Sunday, October 15, 2017

Why Bank Of America Doesn't Want Your Business - Sort Of.

Are we returning to 1950's banking?  Sort of.

A recent article online in Forbes, which can be read without paywall here, illustrates why Bank of America has such a shoddy reputation among the poor.    The Bank has been actively trying to court its existing users who actually have money while at the same time turning away folks who just want to shop cafeteria-style for one banking product, or poor folks who have $22 in their savings account.

Bank of America is profitable again, and they returned to profits by closing down unprofitable branches, fully embracing electronic banking, and embracing their existing customer base.   As I wrote in an earlier posting, in the good old days, the banks paid "bank interest" on savings and then loaned out money at mortgage rates.  The money being loaned out was, by and large, the money being deposited by others.   Banking was a local and community thing.

Maybe that has all changed today.   And many folks today use banking services cafeteria style.  They get a credit card from some place online that offers the lowest rates or the fanciest gimmicks.  They get a mortgage through a mortgage broker.  They get car loans from car dealers offering low rates or even 0% interest.  And they shop for checking and savings accounts based on who has the best services, lowest fees, and highest interest.   And of course, their investments and savings are with some mutual fund company or a financial adviser who operates out of a storefront.

This model of banking makes it very hard for a bank to make money.   Since there are always going to be people online with no overhead who can undercut your rates, you will lose the mortgage and credit card business as well as the car loan business.   All you are left with is grandma and her passbook savings account.   And you ain't making money on grandma.

And we saw this in the now-closed branch here in Brunswick, Georgia.   You would go into the branch and you'd see a line of people cashing paychecks or making tiny deposits and withdrawals from their savings and checking accounts.   The bank makes no money on these customers, and after paying rent and employee salaries, actually loses money.

There are legions of complaints online about how banks screw poor customers with bounce fees and late fees.   In fact there was a joke on SNL, I believe, where the punchline was "give me my $17, bitch!" - which was in fact the balance on their account.   It sounds like a stereotype, but I have read online, "complaint" forums about BoA where some 20-something whines that he overdrew his account and is now being assessed a bounce fee which exceeds the account balance.   Another complainer tried to use his savings account like a checking account, and was charged an excess transaction fee.

Of course, these fees are there for a purpose - to drive away marginal customers.   Banks make no money from someone who deposits a paycheck on Friday and has it all spent by Monday.   The best advice for folks like that is to join a credit union if possible.   But don't expect the credit union to be any friendlier about marginal banking practices.   At the Patent Office Credit Union, back in the day, clerks would line up on Friday to get money orders (at 75 cents apiece!) to pay all their bills.  When I asked why they did this, one teller told me, "We tried giving them checking accounts - they just kept writing checks until they ran out!"   The old joke of "I can't be overdrawn, I still have checks!" is indeed based on real-life experiences.

The problem, of course, is banking discipline, not merely a small paycheck.  As I recounted in another posting, I was in line behind one clerk, who had a beautiful Coach handbag and was looking at a car brochure for the new Coach-edition Camry.   I couldn't figure out how she could afford these things when I could not, making more than twice her salary, when she mentioned she lived with her parents and a number of other relatives.   In other words, she had money to spend, and she was doing a pretty good job of spending it, too.   Financial discipline was just not in the cards.   Having bling was.

And that was me, at age 21, after dropping out of college, bouncing checks at the convenience store and spending every last dime on gasoline, beer, and pot.  I could not understand why the bank was being "mean" to me with bounce fees and whatnot.  It took a long time to figure out that it wasn't the bank that was the problem, it was me.  I had no savings in my savings account.  No financial cushion, no rainy-day fund.   A dollar in my pocket was a dollar spent, and like many poor people, I tried to play a game of leaving as little money in the bank as possible.

And it wasn't as though I couldn't have saved.  Rather, I blew through money on "stuff" instead of saving it.   I mean, when you are trying to make ends meet, do you really need to have exotic fish, or indeed, pets at all?   Why buy a new car when you have one that runs perfectly fine?   I made all of those sorts of mistakes and more.   Of course, back then, we didn't have tattoo parlors and piercing places on every corner - or check-cashing stores and payday loans.   Today's generation has a whole lot more shitty choices to make than I had.   And they say there is no progress!

Today, Bank of America is my new buddy - at least most of the time.   They have been fishing for my business and getting a lot of it - credit card, investment, savings, checking.  Since I have no debts, however, they probably are a little miffed at me for not having a mortgage or car loan.   But rather than fish for new customers - which is an expensive process that requires advertising and promotion - they are trying to harvest bucks from their existing accounts - and doing a pretty good job of it, too.
They have managed to persuade me to move much of my business to their bank, instead of having it spread out across a number of banks (five at one time), mortgage companies (ditto), credit card providers, and so forth.   While I still keep a backup credit card for traveling (if your card is stolen, you are kind of screwed if you are away from home with no way to pay for anything), I have slimmed down my accounts considerably since I started this blog - much to the advantage of BoA.

Saturday, October 14, 2017

Fat-free prunes

Prunes are fat-free, doncha know!  They are also gluten free!  Who knew that fruit has no grease or bread in it!  Learn something new every day, it seems!

One of the craziest things about American culture is how science turns into pseudoscience and is applied to everyday products.  I was noticing this in a small package of prunes, which stated that, among other things, they were good source of fiber (which is true) but that they were also fat-free.

The struck me as kind of an obvious statement.  Fruit generally doesn't have oil or lard in it.   For that matter, prunes are also gluten-free, in that they don't have any bread in them.  I suppose it wouldn't have hurt if they had also advertised them as being not only vegetarian, but vegan as well.  If you are going to state the obvious, you might as well go whole-hog.  No, there is no meat in prunes.  Funny how that works.

I wrote about this before, how the vegetarian aisle at the Wegmans is more like a candy store, with lots of sugary cereals and even outright candy.  A package of Jolly Ranchers was advertised not only is being vegan, but fat-free as well.  Yes 100% sugar has no fat in it.  That doesn't make it health food.

Of course, this plays into the popular misconception that fat makes you fat.  For some reason, Americans are obsessed with the idea that removing the fat from something somehow makes it healthier.  And this is only the case if it is transfats, which largely been removed from the American diet.  And ironically, many "healthy" foods of bygone days contained trans fats - such as margarine, which as offered as a low-fat alternative to "unhealthy" butter.

You know what?  Cigarettes are also fat-free, vegan, and also a good source of fiber.

I ran into this attitude at a restaurant recently.  Our waitress was confiding that she had bought a fat-free fryer to fry her french fries in.  She said this after I declined the side offer of fries and asked for a side salad instead.   She felt that the "evil part" of the french fries was the vegetable oil they were cooked in.  But the reality is the main problem with french fries is that they are 100% starch which is converted in your body to sugar, which in turn goes right to your fat cells, if you overeat and under-exercise.  It is not the oil, but the high amount of calories in fries - calories your body hoards if they are not used.  The fact that they are dripping with canola oil is really secondary.  And of course, the main problem is they give you a pile of them size of your head which really amounts to about 300 to 500 calories worth of potato- enough to serve an entire family.

But she was convinced, that somehow this food stuff could be made healthier if you just remove the oil, when in fact it was the huge amount of calories that was involved that made it unhealthy.

Granted, if you have cholesterol problems, the fat and oils are also an issue.  But "low fat fries" are not the answer to your health problems, the boring side salad is (sans oily dressing, of course).

But marketers and advertisers have seized upon the misinformation of the American public and thus place these labels on products where they are meaningless.  Of course prunes are going to be fat-free, unless you fry them in oil or lard.  Of course Jolly Ranchers are going to be gluten-free, unless you wrap them in a piece of bread.

