Elon Musk’s second quarter report card is due tomorrow (07/24/2019). As such, he dropped a few more nuggets for the faithful about what he might be able to do in the future, probably because the present is such a miserable place to be right now.
Future performance not indicated by past results
Elon is touting patents of technology that might become a reality at some future date, whether he’s the one still alive to do it or not is a debatable point. One involves automobile wiring harnesses and the other stamping body panels. Neither is anything other than a concept right now.
Elon Musk doesn’t want past performance to be used as indicator of Tesla’s future
Please note the tone of the opening paragraphs.
Elon Musk believes the way to usher in a new age of EVs is by going back to square one and tackling the fundamental issues with production.
Tesla just designed and patented revolutionary new wiring architecture, which will enable robots to build the upcoming Model Y.
Now another patent has revealed that Tesla is also moving to a new, full body aluminum casting design; rather than a series of stamped steel and aluminum pieces.
Oh, the headline is deceptive because Tesla has no such casting machine, only a patent on a concept for one which is a very different proposition. All that’s missing from the above article is Billy Crystal’s line from City Slickers that “Life is a do over.”
Apparently, Elon is signaling that he blew it with what he’s done at Tesla and needs another paradigm. Translation: give me yet more time. Like a stopped clock, the faithful hope that he eventually will get it right.
Next nugget, Apple hired Tesla’s VP in charge of design.
Apple Inc. has hired Steve MacManus, at least the third Tesla Inc. engineering executive to join the Cupertino, California-based technology giant in the last year.
MacManus, a Tesla vice president in charge of engineering for car interiors and exteriors, left the carmaker recently and has since joined Apple as a senior director, according to his LinkedIn profile. He worked at Tesla from 2015, after stints at Jaguar Land Rover, Bentley Motors and Aston Martin. His interior-design skills may be applicable at Apple beyond the development of a car.
This should fuel even more rumors about the mythical “Apple Car.”
Apple Car
Sales data sliding
The last nugget which is related to the previous one is that Tesla sales are tanking on their high end vehicles.
The luxury sedan that put Tesla Inc. on the map is starting to show its age, with new registrations of the company’s Model S plummeting 54 percent in the second quarter in California, The Wall Street Journal reports.
Similarly, new California registrations of the Tesla Model X fell by about 40 percent in the second quarter, the Journal reports, citing data from the Dominion Cross-Sell Report.
California is Tesla’s single largest market in the U.S., accounting for about 40 percent of Model S sales last year alone.
The Palo Alto-based automaker has shifted its focus to the Model 3, which is half the price of the Model S.
Meanwhile, the company itself says production and sales of the Model S and X have plummeted.
This time last year, Tesla built 24,761 Model S and X cars — a number that fell 41 percent to 14,517 cars in its most recent quarter.
Analysts say that’s partly due to Tesla’s decision not to update either car.
So the chief car designer for Tesla leaves and goes to Apple and then surprise; a story emerges that Tesla hasn’t updated their higher priced cars since they were introduced and as a result their sales are tanking. Sounds like Elon is lightening the payroll to me.
Maybe those rumors of Apple buying Tesla should be given another look. Tim Cook could do it with his lunch money and still have enough to buy Intel’s mobile chip business.
Elon Musk is in the news again with another distraction so it must be about time to report Tesla’s second quarter earning’s reports.
First, the distraction.
Neuralink, the secretive company bankrolled by Elon Musk to develop brain-computer interfaces, will provide its first public update later today in an event streamed over the internet.
“We’re having an event next Tuesday in San Francisco to share a bit about what we’ve been working on the last two years, and we’ve reserved a few seats for the internet.”
This could be the big reveal of what the mysterious company has been up to since Musk announced it two years ago, and hired a pack of leading university neuroscientists to pursue his goal of connecting human brains directly to artificial-intelligence software.
Elon wants to hook your brain to a computer for some unknown reason. MIT—authors of the above article—speculated that Elon would demo a monkey playing a video game. Based on what I know, it doesn’t take much brain power to play video games so Elon will have to do better than that to get my attention on this project.
Meanwhile, several pieces of Tesla news have surfaced in the last few days.
Sales
Tesla has been claiming that sales are up so of course to they announced another price cut. This is contrary to common sense but this is the company fathered by Elon Musk.
Tesla delivered more electric cars in the second quarter than any three-month period in its history, alleviating concerns that demand is waning for its stylish vehicles as tax incentives in its main U.S. market begin to phase out.
