globe. 

Today much of this is related to a wide acceptance of the economic theory of MMT which details in a different way the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money. According to MMT, "governments with the power to issue their own currency are always solvent which means they can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints". In short MMT enthusiast feel empowered to avoid future crashes. Of course, looking at the vast amounts of historical data on the past financial failures that have taken place we naysayers voice reason for concern.

Post-2012 Debt Of Emerging Markets Has Exploded!
The failures and meltdowns that are chronicled in the 2008 bestseller include state failures, bank crisis, currency crashes and destabilizing outburst of inflation. Several interesting points leaped out to me while I was reading the file. One concern was the strong link found that indicated countries experiencing sudden large capital inflows are at a high risk of having a debt crisis. The evidence over a broad sweep of history suggests that surges in capital inflows often precede external debt crises. at the country, regional, and global level since 1800 if not before. Also, periods of high international capital mobility have repeatedly produced international banking crises, this is not only true during the last one hundred years but historically. For me, all this brought to mind China's current problems and more recently Turkey's rapid fall and crisis.

That Deleveraging Took Place Is A Myth
It seems public debt is handled or should we say, mishandled, in several ways. The massive debt load hanging above our heads in 2008 has not receded or gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. A series of off-book and backdoor transactions by those in charge has transferred the burden of loss from the banks onto the shoulders of the people, however, shifting the liability from one sector to another does not alleviate the problem.

It was also pointed out that countries involved in rapidly increasing trade often drive up prices for primary commodities leading to investment and borrowing in that commodity which results in defaults when prices drop. Commodity price cycles have a way of destabilizing economies which can translate into sovereign defaults when prices return to sustainable ranges. History shows some countries are simply crisis-prone and because of this they becoming "serial defaulters" who over-borrow when times are good which leaves them behind the eight-ball when a downturn occurs. Even the distinction of whether the debt was held internally by its citizens on externally by others did not alter the outcome and things still ended by default. The view that things are different this time is the reason they never are and seems to be the key as to why mankind continues to fall into the same kind of trap time and time again.

Much can be garnered from the book that elevated Reinhart and Rogoff as close to celebrity status as a couple of economists can ever come. A key lesson is that by looking back at 800 years of financial history we see time and time again how high government debt ratios lead to slow economic growth. Overdone are the claims that governments all over the world have taken heed and downsized by adopting austerity measures costing millions upon millions of workers their jobs. Instead, we have seen deficit spending and borrowing surge as never before. It is safe to say everyone involved in shaping economic policy should own a copy of  "This Time Is Different" and open it when things seem to be going well because the read brings with it a blast of badly needed seriousness and reality.

Mature Market And Emerging Market Debt (click to enlarge)
Defaulting on debt and financial promises have become the norm or almost become a rite of passage as countries pass through the emerging market state of development. This is then followed by periods of high inflation. Even the United States endured an inflation rate in excess of 20 percent during the civil war in the 1860s. Some people think Asian countries have been able to avoid the kind of high inflation that has plagued the countries of South America but the fact is China experienced over 1500 percent inflation in 1947 and Indonesia over 900 percent in 1966.  The Asian tigers of Singapore and Taiwan were hit by inflation well over 20 percent in the early 70s and Africa has even had worse luck avoiding this curse. Angola suffered inflation over 4,000 percent in 1996 and Zimbabwe's 66,000 percent inflation for 2007 put that country on track to surpass the Republic of the Congo. Sadly, even as this is being written Venezuela and several other countries are rushing to prove that this time is never different.

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Saturday, August 18, 2018

China Has No Intention Of Altering Its Course In Trade!

It is silly to think China returning to trade talks will result in anything substantial or a quick resolution to current issues. China has little intention of altering its course and will concede nothing in future trade talks. I expect they will even use every last ounce of its power to maximize its leverage over North Korea for its benefit. We need not look far to discover China's intentions and when it refers to its plans the reference extends into trade, OBOR, increased military power and much more. America stands in China's way and as an obstruction to what it envisions as taking its place as the dominant world power. It is the goal of the Chinese Communist Party (CCP) to turn China into a “manufacturing superpower” so advanced in tech manufacturing that it dominates global high-tech markets.