But moreover, saying something is "free" of an ingredient doesn't necessarily make it healthier.  Fats and oils are not necessarily unhealthy things in your life unless you consume them to excess, much like anything else.  The same is true for glutens.  Very, very few people are actually allergic to gluten but it's become trendy to say something is gluten-free and people love to make a big deal or fuss about ordering something without gluten in it, much as vegetarians and vegans like to have things made special for them just to be a pain in the ass.

Sadly, one of the ingredients in food that really can be unhealthy for you, particularly large quantities, is sugar.  And for a long time, marketers love to use the words "sugar-free" in selling products.  But of course, the way they achieve "sugar-free" was to use some sort of artificial chemical or sweetener in place of the sugar.  And some of these chemicals have been alleged to be dangerous to humans and have been withdrawn from the market.

Other alternative is to just not put sugar in things to begin with.  As I noted my previous posting about Trader Joe's, for some reason they feel obligated to dump sugar and almost all of their products. They make an excellent hot sauce call Green Dragon hot sauce, or I should say it would be an excellent hot sauce if it didn't have cane sugar as its fifth ingredient.  When you have this hot sauce you think yourself, "Gee, this is a good hot sauce, but it's a little too sweet."  Unfortunately it seems like everything in their store is saturating with sugar, which is better than high fructose corn syrup, I suppose, but why not just leave the sugar out and be done with it?

The same is true for most commercially available tomato sauce as you see in the stores.  They are usually laced with sugar and sickly sweet.  Ironically, sometimes the store brands are the ones that don't have sugar in it, such as some of Walmart's store-brand tomato sauces.  And if you look at the calorie count on the back of the bottle, you see that the calories count correspondingly lower as a result.

You wouldn't think about making a plate of spaghetti and meatballs and then dumping a bunch of Jolly Ranchers into it would you?  I mean that would be disgusting and sick.  But for some reason, the people who make canned tomato sauce think that we want candy and all of our Foods.  And even so-called "progressive" retail outlets like Trader Joe's (which is really just a German supermarket chain gussied up for the American Market) seem to feel likewise.

And it's unfortunate, but this use of misleading labels seems to point out exactly how ignorant Americans are.  If people really need to be told that fruit is fat free or that candy is gluten free or that sawdust is sugar free, one wonders about the level of intellect in our country.

But then again this illustrates how easy it is to make money in this country, as most people are so entirely clueless and moreover believe whatever is convenient to them.

Friday, October 13, 2017

The Perfect Storm

Could a number of individual factors combine into a perfect financial storm?  Possibly.

Poor Herbert Hoover.  He has been vilified in the press and in the history books as either causing or aggravating the Great Depression and stock market crash of 1929.  In reality, much of what happened during the Great Depression was already in the process of happening before he took office.  However, his lack of action and some of the actions of the Republican Congress certainly made things worse than they had to be.

History has a way of repeating itself, although never in exactly the same way.  The housing bubble of 1989 was similar to the housing bubble of 2008 but not nearly as large.  There were differences between the two bubbles, the causes of them, the extent, and the resulting devastation.  However there is an underlying pattern in both cases - people started to think that ordinary houses were more than just places to live, but instead as gold mines in their backyards.

Our economy and our stock market and our housing market are all cyclical.  We even have names for this, we call the market a bull market when it is charging ahead and a bear market when it is falling behind - this is a known pattern throughout history.  And usually a bear market follows a bull market in a very predictable pattern.  And until very recently, we've been in a record-setting bull market that is going on since Obama's inauguration.  What always follows a bull market?  Always?

The question is, can this bull market continue forever, or will it retract?  Are we on the cusp of a recession or on the edge of a new, even larger bull market that will allow the economy to take off even faster than it has been?   Some on the Right think the latter - that unfettered by regulations and Obamacare requirements, the economy will take off like a rocket.   Others, such as myself, remember what happened in 2008 when regulations on banks and mortgage lenders were reduced and all hell broke loose.

Sadly, I think we are in for a bear market, and for a number of reasons, not just one single one.  There is not any single reason that will crash the economy in the short-term, nor do I think it will be a significant crash, but rather a small recession as we've had in the past.  However, there are a number of warning signs which are very troubling.

Optimists will point to the low unemployment we currently have, as well as the record prices in the stock market, record prices for homes, and robust home sales.  It would appear that the economy is going well.  Cars are selling well and everyone has a job.  But when you scratch the surface, you start to see some troubling signs of problems.

Consumer debt is at an all-time high, which is to be expected, as in an expanding economy, everything goes up in value over time.  However a lot of this debt is to is for subprime loans, particularly car loans and also for credit cards.  And the default rates are starting to ratchet up, and in  fact, are pretty staggering.  Bill Ford warned about this several years ago, when car makers started offering 7-year loans.  This was longer than most people actually own a car, and forces them to be upside down on their car loan for a longer period of time.  The net result is that people either default on their loans or are locked into a car loan for longer than they want to be and can't trade in and trade up to a newer car.

Or if they do trade in and trade up, they fold in the negative equity into a new loan which puts them either further behind the eight ball.  Eventually, like a person taking out a payday loan, they default and end up in bankruptcy has one loan folds into another loan and eventually they're paying very high interest rates and owe more on their car than they possibly will ever be worth.  This is a well-known pattern and I described before how a friend of mine did just that in the 1990's by going from car to car (which she never changed the oil on) and folded negative equity into higher and higher interest rates loans until she went bankrupt.   She ended up marrying a guy from Saudi Arabia and is probably under a Burkha somewhere today.

Granted, unemployment is it all time record lows, but wages seem to be stubbornly stuck in the past. As a result, these very same people who are taking out these subprime loans don't have the income to service them.  Something has to give, and banks are going to be stuck with an awful lot of bad debt.

But what about the rest of the economy?  What about manufacturing and production?  Well here, we are starting to see signs of trouble, an America's manufacturers are already sounding the alarm.  The Trump Administration was elected on the promise of enacting punishing tariffs against our trading partners in order to protect and promote American industry.  This is the core of Trump's "American First" policy.

We are seeing this already at the International Trade Commission, where the ITC is recommending a 200% to 300% import duty on Canadian build jet airliners.  While arguably it is true that Bombardier is dumping these planes on the US market for below cost, or at least at a very reasonable price, there really is no competing American product that is being harmed by the sales.  Boeing's argument the 737 is competitor for Bombardier's much smaller regional jet is someone specious.

But already, even the threat of these import duties is having the expected effects.  The affected countries, which include not only Canada, but also Ireland and England, are promising retaliatory tariffs or trade actions which could damage the US and even Boeing in particular.  Boeing is one of the largest exporters of American products technology, other than agricultural exports, and stands to lose a lot if our foreign trading partners decide to switch their allegiance to Airbus instead.

Moreover, since Boeing is also heavily into the defense business, sales of Boeing-made fighter jets and other defense products may wither as our trading partners decide to look elsewhere for their defense needs, in retaliation for the trade tariffs.  Trade wars never end well for anyone.

This is a nearly exact mirror of what happened during the Hoover administration after 1929.  In the olden days, Republicans stood for God, Country, and the Tariff.  Tariffs were very prevalent early on in American history as a means of protecting American industry from foreign competition.  In the infant days of our country, American manufacturing companies couldn't compete with cheaply manufactured British and European products, and the import tariff was seen as a way of allowing the nascent American industry to thrive.

