Economy – Page 13 – Really Right

Subprime Feeding Frenzy

The sequel to Jaw has the tag line, “Just when you thought it was safe…”

They’re back. Yep. Subprime loans are back and more prevalent than ever. If you thought Bush, Obama, and “too big to fail” were relics of history, you’d be as clueless as the 90-Day Guy or the naïve written about by other bloggers on this site. The truth is that subprime lending and non-traditional (non-bank) loans are even more prevalent than ever. This is true for both corporate and consumer lending.

Below are some articles outlining the threat that subprime lending poses to the financial system.

Definition: Subprime Credit

Subprime credit is typically composed of subprime borrowers with low credit ratings, high debt levels, a record of delinquency, defaults or bankruptcy, no property or assets that can be used as a collateral. Lenders use a credit scoring system, like FICO scores, to classify subprime borrowers based on the probability of repayment. Different creditors use different rules for what constitutes a subprime loan, but FICO scores below 600 have typically been classified as subprime in the past.

Subprime credit is financed by repackaging subprime credit card debt, auto loans, business loans and mortgage into pools and selling them investors as asset-backed securities, like collateralized debt obligations and mortgage-backed securities.

During the housing boom in the early 2000s, lending standards on subprime mortgages were relaxed, with NINJA loans being made to borrowers with no income, no job and no assets. When the bubble burst in 2007, the quantity of subprime credit in the financial markets contributed to the subprime meltdown and the subprime crisis, which triggered the Great Recession.

Consumer advocates say subprime credit is a social good and provides finance to low-income households. Yet it increases the risk of credit booms and busts. In the U.S., banks tightened lending standards after the financial crisis. However, auto finance companies have since used low interest rates to fuel a boom in subprime auto loans. This helped the economy to recover. However, auto loan delinquencies hit crisis levels in 2017, even as subprime auto-lending continued to boom, leading to speculation that this another credit bubble that is set to burst.
Subprime Credit

Subprime Loans to Consumers

The article that I saw today has political as well as economic implications. Read these excerpts and then see if you agree with me.

Lower-income U.S. consumers are showing signs of weakness despite the strong market, and if the economy enters a recession, any possible credit crunch could be “material,” according to UBS.

Strategists led by Matthew Mish and Eric Wasserstrom wrote in a note Thursday that they’re worried about lower-income consumers who have seen little net worth improvement since the financial crisis. Debt burdens for many of those households have grown as credit card interest rates hit record highs and student loan borrowings surged. UBS expects that the consumer credit cycle can extend but a future downturn could be worse than the one seen in 2001 and 2002 thanks to subprime consumers’ growing debt loads, higher losses and the growth of “fragile” non-bank lenders.

A UBS survey found that households reporting credit problems like loan application rejections matched a survey high of 40%, up 4 percentage points from a year earlier. Consumers’ likelihood of missing a loan payment in the next year increased 1 percentage point to 13% …

Even though the Treasury rally has sent U.S. interest rates sinking, the strategists say many U.S. households are still seeing their interest burdens rise, similar to what occurred in the years before the crisis. The higher rates may come from a shift in what kind of debts consumers have: household debt was a record $13.7 trillion in the first three months of 2019, and most of the post-crisis growth in obligations has come from non-mortgage debts like student loans that carry higher interest rates.

UBS’s consumer credit analysts expect some deterioration in delinquency rates, but say positive wage growth should help most consumers stay current on their obligations. They’re more concerned about long-term trends because consumers’ finances aren’t recovering as well as their credit scores might indicate. They estimate some $2.6 trillion of U.S. household debt is subprime, and any future downturn would likely affect lower-tier U.S. consumers, instead of a more systemic problem like 2008-2009.
Bottom 50% of Consumers Are Showing Signs of Weakness, UBS Says

The article seems to indicate that in the next economic downturn that the rich will do fine and the poor will get hammered. The poor are living on borrowed money and when the economy goes down, the credit tap will be shutoff while interest on existing debt will go up. This will cause poor folks to default on their debt and due to the amount of debt, it will send shockwaves thru the economy. In the end, the rich will stay rich and the poor will be even poorer.

This in turn, will feed into the socialist narrative that is being propagated by much of the Democrat Party. Poor folks will once again vote to relinquish their freedom for security, and as a bonus, they can hope to screw the fat cats in the process.

Non-Bank Lenders

Another soft spot in the financial world is the rapid rise of non-bank lenders. These guys exist to make money via loans that traditional banks won’t touch. They loan to both businesses and individuals. Many of these loans would be viewed by traditional metrics as subprime. Please note in the articles quoted below that half of all mortgages are controlled by these non-bank entities. They are not subject to regulation by banking or securities laws. They exist… in the shadows.

When the dotcom bubble burst, Chuck Doyle smelt an opportunity — arranging loans for companies shunned by big banks and too small to tap the bond market. It proved very fertile ground.

His company, San Francisco-based Business Capital, says it has since helped hundreds of smaller companies raise money to keep afloat, finance their inventory or expand. But Mr Doyle, an avuncular former fibre-optic salesman, says conditions in the non-bank, non-bond “private debt” market have never been more frenzied.

“We’ve been through a few cycles, but this one is crazy,” he says. “We’ve seen unbelievably explosive growth. We’ve seen deals that banks wouldn’t have done even before the financial crisis.”

The post-crisis explosion of the US corporate bond market, and more recently the leveraged loans industry, have hogged the attention of analysts, investors and regulators. But it is arguably the underbelly of the American debt market that has seen most change in recent years.