China Excels In "No Nonsense" Manufacturing
China unveiled in 2015 an economic blueprint for this transition and it is known as the "Made in China 2025” program. At its core are 10 tech-related sectors the CCP  wants to develop and it is extensive. It includes advanced information technology, robotics and automated machine tools, aircraft and aircraft components, maritime vessels and marine engineering equipment, advanced rail equipment, new energy vehicles, electrical generation and transmission equipment, agricultural machinery and equipment, new materials, and pharmaceuticals and advanced medical devices. They have integrated this into China's long-term strategy of growth and its OROB initiative. The program builds on existing industrial policies, but with deeper coordination among numerous state agencies. 

A key part of the plan centers around both state-owned and private firms investing in and acquiring foreign companies for the purpose of stealing their technological innovations. Global investment numbers show that in 2016, the top two industries in which Chinese firms engaged in foreign acquisition deals were manufacturing (at about $30 billion) and information technology/software (about $26.4 billion). It is also important to note that in order to receive permission for foreign companies to do business in China it is common for the Chinese to insist the company shares and transfers their tech knowledge to their Chinese joint-venture counterparts which excel in "no-nonsense" manufacturing.

This transfer of technology has been confirmed in reports by both the Office of the U.S. Trade Representative and the EU Chamber of Commerce in China. A 2017 U.S. government survey of the U.S. integrated circuit industry found that 25 companies had to transfer their technology and form joint ventures with Chinese entities as a condition of operating in China. The same intense pressure is put on European companies which is a clear indication that China has no intention of being locked into producing low-end manufacturing of basic goods but is determined to move into high-tech products. Not only can it be seen in the intense pressure they put upon firms to share trade secrets but in China's strong industrial espionage sector which is geared to wrestle away these valuable gems when they are not voluntarily shared.

China Is Building A Slew Of Cutting-Edge Weaponry
To be clear, China still lags behind in technological advances and is rapidly losing its edge as a low-cost producer. In recent years foreign companies that once relied on China’s cheap labor to produce their goods have moved their factories to Southeast Asian countries such as Vietnam, Bangladesh, and India, where operating costs are lower. While claims that higher U.S. productivity and rising operating costs in China will close the cost gap between manufacturing in China versus the United States the idea American firms will bring jobs back to America are far too optimistic and overblown. Even if major multinationals like Nike Inc., Adidas AG, Nikon Corp., and Microsoft Corp. have closed down their Chinese factories due to rising labor and land cost America is not where these factories and jobs are going. Many are slated to move to countries linked to China by its OROB initiative or to be replaced by robots which China intends to build.

Circling back to the issue of China and its strategy going forward, people are naive if they do not recognize China will do everything possible to exploit the distinct advantage a state-driven economy has over free enterprise, With an expanding military armed with a slew of modern cutting-edge weapons produced at home China intends to be ready to flex its muscle if necessary. Predatory in nature, such systems have the ability to quickly exploit the weaknesses of its competitors. It is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition. Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey.

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The second part of this series has now been published and the link is below.

Footnote; The following posts relate to the article above
 http://China State-Driven Business Model.Geared To Expand html

Tuesday, August 14, 2018

How Stupidity Might Delay Our Economic Collapse

The illusion of a robust economy has been propelled forward by the sheer quantity of economic growth rather than its quality. Two recent articles caught my attention in part because of how they highlight this issue. The first had to do with how the poorly crafted and shockingly large omnibus spending bill has created a situation encouraging government agencies to spend like drunken sailors. It seems that Federal agencies, now flush with cash, must obligate that money before the fiscal year ends on Sept. 30 or lose it to the Treasury Department.  The second Authored by WirePoints' Mark Glennon, op-ed via The Wall Street Journal, concerned the planned construction Chicago’s South Side of what has been deemed "The Obama Center" which when announced was herald as a victory for government because it was to be funded entirely with private money.

Wisdom is a valuable commodity and tends to be in short supply in Washington thus when Congress passed and President Trump signed the omnibus spending bill little thought was given to exactly  how the spending would play out. I'm referring to the fact that over the final seven weeks of fiscal 2018, the government is slated to embark on a spending spree of historic proportions as federal agencies look to spend $140 billion more than they expected to receive prior to the bill being passed. For many agencies, this translates into spending as much as 40% of their annual budget in the final two months of the fiscal year. Faced with seeing these funds returned to the Treasury if not spent analysts believe the federal market will see a monumental effort among procurement officials to rapidly spend as much on contracts as possible.

