Month: July 2017

Originally published on DailyKanban.com,

Under Elon Musk’s leadership Tesla’s Model X arrived two years late and subjected the company to six months of self described production hell, only to tie for last place in Consumer Reports’ luxury SUV ratings with a score of 59/100 (Nov 2016). Delays for the falcon winged albatross will allow the Chevy Bolt and second-generation Nissan Leaf to both beat the Model 3 to widespread availability by the end of the year. Tesla’s quality has been poor, the UAW is circling, and Mr. Musk recently tweeted about mixing alcohol and Ambien (zolpidem) — a drug combination not only dangerous in its own right, but that increases the risk of long-term zolpidem addiction. How is this man still Tesla’s CEO?

Yesterday’s Credit, Meet Today’s Criticism

Tesla would not be where it is today without Mr. Musk, who, after agreeing to lead the Series A venture funding round in April 2004, began shaping the company around his singular vision, turning it into one of the world’s most valuable automakers.

What’s more, Tesla’s stock would be nowhere near today’s levels if Mr. Musk had stepped aside as CEO in favor of an industry executive during the development of the Roadster, Model S, or Model X.

But Tesla’s finances and operations would be in better shape, and it would not have needed all of the five capital raises it has sought in the past five years; cash without which the company would have gone bankrupt. And while the company has had ample access to financing, that may not be the case forever; what the market giveth, the market also taketh away.

None the less Tesla the stock has waxed, even as Tesla the company has waned, giving us a business case study worthy of The Picture of Dorian Gray, with shareholders blessing Mr. Musk with all time high share prices, even as he has cursed Tesla with troublesome burdens. Here are three of the heaviest.

 

Toyota Taunting Trouble

Tesla’s biggest missed opportunity came from wasting the chance to learn from Toyota how to efficiently manufacture and design vehicles during their ill fated partnership. Given how much Tesla stood to gain, it was inexcusable for Mr. Musk to have called fuel cells so bullshit when a respectful disagreement would have been sufficient.

For all his recent bluster about “the machine that makes the machine” (Tesla’s only-robots vision was first disclosed on 31 May 2016, about ten days after the UAW publicly expressed interest in organizing the Fremont facility) Mr. Musk appears unaware that Toyota invented that machine seventy years ago. One of the canonical books on the Toyota Production System (TPS) is even titled The Machine That Changed The World.

For more than thirty years Toyota has shown its inner workings to other companies, even auto industry competitors, confident that its competitive advantage lies not in specific work practices but in the continuous improvement-focused culture it has developed.

As a result, every major automaker has long since adopted TPS (under the name of lean production) in full or in part, with Tesla being the lone exception, as is clear from interviews with workers describing a corporate culture where hitting the production numbers is paramount in importance, even if defects sail through, impairing early adopters’ user experience with vehicle flaws and mounting service center wait times.

This bears repeating. Faced with the choice of impressing customers but disappointing Wall Street or impressing Wall Street and disappointing its customers, Tesla has consistently prioritized Wall Street, as evidenced by the production rush at the end of each quarter for the past few years.

As its long time, hands on, nano manager CEO, Mr. Musk is responsible for Tesla’s culture of putting its (end of quarter) customers second; he must also ultimately bear the responsibility for Tesla spurning the chance to learn the craft of quality from the industry’s master, condemning it to tens (and perhaps hundreds) of millions of dollars of otherwise avoidable warranty expenses. This would have saved Mr. Musk and Tesla both the distraction of going on an annual Tour de Finance to refill the company treasury. In this regard, any other choice of CEO would have done better, and Mr. Musk has been sorely below average.

 

The X Factor

While Tesla’s Toyota troubles are ancient history, the Model X has been a more current catastrophe. Let us suppose for a moment that for the Model X, Mr. Musk had stepped back from Tesla in favor of an auto-industry executive; what might have happened?

Timelines and testing are both very important in the auto industry, so the Model X would have largely been on-time, arriving perhaps in 2014; to reduce quality risks, it might have shared 70% of its parts with the Model S, instead of having 70% new parts; the falcon wing doors would certainly have been cancelled (saving time and money) and a more pragmatic design would have helped it outsell its sedan cousin (as most crossovers do), generating billions of dollars of revenue and hundreds of millions of gross profits to fund Model 3 development. Finally and most importantly, the 3 would have soundly beaten the Chevrolet Bolt to market.

The scenario above has a major flaw of course in that it did not happen, and a Mr. Musk fan might propose that the auto executive would have steered the Model X into even worse delays and still lower ratings than actually occurred. So let us reverse the exercise.