“It’s a wild west space, where everyone competes for every deal,” says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. “The whole thing has exploded in size, and everyone is getting into it.”

There is no clear definition for so-called private debt, which is often also called direct lending or mid-market lending. It broadly consists of bespoke loans made by specialised lenders such as fund managers, insurers and tax-advantaged vehicles known as “business development companies.”

Borrowers can range from sizeable international groups to small companies seeking money for a new store — or just a shot of cash to keep trading for another quarter. Unlike leveraged loans, private debt is typically not widely traded, and unlike bonds, the market is largely unregulated and opaque.

“Direct lending has been the strategy du jour — when we see stresses we’ll probably see it there first,” says Jim Smigiel, head of portfolio strategies group at SEI Investments, near Philadelphia. He doubts the market is extensive enough to cause systemic problems, but “a lot of people will lose a lot of money”, he predicts.

Private debt investors admit that the flood of money has dramatically eroded both standards and returns. KKR estimates that the average private debt yield has now fallen to about 6-8 per cent, down from the low teens a few years ago. That is only slightly higher than in the mainstream junk bond market, which is actively traded and far more transparent.
Non-bank lenders thrive in the shadows

“What’s the biggest risk to the system right now? After listening to Fed Chief Jay Powell, who made a lot of sense today, I’d say it’s non-bank lending,” Cramer said Wednesday on “Mad Money.”

In the speech, Powell characterized non-bank lenders as imprudent and a potential problem for the credit markets and the broader financial system.

Even so, Cramer thought the rapid-fire rise of institutions like Quicken Loans, PennyMac and LoanDepot, three of the largest non-bank lenders, posed a near-term threat.

“There are many non-bank institutions making home loans that could collapse in value,” Cramer warned. “These companies came out of nowhere. They now control about half of the current mortgage market — that’s a trillion dollars’ worth of mortgages a year.”

Worse, if those lenders can skirt regulations meant for big banks with similar lines of business and make loans without enough documentation or money down, “that could be a serious problem,” the “Mad Money” host warned.
Non-bank lenders like Quicken Loans are ‘the biggest risk to the system’ right now, Jim Cramer warns

Parallels between leveraged loans and subprime

It’s not surprising that people are drawing parallels. The leveraged loan market is just shy of $1.3 trillion, the size of the subprime market at its peak. As did subprime, it has experienced rapid growth and even more rapid deterioration in underwriting standards, with the most highly leveraged companies accounting for a growing share of the market. Also like subprime, it relies on an “originate to distribute” model meaning the lender originating the loan does not retain major risk if the borrower defaults, but rather passes that risk on to investors, frequently by pooling them and selling securities backed by their cash flows in a “collateralized loan obligation (CLO).”

Like subprime, which catalyzed distress in the broader mortgage market, leveraged loans could also precipitate problems in the broader corporate debt market. Non-financial corporate debt as a percentage of GDP is at an all-time high. A record number of companies are rated just above junk and thus are exposed to system-wide downgrades to sub-investment grade status if the ratings agencies get spooked by a high profile default.

And the risk of that happening is not inconsequential. Leveraged borrowers are not obscure companies but include such household names as American Airlines (AAL), Hilton Hotels (HLT), and Burger King (QSR), according to the trade association that represents leveraged loan lenders.
How regulators can stop leveraged lending from becoming the new subprime

Folks, I hope reading this will cause you concern that everything is not peachy keen in the financial world. I think the availability of these alternative funding sources in a quest for higher returns, might be part of the reason that the 90-day cycle is so important. People want to know their risky investments are paying off or they might be tempted to cut their losses and pull their support.

Utopia Impossible: EV Fleet

You know the drill. A man retrieves a small recording device from an unexpected place. He hits play and is given a seemingly impossible task—usually to save the world or prevent an international incident. The recorder finishes delivering its message and self-destructs. A match lights an old fashioned fuse which starts to burn as the Lalo Schifrin theme song begins. You know the next hour will be full of twists, turns, and deceit. Buckle-up and let the intrigue begin.

Oh, the message for today’s episode goes something like this:

Greetings Mr. Newsom, your mission as passed on from your predecessors, Schwarzenegger and Brown, is to outlaw the internal combustion engine within the boundaries of California by ~~2030~~ 2040. Know that you have the full support of Democratic state Assemblyman Phil Ting of San Francisco, state Air Resources Board Chairman Mary Nichols, and a large block of the Legislature. Your mission, should you decide to continue this quest, is to secure the necessary legislation and resources to make all vehicles in your State electric powered by this deadline. The fate of the planet is in your hands.

**Air Resources Board Chairman Mary Nichols**

As mentioned above, the recorder vaporizes and the credits roll. When the story continues, we find the Governor assembling his team. The team is commissioned with implementing a plan to force people into electric vehicles. After consulting with Warren Buffett, Elon Musk, Alexandria Ocasio-Cortez, the Sierra Club, Green Peace, and a host of interested parties, the team presents the Governor with a list of proposals.

Increasing gasoline taxes
Raising the vehicle emission standards
Denying new permits for gas stations
Increasing regulation of refineries
Tax incentives for electric vehicles and charging stations
Increased DMV registration fees
Allowing electric vehicles to use HOV lanes
Subsidize even more public transportation
Tax all vehicles per mile driven
Outlaw barbeques and fire places
Outlaw gas powered lawn movers, blowers, and trimmers
Outlaw privately owned fuel storage tanks after 2040
Ban privately owned aircraft and tax the crap out of commercial air travel

Anyway, you get the idea. Use the power of government to force people to change their behavior. It sounds so good, what could possible go wrong?