Omnibus Bill Has Resulted In "Must Spend Money"
According to the article in Nextgov, without a budget agreement in place the agencies spent cautiously through the first two quarters of fiscal 2018 before the omnibus bill was signed. This adds up to an additional $80 billion for defense and $63 billion for civilian agencies. This certainly is not the way I like to see business conducted because it tends to create waste. In my opinion, this is where the two articles come together at the intersection of "Stupidity and Wasteful Government Spending." 

Circling back to the Obama Center Article that stated, "When Barack Obama announced he would forgo a presidential library, the news was trumpeted as a win for good government." That was because instead, Mr. Obama would open an official center funded entirely with private money. One author at Politico, who called presidential libraries a “scam,” wrote that Mr. Obama “will rip off the band-aid, removing government from what it has no business paying for.” Sadly as with many of these projects, the devil is in the details. It has now been revealed that the financially battered taxpayers of Illinois will put up at least $174 million for roadway and transit reconfiguration needed to accommodate the Obama Center. With eighty percent of such spending is generally reimbursed by the federal government, Illinois officials expect to receive $139 million of this money from Washington.

Proposed Obama Center Sucks In Taxpayer Money
To be very clear, this is a private foundation and unlike a presidential library, the Obama Center won’t be run by the National Archives and Records Administration. The center won’t even house Mr. Obama’s records, artifacts, and papers, which will be digitized and available online. Instead, the center will be owned and operated by the Obama Foundation with a mission of training and preparing young people to become the next generation of leaders.” No doubt, Obama's definition of “leaders” will be political and that raises the question of why the state and city are giving the Obama Center official support. Under a deal approved by the City Council in May, the Obama Foundation will lease 19.3 acres in perpetuity for $1.

As for the road and transit money a Chicago public television station questioned if Illinois could afford to cough up $100 million to “assist” the Obama Center: “How could a public financing proposal fly in a state that is bleeding red ink, especially when the Obamas have promised 100 percent private funding?” In response, a spokeswoman for the Obama Foundation insisted that “construction and maintenance will be funded by private donations, and no taxpayer money will go to the foundation.” It seems that Illinois’s machine politicians dropped the spending appropriation for this into a 1,246-page budget bill, which was then presented to rank-and-file legislators only hours before the vote. When a few Republicans objected to spending state money for the Obama Center, they were told not to fret: Federal reimbursements were on the way.

It is my fear that the rush to spend by government agencies this "windfall of funding" that is ballooning the national budget and deficit will flow into funding a slew of questionable projects such as the one above. In the past, I have attempted to dispel and chip away at the myth "Public-Private Partnerships" have a great deal of merit. while they are often used to propel forward projects by adding an incentive for the private sector to undertake projects they might choose not to do alone it is often because the numbers often simply don't work. These collaborations between government and a private-sector company touted as our salvation tend to create boondoggles and white elephants. For a number of reasons, these projects are often haunted by problems that go from one extreme to another ranging from over-engineering to shoddy work with little oversight.

Needless to say, following our recent jump in the GDP the federal government going on a spending spree should become a driver of the American economy in coming months adding to the illusion our economy is on sound footing. As a bear, I look forward to the coming months with a bit of trepidation. When coupled with a huge number of stock buyback programs triggered by the Trump Tax Bill the forthcoming wave of spending and a huge number of misconceived public-private projects currently in the pipeline could carry the economy forward for a quarter or so. This is by no means an endorsement of the economy or enough to make me reconsider how this will end, it would be wise to recognize that markets are vastly overvalued and this positive scenario could rapidly be derailed by a tsunami of bad news from a number of sources.

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Saturday, August 11, 2018

Big Government's Failure To Address Our Woes

Big Government Does Not Always Work Better!
The failure of big government to address the problems and woes of our society has left many of us puzzled as to how we should proceed. The large number of government programs that have failed to carry out their duties and the dim view many Americans have towards Washington may be starting to take its toll on those who think big government is the answer. The Democratic Party has long been thought of as the party of "big government"  filled with believers that government can solve and is the answer to curing many of our woes. Sadly, cost and reality are quickly beginning to show the flaws in this theory, government is far better at providing access of citizens and good at passing popular laws, but the private sector tends to be more efficient and better at controlling costs.