This time, let us suppose that Mr. Musk had stepped back in favor of a new product architect (Mr. Hugh) and a new CEO (Mr. Briss) and that the Model X development proceeded as it did in real life.

Would Mr. Musk have defended the product architect if Mr. Hugh’s insistence on vanity doors and seats had delayed more than billions of dollars of revenue, or would Mr. Hugh have been fired?

Would Mr. Musk have stood up for a CEO under whose watch these cost overruns, delays and then production hell occurred, or would the Board of Directors have shown Mr. Briss the door long before the first very-belated Model X rolled off the production line?

Given how the Model X turned out, if Mr. Musk were any other person on the planet, would he still be employed by the company? There have been recent calls to reform Tesla’s governance – given the above, would Mr. Musk have survived the cross examination of an independent Board? If so, how badly would he have to underperform to be relieved of his duties? If the Model 3 ramps up late, receives tepid reviews and only one-half of the 500,000 reservations convert to sales, would that still be acceptable? The heartworm of the problem is that until now, Mr. Musk has gotten what he wanted, but what Mr. Musk wants may not be what Tesla needs.

As we all know Mr. Musk has kept both his jobs, which is still more remarkable, considering that the Model S and Roadster were also late. Not only that, Mr. Musk received full credit for his Model X milestone stock awards, which were based on the delivery of an alpha vehicle, beta vehicle and the beginning of production (see page 29 at this link). Neither timeline nor manufacturing quality nor Consumer Reports ratings nor workplace safety were factors in these incentives, so is it any wonder Mr. Musk’s focus was elsewhere? An impartial Martian might conclude the Model X was a company endangering catastrophe for Tesla, but based on his stock awards, Mr. Musk performed flawlessly.

It is true that market capitalization milestones also need to be reached for Musk to receive his stock grants, and this has created perverse incentives; why else would Tesla sacrifice product quality (and new customers’ experience) at the end of each quarter, just to keep Wall Street happy by beating production projections?

Focusing overly on the stock price would also explain Tesla’s preference for splashy announcements and undertakings – generally quietly withdrawn or scaled back at a later date – when more mundane investments would do far more to strengthen the company. Hyping “the machine that makes the machine” probably increased Tesla’s market capitalization far, far more than reading The Machine That Changed The World, but learning from The Machine That Changed The World would improve Tesla’s operations far, far more than talking up “the machine that makes the machine”.

The skeptical view of the Model X is that the drawn out fiasco has cost Tesla its early lead in electric vehicles. Indefensible design choices causing high rework rates during production hell almost certainly meant lots of overtime, leading to fatigue, leading to higher injury rates, leading to conversations between Fremont workers and the UAW. There is a straight line between Mr. Musk’s terrible Model X design choices and the unionization efforts at the Fremont facility, and what is more, being both product architect and CEO, he is doubly culpable for the labor unrest. Can Tesla afford to give him another chance? Should it?

Residential solar is so bullshit

Mr. Musk’s comment about fuel cells being so bullshit came when he explained that fuel cells are about one-third as efficient as batteries at turning zero emission electricity into forward motion, which is true. Every dollar spent on renewable electricity gets you three times as far on a battery electric vehicle. So why waste time on fuel cells? They’re bullshit.

As it is, solar power comes in two main flavors: residential and utility scale. Mr. Musk was the chair of SolarCity, the world’s leading residential solar installer, which achieved segment-leading costs slightly under $3/watt at a time when utility scale solar projects were coming in a bit above $1/watt. Every dollar spent on utility scale solar projects got you almost three times as much renewable electricity. So why waste time on residential solar? It must be bullshit, right?

Whether or not Musk cared about the hypocrisy of dismissing fuel cells while chairing a residential solar company, he regularly dominates the news cycle, keeping Tesla in the public eye, and supporting interest in the stock; President Donald Trump is not the only outrageously outspoken, Twitter happy, model marrying Wharton Business School graduate to generate millions in unpaid publicity for his endeavours. I would like to credit the Twitter user @eriz35 for pointing out those similarities and others.

On its own, Mr. Musk’s recent championing of Tesla’s upscale residential solar roof would not be worrisome, because everyone deserves hobbies. Unfortunately it is not on its own, as Mr. Musk’s non automotive time commitments now include Tesla’s solar and energy storage businesses, The Boring Company, OpenAI, Neuralink, involvement in the Hyperloop community, a full-time CEO role at SpaceX, his role as Tesla’s product architect, alcohol and Ambien™  enhanced tweeting, and a growing repertoire of celebrity appearances.

