the view through the windshield car blog

Finance and the Economy (2015/17)

Amazon Nation: Does it sometimes feel to you like Amazon is taking over the world? Me too. Karl Denninger thinks so too, although he - like me - wonders how they make any money. Karl noted that "Amazon is turning nearly a negative 20% margin on goods sold not including SG&A (that is, their sales and administrative expenses, such as the buildings and their employees) but only counting the cost of goods sold and their fulfillment (shipping and warehousing) expense."

In the third quarter, Amazon's fulfillment costs (pick, pack and load orders) was over 22% of sales. I'm shocked at this because, in my plastics display business, much of which was a pick, pack and load operation, our fulfillment costs were in the 10-12% range and we didn't have the robots and other 21st Century automation that Amazon employs. We also only shipped 250-350 boxes per day.

In the 1970s, the Plastics Department of Rohm & Haas Co., my then-employer, reported PLS (pack, load and ship) costs of 3% of net sales. Of course, R&H sold mostly in bulk.

An article by Michael J. Coren in Quartz noted, "Amazon today is a retailer, a logistics network, a book publisher, a movie studio, a fashion designer, a hardware maker, a cloud services provider, and far, far more. The private equity firm Pitchbook estimates the company Jeff Bezos founded in 1994 competes head-to-head with at least 129 major corporations just in major markets. That number grows higher as it adds new business units such as fashion, food, and analytics.

Amazon's strategy drives down prices by leveraging a direct relationship between customers and its massive e-commerce and logistics operations. This "flywheel" attracts even more loyal customers who return for the convenience and low prices. Amazon's scale means it can cross-subsidize huge losses from different ventures, plowing profits back into businesses that work. The aim is not to make money on any particular service; Amazon likely lost $7.2 billion on shipping last year and is selling hardware supporting its virtual assistant Alexa around or below cost. It's adding to the value of the system itself. Entire industries are loss leaders for Amazon. For companies that must make money on what they sell, it's a terrifying prospect."

Amazon makes almost nothing on sales of its products and services except media and cloud storage, a soon-to-be commodity market. Basically, they sell things like electronics at break-even.

Coren concluded that "Amazon sports a sky-high valuation because investors are banking that every customer gained today will pay off handsomely in the future." Good luck with that.

Like the discount stores of the 1950s and '60s, (E.J. Corvette, Two Guys, S. Klein, etc.), margins and profits have always been low to nonexistent. And you know what happened to those guys. My advise: Buy 'stuff' from Amazon if you want but don't buy the stock, which trades at over $1,100 per share and has a P/E ratio of close to 300/1. (posted 11/13/17, permalink)


Bursting Bubble Ahead? In six years, vehicle loans have increased more than 55%.

32.5% of all subprime auto loans are now categorized as "deep subprime," with FICO scores below 550. In 2010, the percentage was just 5.1%. With the recent decline in new car sales, banks are tightening their lending standards for auto loans.

"While consumers have fallen behind on most subprime auto loans, the deep classification is responsible for the most serious cases of nonpayment. Delinquencies surpassing 60-day periods have tripled since 2012 and indicate little sign of stabilizing." Last year, financial analyst Malcolm Berko noted that 1 in 3 vehicles traded in for a new car have a negative equity.

It's a race to see which bubble will burst first: student loan debt or subprime auto loans. (posted 5/17/17, permalink)


Richer Than Ever: Scott Grannis recently wrote that "our net worth reached a new high in nominal, real, and per capita terms. We have been struggling through the weakest recovery ever, but at the same time we are better off than ever before, and by a lot." America's light continues to shine brightly - capitalism works.

"On a real per capita basis (i.e., after adjusting for inflation and population growth), the net worth of the average person living in the U.S. has reached a new all-time high of $286K, up from $62K in 1950. This measure of wealth has been rising, on average, about 2.3% per year since records were first kept beginning in 1951. By this metric, life in the U.S. has been getting better and better for generations." Yes, there are blips - upward and downward deviations from the norm - but the basic upward trend has a 66-year track record.

"The ongoing accumulation of wealth is not a house of cards built on a bulging debt bubble either, regardless of what you might hear from the scaremongers ... the typical household has cut its leverage by one third, from a high of 22.1% in early 2009 to 14.8% by the end of last year. Households have been prudently and impressively strengthening their balance sheets over the past seven years by saving and investing more and by reducing the use of debt financing." Because the safety net of a guaranteed retirement payout has largely disappeared from the U.S. private sector landscape, replaced by self-directed 401(k) plans, IRAs and the like and because the post WWII corporate womb-to-tomb security has evaporated, people have been forced to be responsible caretakers of their own monetary destiny.