But economists have argued that free trade is a much better alternative to restrictive tariffs.  And they argue that restrictive tariffs end up tearing down an economy, not building it up.  If each country has restrictive tariffs on imports, it doesn't necessarily mean that domestic industry will thrive, only that the cost of goods will soar in the economy be stifled.  We see this in Central American countries, which often slap 100% import duties on automobile sales.  If you want to move to Costa Rica to escape Donald Trump and retire on Social Security, you will find it very difficult to bring your car with you or have one imported, as it will cost twice as much as it does here in the United States.  For that reason, you tend to see very small, inexpensive cars in Costa Rica, which often cost more than a Mercedes does in the United States.

And no, there is no car industry in Costa Rica that is being protected or is being promoted by these tariffs, it's just a means of the government to raise revenue.  Trade agreements such as our North American Free Trade Agreement would actually allow the United States to sell automobiles into countries in Latin America, which would mean more profits for US manufacturers, which would then trickle down to shareholders and employees.  However, these at the very same agreements that the Trump Administration is attacking.

The Pacific Trade Agreement is another example of this, which Donald Trump wrongly claims gives China some benefits.  Sadly, many voters also believe this, even though China is not a signatory to the agreement and doesn't have any trade benefit from such an agreement.

The current solar panel cases before the International Trade Commission is another case in point.  A small domestic solar panel manufacturing company is claiming that China is "dumping" inexpensive solar panels on the US market.  They're asking for 200% to 300% import duty on Chinese-made solar panels so they can remain competitive.  However if such a duty were enacted, it would not mean that American manufacture of solar panels would increase, only that people would no longer buy solar panels as they would no longer be cost-effective in terms of returning revenue for the dollar invested. Trump will basically kill off the entire rooftop solar industry in the United States as we know it, as well as a number of large-scale solar projects.

Of course, the Secretary of State is a former Exxon executive, so few tears will be shed when the solar industry dies a quiet death.  If only they can figure out a way to destroy wind turbines - much as Donald Trump is trying to do in Scotland.

The death of the solar industry is probably not enough to tear down the United States economy by itself, but it could be a contributing factor, when you add in the cost of defaulted subprime loans as well as a trade war which would severely limit our ability to export products.

Of course, one of the problems that led to the Great Depression, or at least was an early warning sign of the impending doom, was the mass failure of American farmers in the 1920s.  We tend to think of the Roaring Twenties is a great time where everybody went to speakeasies and shook cocktail shakers full of bootleg gin, while gangsters drove slick cars with whitewall tires and carried machine guns.  It was the era of Flappers and Jazz and modernism.  But at the same time, the Joad family was on the road to California after losing their family farm in the Dust Bowl.  This preceded the great crash of 1929, although many people seem to remember it is happening later on in the 1930s.

We already hearing stories about American farmers struggling with overproduction, particularly of corn. We've become a one or two crop country, growing corn and soybeans and relying on genetically engineered crops and Monsanto Roundup Ready herbicide, which appears to be killing off anything that is not on Monsanto genetically engineered crops, including trees, flowers, and other plants.

While Monsanto's genetically engineered crops are unsuccessful, they're arguably too much so and now the farmers have too much crop and not enough market to satisfy the supply.  If we get involved in a trade war with our foreign trading partners, they may in fact and enact heavy duties and import restrictions on America's largest export, which is crop foods.  Trump's trade war will screw American farmers - and no, the "death tax" abolition will not benefit them at all, as farms are largely exempted from the Gifts and Estate tax already.

But what about manufacturing?  Reports are coming in that manufacturers are expanding at a rapid clip and manufacturing growth is better than ever.  On the other hand, we are hearing that automobile sales are in the toilet and even vaunted pickup and SUV sales are slacking off.  General Motors is now offering 0% financing to move its most popular product - pickup trucks and SUVs.  Ordinarily, these products have sold themselves and it is troubling that manufacturers are resorting to incentives to move their most popular iron off the lot.

Then there are the IPOs and the tech bubble.  We are in an era where we have a lot of tech-that-is-not-tech that is being offered with IPOs for things like delivering food to your house.  People have been delivering food for decades if not hundreds of years, we never thought of it as a technology. However today, since we do it from a cell phone app, we call the company a "Silicon Valley startup" and say it is worth billions of dollars.  However, the number of people who want their food delivered as opposed to going shopping is far overstated.  This and a lot of other tech-that-is-not-tech companies such as Uber (which is just a taxi company that is unlicensed and being hounded out of many of its jurisdictions) may fail in the coming years or at least be severely restricted or diminish in value.  Much of these "tech" stocks are just wildly overvalued with P/E ratios in the hundreds or even thousands.  Eventually some sort of comeuppance is due.

Again, taken by themselves, each one of these factors is not enough to crash the economy.  But if all of them come together at once or at about the same time, it could be a perfect storm of economic malaise.  The underpaid worker who hasn't had his salary increase in over a decade can afford to buy a $999 iPhone, much less call an Uber or have his groceries delivered.  And this job may be on the line if he works for SolarCity or one of the other companies which may be affected by our trade wars, tariffs, or general economic downturn.  This in turn again feeds the downward spiral.

UPDATE:  From a personal perspective, the prospect of spending $14,000 a year on health insurance (thanks to Mr. Trump) makes me reluctant to spend money on things like new trucks or boats or whatever.   The current economic climate and a President who is going to "give us what we deserve" in terms of health care (which sounds more like a threat of punishment than a promise of good) is putting me personally in "hunker down" mode.  I am selling more stock while the market is at all-time highs.

Then there is NAFTA.  If we abolish that, it will disrupt the economy in several ways.  American farmers could find duties as high as 75% on their products exported to Mexico and Canada, and American car makers will have to scramble to find parts to assemble their cars.  Of course, by then, no one will be buying anyway, right?

Oh, shit, this does not bode well!

Thursday, October 12, 2017

How The Electric Car Killed The Electric Car

What will kill the electric car this time?  Cheap gas?  No, electric cars themselves!

Over the years electric cars have come and gone on the American highways.  Some of the very earliest automobiles were electric cars such as the Baker Electric, which Jay Leno owns an example of.  A lot of people said that John D Rockefeller killed the electric car the first time around by making available low-cost gasoline to power internal combustion engines.

But what killed the electric car in those early days was the available driving range and low purchase cost of the Model T Ford.  Electric cars of those days couldn't compete because of their primitive lead-acid batteries which provided only a few miles of range.   Lead-acid batteries also made electric cars expensive to buy and maintain.

Lead-acid batteries remained the biggest obstacle to the adoption of electric vehicles for an awfully long while.  Over the years, hobbyists and experimenters tried to build electric cars using lead-acid batteries with limited success.  The resultant vehicles were slow and had very limited range and were very expensive.  And the batteries only lasted a few years and had to be replaced at great cost.  Practical electric cars simply didn't exist until very recently.

In response to California's electric car mandate of the 1990's, companies such as General Motors developed electric vehicles such as the EV-1.  People accused General Motors of killing that car as well, but it had a very limited range, was very expensive, and GM lost money on every example they made.  The technology just wasn't there to make electric cars work, as recently as the 1990's.

But battery technology improved.  Lithium-ion batteries have the energy density to make a practical electric car, albeit one that maybe doesn't have quite the range of an internal combustion engine vehicle or can be recharged (refueled) as quickly.  The problem with lithium-ion batteries is that they are very expensive, and if not manufactured properly, have a tendency to catch fire.

Elon Musk was very successful early on with his electric cars in that he didn't pitch them as the Every Man's vehicle but rather as an accessory or toy for the very rich.  The original Tesla Roadster was a very expensive vehicle and not practical for daily use as it could only seat two people.  The Tesla Model S was at least a more practical car, but priced only so that only the very wealthy could afford one.  And the very wealthy, no doubt, had a second vehicle, probably an SUV, for other tasks that an electric car would not perform.