However hard driving a workaholic Mr. Musk may claim to be, he is definitely spending less time as an auto company CEO than his competition is doing, and it takes an egregious amount of hubris to believe one can run an car company as a part time CEO against focused global titans with full time CEO’s who are willing and able to wage wars of attrition. One must hope that Tesla can weather the storm when it comes, because to this point its finances have not been planned with prudence in mind.

 

Mr. Musk Must Set Tesla Free

Without Mr. Musk, Tesla would not be where it is today; Eberhard and Tarpenning might have floundered for years without funding, and only Nissan would have released an electric vehicle outside California. (One suspects that Jeff Bezos would have eventually stepped in, much as he did with space exploration firm Blue Origin and nuclear startup General Fusion.) Mr. Musk benefited Tesla tremendously in its early years.

His recent record, however, has been unimpressive, unsatisfactory, and in the case of the Model X, unacceptable. His obsessive pursuit of a falcon winged white whale has shipwrecked Tesla’s electric car leadership – a lucky fluke for GM and Nissan, who will take aggressive advantage. Even BMW has taken advantage of the delay to announce the unveiling of an all electric series 3 in September. A mania for moonshots has ramped up Tesla’s financial commitments, five capital raises have not been sufficient to put the company on firm financial footing, and Mr. Musk likely spends fewer hours per week tending Tesla than do his auto CEO peers with their firms.

In short, Elon Musk has gone from Tesla’s greatest asset to its biggest liability, from the one whose zeal pushed it forward, to the one whose self same zeal is now holding it back (in all aspects except for the stock price).

For Tesla to become self funding and sustainable, it needs a pragmatic CEO who under promises and over delivers, and who can reshape the company into an efficient, modern automotive manufacturer. That CEO will need the freedom to make possibly unpopular decisions without interference or mixed messaging from its iconic principal shareholder, and that will not happen unless Mr. Musk is willing to step away and relinquish control; willing to be ignored by his CEO, overruled by an independent Board, and sidelined at new product announcements.

This is the familiar experience of every parent who knows that for their kids to grow, they need to learn to let them go; as dear as it is to his heart, and as eager as he is to help it succeed, if Mr. Musk truly loves Tesla, he must set it free.

via http://ift.tt/2tz8SDI Tyler Durden

The writing has been on the wall for months, but German lawmakers have now passed a controversial law under which Facebook, Twitter, and other social media companies could face fines of up to €50 million ($57 million) for failing to remove hate speech.

As AP reports, the measure approved is designed to enforce the country’s existing limits on speech, including the long-standing ban on Holocaust denial. Among other things, it would fine social networking sites if they persistently fail to remove illegal content within a week, including defamatory “fake news.”

“Freedom of speech ends where the criminal law begins,” said Justice Minister Heiko Maas, who was the driving force behind the bill.

Under the law, social media companies would face steep fines for failing to remove “obviously illegal” content — including hate speech, defamation, and incitements to violence — within 24 hours. They would face an initial fine of €5 million, which could rise to €50 million. Web companies would have up to one week to decide on cases that are less clear cut.

Aside from the hefty fine for companies, the law also provides for fines of up to 5 million euros for the person each company designates to deal with the complaints procedure if it doesn’t meet requirements.

Social networks also have to publish a report every six months detailing how many complaints they received and how they dealt with them.

Maas said official figures showed the number of hate crimes in Germany increased by over 300 percent in the last two years.

But human rights experts and the companies affected warn that the law risks privatising the process of censorship and could have a chilling effect on free speech.

“This law as it stands now will not improve efforts to tackle this important societal problem,” Facebook said in a statement.

 

“We feel that the lack of scrutiny and consultation do not do justice to the importance of the subject. We will continue to do everything we can to ensure safety for the people on our platform,” the company said, noting that it is hiring 3,000 additional staff on top of 4,500 already working to review posts.

In an interview with Breitbart London, the CEO of Index on Censorship, Jodie Ginsburg, said:

"Hate speech laws are already too broad and ambiguous in much of Europe. This agreement fails to properly define what 'illegal hate speech' is and does not provide sufficient safeguards for freedom of expression.

 

"It devolves power once again to unelected corporations to determine what amounts to hate speech and police it — a move that is guaranteed to stifle free speech in the mistaken belief this will make us all safer. It won't. It will simply drive unpalatable ideas and opinions underground where they are harder to police — or to challenge.