Despite so many apocryphal tales of clueless, overextended spendthrifts, the data tell a different story. Pay no attention to downbeat books such as Edward McClelland's 'Nothin' But Blue Skies: The Heyday, Hard Times, and Hopes of America's Industrial Heartland'. As a group, U.S. consumers generally act rationally and do a decent job managing their financial resources.

Scott concluded, "Is this a great country or what?" (posted 3/24/17, permalink)


Numbers Don't Lie: Based on average annual GDP growth, Barack Obama is the worst president ever as The Simpsons' Comic Book Guy would say.

According to Mark Perry, Gross Domestic Product grew slowest under President Obama compared with his 10 presidential predecessors:

U.S.
President
Avg. Annual
GDP Growth
U.S.
President
Avg. Annual
GDP Growth
Lyndon B. Johnson
5.29%
Dwight Eisenhower
3.00%
John F. Kennedy
4.33%
Richard M. Nixon
2.81%
Bill Clinton
3.87%
Gerald Ford
2.56%
Ronald Reagan
3.47%
George H.W. Bush
2.26%
Jimmy Carter
3.25%
George W. Bush
2.10%
Barack Obama
1.46%

Dr. Perry wrote, "Obama was also the only president in this group that didn't have a single year of 3% economic growth during his time in office." These data came from the Bureau of Economic Analysis. (posted 2/22/17, permalink)


Slick Situation: Shawn Driscoll, manager of the T. Rowe Price New Era Fund, wrote that oil will average $40-50 per barrel over the next decade. "Fast-forward to about 2006 when the shale era of horizontal drilling and hydraulic fracturing really got underway. Since then, productivity - measured by gross barrels produced per rig - has improved at an exceptional rate. New shale formations, such as those in North Dakota, Texas, and New Mexico, now account for a significant amount of incremental global supply annually."

In fact, the United States now rivals Saudi Arabia and Russia as a leader in total global oil production. "While the Organization of Petroleum Exporting Countries (OPEC) accounts for about 40% of total global oil production, the United States has provided more than 50% of the incremental gains in the global oil supply since 2008." (posted 12/14/16, permalink)


Slow Going: Scott Grannis has posted a graph showing the growth of the Gross Domestic Product over the past 50 years:

He wrote, "The chart above illustrates just how miserable economic growth has been in the current recovery. Instead of averaging just over 3% growth per year, as it did from 1965 though 2007, the economy has only managed a 2.1% annualized pace for the past seven and a quarter years. The gap between where we are and where we might have been had this been a normal recovery is a bit more than $3 trillion, by my calculations. That's huge, and that's the measure of our discontent."

The last time that the GDP fell behind was at the end of the Jimmy Carter years. I remember that era well. Business conditions were abominable. Linn County Oregon had a 27% unemployment rate; the national rate was more than double what it is today. The Dow was at 800 or so. Mortgage rates on conventional 30-year loans topped out at 18.63%.

As a nation, we learned that you can't combine big wars and big social programs - you must pick one. If you insist on choosing both, you will pay dearly in less than 10 years. We observed the results of the excesses of the 1960s when Lyndon Johnson's failed and expensive Great Society program was launched just as the cost of the Vietnam War was escalating. The result was the Misery Index (the sum of inflation rate and unemployment rate) of the late 1970s - a number resulting from high inflation combined with a stagnant, high-unemployment economy.

Blame it on both Republican and Democratic administrations from 1965 through 1980. During Jimmy Carter's term, inflation reached 13.3%. By mid-1980, the prime rate was over 20%. Unsecured personal loans were actually cheaper at Household Finance Corporation than small business loans were at my local banks in those days.

I remember coming home from work exhausted after a 10-plus-hour, hot-as-hell, July 1979 day at my then-struggling manufacturing business, arriving just in time for the 6:00 pm Pacific time Oval Office lecture from a stern-faced Jimmy Carter - the one where he told us that everything was our fault because we had a Bad Attitude. At that moment, I became a Republican. And Ronald Reagan subsequently got my vote.

As President, Ronald Reagan and his staff moved quickly to fix America's mess. His initial moves threw this country into a steep recession (probably overdue anyway), but we recovered in the typical 18 months. By that time, inflation rates had fallen - and stayed down. During Reagan's 8 years the inflation averaged less than 4%. The Misery Index disappeared from the nation's vocabulary.

The stock market took off in a recovery which continued (with the occasional hiccup) for the remainder of the 20th Century. Unemployment subsided, too. Recessions since then have been normal in scope but infrequent in nature. The dollar recovered - so much that, by the mid-1980s, the British pound was down to $1.09. And 'stagflation' disappeared from America's lexicon.