Big government is not just an American problem and tends to be even worse in countries established long ago. It seems corruption and government both tend to grow in unison over time. The way in which an increasingly better-educated world population faces and deals with growing governments will determine the future of the Planet Earth. The saying "be careful what you wish for" may again be proven true as those wanting more government intervention experience the limits of government and bureaucracy while burdened by the true financial cost it imposes. We must remember that government is often not constrained by the power of the purse to strive for efficiency, where a business fails when it does not meet its goals of providing a good service or product at a reasonable cost government muddles on.

Over the last two centuries the United States government has been steadily moving away from Adam Smith’s idea of limited government and towards the view of Abraham Lincoln that the purpose of government should be to do for the people, whatever they needed done, but could not do for themselves or could not do as well for themselves as individuals.  At a time when the Country was young and adding state after state one might make the case that larger Government was appropriate.  As more and more citizens earned the right to vote and become better educated, they have been encouraged to look at the government, as their government. This has greatly changed the viewpoint of the functions of government and has resulted in large increases in governments activities.  The role of the government in America has changed at all levels.

The Trend From 20% To 35% Is Clear And Continues
Sadly the open-ended theme of larger Government is generally a mechanism to in some way transfer wealth. Mandates often unfunded are fostered upon business organizations and private citizens. It is the nature of bureaucracy to expand.  A new proactive movement of “cuteness” cloaked in a veil of flexibility and diversity allows politicians and bureaucrats use terms like "Private Public Partnership" and "quasi-government entities" has masked just how deep its roots have grown. Both of these allow a pathway for politicians to tinker without the personal financial risk that a businessman must take. The problem is that those within government love being creative especially when they do so on our dime. The use of sun-set legislation is underused and the bar set too low when it comes to extending and renewing government bodies. We tend to forget that the best time to kill a monster is while its small.

Shifting demographics are quickly weakening the Republican Party, if they do not adopt a more populist message and a big tent policy soon they will continue to lose power. This could have a very negative impact on America going forward. The polarization we see today may be mild compared to what we see in ten years if a large segment of the population feels its voice is unheard. If the checks and balances in our system fail anger will grow as more Americans begin to feel even more left out in the cold. Ironically the best friend of the Republican party has become big government and the Democratic party that has been eager to promote it as a cure to our woes. It must be pointed out that the cost of this experiment has soared over the years and created a national debt that threatens the economic health of future generations.

Governments must be of the people, for the people and honor laws that are rational and fair. The reality of ever-larger government has manifest itself in more scandals as departments overreach their missions. This can be seen in the military, the IRS, NSA and in our government's failure to accomplish tasks such as putting together a working and functioning Healthcare web site. With freedom comes responsibility, people must control their own governments. Once established and settled it is often difficult to change the way a nation chooses its leaders. This is true in America where our election system strongly discourages a third party and even out of date safeguards such as an illogical and out of date electoral college heavily influences our Presidential elections. This means small passionate groups of people can often skew results as their voices become amplified at the same time the value of other voters is diminished.

A government may be chosen by a variety of methods. A one vote one person system does not differentiate between the social or economic status of the voter, and while on the surface this would appear fair it could be argued that it is flawed. Today in a society geared to pander to political correctness the idea of questioning a person's competence to vote would draw massive outrage and give rise to protest. Another factor is the role of money in politics and how it, and lobbyist can corrupt the system by buying influence and favors. In many ways like in a pot of stew, these ingredients are thrown into the mix and allowed to simmer and commingle till a result is had.

As for the idea of reforming or improving our election system, that is very unlikely to happen as neither party wants to introduce a change that might benefit the other. The entrenched interest of the elites within the system block change. Having conceded hope, as I look around the world I like the idea of runoff elections where voters are allowed to choose their "two" favorite candidates. This lessens the chance of getting stuck with someone unpopular because a third party spoiler has skewed results. I like the politically "toxic idea" of limiting and qualifying voters, removing the "stupid" or allowing voters with more skin in the game such as landowners, the employed, or those who pay taxes to have more voice. To bring positive change it would be geared to the giving the middle-class an overwhelming voice rather than the wealthy or elite. I understand this flies in the face of current values in that doing something to earn the right to vote or prove you have a vested interest in society other than "just being here" is completely foreign to America.