So long as these remained expensive playthings for the rich, he had a viable business model, as the cars cost an awful lot to make, and the average person could not afford one, even with the tax incentives.  Musk then promised to make an affordable electric vehicle that the average person could buy.  And other automakers followed suit.  Part of this surge toward electric vehicles was the possibility of more mandates for electric vehicles from various government entities, and part of it was a desire to have a "me too!" product available.

Sales of these more plebeian electric cars such as the Nissan Leaf and Chevrolet Bolt, however, have been very thin.  They cost more than that a comparable internal combustion engine vehicle and most people can't afford the difference.  Moreover they need a vehicle they can drive to Disneyworld from Detroit, Michigan, without stopping for hours to recharge.

Today, it seems everyone is jumping on the EV bandwagon.  Volkswagen is claiming to move to an all-electric business model.  Various European governments and China are claiming they plan to outlaw the internal combustion engine, as is the state of California, in the next 20 years.  Whether electric vehicles will be ready by that time is anyone's guess.  One thing is for sure, the cost has to come way down, the range has to go way up, and the recharge rates have to increase - and we will need a lot more than a few demonstration recharge stations.   Every parking space and every parking meter will have to have a plug in it, and a way of charging customers for charging their vehicles.  It is not enough for rich folks to have chargers in their garages - apartment dwellers will need chargers as well, and city dwellers, who park on the street, will need access - anywhere - to a charging station.

Maybe in twenty or thirty years all of this could actually happen.  But what will happen in the next five years is of more consequence to Elon Musk.  His vehicles will have to move beyond being mere playthings of the very rich.  Compounding his problems is his acquisition of SolarCity which makes solar roof tiles, which combined with a lithium-ion battery pack, could power a house without the need for electrical utilities, or having to sell electricity back into the grid.

The problem is, solar panels, like electric cars, so far have been the toys of the very wealthy.  I have one friend who put solar panels on his house.  He's the kind of guy who owns three Mercedes and experiments with biofuels in his backyard.  They are hardly poor by any means.  And of course, they relied upon leasing solar panels in order to amortize the cost.  And the leasing company relied on being able to sell power back to Georgia Power at retail rates.  How this works out (particularly now that the house has been sold to a new owner) remains to be seen.  Does the homeowner have to take it on the chin for higher lease rates?   At 10 cents a kW-hour buy-back, my friend was getting negative electric bills.   Under wholesale rate buy-backs, the new owner of the house may find he is paying more, not less, for electricity than his non-solar neighbors, as the cost of the panel lease far exceeds the electricity he sells back to the utility.

As others have noted, apartment dwellers and more plebeian Americans can ill-afford solar panels at this point, much less have a place to put them.  It is one of these technologies that, at this point, is a plaything of the very rich, but not ready for mainstream America.

Again, in 20 or 30 years maybe this will work out, but what happens in the next two to three years?  It is not that I'm against solar power or electric vehicles - far from it!  I'm a big proponent of both, as I'm an automotive and electrical engineer.  I would like to see a world where we power vehicles by the sun.  And I think this may happen - in the long-term.  In the short-term, Mr. Musk has to pay back his creditors.

In the short-term, companies have to make profits, and it doesn't look like anyone is making profits from these technologies at the present time - without heavy government subsidies.  If those subsidies are taken away, such as in the solar panel field, the entire business could evaporate.

And the current Administration is more than a little hostile to renewable energy and electric vehicles. The Trump Administration is poised to impose a 200% to 300% duty on imported solar panels, which could effectively kill off the entire solar industry, as 90% of all solar panels sold the United States are indeed, imported.  At triple the present cost, solar panels are no longer a cost-effective proposition.

State after state has enacted new utility regulations which no longer require the utility companies to buy back electrical power at retail rates.  Again, this makes solar uneconomical for the average American, much less even the wealthy American.  While it may seem we are very close to a solar Shangri-la, we are actually a long way away, as without these government and utility subsidies, the entire thing collapses under its own weight.  Throw in a Administration hustle to solar, the entire thing disappears.

The same problem exists for electric cars.  Without electric car tax subsidies, which likely will disappear, electric cars will be less and less affordable.  Without an infrastructure of charging stations, electric cars will be impractical.  The technological press is getting ahead of itself and promising electric cars for everyman within a few years.

Reports are coming out that Elon Musk is struggling to produce his new "affordable" model 3.  He claims to have 500,000 orders for the vehicle, although later he admits the number is far less.  However today only a few hundred of the models have been produced, mostly by hand.  Mr. Musk is running into a problem that others have faced before him, when trying to enter the automobile business.  It's easy to make a few custom prototypes, it's very difficult to mass-produce cars, as General Motors can attest to.

So, even assuming demand for these cars is steady, Mr. Musk is going to have a hard time meeting that demand and maybe hemorrhaging money in the short term.  Moreover, as more and more people get into this space, it will become more and more difficult to make profits.  And it seems that everybody wants to make an electric car these days, including the British guy with his stupid vacuum cleaner.

To me, this is a sign the electric car bubble is ready to burst.  It takes more than skill in making vacuum cleaners to make automobiles as Mr Dyson will no doubt find out very quickly.  That dilettantes like him think they can just press a button and start competing with the world's automakers is a sure sign the bubble is upon us.   World automotive assembly capacity already far exceeds demand.   The last thing the world needs is another car factory built from the ground-up.    Existing car makers will clean the clocks of Mr. Musk and Mr. Dyson, if there is indeed a market for these cars in the short-term.

Now throw in an economic recession, which is sure to occur in the next few years, particularly now that we have a very unstable government in the United States.  Sure, the press is reporting that everything is going gangbusters with the economy and the stock market is going through the roof  - and that consumer confidence is very high.  The same was true in 2006.  Things are always greatest before the fall.  Once people realize that the vaunted "economic reforms" of the current administration aren't going to happen - and even if they did, reducing regulations and taxes isn't necessarily going to make the economy take off - the present euphoria about the economy will dry up.

The good news is, like the "dot com" crash of the 1990's, the wreckage will provide a lot of low-cost infrastructure and technology for subsequent companies to get off the ground - infrastructure that would not have been affordable prior to the crash.  Thus, I believe, we can expect another crash in the electric car business, due to the current wild optimism over the business, but the end result being that the new technology and availability of parts and infrastructure will seed the next generation can be built from the ashes of the first.

And who knows, maybe in twenty or thirty years Mr. Musk's dream will come true - although he will not be at the helm of the company running that dream.

Monday, October 9, 2017

Why Do Used Cars Sometimes Cost More Than New Ones?

Dealers often sell used cars for higher prices than new ones.  Why is this?

Years ago, when we were still into German cars, and German cars were still a good value proposition, we looked at buying a used Mercedes wagon.   Back then, they were 300,000 mile German tanks.  Today, they are fussy, delicate jewelry boxes, and no longer a good bargain.

We went to the local Mercedes dealer, which was offering to "re-lease" used Mercedes wagons.  I thought briefly about leasing the car through my company and writing it off as a business expense, but quickly realized that even if I could write it off, it was still an overpriced deal with a lot of hidden fees.  Again, leasing only makes sense only if you can write off the costs - and even then, sometimes it is better to buy than lease.  For ordinary consumers?  Leasing makes no sense at all.

We were about to walk away, when I noticed in the showroom across the street, the same identical car, brand new, for sale.  Curious, I walked over to look.  What shocked me was that the price on the window sticker was lower the the price of the used wagon across the street.  I quickly got into my car and left - these people were clearly crooks.