In the first part of the 21st Century, we - once again - combined big wars (this time in the Middle East) and expanded social programs (nonexistant immigration control / welfare programs for illegals, the Medicare/Medicaid drug program and loosened requirements for disability claims) - and we paid for it with slow growth after the Great Recession of '08. Once again, there's much blame to go around in both political parties.

Ronald Reagan made America great again. Let's hope that Donald Trump can do the same. (posted 12/8/16, permalink)


Rotten Tomatoes & Rotten Economy: Garden Fresh Restaurant Corp., owner of the Sweet Tomatoes and Souplantations restaurant chains, has filed for Chapter 11 bankruptcy protection. The company owns over 100 restaurants and could close up to 30 locations. Garden Fresh owes nearly $175 million to lender groups. The Sweet Tomatoes in Vancouver, Washington, which offers mostly salads and soups, plans to remain open.

The restaurant industry is in trouble, these days. "Revenues and same-store sales have been declining for most of 2016," said Kurt Schnaubelt, of restructuring firm AlixPartners, about the restaurant industry.

The general business climate continues to be lousy. According to the American Bankruptcy Association, commercial bankruptcy filings are higher by 28% through the first nine months of the year to 28,789.

Business closures now exceed business formations. The rate at which new companies are being formed has fallen steadily for over three decades - almost 30%. By other measures - as a share of all businesses or relative to the size of the working-age population - it has fallen in half. This is a major problem, since the vast majority of new U.S. private-sector jobs (65%-90%, depending upon which data source you choose) are created by small businesses.

This decline has occurred nationwide - even in tech-heavy, entrepreneurial Silicon Valley. Business creation there is still higher than the rest of the country, but it's down markedly from the past, according to the Brookings Institution.

Finally, 94,184,000 Americans were not in the labor force in September - the largest number since the Misery Index era of the Carter administration in 1977. Thanks, Obama. (posted 10/10/16, permalink)


The Wealth Of The Nation: Scott Grannis wrote, "On a real, per capita basis, the net worth of the average person living in the U.S. reached a new all-time high of $273,560. This measure of wealth has been rising, on average, about 2.4% per year since records were first kept beginning in 1951." This graph illustrates the point:

"The ongoing accumulation of wealth is not a house of cards built on a bulging debt bubble either, regardless of what you might hear from the scaremongers. The typical household has cut its leverage by over 30% (from 22% to 15%) since the onset of the Great Recession in 2008. Household liabilities today are the same as they were in early 2008 (about $14.5 trillion), but financial assets have increased by one-third since then, thanks to significant gains in savings deposits, bonds, and equities."

Pay no attention to those Feel The Bern progressive crowd who claim that the rich are getting richer and the poor are getting poorer. "Income inequality is not a factor either in the ongoing rise in wealth ... the share of total income earned by the top 5% and top 20% of households has been essentially unchanged for many years."

Nevertheless, I still feel that the savings rate for most Americans is too far low - resulting in that low net worth gain of only 2.4% per year. It needs to grow much faster for those who want a comfortable retirement. During my peak earning years (age 40 to 55), we saved like crazy and our net worth grew thirteen-fold. Even in retirement, with no working income (just money from Social Security, stock dividends and, more recently, mandatory IRA withdrawals), our net worth is still growing at an inflation-adjusted rate of over 6%/year.

How do I know that the savings rate is too low? Consider this: Nearly half of those earning between $100,000 to $149,999 a year have less than $1,000 in a savings account. And almost 29% of those earning more than $150,000 have less than $1,000 in their savings account. (posted 7/5/16, permalink)


Why So Many People Feel Poor These Days: Breitbart News noted, "The number of Americans not in the workforce during the month of April (2016) increased substantially compared to the previous month - again tipping over the 94 million mark - according to Labor Department data. The Bureau of Labor Statistics reported that 94,044,000 Americans were neither employed nor made an effort to find employment - due to discouragement, retirement, schooling or otherwise - in April. Last month's numbers represented an increase of 562,000 over the month of March, when 93,482,000 Americans were out of the workforce."

In total 151,320,000 Americans had a job last month and another 7,920,000 Americans were unemployed. 2.1 million workers have been out of work for at least 27 weeks. 568,000 discouraged workers stopped looking for jobs in April.

"The U.S. economy added the fewest number of jobs in seven months in April and Americans dropped out of the labor force, signs of weakness that left some economists anticipating only one interest rate hike from the Federal Reserve this year." April job cuts exceeded 65,000 workers, up 35% from March and a seven-year high.

In the last 18 months, the mining industry has lost 191,000 jobs due to onerous clean fuel regulations promulgated by the Obama Administration. Government regulations imposed by agencies - rather than Congress - cost businesses $1.9 trillion last year."