Despite the heartening news Tuesday, Tesla still hasn’t proven it can consistently make money despite repeated promises from CEO Elon Musk to reverse the company’s long history of losses.
Musk himself has already acknowledged Tesla will post a loss for the past quarter, but forecast profits after that—something he also did last year, only to be proven wrong. Analysts polled by FactSet are predicting the company will absorb a loss of about $228 million for the second quarter. If those projections hold true, Tesla will have lost nearly $1 billion during the first half of this year.
Tesla workers have told CNBC that, in order to meet Elon Musk and Tesla’s delivery quota for the second quarter, that they were subjected to unfathomably harsh conditions and took numerous manufacturing shortcuts.
This “bombshell” should come as no surprise anyone who has followed the Tesla story.
However, Tesla operates its manufacturing business in what is called an “open-air tent factory,” and employees told CNBC that they were forced to work through freezing nighttime temperatures, excessively hot daytime temperatures, and even unhealthy air quality brought on by wildfire smoke.
Elon Musk doing his Captain Blith impersonation
Whereas most legitimate automobile manufacturers rely excessively on robots and other automatic means of production to meet delivery estimates, these employees said they themselves had to bypass the robots and put the cars and battery packs together themselves.
This included the use of electrical tape to fix some defects. Great. That should rival being able to trick an autopilot-enabled car with table salt.
The grander point about how Tesla is being run is a referendum on Elon Musk. If these same stories came out of any other legitimate car manufacturer, the entire industry would be in an uproar.
Managers would get fired, senior management would be forced to resign, the stock of that particular company would fall, and government regulators would be all over that company in less time than it takes a BMW to go from 0 to 60.
This isn’t even the first time we’ve heard about worker conditions. It’s been going on for two years.
But because this is Tesla and Elon Musk, everyone seems to turn a blind eye.
Mark my words: If vehicles were delivered in this quarter under the conditions that these employees describe, consumers should worry that they are going to suffer from higher-than-average mechanical and recall problems.
Autopilot claims scaled way back amidst programmer mutiny
A day after Elon Musk suggested that auto-driving Tesla cars might not be sold to the public and could instead be hawked as robotaxis, a report dropped revealing that in recent weeks nearly a dozen Tesla Autopilot engineers had already hit the eject button.
You can’t make this stuff up.
Tesla Engineers: We’ll Drive Ourselves Home As many as 11 individuals on Tesla’s software Autopilot team departed the company during the past few months, according to The Information, continuing a purge which began when Elon Musk booted the team’s leader in May.
The significance of these Autopilot departures cannot be overstated. One of the highest profile functions of future Tesla vehicles is its ability to drive itself.
While there are other competitors in this market, for 10% of this division’s workforce to get up and leave means that they do not believe the timeline that Elon Musk has set for the product is in any way realistic.
And that’s not the only problem: There has always been doubt regarding the safety of Tesla’s Autopilot system, not only in its supposed ability to reduce crashes, but also in the numerous crashes in which it has allegedly played a part.
The article above calls followers of Musk a “cult.”
This should tell investors and consumers a lot about company culture. It is a personality cult. The product itself has a cult-like following. Tesla is all about Elon Musk.
Musk certainly has cast a spell on the true believers of his utopian dreams. He has made an irrational and emotional connection with people that willingly follow where he leads. These folks are convinced that Musk is singlehandedly transforming the world and the cosmos. They can’t wait to follow him to Mars.
My problem with Musk is that he doesn’t risk his own money to do anything, he always manages to fund his ventures with tax dollars and gullible investors. He starts much and finishes nothing. He is the 21st Century P.T. Barnum.
P.T. Barnum
Musk claims economic miracle
Oh, if you thought Burger King and Bill Clinton had cornered the market on whoppers try this from Elon:
Tesla Inc.’s Elon Musk is standing by a claim that the company’s electric cars will be appreciating assets once they’re capable of driving themselves.
Musk, Tesla’s chief executive officer, first made the claim in a podcast interview in April that the company’s vehicles will gain in value because they’ll eventually be capable of fully autonomous driving. He stood by this in a reply to a follower who wrote Tuesday that he was unsure if the CEO was joking or making a “really dumb” statement.
Quinn Nelson, the owner of a media company that produces videos about tech products, kept engaging Musk in a debate over the claim, which Nelson said “makes no sense.” The CEO replied that Tesla is bundling full-self driving — or FSD — into all cars the company builds, and that Tesla will be unable to keep up with demand when the vehicles are capable of complete autonomy.