Add to my wish list of "crazy" ideas the following. Eliminate the dreadful electoral college and the distortion it causes, it is mind-boggling as to how much this has skewed the political landscape. Next, I would like to see cut in half the number of members in both the House and Senate while at the same time placing term limits upon them. Limit all laws to under five pages even if this makes them less comprehensive, when laws become overly complicated they become impossible to follow. Last but not least, move toward more national referendums and votes, if American Idol can do it, so can we. In the future elections should also be held this way as long as proper verification can be confirmed.

Polls show that a majority of Americans feel we are moving in the wrong direction. At the same time, this does not indicate exactly what they think is the proper direction. It often takes courage to make the difficult and unpopular political and economic decisions that will cause pain but benefit society in the long run. A political system that encourages sidestepping these issues to pander to the masses in exchange for remaining in power pays a tremendous price that can stay hidden for only so long. This is a trap America has slipped into, getting out of this will prove quite difficult. I seriously question whether we have the fortitude to take the necessary steps required.

 Footnote; This post dovetails with many of my writings. Some of my solutions may come across as provocative but are food for thought. For more on governments role in our lives, I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading.

Friday, August 10, 2018

Elon Musk And Tesla Motors - An Updated Overview

Tesla's Debt Is Up As Cash Flow Drops (click here to enlarge)
On Tuesday Elon Musk opened what may turn out to be a can of worms when he let rip what is now known as his infamous Tesla "going private" series of tweets. The latest dust-up surrounding Tesla stems from Elon Musk claims that he had a deal. Now all kinds of questions are surfacing such as where or who is the bank and is the SEC going to push hard and demand Musk is not just jawing the stock higher. The type of questions being asked suggests Tesla could come under an enforcement investigation if regulators develop evidence that Musk’s tweet was misleading or false. Reuters reports that Tesla's board of directors is currently not up to speed about a detailed financing plan and are seeking more information from Musk. The CEO's declaration and vow that "funding is secured" has only increased the disagreement between bulls and bears as to where Tesla is going.

With all the ruckus Elon Musk caused an update of an article written in early 2017, merits an update. Of course, this is on the heels of the shorts again getting burned on some rather ambiguous numbers flowing from Tesla during its most recent quarterly earnings release where it revealed a whopping 718 million dollar loss yet the stock rallied on claims it was making solid gains in production as Musk pushed a rosy scenario of future growth. It has been a while since we have heard any good news flowing from Tesla and shareholders should be worried. In a recent head-to-head comparison in Motor Trend, three reviewers compared the Tesla Model 3, Chevy Bolt, and Nissan Leaf in a test, and only one person picked the Tesla. Many people would be surprised to know that the reviewers were comparing the base versions of the Leaf and Bolt, which cost $30,000-35,000, to the fully loaded Model 3 that costs more than $60,000. On top of this Tesla has had huge production problems plague the Model 3, seen several Tesla's involved in gruesome crashes, general quality concerns, and the fact the company has been burning through cash at a massive rate.

Elon Musk stands as one of those iconic figures the world occasionally conjures up to wow and entertain the masses. As media generated symbols of success go he ranks up there with the best of them. Much of the aura that surrounds Musk comes from his success at PayPal. Musk co-founded, an online financial service and e-mail payment company, in March 1999. One year later, in a 50/50 merger, joined PayPal a company that operated an auction payment system similar in size to Musk was instrumental in organizing this deal due to his belief in emerging online transfer technology. The combined company at first adopted as the corporate name, but in February 2001 changed its legal name to PayPal Inc. Musk is credited in driving the new PayPal to expand and focus on a global payment system, in October 2002, PayPal was acquired by eBay for $1.5 billion in stock, Musk, the company's largest shareholder, owned 11.7% of PayPal's shares.

Elon Musk, Visionary And Wonder-Boy?
With his youthful looks and forward thinking the media latched on to Musk and propelled him into being viewed as a visionary and wonder-boy that turns everything he touches to gold. When talking about the CEO of Tesla Motors, Bloomberg News almost always says "Billionaire Elon Musk", this happens so often that many people probably think his first name is "Billionaire". As to the source of his success, it seems Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. This figure includes a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups. He definitely goes where there is government money,” said Dan Dolev, an analyst at Jefferies Equity Research.