Industries that showed strong first-quarter job growth have now pulled back, with retailers cutting payrolls by the most in two years and construction companies adding the fewest positions since June. More tempered additions to headcounts shows hiring managers are adjusting in the wake of economic growth that has slowed for three straight quarters. One also has to look at the kind of jobs being created. They haven't been all that great, and wage stagnation has been the rule, rather than the exception.

For the first time since the Great Depression, Americans are losing ground that they cannot seem to regain. Median household income fell by nearly 10% from 1999 through 2011 and remains far below previous peaks. The rate of participation in the labor force has fallen from 66% before the 2008 financial crisis to just 62%, the lowest since the 1970s. A generation of young people has graduated from college to face mediocre earnings prospects and mountains of student debt.

For those unfortunate retirees who depend on income from fixed-rate investments such as money market funds and CDs, they have suffered greatly under Barack Obama's seven-plus years of leadership. Courtesy of Lipper, here are the returns on the average money market fund for the past 10 years:

Year
MM
return
Year
MM
return
2006
3.69%
2011
0.00%
2007
4.65%
2012
0.00%
2008
3.02%
2013
0.00%
2009
0.62%
2014
0.00%
2010
0.02%
2015
0.00%

So far in 2016, the average money market fund total return remains at zero.

Thanks for nothing (literally!!!), Obama. In this election year, let's vote for you-know-who and Make America Great Again. (posted 5/23/16, permalink)


Implied Promises Not Kept: Politicians of yore promised us the modern version of A Chicken In Every Pot ... work hard and you'll get womb-to-tomb security.

Blue-collar and mid-management white collar voters now feel betrayed. Their jobs have disappeared because of 1. automation, 2. computers, 3. the internet and 4. free trade.

Said one worker, who was employed by a hospital furnishings manufacturer for almost 43 years until his job was outsourced to China, "You had the job, you figured you were planning out how things were going to go. Now you've got to back up and rethink."

The manufacturer "shuttered its plant in Stevens Point, WI in 2012 after years of gradually outsourcing work to China. It cut loose 175 workers." Milwaukee, once known as "the machine shop to the world," is now grappling with a new economy. So are most other areas where 50 and 60-somethings have found their 'careers' disappearing. They are now looking for work and finding none. Or poorer-paying jobs with little or no security.

Many of those who have not experienced offshoring end up as freelancers with no benefits or job security. Popular alternative euphemisms include 'contingent worker' and 'temp independent consultant'. This is the new workplace world and it means that many well-educated, middle-class folks are now finding themselves 'underemployed', with reduced hours and little if any job security. Much like ditch diggers in 1913.

A worker at Caterpillar - a company which has laid off about 600 of its 800-plus workers over the past two years because of a business slowdown - said, "It's had a pretty large impact. Whether it's small grocery stores, a hardware store down the street or local taverns - they used to get a lot of business from the people that live in this community who were making a good living, a good wage working here." No longer - kinda the evil-twin of a trickle-down economy.

The turmoil feeds into a debate over trade that's playing out in the 2016 campaign. Donald Trump and Bernie Sanders have been the most outspoken about trade. Both lambaste trade deals as job killers.

People who were born before 1940 and managed to die before 1990, probably got their womb-to-tomb security. The first signs of change began in the 1960s, when finished textile products were moved to Central America and Asia. Such manufacturing was once a staple of New England before World War II but, with the advent of air conditioning, plants moved to the Southern states - then the land of cheap labor - in order to reduce costs.

There are many examples of U.S. plants moving to nations with low-cost labor, including the closure of the Philadelphia Nabisco plant in 2015 and the Chicago operation in 2016. Oreos and other Nabisco brands - including Ritz, Nutter Butter, Nilla Wafers, Honey Maid, Premium and Wheat Thins - will be produced in Mexico to be sold across North America.

Ford Motor Company is investing $1.6-billion to build another new Mexican factory - this one in San Luis Potosi.

Construction will begin this summer and it's expected to begin producing cars by 2018. About 2,800 people will be employed at the facility by the end of the decade. Ford hasn't announced which vehicle or vehicles will be built at its newest Mexican factory, but they will be in the small car segment. Ford already builds the Fiesta in Cuautitlán Izcalli.

But it's not just outsourcing to low-wage countries that's taking away jobs: The development of the web and high-speed internet caused many manned business functions to be moved online. Customers can now search inventory, make travel arrangements (air travel, rental cars and lodging) online, without human contact.

Clerical and support positions are going away. Such jobs used to provide a very decent living for earnest, smart high school grads and college graduates with unmarketable degrees (Humanities, Social Studies, Poetry, Music, et al). This is the dark side of productivity. When you can post your inventory on the web for prospects to browse and select, you no longer need 'Lemme' support staff to answer phones and say, "Lemme check our inventory list." Or, "Lemme see if we have room available at that hotel on the dates you requested."