With the exception of collectors’ cars and other rare cases, depreciation has been a fact of life for automakers, dealers and rental-car companies for decades. While Kelley Blue Book has handed Tesla a best resale value award for its Model 3, for example, the car-shopping researcher estimates the sedan retains about 69% of its value after three years.
The wheels are falling off the Tesla dream. Musk would rather be doing other things than running this company and it shows. His attention and passion are elsewhere. He is a butterfly searching for the next colorful flower to pollinate.
Back in August 2018, the Knights of Columbus (a Catholic Church volunteer group) was served a lawsuit by a vendor alleging insurance fraud and manipulation, essentially running a Ponzi scheme.
U.S. District Court in Denver against the Knights of Columbus, claiming the Catholic-charity behemoth is using “phantom” numbers to fraudulently inflate its 1.4 million insurance pool of mostly aging members.
The lawsuit, filed Tuesday by Greenwood Village attorney Jeffrey Vail on behalf of UKnight Interactive and manager Leonard Labriola, accuses the charity of artificially claiming that it has 1.9 million insureds worldwide by counting members who have dropped out. It also accuses the charity of stealing the company’s trade secrets.
Another Catholic organization facing serious lawsuits stemming from misleading its members…heard that before? Sadly, as a member of said group, the lawsuit is wholly WITH merit, and not a baseless claim, as some may have you believe. See I work in the business and I can say there is manipulation and cooking the books taking place and has been for some time. I am here to tell you the insurance arm of this organization is a Ponzi scheme and will fail by 2033 if things don’t change rapidly. I will lay out my thesis and reasoning below.
First basic insurance 101: The company charges you a premium, and if nothing happens the insurance company gets to keep it, if something happens, they must pay out for a covered loss. One reason this line of work is very profitable is you pay them in today’s dollars, they pay out as long as 30 days after the incident, pocketing the difference. The monies collected can be invested, but a reserve enough to cover a certain threshold of claims must be kept liquid in order to meet obligations should they arise!
In the case of the Knights of Columbus (KOC) they only sell life insurance, annuities, retirement, and long-term care policies to members and their spouses. As a result, they have a very small pool from which to choose since members must not only be Catholics but a member of the organization! In the case of all these products, claims are not anticipated for years after buying the product; in many cases, life insurance never will pay out! However, the organization is aging and has not been able to attract younger members to backfill the monies now being paid out to dying members. Worse yet, every major player in California has ceased selling long term care as it is very underpriced and most companies with policies remaining are doubling prices annually just to tread water! Even worse, the Knight’s products are not priced adequately, many far below the premium of far more reputable companies such as the carrier I represent! Problem is, in recent years, the amount of money paid out, has far exceeded monies paid in, resulting in an operating loss.
“Indeed, the KC Supreme insurance program is only one step removed from a classic Ponzi scheme,” the lawsuit says. “This case involves an elaborate scheme of racketeering, fraud, deception, theft, and broken promises by the Knights of Columbus Supreme Council (KC Supreme) and two of their senior executives, Thomas Smith and Matthew St. John.”
The problem lies in a couple of areas, like many groups and organizations not involving drinking or trips to a gentlemen’s clubs, the membership skews older. KOC is no different. Over 30% are over the age of 70. Most of the Knights in this age group own multiple policies totaling several hundred thousand or possibly a million dollars. But that’s ok because what about the other 70% right? Well here’s the issue, they are inactive. They only joined because their parent/grandparent made them and has been paying their dues. (Think CRA but not as far down the drain.). The reality is that this group has not bought the insurance, thus saddling the KOC with an aging membership controlling most of the insurance liability to be paid upon death!
Most phantom members are younger men who quit because of the demands of raising children and families, the lawsuit says. Aging and retiring members tend to remain active, it says.
For example, KC Supreme advertised on its website that it had 45,000 new members in 2010, while counting phantom members and omitting the fact that with the numbers of members who died or withdrew, net membership numbers actually shrank, the lawsuit says.
This creates a reserve issue and here is where the racketeering comes into play, and this part of the fraud leads all the way to New Haven, Connecticut where the HQ is located.
Knights HQ in New Haven
A directive came out, saying we are not to drop a member for any reason if he has attained the highest degree of rank…the only way to drop a member is if he has not paid dues for over 5 years! Think about that; 5 years plus of non-payment! (again, very reminiscent of CRA.)