Recently, we were looking at boats, and it has filled me with trepidation.  When I was younger and clueless and thought money would continue to flow into my life, we bought boats without much of a thought.   And we had fun.  Today, the idea of tying up all that money in a depreciating asset scares me to death.  I guess part of it is the fact I am getting older and more conservative with money, the other part is, the economy scares me right now, as does the unstable government we have.   Not a good time to buy a depreciating toy.

The other half of the equation is that to tow this boat, we would have to buy a larger truck.   Mark Twain was once credited with saying something like, "beware of any venture which requires new clothes" - and I am sure if he were alive today, he would amend that to "beware of any venture which requires a new truck."   And big trucks are not cheap, which is why I never bought one before.   They also depreciate rapidly and it seems most of them are optioned out of the universe.  We've seen zillions of off-lease Crew Cab F-250 "King Ranch" diesel trucks for sale, which were $70,000+ trucks new, now selling off-lease for $40,000 or so.

But I don't need or want a truck that is as long as a city block and requires a step ladder to get into, no matter how many acres of brown leather it has inside.

So instead, we looked at a stripped-down "work truck" with a standard cab and bed.   Now by "stripped down" I mean a truck with more options than your Grandma's 1968 Cadillac.   Stripped today means the base sound system and no automatic climate control.  You still get power windows, locks, cruise control, air conditioning, an AM/FM stereo radio and a host of stuff that wasn't even conceived back in the 1960's - like anti-lock brakes, traction control, air bags, disc brakes, radial tires, and so on.   Today, we consider that a plebeian "bare bones" truck, suitable only for utility crews.  How times have changed.

Anyway, the local dealer has one on the lot, used with 900 miles on it, but asking $32,000.   They also have the exact same truck - in fact three of them - brand new on the lot, with asking prices of $29,000.  What is going on here?  Why is a new car less costly than a used one?  Not only that, why is this something that happens more often than not?   The answers are various, but get down to the attitudes and self-esteem of the buyers involved in new and used cars.

I asked the salesman why the new trucks were less expensive than used ones.  He replied with his gobblygook message:
We do have new ones listed at 29 thousand for our internet price but that's not going to be your sales price you have to add back in what ever the rebate is on the F-250, freight, military, and college to get a taxable sales price. The only thing I would say that would be different is the rates on new vs. used
 Huh?   I am expected to pay more for a used truck "just because" and for some reason should "back out" the rebates on the price of the new one to make a comparison?   This is literally nonsense - Alice in Wonderland stuff.

The real reason is, of course, that used car buyers rarely cross-shop with new cars, and moreover will often take whatever shitty deal is offered to them, even if it means paying more for a used car than a new one.   This is not only a matter of low-self-esteem, but poor thinking in every sense of the word.   The new car buyer is expected to have a better credit rating, be more educated, and more astute - and do more research.   The used car buyer thinks a used car is always cheaper than a new one - but never bothers to actually check.

He also is more likely to have damaged credit, less education, and less likely to go online and comparison shop.   He is more likely to be the guy who shows up on the lot with nothing more than a checkbook and a W2 and is "sold" a vehicle by a salesman, who saddles him with onerous financing and a padded price - all based on monthly installment costs, not overall costs.

Of course, there are good deals on used cars out there - but they are rarely from dealers.  Private party sellers are not interested in getting a kickback from the finance company, nor are they sophisticated enough to bamboozle you with nonsense and price-padding.   And that in a nutshell is why all the "books" of used car prices (KBB, NADAguides, Edmunds) show private party sales prices at 10-20% less than dealer retail.

But used car dealers?   Nope.   You are going to be given the runaround every time.   And that is one reason we walked away from the boat here in Annapolis - it was being sold by a dealer, and he was trying to use all the cheap psychological tricks to get us to buy it - playing games with the price, and our emotions.   We are now headed to North Carolina to look at another boat, for sale by owner, for a lot less money.   Whether we buy it or not, the point is, we don't have to dick around with a salesman in the deal.

And if we buy a truck to tow it with, we will look for one from an individual, not a dealer, and we don't need nonsense and gobblygook in our lives, and since we are not chained to the finance company to pay for it, we don't have to go to some salesman and hand him our checkbook and say, "you just write down a number that you think is fair, and we'll pay it!"

But of course, the other option is to opt-out entirely.  We don't "need" a boat to live or have fun. We could rent boats at various places we'd like to go boating.  We could do other things.  We would wait until next year, when perhaps economic conditions put a lot more boats on the market - at far lower prices.   Buying a motorized toy during an economic boom time is never a good choice.   During the downturn, however, you can snap them up for cheap.

Something to think about.  The minute you decide you "have to have" something, you are screwed.

The Farm Stand - A Scam? Sort Of, Sometimes.

Are roadside farms stands or "farmers markets" really selling local produce, or just overpriced grocery store food?   Sometimes, a little of both!

Traveling cross-country, we see a lot of roadside farm and vegetable stands.  Some of these are little more than a wagon with a few pieces of fruits and vegetables on them and a coin box, with a sign saying "Honor System".  Usually, these are folks with backyard vegetable gardens who are selling their surplus vegetables to make a few extra dollars.

Other farm stands are a little larger, often with row upon row of fresh produce as well as a cashier and even a machine that accepts credit cards.  And sometimes these too, are local produce from local farmers, or backyard truck farmers.  But often, the produce we see is from far away, often quite far away. In fact, sometimes it is the exact same produce you see in the supermarket.

And some of these farm stands or produce sellers are pretty upfront about this.  At the local "farmer's market" an hispanic family sells produce from cartons clearly marked "Walmart" or "Safeway."  When you ask him where the produce comes, from he vaguely replies "Florida."  I'm not sure whether he's buying this stuff directly from the supermarket or from a wholesaler or whether it "fell off the truck."  But they are not representing that they grew the food in question.

It seems about half these farm stands are this way.  Either some of the produce they sell is locally grown and then the rest of it is purchased from a wholesaler, or in some cases all of the food is just from a local wholesaler.  If you ask them where the produce comes from, some are either outright deceptive or give vague non-committal answers.  Few of them will actually come right out and say, "I buy this by the case from the wholesaler down the street, who in turn gets it from a truck that came from California."

Then there are the so-called Amish farm stands.  Some of these are somewhat authentic in that they sell products grown or made by local Amish people.  The stands themselves might not necessarily be run by the Amish, but are more like small supermarkets.  In other cases you actually see Amish people selling products directly by the side of the road, often the small children operating the stand.  These are usually pretty authentic in that the produce you are buying was grown on their farm.  Some of the more Mega-Amish supermarkets contain a lot of products which clearly were not made by the Amish, such as candy corn.

Then there are farm stands which are not really farm stands, but people just selling things out of the back of a pickup truck.  We used to stop by an old fellow on the way back from Ithaca, who would have his pickup truck parked by the side of the road, with a small selection of produce on the tailgate.  It was never cleared us where he was getting the produce, but I don't suspect he was actually growing it.  We've also come across people with pickup trucks full of melons, potatoes, and other vegetables.  And when I say the pickup trucks are full, they are full to the brim.

During a stop at a rest area one day, we saw two gentlemen in parallel pickup trucks transferring a load of watermelons from one truck to the other.  The gentleman stood in one truck and threw the watermelons 15 to 20 feet to his companion, who caught them and carefully stacked them in his truck.  Where these melons came from, or where they were going was not exactly clear to us, although they did offer to sell us one, and as I recall, we bought it.