Online stores are replacing brick-and-mortar establishments, eliminating retail employment - no counter jockeys, sales 'associates' or stock boys needed on the 'net. The ability to send large files back and forth between countries via the internet has impacted jobs in design, medical scan analysis, hard tooling/machining and other formerly 'safe' fields of American employment. Within the U.S., automation - especially robotic devices - has further eroded the job market.

Back in the mid-1980s, my plastics manufacturing business purchased a Tennant self-propelled floor sweeper to replace daily manual clean-up by all employees at the end of each shift. Based on labor savings alone, the machine paid for itself in two months. At the time, our firm was growing rapidly so no one was laid off. But the idea that even simple machines could reduce the need for more employees became imprinted in my mind.

Today, it's a new world and, while candidates Bernie Sanders and Donald Trump talk about righting perceived trade agreement wrongs, they won't be able to turn the clock back on the various forms of job-killing technology. All of the companies where I once worked are now gone (bankrupt, merged out of existence, etc.). Same for my dad and both of my grandfathers. Progress has a price. (posted 4/7/16, permalink)


Wild Rides: Did your 401K run out behind the Dumpster and throw up last Friday night? Well that's what happens when the world's economies are being run like some out-of-control amusement park and your money has been taking all the rides on a fully-invested stomach.

Your life-savings white-knuckled the grab bar on the big 'ol Dow Roller Coaster when it dropped over 530 points Friday - more than 3% - in one day. The DJIA was down 7% for the week - the worst weekly decline since October 2008, during the Mega Financial Meltdown Armagedon.

The Slip-N-Slide Oil Ride has gotten too slick; oil has dropped to below 40 bucks a barrel and consensus is that the global gut of oil will be around for a while. That's, of course, if you believe that Consensus can be found in an amusement park.

In the short term, cheap oil will make for queasiness in the energy sector of the U.S. economy. In the long term, it could decimate the Iranians, Saudis and our other 'friends' in the Middle East. So, it's not all bad. Just put your head between your knees, breathe deeply and repeat the mantra, 'Keystone Pipeline, Keystone Pipeline', until your tummy settles.

Our economy has digested too much fluffy Cotton Candy (aka - Quantitative Easing) served up by the Fed. Now the room is starting to spin and we don't feel too well. Shouldn't have gone on that last ride. Time to pay the piper.

All those smart financial advisers who were pushing International Investing are now hiding in a back booth at the International House of Pancakes. The Japanese Nikkei fell 3% Friday and Hong Kong's Hang Seng Index dropped enough that poor old Seng actually went out and hung himself.

China's Mystery Dragon Ride - the cause of much of this mess, with its inscrutable economy and rigged currency - has experienced a stock market drop of more than 32% since June. Manufacturing in China is now at a six-and-a-half year low. How's that for noodles, pal? You should never, never eat Chinese at an amusement park. If you do, you'll soon be blowing chunks. Or Chun King.

Europe is reeling, too - the Germany's DAX is upset, dropping sharply. When a a German comic book character is vomiting, the word balloons always read, "Dax! Urrgh! Dax!" It's probably because of all that Greek yogurt they've been forced to eat.

Britain's FSTE 100 (sounds like the name of an rickety old bumper car) fell almost 3%. Knocked the Queen's crown askew, it did, guv. Ready for a swig of Pepto Bismol yet, old chap?

So what should you do? Maybe you should invest in health care stocks; they have outpaced the general stock market for 30-plus years. I have no other recommendations to make: TIPS are in negative territory, the outlook for bonds isn't so hot, I think gold is a fool's errand (unless you believe those William Devane TV ads because he's old, wizened and looks vaguely like a Kennedy) and you'd be lucky to find a money market account paying much of anything.

I suppose you could hoard Forever stamps and canned goods if that makes you feel better.

As for me, I'm hanging in there. Things will get better - they always do. "There's got to be a morning after," a hopeful Maureen McGovern used to sing. I'd rather bet on her than the soothsayers at IHOP. (posted 8/24/15, permalink)


Jobless Recovery Explained: Recently, Bill McBride posted a graph showing job losses and recovery times for post-World War II recessions.

In the past, typical recessions took 10-23 months for job recovery. The recovery timeline began to stretch beginning with the recession of 1981. Here are the data:

Recession Beginning In:
Time for Job Recovery
1981
27 months
1990
31 months
2001
47 months
2007
75 months

What has caused this alarming acceleration? A combination of technology and outsourcing.

Outsourcing began in the 1960s when finished textile products were moved to Central America and Asia. Such manufacturing was a staple of New England before World War II but with the advent of air conditioning moved to the Southern states - then the land of cheap labor - in order to reduce costs.