 

"There have been precedents of content removal for unpopular or offensive viewpoints and this agreement risks amplifying the phenomenon of deleting controversial — yet legal — content via misuse or abuse of the notification processes."

A coalition of free speech organizations, European Digital Rights and Access Now, announced their decision not to take part in future discussions with the European Commission, saying that "we do not have confidence in the ill-considered 'code of conduct' that was agreed." A statement warned:

"In short, the 'code of conduct' downgrades the law to a second-class status, behind the 'leading role' of private companies that are being asked to arbitrarily implement their terms of service. This process, established outside an accountable democratic framework, exploits unclear liability rules for online companies. It also creates serious risks for freedom of expression, as legal — but controversial — content may well be deleted as a result of this voluntary and unaccountable take-down mechanism.

 

"This means that this 'agreement' between only a handful of companies and the European Commission is likely in breach of the EU Charter of Fundamental Rights (under which restrictions on fundamental rights should be provided for by law), and will, in practical terms, overturn case law of the European Court of Human Rights on the defense of legal speech."

Writing for Gatestone Institute, British commentator Douglas Murray noted that this assault on "racist" speech "appears to include anything critical of the EU's current catastrophic immigration policy." He wrote:

"By deciding that 'xenophobic' comment in reaction to the crisis is also 'racist,' Facebook has made the view of the majority of the European people (who, it must be stressed, are opposed to Chancellor Merkel's policies) into 'racist' views, and so is condemning the majority of Europeans as 'racist.' This is a policy that will do its part in pushing Europe into a disastrous future.

Janice Atkinson, an independent MEP for the South East England region, summed it up this way: "It's Orwellian. Anyone who has read 1984 sees its very re-enactment live."

via http://ift.tt/2tz0cNJ Tyler Durden

Authored by Chris Martenson via PeakProsperity.com,

 

via http://ift.tt/2uyRDiy Tyler Durden

While Bob Woodward is more stoic in his public discussion of the predicament this nation finds itself in (lambasting the 'fake news' media rather than directing his ire at the body politik), his partner in un-crime, legendary Watergate reporter Carl Bernstein, called the Trump administration a "malignant presidency" on Saturday, and suggested that the wrongdoings committed by the White House were unprecedented.

Journalism legend Carl Bernstein on President Trump: "We have never been in a malignant presidency like this before" https://t.co/847szAUDhk http://pic.twitter.com/OBPUajeqzf

— CNN Politics (@CNNPolitics) July 1, 2017

Speaking on CNN, The Hill reports that Bernstein warned that the Trump administration is "not functioning," and appears to hint at a 'soft coup' amid the nation's deep state…

"We are in the midst of a malignant presidency," Bernstein said. "That malignancy is known to the military leaders of the country, it's known to the Republican leadership in Congress who recognize it, and it's known to the intelligence community."

 

"The presidency of Donald Trump is not functioning," he continued. "It's really not functioning because the character and capabilities of this president are called into grave question in a way that those that know him are raising serious concerns about."

While Bob Woodward warned the "smug" media against "hyperventilating" over Trump, Bernstein suggested Trump was the "greatest journalistic challenge of the modern era."

"To report on a malignant presidency, what it means, and where it's going," he said. "This president is not in control of the presidency in a way that it is functioning."

 

"That has got our leaders worried, they are worried about his character, they are worried about his temperament," Bernstein said.

 

"We are in foreign territory. We have never been in a malignant presidency like this before."

As a reminder, Woodward previously warned that it’s not in the interest of either the Trump White House or the media to war with each other.

"I think everyone has accelerated this work. The other question to ask, is there any justification for Trump and people like — in his White House responding this way? And the only justification I can think of, which really isn’t a justification, but it accounts for emotional spasm of, my God, this is enemy of the people, I know that reporters have talked to people in the Trump house, — Trump White House about very sensitive intelligence operations, that we find out about in the press. And I think Trump is horrified that this is out there. And these are not necessarily things that are going to be published, but Trump is a newcomer saying, my God how do reporters know about these things? And so it’s — we’ve got to stop it.” 

 

“[I]t’s not in our interest, the media’s interest to have a war with the Trump White House. It’s not in Trump’s interest to have this war.”

Sadly, it appears it's too late to get this toothpaste back in the tube (for both sides).

via http://ift.tt/2sBaHLQ Tyler Durden

Authored by Mike Shedlock via MishTalk.com,

Total capitulation by Governor Bruce Rauner is in the works. The taxoholics wore him down.