Perhaps these were purloined melons stolen from some farmer's field, or perhaps they had a job picking melons and were paid in part by being given excess melons to sell.  I guess we'll never know how or why this works, but a lot of people will park by the side of the road and sell produce either occasionally or continually.  I supposed it is a good way to make some spare change if you need some money.

This is not to say these farm stands are all rip-offs or scams or schemes of one sort or another, only that many of them, in order to stay in business, get their produce from a number of sources.  If you have a backyard garden producing fresh vegetables and people want tomatoes when all you have is potatoes, you are turning away customers.  So it is tempting, and indeed a logical business choice, to buy a case of tomatoes from the wholesaler down the street and put them out and just not comment as to whether they were locally grown or not.

Similarly, produce that you grow is only available when it is in season, and tourists and other people may be coming by at all times of the year.  So it is tempting, and indeed a logical business decision, to go down and buy produce that may be made across the country and shipped in refrigerated trucks to a distributor near you.

Regardless of the truth in advertising, the ultimate question as to whether the products are good value. Oftentimes we find that many "local produce" stands offer the same products that the local grocery store has, but for a much higher price.  And of course this is because they are buying the products of the local grocery store and then reselling them, so they have to pad the price.   The sellers also know that people will pay more at a roadside stand, as they often don't check prices, or think they are paying more for "local" foods.

On the other hand, we often find very good fresh produce at somebody's stand at very reasonable prices. Of course, it helps to know what a reasonable price is for produce.  And then in other instances, even if the price isn't pretty good, there is the convenience factor.  When you're on your way to the campground, and need a few tomatoes and peppers, it's nice to know there's a stand nearby where you can buy produce, fresh, local, or not.

But not in all cases are vegetables from a "farm stand" necessarily grown at the farm behind the stand. 

Sunday, October 8, 2017

There is No Motive For Crazy

There is no motive for crazy, and trying to rationalize crazy behavior is just an exercise in futility.

The recent shootings in Las Vegas were horrific, but then again, predictable.  Just as ISIS or Al Qaeda or some other terrorist group continually thinks up some new form of torture or terror, the crazy shooters of the world continually come up with new ways to immortalize themselves with new forms of mass-murder.

They say that comedy is tragedy plus time, but apparently The Onion, the satirical newspaper, isn't wasting any time about this, offering headlines such as, "Those Close To Nation Say It Showed Dozens Of Warning Signs Leading Up To Massacre" among others.  While that may seem tasteless, so soon after such a tragedy, it does raise the point that these shootings have become a predictable part of American life, and, as another Onion headline opines, "Americans [are] Hopeful This Will Be Last Mass Shooting Before They Stop On Their Own For No Reason".   We just close our eyes and hope it all goes away on its own.

But it won't, of course.

The sad thing is, not only are these events predictable today - not in the sense of a specific event is predictable, but that, like riding a motorcycle, getting into a wreck is a predictable event - but also that how these "tragedies" are handled is very predicable.  I put "tragedy" in quotes as a real tragedy is something that could not be prevented, but these shootings are something we can prevent but choose not to, due to politics.

The pattern is the same - the hand-wringing, the anguish, the media having a field day of coverage (and boffo ratings) and of course, the hushed profiles of the victims and what wonderful people they were (which no doubt they were, but it would be better yet if they were still alive).   No offense, but my goal in life is not to be remembered on some memorial wall or by a stack of flowers and teddy bears.   Tearful memorial ceremonies are not the answer.

And like clockwork, the NRA and its lackeys in Congress say, "How dare you discuss gun control at a time like this?" using the time-honored technique of shaming and damning to shut down discussion at all.   Nice try, first time around, and maybe Fox News commentators still buy that bullshit, but the rest of America saw through this years ago.  How dare the NRA say we can't even discuss things, except on their timetable?

But as part of this predictable pattern, we then see the search for motive.   What caused the shooter to go berserk and kill all the people at the mall/school/gay night club/rock concert/airport/whatever?  As rational people, we want to pigeon-hole a "reason" behind all of this, so that somehow it makes sense.  The Post Office shooter was mad because he was fired from his job, so he goes and kills his boss and co-workers before turning the gun on himself.  The jilted lover stalks and murders his would-be girlfriend, so "no one else can have her".   The divorced Dad murders his ex-wife and/or his children or shoots up the offices of his ex-wife's divorce lawyer.   For some reason, we "get" that, and accept those as "reasons" for shootings. 

But of course, they are not.   You get fired from a job, you go get a new job.  And maybe look inwardly and think about how you could have handled your old job differently.   If a girl doesn't want to go out with you, you find another girl.  There about 150 million of them in the USA alone.  And again, maybe think about how you acted that made her dump you.  Yea, chicks don't dig crazy stalkers - funny how that works.  And if your wife leaves you, well, you pay for child support until the kids are 18 and then move on with life.   There are other choices, unless of course, you are bat-shit crazy, and killing people seems like a "logical" choice.

Crazy doesn't need a reason, and this takes a long time to figure out.   My family has a history of crazy, and my Mom was a full-on whack job.   And a lot of time and effort was wasted by all of us trying to "understand" crazy, when it just is.   I figured this out early on, as I was forced to live with her, as a teen, alone most of the time, during her fugue states and witnessed that there was no "trigger" to set them off or any way to prevent them or "talk her down" from them.   They were just electrical storms in her brain.

My late sister spent too much time and energy trying to "understand" Mom - there must have been some triggering event or situation that caused all of this, because as rational people, we want to see cause-and-effect.   Things don't just happen for no reason, right?   I mean, if that was true, then where is God in all of this?

But the reality is, God is in random events.  God is quantum.   So when horrible things happen, don't go asking God why or looking for reasons.  Shit just happens. And Crazy happens.   There is no "reason" or "trigger" for it, and often no way to prevent it.   The best you can do is get treatment for crazy people, get them off the streets if possible, and by all means, keep them away from guns.   How you do this, is of course, tricky, in a country that values freedom and guns above all else.

In the case of this Las Vegas shooter, it isn't hard to see what happened.  There was no triggering event or "reason" behind his actions, other than just craziness.   He was the son of a bank robber, who was described as being a sociopath.  This shit is often hereditary.   And if you read the descriptions of his life, from neighbors and even his own relatives, you get a picture of someone who is, well, not exactly normal.  A man capable of making shrewd business decisions and a lot of money, but unable to maintain intimate relationships.  A man who was abrupt, cold, and often hostile and demanding - and often demeaning his "girlfriend" in public (supposedly saying, in a Starbucks, "I'll pay for your coffee just like I pay for you!" or something to that effect).

There is a lot of anger here - seething anger at society.  This is not a happy person - perhaps autistic or Asperger's syndrome - although it is way too trendy to diagnose this sort of shit online.  Seeing groups of people being happy was probably enough to piss him off.  Neighbors who shouted "Merry Christmas!" pissed him off.   His homes were like dorm rooms - places to dump "stuff" and maybe crash for a day or two.   No real interest in them or love of them or desire to decorate or nest.

Trying to understand the "Abe-Normal" brain is an exercise in futility.

This is a man who made a lot of money, apparently, but had no real reason for spending it or enjoying it.   No fun in his life.  No children to bounce on his knee.  No weekends at the lake house, just "kicking back" and hanging out with friends.   And no doubt, he resented those who could enjoy those things, let their hair down, and go "Yee-Haw!" at a Country Music concert.

Now throw in guns.  Not hunting rifles or even personal protection firearms, but the new generation of weapons designed for mass-mayhem.   And you know the difference between the two and stop pretending you don't.  You know the difference between a gun enthusiast or collector and a gun nut.  The collector has a carefully curated collection of firearms.  The hunter buys one or two rifles for deer hunting.  The gun nut has an arsenal of weapons, all designed to kill people.