Moving manufacturing jobs outside of the U.S. gathered more steam in the 1970s and by the 1980s had become a fact-of-life in many industries. I remember when the manufacture of cell-cast Plexiglas acrylic sheet was moved from plants in Pennsylvania and Tennessee to Mexico in the early 1980s. Pundits in the plastics industry referred to the resultant product as 'Mexiglas'.

The move to Mexico was an attempt to reduce costs in order to compete with Asian-produced cell-cast acrylic, which had cut heavily into the sales of thick Plexiglas especially along the West Coast. And had been doing so since the early 1970s.

Terence P. Jeffrey wrote, "Manufacturing employment in the United States peaked 36 years ago in June 1979. That month, the U.S. had a civilian labor force of 104,638,000 and 19,553,000 - or about 18.7% - were employed in manufacturing. Last month, the U.S. had a civilian labor force 157,469,000, but only 12,355,000 - or about 7.8% - were employed in manufacturing. Between those two dates, the number of Americans who held a job or actively sought one increased by 52,831,000. But manufacturing jobs declined by 7,198,000. In 1979, when manufacturing jobs peaked, households headed by Americans who had completed high school but not attended college ... enjoyed a median income of $54,503 in constant 2013 dollars. In 2013, the latest year on record, those households had a median income of $40,701 in constant 2013 dollars - a real drop of $13,802."

The outsourcing of manufactured goods caused unemployment in the manual labor force but, at first, left most clerical jobs untouched. Then came the computer revolution of the 1980s and '90s. The automation of data collection and distribution caused many low-level white collar workers to lose their jobs. Improvements in telephone technology - the use of phone-trees and automated voice recordings - eliminated many phone-answering jobs. The reduction in the cost of overseas calls caused many call centers to be moved from the U.S. to Asia.

Faced with ever-increasing, costly, government-imposed labor regulations, upwardly spiraling health care costs and the like, many companies are reducing their workforce by subcontracting services overseas, including engineering and technical services.

The development of the web and high-speed internet, caused many manned business functions to be moved online. Customers can search inventory, make travel arrangements (air travel, rental cars and lodging) online, without human contact. When you can post your inventory on the web for prospects to browse and select, you no longer need support staff to answer phones and say, "Let me check our inventory list for you." Or, "Let me see if we have room available at that hotel on the dates you requested."

Online stores are gradually replacing brick-and-mortar establishments, eliminating retail positions. In the fourth quarter of 2014, total U.S. retail sales grew 3.7% compared to the same quarter in 2013. During the same period, e-commerce sales jumped 14.6%. One year earlier, total sales grew 3.8% year-over-year, while e-commerce sales increased 16.0%.

The ability to send large files back and forth between countries has impacted jobs in design, medical scans analysis, hard tooling/machining fields and other formerly 'safe' fields of American employment. Within the U.S., automation - especially robotic devices - has further eroded the job market.

In the past, technological changes simply shifted opportunity within the U.S. As farm jobs were eliminated by mechanization, factories hired more. As factories increased productivity and moved work offshore, more Americans turned to lower-pay jobs in health care and other services.

But nothing in any economic database indicates that the supply and demand for workers will intersect at a wage that is socially acceptable within the U.S.

Therein lies the crux of the problem: lousy pay, limited career opportunities and little job security seems to be what the future holds for American workers. And it gets worse with every recession.

Progress has a price. (posted 7/13/15, permalink)


Book Review: 'Hidden In Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again' by Peter J. Wallison

This is a through and detailed - sometimes too detailed for my taste - book which demonstrates with facts and graphs that the root cause of the 2008 financial meltdown was the continued loosening of the Community Reinvestment Act, an insidious government mandate which forced lenders into relaxing their mortgage underwriting standards for loans to inner-city borrowers to the point that borrowers of all kinds were lying about their income and ability to repay loans.

You'll get no argument from me on that score. In September 2008 ... (more >>>)


Warning - Uncertain Future Ahead: In the recently-issued Vanguard Dividend Growth Fund Annual Report, Donald J. Kilbride, the Senior Managing Director and Equity Portfolio Manager of Wellington Management Company, wrote, "Our expectation for 2015 is for more of the same. The global backdrop of much of the last three years - a relatively healthy United States, a messy Europe, and a very uncertain China - appears to be intact. The difference now is that it's possible all three of these conditions could change, which means that they could be overly discounted in the markets.

For example, conditions in the United States seem very good (at least relatively), but the U.S. market seems to have more than adequately priced for that. Should the Federal Reserve act decisively on either interest rates or its balance sheet, the market might react strongly, as underlying economic performance seems insufficiently strong to fight through.