While California seems on the cusp of making this self-imposed dream a political reality, the bigger issue is can an all-electric vehicle mandate be done?

While Sacramento, used to issuing orders, believes it can simply command a fully electric automobile fleet through votes and the stroke of a governor’s pen, the same way it believes it can decree that the entire state must switch to renewable sources for electricity, it can’t escape the reality, which says it can’t be done. There aren’t enough raw materials available.

This answer many surprise you. In England, a similar mandate has been adopted with a date further into the future, 2050 as opposed to the preliminary date of 2040 in California. The United Kingdom (i.e. England, Scotland, Ireland, etc.) has 38.2 million vehicles as opposed to 25.6 million in California. Doing the math, California has 2/3 as many vehicles as the U.K.

A statistical study was published to see just what it would take for the U.K. to achieve their goal. The study was quoted by Steve Milloy on the website Junk Science.

British researchers say that if the United Kingdom is to meet its electric car targets for 2050 it “would need to produce just under two times the current total annual world cobalt production, nearly the entire world production of neodymium, three-quarters the world’s lithium production and at least half of the world’s copper production.”

Adjusting other statistics for California’s market yields:

134% of current global cobalt production
67% of current global neodymium production
50% of current global production of lithium
And 34% of current global production of copper

With governments all over the world scrambling for the same scarce resources, it’s just “not possible,” Milloy concludes, for California to go all-electric. Have policymakers even considered this in their haste to outlaw conventional cars and trucks?

The article I’m quoting concludes:

Lawmakers can legislate, expect, wish, hope, and mandate until they collapse from exhaustion onto the capitol’s marbled floors. But they are bound by the pace of technological advancement. They can no more decree an EV fleet to be so than they can change the color of the sky.
Here’s Why an All-Electric Vehicle Fleet Can’t Happen in California … Or Elsewhere

The statistics in the U.K. study are mind blowing.

Again, as is my habit, I will quote extensively in case the URL I’m citing should be deleted, moved, or placed behind a pay firewall at some point in the future. Remember that this study assumes only the U.K. is implementing this goal. The economic reality of other actors–be they California, China, or whoever–places even more demand on these resources.

The metal resource needed to make all cars and vans electric by 2050 and all sales to be purely battery electric by 2035. To replace all UK-based vehicles today with electric vehicles (not including the LGV and HGV fleets), assuming they use the most resource-frugal next-generation NMC 811 batteries, would take 207,900 tonnes cobalt, 264,600 tonnes of lithium carbonate (LCE), at least 7,200 tonnes of neodymium and dysprosium, in addition to 2,362,500 tonnes copper. This represents, just under two times the total annual world cobalt production, nearly the entire world production of neodymium, three quarters the world’s lithium production and at least half of the world’s copper production during 2018. Even ensuring the annual supply of electric vehicles only, from 2035 as pledged, will require the UK to annually import the equivalent of the entire annual cobalt needs of European industry.

The worldwide impact: If this analysis is extrapolated to the currently projected estimate of two billion cars worldwide, based on 2018 figures, annual production would have to increase for neodymium and dysprosium by 70%, copper output would need to more than double and cobalt output would need to increase at least three and a half times for the entire period from now until 2050 to satisfy the demand.

Energy cost of metal production: This choice of vehicle comes with an energy cost too. Energy costs for cobalt production are estimated at 7000-8000 kWh for every tonne of metal produced and for copper 9000 kWh/t. The rare-earth energy costs are at least 3350 kWh/t, so for the target of all 31.5 million cars that requires 22.5 TWh of power to produce the new metals for the UK fleet, amounting to 6% of the UK’s current annual electrical usage. Extrapolated to 2 billion cars worldwide, the energy demand for extracting and processing the metals is almost 4 times the total annual UK electrical output.

Energy cost of charging electric cars: There are serious implications for the electrical power generation in the UK needed to recharge these vehicles. Using figures published for current EVs (Nissan Leaf, Renault Zoe), driving 252.5 billion miles uses at least 63 TWh of power. This will demand a 20% increase in UK generated electricity.

Challenges of using ‘green energy’ to power electric cars: If wind farms are chosen to generate the power for the projected two billion cars at UK average usage, this requires the equivalent of a further years’ worth of total global copper supply and 10 years’ worth of global neodymium and dysprosium production to build the windfarms.

Solar power is also problematic – it is also resource hungry; all the photovoltaic systems currently on the market are reliant on one or more raw materials classed as “critical” or “near critical” by the EU and/ or US Department of Energy (high purity silicon, indium, tellurium, gallium) because of their natural scarcity or their recovery as minor-by-products of other commodities. With a capacity factor of only ~10%, the UK would require ~72GW of photovoltaic input to fuel the EV fleet; over five times the current installed capacity. If CdTe-type photovoltaic power is used, that would consume over thirty years of current annual tellurium supply.
Pedal to the Metal: Why California can’t ban gasoline-powered cars

Please note that many of these rare-earth metals are mined by poor people in third world nations that are slaves or politically oppressed. The workers’ pay with their blood while the ruling class line their pockets with the proceeds.

Tesla Rejected: Must Pay China’s 25% Tariff

Tesla stock has been slightly up these past two weeks but not because of earning reports or Elon Musk ginning up support on Twitter. Instead Tesla has benefitted from the algorithms that fund managers use to insure they have a sufficiently diversified portfolio. Generally, if the Dow is up, Tesla has been up and vice versa.

However, Tesla has hit another bump in the rode.