The charity props its membership rolls by forcing 15,392 local Knights of Columbus councils to continue paying nominal dues for former phantom members after they drop out, the lawsuit says. The charity requires councils to recruit a new member before allowing them to drop an old one, the lawsuit says.
Based on such rules, one local council in New Jersey reports that it has 316 members when it actually has 54 members, the lawsuit says. When a Dallas council asked to remove more than 80 “long-delinquent” members from its rolls, KC Supreme only allowed eight to be removed, the lawsuit says.
I say the only way, because the other ways to drop someone are automatic…felony…no longer a Catholic…those things. The root issue is the younger members aren’t buying policies and have no intention to do so in the future, and since many members aren’t paying dues for themselves, they are being kept around to artificially inflate the membership rolls. This is where the racketeering scheme comes into play, as the KOC can lie to credit rating agencies about how solvent they are. KOC Insurance company can hide behind “…well we have 1.9 million members we can sell our products too…so we can be solvent if given an opportunity.”
While local councils do volunteer and charitable work, KC Supreme, generates billions of dollars tax-free every year selling life insurance, the lawsuit says. The Knights of Columbus’ KC Supreme website falsely advertises that its membership of “brother knights” grew for the 44th consecutive year and will soon top 2 million men, the lawsuit says.
“In fact, the true membership of the Knights of Columbus without these ‘phantom’ members is only about 1.4 million — their published number represents an approximate 36% overstatement!” the lawsuit says.
The insurance is pushed very hard by the organization. It’s mentioned at all 4 degrees (steps) you go through to full knighthood. You are required to meet with the agent after joining the knighthood, and insurance is pushed at every meeting. The agents are similar to your neighborhood AMWAY sales guy, essentially programmed to take a “No” as a “Yes”, and to keep pushing for the sale, it’s a turn off. These insurance reps are paid a slave wage and become commission only after about a year, and only get 4 councils to sell to, many having aging populations who won’t be eligible for the products. Turnover is high, and usually you buy a handful of policies on yourself to advance the scheme in the sense of putting food on your own plate. Isn’t this taking advantage of someone which runs contrary to the church’s values? Think that is odd, try the “retirement” of Chief Investment Officer Tom Smith, who stepped down just after the lawsuit was served…. let me guess impeccable and unrelated timing, right? Probably said he needed to spend more time with his family. I think Smith knows this Ponzi is about to hit the fan. Why else would he resign from a job paying him $900K a year?
Tom Smith
The fraternal order has $105 billion of insurance in force written against only $22 billion in assets, the lawsuit says. It says the Knights of Columbus organization “may very well be on the verge of financial collapse.”
I can say firsthand that the issues here are very real and true, heads are going to roll, and Pharisees and tax collectors described in the Bible will be shown in real modern form. I can say our council has 17 non-payers, and likely has at least that amount in next of kin whose dues are paid for by poppa.
A District Deputy (think regional manager) in Illinois has a council, that lists 300 members, but none have paid dues in years, and the council has not had a meeting in years. This narrative plays out everywhere leading me to believe the 1.9 million is closer to 1.1, making the “insurance pool” far less than advertised. A very heavy emphasis is put on recruiting, almost unhealthy emphasis, we just want a warm body capable of fogging a mirror, because they can buy a policy, thus buying time for the order.
My advice: Stay away from this group and if you have an insurance policy make sure the KOC belongs to the National Association of Insurance Commissioners, which in layman’s terms means if something were to happen and the insurance arm goes bankrupt, other companies step in to pay the claims/absorb the policies.
This is actually a very big deal, as many members have been misled about the insurance program and its long-term viability. The Chief Insurance Officer retiring, is likely more of a sign of a rat scurrying off the ship. Tom Smith is a coward of a human, yet no one is able to call him out. This story does not end well, and hopefully no one has any retirement monies invested in this scheme. Sit back and watch the dominoes fall boys and girls….and the Catholic Church wonders why it’s dying off.
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.
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.
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.
Chuck Doyle
“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.
“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.
Fed Chief Jay Powell
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.
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.
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.
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:
Message delivery
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.
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.
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 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.
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.
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 Musk with Tesla Flamethrower
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?
Last year’s Tesla Model M motorcycle
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.
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.
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.
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.
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.
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.
Rahm Emanuel
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.
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 …”
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.
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.
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.
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.