In the emergency session, Rauner has agreed to hike the personal income tax rate to 4.95% from the current 3.75%. The corporate income tax rate will rise to 7% from the current 5.25% rate.

For what? Nothing. Reforms are non-existent.

Another Deadline Come and Gone

Illinois failed to approve a budget today and thus heads into its third fiscal year without one.

A vote has been scheduled for Sunday.

I do not expect your opinion will matter, but in the slim chance I am wrong, Please Email Your Representative voicing displeasure of the tax hike.

The preceding link will find your rep based on your address.

Rule of Nothing

A zombified Rauner has capitulated in every way but the final signing.

Tax hikes have been agreed to with no reforms in return.

The Rule of Nothing is clearly in play.

Rule of Nothing

 

In any given political situation, the best outcome one can reasonably expect generally happens when politicians do nothing.

 

Implied corollary#1: When politicians attempt to fix any problem, they are highly likely to make matters worse.

 

Corollary #2: Politicians almost never do nothing. It’s why we have a messed up healthcare system, education system, public pension system, etc..

Taxoholics Win Again

Chicago schools will not get fixed. The hikes will not shore up pension plans.

Within one month of tax hikes, public unions will ask for more money. And people will leave the state. So will corporations.

Rauner pledged 44 reforms. He is 0-44 on his pledges.

The property tax freeze currently under debate has so many holes it is as useful as a bucket with no bottom.

Trading tax hikes for nothing is a horrible deal. Nonetheless, the taxohalics won again.

More business flight and human capital flight is the guaranteed outcome. Doing nothing at all would have been a far better outcome.

via http://ift.tt/2tEKLnq Tyler Durden

Just when you thought American politics couldn’t get much more surreal, this happened:

#FraudNewsCNN #FNN http://pic.twitter.com/WYUnHjjUjg

— Donald J. Trump (@realDonaldTrump) July 2, 2017

 

Of course, this latest “big league” video came after Trump launched yet another tweet storm last night blasting the media.

….the 2016 election with interviews, speeches and social media. I had to beat #FakeNews, and did. We will continue to WIN!

— Donald J. Trump (@realDonaldTrump) July 1, 2017

I am thinking about changing the name #FakeNews CNN to #FraudNewsCNN!

— Donald J. Trump (@realDonaldTrump) July 1, 2017

My use of social media is not Presidential – it’s MODERN DAY PRESIDENTIAL. Make America Great Again!

— Donald J. Trump (@realDonaldTrump) July 1, 2017

 

Meanwhile, CNN seems to have been triggered…

 

…which means that Trump’s plan worked.

“The President in no way form or fashion has ever promoted or encouraged violence. If anything, quite the contrary.” – @SHSanders45 6/29/17

— CNN Communications (@CNNPR) July 2, 2017

via http://ift.tt/2sfXbhp Tyler Durden

Authored by Bill Bonner via InternationalMan.com,

“Elizabeth,” I asked this morning as my wife climbed out of the pool. “How would you describe that sea turtle we saw on the beach?”

Pausing for a moment, she replied, “Rotating its slow and majestic flippers, it ground its way slowly and inexorably toward China…”

The sea turtle was headed east. Whether China was its destination or not, I don’t know. I only know that it was about to leave the Latin America isthmus, from the west coast of Nicaragua, and put out to sea when a muscular, brown young man picked it up and carried it back up on the beach. He and his friends had dug a big hole in the sand where the turtle was placed.

At night, we often see the dim light of flashlights along the beach. “It’s the locals looking for turtle eggs,” Manuel explained. “It’s illegal to take them, but…” Manuel shrugged his shoulders.

Sea turtles are protected by international convention. But here in the wilds of Nicaragua, they still end up in the soup from time to time.

Not the Same America

This is America, too… but it is not the same America. It is the New World… but not as new as the world north of the Rio Grande. Here, the Old World has not yet been snuffed out. It survives in a semitropical paradise.

But the object of our attention today is neither the Old World nor the new one – but the ever-changing, never fully explored idea of America.

“Proud to be an American,” says one bumper sticker. “One nation – indivisible,” says another. America was, of course, founded on the opposite principle… the idea that people were free to separate themselves from a parent government whenever they felt they had come of age. But no fraud, no matter how stupendous, is so obvious as to be detected by the average American. That is America’s great strength… or its most serious weakness.

After September 11, so many people bought flags that the shops ran short. Old Glory festooned nearly every porch and bridge. Patriotism swelled in every heart.