Tesla and Uber both had requests for tariff relief rejected by U.S. trade officials, a decision that will force the companies to pay a 25% tariff or seek new suppliers.

Reuters was the first to report the decision by the office of the U.S. Trade Representatives. TechCrunch previously reported on the Trump administration’s refusal to exempt the “brain” of Tesla’s Autopilot technology from punitive import tariffs.

Last year, the Trump administration imposed 25% tariffs on a range of imports, including electronics, to try to reduce the U.S. trade deficit with China. Tesla and Uber are among the U.S. companies that have requested relief on those tariffs.

Tesla warned that higher tariffs on the “brain of the vehicle” could cause economic harm to the company.
Why Tesla and Uber won’t escape 25% tariffs—for now

As stated here before, Musk’s fortunes have been bleak since Trump was elected. Trump has shutoff many of the taxpayer subsidies that Musk needed because he can’t compete in an open and free market. Republicans don’t tend to tamper with the market by subsidizing unproven alternatives to things that work while Democrats have the hubris to pick winners and losers (Solyndra and Tesla) claiming for political and economic reasons that “Green” is good despite any evidence that it is factual.

But there’s even more bad news for Elon and his posse.

One such stock that you may want to consider dropping is Tesla, Inc.

A key reason for this move has been the negative trend in earnings estimate revisions. For the full year, we have seen two estimates moving down in the past 30 days, compared with no upward revisions. This trend has caused the consensus estimate to trend lower, going from a loss of $1.14 a share a month ago to its current level of a loss of $1.32.

Also, for the current quarter, Tesla has seen two downward estimate revisions versus no revisions in the opposite direction, dragging the consensus estimate down to a loss of 70 cents a share from a loss of 64 cents over the past 30 days.
Falling Earnings Estimates Signal Weakness Ahead for Tesla

I’m not ready to declare Tesla dead yet but the disconnect between their perceived value and actual value is still way out of line. Barring anything else, look for a significant drop when the 90-day monster makes its appearance in July. The “tell” is when Musk goes on Twitter in mid-July to divert your attention from the impending bad news. So far we have had the flamethrower, leaf blower, underwater submarine car, and pickup truck.

**Elon** has plans for submarine better than the one driven by **James Bond**
Disclaimer: *Playboy model extra, some assembly required*

Can the Tesla motorcycle be far behind?

Oh, wait, Elon had that last year. What will this guy think of next? He wants you to look at the new shiny thing in his hand not dollars and common sense.

Introducing CALSavers Your State Run Retirement Plan

The Chief explores another socialist step in the cradle-to-grave care provided by the almighty state of California.

In case you missed it, a new retirement program goes live in California starting July 1st. This plan was put in place because the state wants businesses who don’t offer a retirement plan to be forced to offer them. It’s very easy to enroll, actually you are automatically enrolled, unless you opt out. Starting next year, any business with over 100 employees is required to enroll, the following year, the employee number drops to 50, then by 2022, the employee threshold drops to 5.

Details on the actual program are tough to glean, so I called the Employment Development Department (EDD) and they could not answer my questions. Seriously if you want bruises on your brain by all means call them. The State Treasurer’s Office (STO) did provide some color, but not any direct answers. In fairness I totally threw him off his game, after he called me back and said a long spiel which sounded like Latin or some other generally accepted language in California. When he came up for a breath, I told him, “Sir, this is an Arby’s.” He was shaken. I continued to dig for answers, to which this guy either 1) didn’t know or 2) would get back to me about.

From what I could find out online, it looks like if you do nothing that you “opt in” resulting in 5% of your paycheck being remitted to the State and deposited in this retirement plan. The 5% increases by 1% each year until you reach 8%. Anyone can “opt out” or “opt back in” anytime. Such fluid policies seem like a strange hybrid model and an HR nightmare for a small business. If you opt in and don’t put an income level in the program it defaults to 30k a year, so if you make less than that you will be “feeling the Bern” on your paycheck. Something tells me that the paperwork won’t get corrected quickly nor will they “refund” the overage. Account changes are made with the state via internet or snail mail not your HR person so how does this state program communicate with employer to coordinate withholding amounts remain correct?

The account is an after-tax investment i.e. Roth IRA. It appears you have the choice of a mutual fund or a money market fund to deposit your money into. Investing in a money market fund makes little to no sense as they only provide about 1% interest a year. Fees run about 1% a year as well effectively destroying and rate of return on that account. The whole thing reeks of being a Ponzi scheme……

Well, actually it is.

The program was started with a loan (interest to be paid back) from both the SEIU and the CTA, two of the most powerful unions in California.

Two large public employee unions, the California Teachers and the SEIU, each contributed $100,000. Public employee unions played a major role in a national drive to create state-run savings plans for the private sector.

Public unions think improving private-sector retirement can help counter pressure to cut government pensions or, following the corporate trend, switch to 401(k)-style individual investment plans that create no long-term debt for employers.

The nine-member CalSavers board has looked at a public union-backed “pooled IRA” that could gradually, by diverting some of the investment yield in good years, build a reserve large enough to replace some of the losses in a bad year.
State-run retirement savings plan ready to launch

So, the “savers” will have to pay a fee to participate and must be enrolled automatically, or employers will be fined $750 per employee. So now an employer must complete all applicable forms for a new hire, and have them complete this paperwork? This is unfair. No wonder businesses are fleeing the state. Think of the food service industry or a minimum wage jobs where they turnover employees constantly. Another curve ball here, what if the employee doesn’t have a bank account and receives a paper check? What if the employee gets terminated and you fail to let “CalSavers” know? Do the deductions continue? Those fees are ridiculous and are literally just redistributing wealth to current retirees. For example, Vanguard offers accounts for literally a fraction of the fees. The “redistribution” I speak of is just a new way to keep current pension retirees happy. Keep this in mind, older folks (social security/pension recipient) vote in very large numbers, and it would spell the end for many a political career should said pension check bounce. Make no mistake about it, the SEIU and CTA could care less about any non-union member, they want their own taken care of first, and everyone else is a sucker and they are out of luck.