You've seen the videos on YouTube.  The gun nuts like to go out and shoot pumpkins or watermelons and pretend they are blowing someone's head off.  The shoot up old cars, preferably with mannequins inside, so they can pretend they are committing mass-murder.  The shoot at exploding targets to they can pretend they are in a war zone.  They want to destroy things, break things, damage things.  They shoot up old appliances as if they appliance had somehow done them wrong.  They have anger issues and a feeling of powerlessness - and weapons make them feel powerful, at least for a moment.

Once they start collecting these arsenals and acting out these pretend murders, well it is only a matter of time before they start planning a real one.   After all, you don't buy a pair of skis to not go skiing, right?  So once you have the arsenal of weapons, and once you go down the road of shooting up "targets" that resemble people, it is only a matter of time before you do the real thing - because you are batshit crazy to begin with, and now you have the trigger - quite literally - to set it all off.

And besides YouTube videos, there are magazines and websites and discussion groups to encourage all of this.  People spend all day talking about "stopping power" and describing in gory detail how a hollow-point bullet tears through vital organs or whatever.   It is pretty sick thinking.   But it is no different than being radicalized online.   In fact, it is the same exact process.  The Internet is an echo-chamber.

So what will change after this latest shooting?  Not much, to be sure.   Since we won't limit access to firearms or try to prevent crazy people from getting them, there will be similar shootings in the future.  In fact, some copycat right now is out there figuring out a new target and a new form of mayhem.    I suppose open-air venues will become harder to book.   Concerts and other events near tall buildings will become obsolete.   Or police snipers will have to be stationed on nearby buildings to quickly "take out" potential shooters.  One wonders how venues like Camden Yards in Baltimore will be able to continue, when so many tall buildings with open windows are nearby.

In short, we will hunker down and learn to live in a war zone.   People will stop congregating in public areas.  Personal body armor for average citizens will become a "thing".   And of course, we will all have to arm ourselves - as the NRA suggests - to shoot back at the shooters.   But of course, even if every person at that concert in Las Vegas was armed, it wouldn't have made a damn bit of difference.   And as it turns out, if not for a stray door being left ajar, the shooting rampage might have gone on for far longer than it did.  And imagine if he had access to silencers - as the NRA suggests we allow to "protect the hearing of shooters"?

One thing's for sure.  there will be more of these shootings, each more horrific than the last, unless we really want to do something about it.

Saturday, October 7, 2017

A Clever Idea For Boating On The Cheap

A used centerboard sailboat can be bought cheaply and turned into a "vintage" looking river launch!

While researching yet another boat, the Atlas Acadia 25 (which is made in a small shop in Florida by a very nice man), we stumbled upon a website put up by a boating enthusiast.  It lists all the boats he's owned and worked on over the decades, and it is a fascinating read.   

One of his ideas, that I think is genius, is to take an old centerboard sailboat, which can be had cheaply, and then converting it to an old-timey river launch.    Yes, you can buy a "new" river launch like this, but they cost tens of thousands of dollars.   But old centerboard sail boats?   You can find them sitting on a trailer literally by the side of the road, sans sails or rigging, with a faded "for sale" sign on them.

Now the fellow on this site (whose name is also Bob) does great woodwork and spent a lot of time and effort making this old sailboat into a replica of a late 1800's river launch (such as we used to have here on Jekyll Island) and this took a lot of time and money, of course.  But if you are not as interested in all the wood trim accessories, you probably could do this for a lot less money than he spent, and still have a pretty spiffy looking boat.  The main expense, of course, would be in canvas, for the canvas roof (with some sort of fringe around it, right?).

An actual vintage steam launch could cost hundreds of thousands of dollars.   You could get the look and feel, for a whole lot less!

Of course, such a boat is nice for just cruising around at slow speeds.  If you live on a canal or small creek or river or a fairly small and calm lake, such a launch could be a great way to spend the afternoon cruising.

And what a great way to recycle one of the hundreds of thousands of old sailboat hulls that are rotting away in side yards across the nation!

Friday, October 6, 2017

The Smartphone Recession?

What will trigger the next recession?

Both Apple and Samsung are slated to release their latest versions of their smartphones shortly.  Both phones will be at or near the thousand-dollar mark - a new plateau for smartphone pricing.

This makes me wonder as to whether many people will snap up these phones at a price that would easily buy two laptops or maybe even three desktop computers.  Granted, a lot of people don't think they "pay" for their phones, as the phone is part of their contract plan.  However the cost of these phones is amortized over a number of years and added to the overall cost of the plan.  Thus, we can expect to see plan rates go up over time, or at the very least the price of the phone being made a la carte or only partially subsidized by the plan.

But I also wonder whether people will simply take a pass on a $1,000 smartphone, when far less expensive options are available.  As I noted before, we are currently using two used Samsung Galaxy S4 phones which we purchased on eBay for $99 each.  They seem to work very well and run every app that we want them to.  The battery seems to last a very long time between charges and we haven't had any problems with them operating slowly - which appears to be an issue based on the number of "cleaner" apps you see advertised (which are all scams).

Folks like me, who do not have a "contract" plan but a pay-as-you-go monthly plan (AT&T GoPhone) that costs $40.75 a month (including the 75 cent tax, period!) buy their own phones rather than get a "bells and whistles" plan that costs far more (particularly with add-on costs and data caps).   So to me, the actual cost of the phone is something I can see and feel, while the "contract" people think they are getting a "free upgrade phone" when in fact, they are paying for it just as I pay for mine.   And as more and more people move away from "contract" plans, the cost of the phones will be more readily apparent to them.  And a thousand bucks is a lot for a telephone.

Back in 1995, Windows introduced a new operating system, Windows 95, which was expected to be a sea change in the computer industry. The program was a great improvement over previous versions of Windows, but required much more memory and faster processor speeds in order to be effective.

The thinking was, at the time, that everyone would go out and buy new computers in order to run Windows 95 - and computer manufacturers geared up for a rush in sales. However what actually happened was something of a disappointment.  People who were using earlier versions of Windows felt that their existing software was more than adequate, and didn't see any need to junk computers that were only a year or two old just to have the "latest and greatest" version of the operating system.  They decided to wait.

The result was a recession in Silicon Valley, as many hardware manufacturers had ramped up to make large numbers of parts only to find them languishing on the shelves, often selling for pennies on the dollar.  Many chip manufacturers faced hard times, and some of them, including a client of mine, nearly went bankrupt.

Penetration of smartphones is almost one hundred percent in the marketplace, and growth has slowed down.  At this point, sales of new phones are merely replacements for older phones that have either worn out, broken, or were lost or stolen, or in some cases, have become obsolete.  But in reality, only the very earliest versions of either the Apple or Samsung phones are really obsolete at this point, and a large portion of the smartphone population is more than a few years old and still functioning adequately.

I'm sure that the new Samsung and Apple phones are nice products and have additional features which people will eventually flock to.  But I wonder if this could be the precursor of our next recession, if both companies gear up for a big roll-out of these products, and the general public yawns and continues obsessively texting using last year's model, instead.

Thursday, October 5, 2017

Complicated Cons - the IPO

Complicated cons are hard to figure out, so most people can't figure them out.  And since they are often legal, nothing much can be done about them, other than to guard yourself against falling for them.