The consensus view is that Europe is in trouble. Although that seems most likely true, aggressive action by the European Central Bank might provide enough liquidity to turn the tide and markets. Finally, China is fighting various challenges, the most profound being the slowing of its economy. How its government manages the economy will be critical." Indeed.

As to those 'conditions' in the U.S., they're really nothing to brag about. Scott Grannis offered comments on the weak recovery, noting that "real GDP is a little over 10% below its long-term trend potential." Quite anemic.

The latest figures are not heartening; real gross domestic product - the value of the production of goods and services in the United States, adjusted for price changes - increased at an paltry annual rate of 0.2% in the first quarter of 2015, according to the "advance" estimate released by the Bureau of Economic Analysis.

Grannis wrote that "we are stuck in the slowest recovery ever. It's my belief that the persistence of slow growth is largely the result of bad policies, though demographics likely plays a part too. Corporate profits have been very strong, but business investment has been very weak. Without new investment and risk-taking, we are not going to see a pickup in productivity which is, at the end of the day, what drives stronger growth and higher living standards. Investment has been weak probably because marginal tax rates and regulatory burdens have increased significantly in the past six years. In a sense, and expansion of government has suffocated the private sector."

Until the Obama Administration stops choking business, the mighty engine of the American economy cannot roar. (posted 5/4/15, permalink)


A Good Change: Recently, Scott Grannis wrote, "Commercial & Industrial Loans outstanding at U.S. banks grew at a 19% annualized pace in the first three months of this year. These loans are mostly to small and medium-sized businesses that are not able to access the capital markets directly."

In the past, I've written a detailed explanation of why most small businesses cannot grow without access to capital. Most 'ordinary' manufacturing businesses have 30-35% gross profit and net 10% or less before taxes. A 30% growth in sales means that you have to buy 30% more raw material inventory, you'll be carrying 30% more work-in-process and finished goods inventory and your accounts payable will jump by 30% as will your receivables.

Your increase in profit dollars (at 10% NPBT) won't be nearly enough cover these increased expenses. Therefore, if you can't secure working capital, you can't grow and your business will stagnate. Others - your competitors - will step up and meet customer needs.

In recent years, business loans for young companies were extremely hard-to-get because the locally-owned bank has become a rarity. No longer is there a hometown bank executive who keeps his nose to the ground, has significant personal lending authority, makes loans based partly on the character of his clients, is guided by a loan committee of other knowledgeable locals and knows his market because he attends local business events and networks.

He has been replaced by a Formica Monkey - a well-dressed employee-drone of some mega-bank, who has almost zero lending discretion and knows little about the business community he/she serves.

Lending decisions are made by a committee of uninvolved managers thousands of miles away based on a proprietary, arbitrary scoring system. Luckily for small business owners, the mega banks are easing their lending standards. (posted 4/27/15, permalink)


Bad Bank: Malcolm Berko is no fan of Bank of America. Neither am I.

"Visit Google and type in "Bank of America fraud," and then read and weep. Next type in "Bank of America fines and penalties." You'll quail at the innumerous details about BAC's allegedly intentional illegal activities, all of which were said to be approved by management, the executive committee and the board of directors. Those accusations include, but are not limited to, e-mail fraud, foreclosure fraud, consumer loan fraud, debit and credit card fraud, defective mortgage fraud, currency and commodity manipulation, money laundering, fraudulently overstating its capital ratio, defrauding Fannie Mae and Freddie Mac, and colluding to rig international benchmark levels used by fund managers. To settle, BAC paid billions in fines and legal fees. Still, management and the board, disdainful of those fines, look down their chins (not their noses) at investors and regulators.

BAC's biggest fine, $16.65 billion, was for knowingly selling shoddy mortgages and intentionally misrepresenting their quality.

This bank shouldn't be called Bank of America. That gives America a bad name; rather, BAC should be renamed Bank of the Mafia. I'd never recommend a bank that's run by a crew of crooks who knowingly bilked middle-class Americans out of billions of dollars. This mortgage fraud by BAC, Goldman Sachs, JPMorgan Chase, Citigroup, UBS, etc., is the primary reason the market crashed in 2008. And in the aftermath, not a single member of BAC's management, which engineered this fraud, its executive committee, which encouraged it, or its board of directors, which approved it, paid a fine or spent an hour in jail. It's good to have well-paid friends in Congress." (posted 3/9/15, permalink)


Alarming Business Trend: Gallup CEO and Chairman Jim Clifton sounded the alarm that "for the first time in 35 years, American business deaths now outnumber business births." Clifton says for the past six years since 2008, employer business startups have fallen below the business failure rate, spurring what he calls "an underground earthquake" that only stands to worsen as lagging U.S. Census data becomes available. "Let's get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses," decried Clifton.