How would this plan even be enforced? The Treasurer’s Office representative said the state has a data base on all eligible business…. where? Even the Secretary of State’s Office can’t possibly have every business on record! Even if they did, how can they screen based on how many employees you have? Is their info really up to the minute? How can that be verified? This would be a nightmare to enforce!

Which parlays into my next point, the real point of this program is to create a brand-new layer of government workers, and a separate group of folks 100% dependent on government. While this may just be a pilot program initially, it will eventually expand to include 7.5 million workers in California… Why is what you may ask?

Low income citizens will opt out of said program (think about it $13 an hour with 8% of pretax paycheck deducted) doesn’t leave much room for food each month. Actually, it amounts to a salary cut…with rising fuel, food and housing costs retirement won’t be an option.

As a result, they will want to lure people like me into this scheme. If you earn around 80k that’s $6,400 a year that goes under state run control each year. By opting out and staying at Vanguard they lose out on that “revenue.” Trust us folks, there is a plan for this, and eventually I will be forced into the account or assessed a penalty for opting out.

As I consider this, I can think of many other questions. What if you leave the state while still working age? Can you roll it into another private account? Or is it heavily penalized and forced to remain in CA? I feel this will become a defined benefit scheme similar to current pension funds used by our state workers, where they are “funded” until they aren’t anymore and the last ones in are wiped out. What makes me skeptical is that the program was known as “Secure Choice retirement investing” prior to a name change. Is it just me or is using the word “secure” in regards to retirement plans just inviting a major lawsuit?

In addition, how does shareholder voting work? Obviously, these funds are going to hold a bunch of companies (more on this in a minute) and as a shareholder you have a right to vote but I don’t see this being allowed. Is Big Brother casting shareholder votes on my behalf so they can steer the market in a way more in line with their political ideology? What companies are being invested in? Something tells me Phillip Morris, Raytheon, Pepsico and other “sin/bad for you companies” will be passed over. Want to take bets Tesla, and other “green” startups will be preferred? Politics over investment return is part of the governing documents of this scheme.

ESG/Socially Responsible Investments: Responsible social, environmental, and governance investing is an issue important to some Participants, and an Investment Option reflecting that belief should be offered.
INVESTMENT POLICY STATEMENT Appendix I

I noticed a bond fund is available, I assume any state with policies/laws we don’t agree with here in CA will be passed over in favor of CA junk bonds! This is just a new way to put a hand on the scale to get a desired outcome, no question it bothers some in this state Tesla is literally going up in smoke. Or is this a way to load up on company stock and push for policy changes? If this program goes the way of MYRA at the federal level what happens to the government workers? I have a feeling they won’t be laid off just folded into an existing bureaucracy.

Worst of all workers will be screwed. You will find yourself laid off and working the same job as an independent contractor or a “temporary staffing worker.” All in the name of your employer avoiding this new program.

You have been warned…..

“The Chief”

San Francisco Explores Buying PG&E’s Assets

Did we do it again or did we do it again! We said in this very space on a couple occasions that San Francisco could be a buyer of Pacific Bankrupt Gas & Electric’s assets, well the city has hired a prominent investment banker from Jefferies LLC to assist in exploring buying the assets. When you hired a firm like Jefferies you are very serious. The fee’s charged by this prestigious firm are so high a credit card company would be jealous.

Jefferies LLC consultant team tackling options on buying PG&E assets

While nothing is final, I would say the assets the City wants are as good as sold since PG&E needs cash to pay off its fire liabilities in both the Bay Area and “Paradise”.

The San Francisco Public Utilities Commission said on Tuesday it has hired an adviser to explore the potential acquisition of PG&E Corp’s distribution assets, sending shares of the power company up 2.6% at $18.37.

San Francisco has hired Jefferies LLC as buy-side financial adviser, the utilities commission’s Press Secretary Will Reisman told Reuters in an e-mail statement.
San Francisco city hires adviser to explore potential acquisition of PG&E assets

In some ways this makes sense. The City can keep the rates cheap as it won’t have to subsidize rural areas. The lines are almost entirely underground so fire liability is essentially nil. The City desires to be greenhouse gas free in the near future, so I guess it reduces fossil fuel reliance.

Bloggers note: What fossil fuel plants are left here? However the burning question is how will they generate power? In a post Enron era would you really want to rely on an out of area producer? A jilted PG&E who you bought the assets on the cheap from? Sun? Water? Wind? Waves? Biomass?

Green energy production, the future of San Francisco

I guess being able to sell the masses on lower rates and “transparency” makes sense in some ways but I don’t see the end game here. Additionally as discussed here, the infrastructure is very old, outdated and more saliently what exactly does the City think its purchasing? Wires and pipes underground are very easy to maintain, you just ignore them until there is an issue, but how old are these pipes and wires and are we sure we know where they are buried? What if the “big one” finally happens? Is this really the liability I would want to take on as a city? Well I suppose if you want lower rates.

I guess Rahm Emanuel was onto something when he said, “Never let a good crisis go to waste”, but I just don’t see this penciling out.