In a previous posting, I mentioned in passing:

"Throw in a non-protectable business plan and low barriers to entry and, well, you've got a serious problem.  Well, you would have a problem if your goal was to make money.   But the way these "new-tech-that-aren't-tech" companies work is not to make profits for shareholder but to make capital gains for founders and early investors.   It is nothing short of a legal con game."
As I noted before, you can do an IPO and steal money from investors - all perfectly legal.  It isn't really stealing, as stealing is against the law.   So long as your prospectus honestly says what you are doing, it's OK.  Investors are assumed to know better.   So if your prospectus says, "Our goal is to use investor money to go to Vegas and gamble and hire hookers and snort cocaine until all the money is gone" you are perfectly fine, if you end up doing just that.   Hey, you didn't lie about it, didya?

Similarly, you can start or run a company and put in the prospectus or annual SEC reports that you don't think the company has any shot at making it in the long-term, and is in fact, insolvent, and you can still sell stock, take deposits, or whatever - much as Mr. Elio has done with his three-wheel car company.   Hey, he never promised you a rose garden, and in fact, said quite the opposite.   Your fault if you believe the hype and not the SEC filings.

When I was at the big odious law firm (for all of six months) I didn't understand this.  Being naive, I assumed the point of an IPO was to "raise capital" for a company to buy machines and build factories.  After all, my background was in heavy machinery - ball bearing and air conditioning factories which had been in business for nearly a century - and used capital to buy machines and factories and hire people.   This "new paradigm" had me stymied, because it never occurred to me it was all a fraud in a manner of speaking.

We would an "initial round of funding" for a "dot com" company and when they broke out the champagne in the conference room, the Senior partners would get the hapless dolts who ran the company to sign off on our legal bills - often 10% or more of the amount funded.  The Venture Capitalists ended up owning most of the company, which may have had a neat idea for some computer gizmo thingie website at one time or another.

The VC's weren't interested in the computer thingie, though, other than as a means of hyping the value of the company.   The company would then make a big splash in the press.  The funding alone merited a "press release" and several more would come down the pike.  The nerdy computer geek principals of the company would go on the financial and tech channels to be interviewed about their "ground-breaking product" and everyone acted like they were the next Steve Jobs or Bill Gates.

They would also go to the "tech conventions" and consumer product shows like SXSW or CES.   Lots of well-placed articles in the paper and "buzz" over the company would be generated.    They let this build for a while, perhaps fudging a few quarters of reports to show profits (or at least showing slowing losses) and then they'd "drop" the IPO.   The tension in the market was so high by then that people went nuts to buy the stock.   All they had heard about for months was the company we were hyping.   Surely this has to be a good deal!

And that's where I got confused.   They would sell off 5% of the company for maybe a billion in stock sales.   They already had a few billion on hand, why did they need another?   Moreover, the day of the IPO, the stock price doubled which meant that the institutional investors and "friends" of the company who subscribed at the IPO price, doubled their money within minutes.

"This makes no sense to me!" I said, "the company is leaving cash on the table here - they could have raised twice as much money by raising the IPO price!"  I was hushed up and told to go work on a Patent or something.  I was too dumb to even conceive that the entire thing was a con.

The point of the IPO wasn't to raise capital to buy ball-bearing grinders, but to create a marketable commodity in the company's equity.   The Venture Capitalists and the company founders now had a means of selling their shares of stock to the general public for far more than they could have gotten in private sales.    And they sold, too.

The small-time players who worked for the company for stock were "locked" from selling early-on, so that the big players could cash in.   Those little people were able to sell out later on, hopefully before the company went belly-up.   The founders of the company either realized what was going on, or were utterly clueless - often wondering why their precious company and great product were being trashed just to make a few bucks.  Some of these tech geeks were actually true believers and didn't realize their "idea" was just a pretext for the whole scam.   In a way, it was like the classic "bust-out" scheme of Tony Soprano and his ilk.

Too late, the small investor who bought 100 shares of "The Next Big Thing! Inc." realizes that the company is losing money and moreover has no realistic plans to ever make money and he sells out in a panic.   Eventually the company either goes bankrupt (like when they run out of money to pay the light bill, or they sell out the shell of the company to another company, if there is some sort of useful business model left that might wring out a tiny profit (now that it is sold for pennies on the dollar).

That's how IPOs work.   Modern IPOs, anyway.  They are less about raising capital than cashing in.   And you can tell this by the pitiful amount of stock they sell in the IPO as well as the sky-high "market cap" numbers, valuing some marginal company more than an entire country.  There is a pattern to this, right down to one or two quarters of "profitability" they show, right before they go back to drowning in red ink.   It is like they all read from the same playbook.

People buy into this nonsense out of greed.  I get e-mails all the time from people who want to make a lot of money in a short period of time, without any risk or effort on their part.  In their mind, they are "missing out" on the last big IPO, gold, or Bitcoin.  After all, all those people in the newspaper made money at it, why not them?   Why couldn't they be the one to cash in on the Microsoft IPO back in the day?

And right there is the answer.  Back when Microsoft went public, there wasn't much of a "buzz" about it, or about IPOs in general.  In fact, most Americans didn't know what an "IPO" was until the mid-1990's when the dot-com boom (and bust) occurred.  This whole deal of hyping IPOs is a recent invention, not some time-honored tradition.   And today, it is all the financial press talks about, as it is easy to write stories about, and it is something happening in the market that appears interesting, so readers will click on it.   Reporting on traffic is boring.  Reporting on a traffic accident, particularly a bloody one, is interesting and is easier to sell to readers and viewers.  The financial press is no different.

So how do you tell if an IPO is a con or not?  You really can't.   For example, with this "Blue Apron" IPO, I searched online and found countless articles breathlessly saying what a great deal the IPO will be ("5 things you need to know!") and then several articles about how the stock price tanked after the IPO.   But it is damn hard to find out how much, as a percentage of the company they sold as stock and how much stock is held by "insiders".

In previous tech-not-tech IPOs, this number is usually around 5%.   Martha Stewart Omnimedia, which turned out to be a cookbook, sold 4% to the public.  Others fall along similar lines.  Few sell more than 10% of the company to the public.   Again - and get this through your thick head - they are not trying to raise capital but to cash out.   Ferrari dealers don't take "dot com" stock in payment for a new Ferrari.  Nor do they take Bitcoin!  (no one takes Bitcoin - they just convert it to dollars and take that.  It is not a real currency).

So is the stock price tanking a bad sign for Blue Apron?  Maybe not.  The insiders can still sell shares over time, and that of course will depress stock prices (which is why most of these IPOs start out high and then drop way off in price as insiders flood the market with their shares).   Maybe down the road, some other company will buy it out to get in on this fad - and it is a fad.

We do see some parts of the pattern here, though.   Blue Apron showed one quarter of profitability in 2016, before going back to losses.  They sold 30 million shares at the IPO - about a quarter billion for a company valued at $2 Billion back in 2015.   How much "equity" the IPO shareholders actually have in the company is anyone's guess.

And they are pretty up-front about this in the IPO filing docs:
We estimate that the net proceeds from the sale of our Class A common stock in this offering will be approximately $278.5 million, after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters fully exercise their option to purchase additional shares from us in this offering, we estimate that the net proceeds will be approximately $321.0 million.

The principal purposes of this offering are to create a public market for our Class A common stock, facilitate access to the public equity markets, increase our visibility in the marketplace and obtain additional capital

Read that again -  "The principal purposes of this offering are to create a public market for our Class A common stock".   Do you get it?   It isn't quite as bad as ""Our goal is to use investor money to go to Vegas and gamble and hire hookers and snort cocaine until all the money is gone" but it ain't far off, is it?

In other words, in either instance, the founders make money - your money - and you lose money, which becomes their money.   Why would anyone want to "invest" in an IPO these days?  Why would it even be considered an investment?