An example of how deep these subsidies feedback into the numbers is that as of early 2017, Tesla had already collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. I have written several articles about Tesla and Musk over the years but as I continued my research for this update and a more in-depth piece my eyes literally began to glaze over at the magnitude of the subsidies. Government support is a theme of all three of these companies, and without it, none of them would exist. Then comes the issue of corporate incest, in August of 2016 Tesla formally announced it would be acquiring ailing SolarCity in an all-stock $2.6 billion merger. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla's mission since its inception was part of Elon Musk's overall "Secret Tesla Motors Master Plan" to expedite the world's transition to sustainable energy and away from a fossil fuel economy. Musk called the merger a no-brainer and said it was an accident of history that Tesla and SolarCity were ever separate companies.

In 2017 Only About 1 In 5,000 Cars Was A Tesla!
Tesla is in the news far more than a company with such a small footprint would merit. Much of its significance is derived from Musk who remains a master at getting press coverage, most of it "free" and positive advertisement. Please take note of how insignificant these numbers really are. Tesla Motors announced in early August 2009 that it had achieved overall corporate profitability for the month of July 2009 when it earned approximately $1 million on revenue of $20 million. Profitability arose primarily from improved gross margin on the 2010 Roadster, Tesla’s award-winning sports car known for its designs and "very sexy lines", similar lines have been on the drawing boards for years but were impractical because of the internal combustion motor and all the mechanical junk required to support it. Tesla, which like all automakers records revenue when products are delivered, shipped a record 109 vehicles at the time and reported a surge in new Roadster purchases. Even to date, Tesla's numbers remain small Tesla is said to have delivered 50,580 vehicles in all of 2015.

The value of Tesla's stock dramatically changed years ago following the report where it made its first quarterly profit, its market value soared to more than $10 billion. It should be noted a large part of the increase in the stock price occurred when people that had short positions in the stock were caught in a short squeeze and forced to buy back their stock. At the time Musk said, “I thought it would be quite difficult to raise the capital for Tesla.” he went on to state his realization the electric-car maker could retire its U.S. loan nine years early didn’t arise until Tesla shares unexpectedly surged. Since that time Tesla's fortunes have moved in lockstep with a surging stock market. In an upbeat article published by Inside EVs shortly after that time, it was pointed out that Ford stock had fallen 23 percent from 2015-2017, however, Tesla stock was on the rise, approaching an all-time high which gave the electric startup a market value of $43 billion compared to Ford’s $49 billion.

Tesla currently has a market cap of around 65 billion dollars while Ford its much large competitor languishes around 40. It is important to note that in January 2016, Ford Motor sold 173,723 vehicles in January 2016 while Tesla made a little over 80,000 cars in all of the prior year. As for Tesla's stock which continues trading at incredibly high multiples, much of that can be contributed to the historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life. Remember the company had received a huge government low-interest loan to kick start its existence, also note that it has no legacy cost or issues that plagued so many of its competitors. Now thanks to the gobs of money looking for any kind of return, Tesla can borrow cheaply. Like several other high flyers lead by self-promoters and propelled forward by media hype Tesla has been on a roll.

It does not take much research to see public subsidies for Musk’s companies stand out both for the amount, relative to the size of the companies, and for their dependence on them. No effort has been spared to spin Tesla and Elon Musk as a finished success, of course, the "proof will be in the pudding" when we look back years from now. Time will most likely determine whether Musk is viewed as an unabashed promoter or a serious visionary. Using government programs and loans as well as money from investors Musk has built a pulpit from which to position himself for praise and at times ridicule. David Stockman wrote in May of 2015, "In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%." Stockman went on to state, "You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder."

Tesla entered 2017 with the goal to launch a new car, open a large battery factory, and perfect autonomous driving but has encountered several setbacks. When all the hoopla ends, the question is whether larger competitors will simply overwhelm and crush Tesla, or will Tesla instead position itself to grow and maybe take over a competitor to help propel it forward. Remember this is a field where many have failed, one great example was the Delorean. I have become predisposed to discount, and have actually grown a massive aversion to "media hype", this is one reason you should color me skeptical. The city where I live, like other cities across the world, have a long list of bold men herald and declared to be "gods gift to business,"  many in the end flew too close to the sun only to crash and burn. Success has a way of making us humans giddy, creates a feeling if euphoria and can manifest into the illusion that we are invincible. In any case, what has happened at Tesla Motors and to Elon Musk's other ventures up until this point might be enhancing the meaning of the phrase, "I would rather be lucky than good!"

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Footnote #1; Another company in the same that was not so lucky and saw its fortunes fall was Fisker Automotive, for more on this folly read the post below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,