In a way I feel bad for the ratepayers in San Francisco. While SMUD may not be perfect, I wouldn’t want any PG&E assets within a 90 mile radius of my house.

“The Chief”

Rent Control Smoke and Mirrors

Photo above: Los Angeles Mayor Eric Garcetti

Those of you aspiring to get rich in California real estate better buckle-up and get ready for a tumultuous ride. Those owning commercial property, your day is coming; but today; let’s look at those of you that rent housing to others.

First, congratulations! You are about to win the lottery. At least according to people that I know that rent property. No, really. Thanks to the California Assembly, under the guise of affordable housing, you are about to score bigtime. AB 1482, has passed the Assembly and is waiting on the Senate for action. This bill is a ‘guaranteed income for life dream’…at least until you get hosed by whatever happens when Prop 13 is dismantled.

This bill allows you to increase tenant rent by five percent a year plus inflation.

“… prohibit an owner of residential real property from increasing the rental rate for that property in an amount that is greater than 5% plus the percentage change in the cost of living …”
AB 1482

It’s possible that the actual rent increase could go up to seven percent if our benevolent lawmakers decide to more closely mirror the Oregon version of the law but who knows. Anyway, the only thing standing between you and this utopian dream is two guys, the senate leader and Governor. I’m not sure I’d bet against the house (pun intended) on this movement.

So what is the downside of such blessed compassion on the masses?

Ironically, more than 10,000 apartment units in San Francisco reportedly sit vacant. That’s another result of the city’s rent control and tenant ordinances: Landlords are afraid to rent their apartments to strangers. Because tenants are granted special “rights,” it’s difficult to evict them. Landlords let the properties sit idle.

That’s a reality. If the cities where I own rental houses pass rent control, I won’t be the only one who is done with that type of investment. Who has enough blood-pressure medication to handle the stress of it? In rent-controlled cities, landlords exit the business and turn their apartments into luxury condos. If they can’t make a profit, they’re not about to install new counters or put on a pricey new roof. We end up with third-world conditions: the wealthy living in beautiful places and everyone else in squalor.
Rent-Control Initiative Could Obliterate California’s Housing Markets

Oh, should this legislation go down in flames, never fear. Regardless of legislative action, statewide rent control will be on the ballot in 2020 and it’s considered a slam-dunk by its opponents.

Californians need to ponder this unpleasant reality given that community activists appear to have gathered enough signatures to place a statewide initiative on the November ballot that would overturn state limits on local rent-control ordinances. The 1995 Costa-Hawkins Act forbids California localities from placing rental-price caps on single-family homes, condos and newer construction. It also bans vacancy controls, meaning that landlords in rent-controlled cities are free to raise the rent to market rates once tenants vacant the property.

If California voters approve the repeal of that measure, the state’s housing crisis will get worse—especially in the liberal, high-priced coastal cities that almost certainly will embrace tougher rent control laws. It’s going to be difficult to stop the initiative, for obvious reasons. The pro side will hit the “easy button” (the rent is too damn high; we’ll magically make it lower!). Unfortunately, it’s hard to make a complex economic argument to voters who are suffering from unaffordable rent and housing prices, but it’s worth rehashing the long-proven results of such ordinances.

Why Tesla Still Lives

When I saw that Tesla stock was up today (which is a rare occurrence), I thought Elon was back on Twitter but alas, I found a different reason. Tesla is getting free money.

As mentioned in a previous installment, Tesla is being subsidized by European automakers so they can make their emission goals thanks to the nonsensical fake environmental “science” of carbon taxes and emission credits. Now Bloomberg has published an article that Tesla is also being subsidized by American automakers GM (Government Motors) and Fiat-Chrysler.

For years, Tesla Inc. has hauled in revenue by selling credits to other carmakers that needed to offset sales of polluting vehicles to U.S. consumers. These sorts of transactions have largely been shrouded in secrecy — until now.

General Motors Co. and Fiat Chrysler Automobiles NV disclosed to the state of Delaware earlier this year that they reached agreements to buy federal greenhouse gas credits from Tesla. While the filings are light on detail, they haven’t been reported on previously. They also represent the first acknowledgments from carmakers that they’re turning to Tesla for help to comply with intensifying U.S. environmental regulations.

The deal with GM will come as a surprise to those who thought years of sales of plug-in hybrid Chevrolet Volts and all-electric Chevy Bolts would leave the largest U.S. automaker in the clear with regard to regulatory compliance.
GM and Fiat Chrysler Unmasked as Tesla’s Secret Source of Cash

Oh, also buried in this article is a nugget about the 2020 election.

And the company wants to bank the credits for future years when emissions rules get tougher — especially if a Democrat beats President Donald Trump in 2020.

“This might not be a bad hedge,” said Mike Taylor, the founder and president of Emission Advisors, a Houston-based environmental credit consultant and broker. “If a Democrat gets elected in 2020, GM may need the credits and prices may go up.”

If you read further into the article …

Tesla has generated almost $2 billion in revenue from selling regulatory credits since 2010.

So between US and European manufacturers, we now know that Tesla has banked at least $4.3 billion dollars just for existing—and producing nothing.

Once again, it is proof positive that in a truly free-market economy, Tesla would not cut it as a viable business. Only because of government interference–direct and indirect–does this company still draw breath.