The statistics are worrisome. Contrary to the oft-cited 26 million businesses in America figure, Clifton says 20 million of these so-called 'businesses' are merely companies on paper with zero workers, profits, customers or sales. I suspect many of these are part-time moonlighting employees, people who have been sucked into get-rich-quick, work at home schemes as well as people on the bottom rungs of multi-level marketing distributorships such as Amway, Mary Kay and the like. All are Schedule C filers who report very low annual sales.

In reality, America has just 6 million businesses with one or more employees – 3.8 million of which have four or fewer employees. In total, these 6 million U.S. companies provide jobs for more than 100 million people in America. Of the 2.2 million job-creating companies with five or more workers, the numbers break down accordingly:

There are about a million companies with five to nine employees, 600,000 businesses with 10 to 19 employees, and 500,000 companies with 20 to 99 employees. There are 90,000 businesses with 100 to 499 employees. And there are just 18,000 with 500 employees or more, and that figure includes about a thousand companies with 10,000 employees or more. Altogether, that is America, Inc.

The Gallup CEO says the numbers paint an ominous portrait of America in a dire state of decline. And it's going to stay that way until we quit electing anti-capitalist, anti-business, anti-American administrations.

"I don't want to sound like a doomsayer, but when small and medium-sized businesses are dying faster than they're being born, so is free enterprise," says Clifton. "And when free enterprise dies, America dies with it."

The rate at which new companies are being formed has fallen steadily for over three decades - almost 30%. By other measures - as a share of all businesses or relative to the size of the working-age population - it has fallen in half.

I wrote about this last October and gave four reasons why small businesses are in trouble. (posted 1/19/15, permalink)


Years Later, Still Lousy: Bank of America remains deeply unpopular. The banking giant received an American Customer Satisfaction Index score of just 69, well below the industry average of 76, and "an indicator that customers are highly unsatisfied with the bank. Worse still, the company received the highest share of poor reviews of any business in Zogby Analytics’ 2014 customer service survey."

B of A's inability to satisfy customers is not its only problem. After the bank discovered an accounting error in April, the Federal Reserve forced it to suspend both its share buyback program and its planned dividend increase. The bank also reached an agreement with the Justice Department to pay a record $16.65 billion settlement related to its mortgage practices leading up to the financial crisis. This was just the latest in a series of multi-billion dollar mortgage-related fines the bank has paid in recent years.

Bank of America's share price has been effectively flat over the last five years, even as the S&P 500 has risen by almost 80%.

I am not surprised. We cut our ties with Bank of America in 2012, after experiencing multiple incidents of customer service problems. They were a lousy bank then and, apparently, still are today. (posted 1/16/15, permalink)


Passive Investing: After being frightened by the Great Market Crash of 2008, individual investors are now returning to the market in droves. (It's a little late to do so, since the market has gained about 260% since the end of '08.) But they are tending to choose passive index-type mutual funds over individual stocks and actively-managed funds.

Last year, investors poured $216 billion - a record inflow for any mutual-fund firm - into Vanguard Group, the biggest provider of index-tracking products. Recently, John Authers of the Financial Times, in a piece entitled 'Investment: Loser’s Game' argued that with more than 90% of active managers on track to underperform their benchmarks, a tipping point may have finally been reached.

"Active investments have been hurt by years of subpar performance and high fees. Data through November, the latest available, show investors pulled $12.7 billion in 2014 from actively managed U.S. stock funds while plowing $244 billion into similar passively managed funds, according to fund-research firm Morningstar Inc." Almost 75-80% of actively managed funds underperform the S&P 500 Index over any given ten year period.

Here's the money quote: "Many financial advisers have incentives to recommend low-cost funds because they can charge their own fees without giving investors sticker shock." (posted 1/9/15, permalink)


Earlier 'Finance & the Economy' postings can be found here.

Other Pages Of Interest

copyright 2015-17 - Joseph M. Sherlock - All applicable rights reserved


Disclaimer

The facts presented in this blog are based on my best guesses and my substantially faulty geezer memory. The opinions expressed herein are strictly those of the author and are protected by the U.S. Constitution. Probably.

Spelling, punctuation and syntax errors are cheerfully repaired when I find them; grudgingly fixed when you do.

If I have slandered any brands of automobiles, either expressly or inadvertently, they're most likely crap cars and deserve it. Automobile manufacturers should be aware that they always have the option of trying to change my mind by providing me with vehicles to test drive.

If I have slandered any people or corporations in this blog, either expressly or inadvertently, they should buy me strong drinks (and an expensive meal) and try to prove to me that they're not the jerks I've portrayed them to be. If you're buying, I'm willing to listen.

Don't be shy - try a bribe. It might help.


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