Under Armour Inc. Switches to Inflation Based Pricing

By “The Chief”

William and I have been surprised lately by the statistics showing “jobs growth,” most of which coming from low skilled positions by the way, however an advertisement caught my eye in my inbox yesterday. I shop, like many other Americans online; usually getting free shipping and most of the time paying no sales tax. Under Armour basically spams my inbox daily; however, this one was a doozy and the guy who sent it out probably should be re-assigned. Here at reallyright.com we don’t have a practice of call for people to be fired (unless they work at ESPN or for taxpayers). Take a close look at the email…it says additional 30% off! Yet the prices of said items have actually been marked up by 30%. Not a great look if you are a major, publicly traded company, especially one with a ton of people who consume your products.

Under Armour plus 30 percent sale
Hurry 05/22/2019 Only

This is really a rough look, which makes me wonder if they decided to switch to an inflation model where the price changes as inflation rates are dictated? Or is this a new Venezuela based system that since the value of the currency is so low the price must keep going up? Either way rough look, nonetheless. What’s even more disturbing? The original email went out at 9:58 am and the retraction didn’t go out until 6:15 pm. Who was minding the store? I find it hard to believe no one caught this…this is a pretty large error? The retraction gets sent at the end of the day? I wonder what sales were like? The types of things in this society that go unnoticed blows my mind.

As an additional nugget a “pride email” showing off their newest “pride offerings” went out as well, and there were no errors in that, so I guess we see where they stand on “the issues.”

This is an issue that has been building for a while now, I will detail it in a future blog, but the “job growth” is happening at the high end, or the very low end. The 90-day types will cheer the job reports, but mass layoffs have started, and it is not pretty. These are low skilled workers assigned to social media/email accounts trusted with sending the info out. They are monitored by aloof absentee middle managers who spend most of their time applying for their next job, so retractions don’t go out till later. Anyone want to take bets; if the “pride email” was screwed up, a couple of people would be paying with their jobs?

“The Chief”

Morgan Stanley Says Tesla Stock May Drop to $10 a Share

Wow, I thought I was tough on Tesla but others are really piling on. The consensus is that their stock is heading down to about $100 per share. However, Morgan Stanley is even more dire.

Morgan Stanley cut its bear (worst-case) forecast on Tesla’s stock from $97 to just $10 on Tuesday, citing concerns about the company’s increased debt load and geopolitical exposure.

“Our revised bear case assumes Tesla misses our current Chinese volume forecast by roughly half to account for the highly volatile trade situation in the region, particularly around areas of technology, which we believe run a high and increasing risk of government/regulatory attention,” the research team, which included analyst Adam Jonas, said in the note.

But it’s not just the Tesla bears making cautious calls. Financial services firm Baird also cut its Tesla estimates Tuesday, lowering the company’s stock to $340 from $400, while T. Rowe Price, for years one of Tesla’s biggest investors, sold around 81% of its holdings over the first three months of 2019.

Link: Tesla shares could drop to $10 in a worst-case scenario, Morgan Stanley says

The article also couches the story as Tesla can overcome all the adversity but they are hoping that Tesla can change. I don’t know about you, but the last guy selling hope and change was to total disaster.

Oh, there is a bright spot. Like Microsoft propping-up Apple in during the Clinton Administration to avoid accusations of a monopoly, other auto makers are paying money to Tesla so they can build cars that people want to buy and still meet the emission standards set by the government.

Carmakers across Europe are striving to meet a 2020 EU target of average car CO2 emissions of 95g per kilometer. To avoid the fines, the EU allows automakers to pool their fleets together and purchase credits from other automakers with a surplus. Last month, Financial Times revealed a deal between Tesla and Fiat-Chrysler (FCA) worth “hundreds of millions of euros”. According to the Financial Times, the understanding is now worth around €2 billion ($2.3 billion USD). The deal with FCA is expected to be an extremely great boost of money for Tesla but FCA should keep in mind that the sale of emission credits will not last forever. The new regulations while helping Tesla financially are pushing other carmakers to release their own all-electric vehicles as nobody in the industry is ready to keep dispensing billions to their own competitors.

Link: Fiat-Chrysler Is Ready To Pay Tesla Up To 2.3 Billion For Emissions Credits So It Can Meet European Car Emissions Standards For 2020

Elon Musk with the look that says, “It’s not personal, it’s business”

Tesla has also introduced another price cut for its cars. OK, actually they raised the price of their cheap cars by $400 and cut about $300 off the higher priced vehicles. Contained in the story are these choice words.

The moves come as Tesla’s stock is under pressure from investors who are becoming skeptical of CEO Elon Musk’s ability to turn a profit and keep the business growing, all while balancing demands of developing a self-driving ride system and building new products such as a small SUV, a pickup truck, a new roadster and an electric semi.

“The business fundamentals of Tesla always have been shaky, but the stock price has been buoyed by the story that this is a company that was going to do huge things,” said Navigant Research analyst Sam Abuelsamid. “What we’ve seen in the last month or so is people are starting to recognize maybe that wasn’t really true.“

Last quarter was among the worst for Tesla in the past two years. Sales tumbled 31% in the period. Musk predicted another loss in the second quarter but said Tesla would be profitable again by the third quarter.

Link: Tesla reduces prices on Models S and X amid stock slump

Tesla’s slide in value continues. The gap between what Elon Musk promises and what he can deliver is finally becoming apparent to more people. Investors took a risk on his out-of-the-box thinking but clearly he has failed to deliver on the promises. Once governments quit propping him up, the market will get to decide his fate.

Lastly, we have no word on anybody accepting the bet for $10K that Musk is right on his predictions even though it’s been out there for the better part of a week. Nevertheless, Mr. X has contacted me and is ready to serve Kool-Aid for whoever takes the wager.

Oh, the children in his neighborhood have offered their tea set and a bag of Chips Ahoy cookies for use at his Kool-Aid party.

PG&E Introduces the “Rolling Blackout”

Special Report from The Chief

In case you missed it, PG&E is bankrupt; however, they are allowed to continue to operate while the state regulator figures out whether to let them re-organize or partout the company. PG&E has been wallowing for about a year now, trying to convince legislators to overturn the “inverse condemnation” law that forces them to repay any damage done by their equipment in the event of a wildfire. This has gone nowhere and predictably the utility has responded by saying they are going to implement “rolling blackouts.” The policy, as explained by the utility, is that PG&E will attempt to reach out to affected customers within a day or two of the scheduled blackout. Such blackouts are contemplated when high winds are in the forecast. They will send out a warning, and then cutoff all power to the area. The company goes on to add, the power will be restored when danger of their equipment causing wildfire is no longer imminent. The spokesperson added that some customers could be without power for days.

Under intense scrutiny from regulators and an unsympathetic federal judge, the utility Wednesday rolled out a fire-safety plan for 2019 that calls for shutting power to vast chunks of its territory when winds kick up and other fire perils abound. It’s designed to curtail the type of deadly wildfires that drove PG&E into Chapter 11 bankruptcy last month.

…PG&E is still evaluating the criteria it uses for blackouts, which are based on heat, lack of humidity, high winds and other factors.

In any event, he said the company is committed to a system that, when blackouts are imposed, will spread the impacts to much wider areas than before.

Link: California wildfires: Get ready for bigger, broader PG&E blackouts this summer

On one hand I understand why the company is doing this. If the windstorm knocks over the power lines causing a fire to spark, they are on the hook for all damages. Easiest way to prevent said liability? Cut the power! If you happen to live in an area where a wildfire could start if their equipment is knocked over? Too bad, so sad. Have solar on your roof? Thanks for your service….but your power is still being cut. If you’re thinking about buying a Tesla emergency battery generator…in addition to reading some of Williams articles, just understand that battery could either catch fire….or not last long enough to generate power for your dwelling. In addition, if you live in a rural area, you are automatically a low priority for having your utility service restored. So if you live in the sticks, or a tee pee like me, you could be without for several days. The battery power generator you are buying will only work for a few hours at most, keep in mind most houses in rural areas tend to be much bigger than a standard tract home in the city or suburbs.

Who Decides

The scariest part of this is that you are at the mercy of a very corrupt and morally bankrupt PG&E. It’s frightening that their “meteorologists” (no doubt overseen by a team of lawyers) will determine when the power should be cut and restored. It’s alarming to be at the mercy of the only utility on the planet whose carbon foot could be seen last summer with the naked eye from the International Space Station.

In California where the utility pays for all damage caused by their equipment, you can rest assured your power isn’t being restored until everyone is certain the storm has more than passed. Even more worrisome are the practical ramifications of this policy. While hospitals and maybe assisted living centers will have a backup generator, it will not power the facility very long. The entire community, city, or region will be without power meaning no street lights, gasoline or other fuel sales, restaurants, stores, everything will be down.

Summary

Thanks to Pacific Gas and Electric, this summer you can relive the glory days of Governor Gray Davis and simultaneously live like the folks in Venezuela. From now on, in the PG&E service area, electrical service is a privilege not a right. What’s the old saying, “Forewarned is forearmed”? Unlike the Gray Davis era, in the enlightened age of Gavin Newsom, they’ll let you know when it’s convenient to provide electrical power. But remember, you only get billed for what you actually use.

As an added bonus, PG&E could now consider letting their union workers have holidays like the Fourth of July and Labor Day off. This will save them having to pay double and triple time to their union employees working on legal holidays and it won’t inconvenience many customers because most folks are eating out of their ice chests and picnic baskets during these holidays.

There is Hope

Despite these ominous threats, fear not fellow Californians. Our leader of the republic, Gavin Newsome, has committed $75 million to the cause. No word on what that money will be spent on. We wait patiently to hear more about the other added millions later in this process. Newsome added he is “scared.” Well rest assured sir, your house in Fair Oaks is in SMUD’s service area, and chances of a wildfire causing your power to be cut are NILL. In addition if your power were to go out, I’m sure you won’t have to wait in line like the rest of the unwashed masses, his majesty will have power turned on far before any of us.

Stripping PG&E’s Carcass

In related news: The City of San Francisco has begun discussions to look into buying the local SF portion of PG&E during the bankruptcy process.

As PG&E (PCG) continues to emerge from Chapter 11 bankruptcy protection, the city of San Francisco is reportedly considering offering a deal to the utility for some of its power assets.

The multimillion-dollar deal is expected to happen within the next few months as Mayor London Breed told PG&E back in March that a formal bid would come if it proves feasible for the city, Bloomberg reported.

San Francisco is looking to purchase PG&E’s electric distribution system in the city, which it estimates “in the range of a few billion dollars,” according to Monday’s report from the San Francisco Public Utilities Commission.

Link: Why Would The City Of San Francisco Purchase PG&E’s Power Assets?

I’m unsure of what they are thinking because the city would be liable for any equipment damage causing a resulting fire. In addition, does anyone know what infrastructure is even located under the city’s streets? Also, where do they plan on getting the power needed for their city? As William pointed out, there is precious nothing as far as electricity generating assets around the City, please don’t think Hetch Hetchy is capable. Maybe using the methane from their own citizens “deposits” found all over the town’s sidewalks? I know liberals want to send us to a Dark Age with all the green new deals; however, it seems like PG&E wants to do one better and send us to the Stone Age; less the ability to wield fire.

You have been warned.

The Chief