Europeans, coming back to the Old Country, reported that they had never seen anything like it. A Frenchman takes his country for granted. He is born into it, just as he is born into his religion. He may be proud of La Belle France the way he is proud of his cheese. But he is not fool enough to claim credit for either one. He just feels lucky to have them for his own.

What Makes America Different?

America, by contrast, is a nation of people who chose to become Americans. Even the oldest family tree in the New World has immigrants at its roots. And where did its government, its courts, its businesses, and its saloons come from?

They were all invented by us. Having chosen the country… and made it what it is… Americans feel more responsibility for what it has become than the citizens of most other nations. And they take more pride in it, too.

But what is it? What has it become? What makes America different from any other nation? Why should we care more about it than about, say, Lithuania or Chad?

Pressed for an answer, most Americans would reply, “Because America is a free country.” What else can be said of the place? Its land mass is as varied as the earth itself. Inhabiting the sands of Tucson as well as the steppes of Alaska, Americans could as well be called a desert race as an arctic one.

Its religions are equally diverse – from moss-backed Episcopalians of the Virginia tidewater to the Holy Rollers of East Texas to the Muslims of East Harlem.

Nor does blood itself give the country any mark of distinction. The individual American has more in common genetically with the people his people come from than with his fellow Americans. In a DNA test, your correspondent is more likely to be mistaken for an IRA hitman than a Baltimore drug dealer.

America never was a nation in the usual sense of the word. Though there are plenty of exceptions – especially among the made-up nations of former European colonies – nations are usually composed of groups of people who share common blood, culture, and language.

Americans mostly speak English. But they might just as well speak Spanish. And at the debut of the republic, the Founding Fathers narrowly avoided declaring German the official language… at least that is the legend.

A Frenchman has to speak French. A German has to speak the language of the Vaterland. But an American could speak anything. And often does.

Be What You Want to Be

Nor is there even a common history. The average immigrant didn’t arrive until the early 20th century. By then, America’s history was already three centuries old. The average citizen missed the whole thing.

Neither blood, history, religion, language – what else is left? Only an idea: that you could come to America and be whatever you wanted to be. You might have been a bogtrotter in Ireland or a baron in Silesia; in America, you were free to become whatever you could make of yourself.

“Give me liberty or give me death,” said Patrick Henry, raising the rhetorical stakes and praying no one would call him on it. Yet the average man at the time lived in near-perfect freedom.

There were few books and few laws on them. And fewer people to enforce them. Henry, if he wanted to do so, could have merely crossed the Blue Ridge west of Charlottesville and never seen another government agent again.

Taxation With Representation

Thomas Jefferson complained, in the Declaration of Independence, that Britain had “erected a multitude of New Offices, and set hither swarms of Officers to harass our people, and eat out their substance.”

Yet the swarms of officers sent by King George III would have barely filled a midsize regional office of the IRS or city zoning department today.

Likewise, the Founding Fathers kvetched about taxation without representation. But history has shown that representation only makes taxation worse. Kings, emperors, and tyrants must keep tax rates low… Otherwise, the people rise in rebellion.

It is Democrats that really eat out the substance of the people: The illusion of self-government lets them get away with it. Tax rates were only an average of 3% under the tyranny of King George III. One of the blessings of democracy is average tax rates that are 10 times as high.

“Americans today,” wrote Rose Wilder Lane in 1936, after the Lincoln administration had annihilated the principle of self-government… but before the Roosevelt team had finished its work, “are the most reckless and lawless of peoples… We are also the most imaginative, the most temperamental, the most infinitely varied.”

But by the end of the 20th century, Americans were required to wear seat belts and ate low-fat yogurt without a gun to their heads. The recklessness seems to have been bred out of them. And the variety, too. North, south, east, and west, people all wear the same clothes and cherish the same decrepit ideas as if they were religious relics.

And why not? It’s a free country.

via http://ift.tt/2t5CqYt Tyler Durden

A major issue arising in Canada hasn’t received too much attention lately. Year after year, quarter after quarter, the level of the household debt is increasing both in absolute and relative numbers:

Source: tradingeconomics.com

The net debt versus disposable income tells you the total amount of debt in a household versus that household income and is a bit comparable to a net debt/EBITDA ratio on a company basis. A ratio of 170% means a Canadian household would have to spend 21 months of its (entire!) disposable income on debt repayment before being debt free. If a repayment capability is for instance just 20% of the disposable income, you’re talking about a repayment period of 10 years – excluding the additional interest expenses.

Did you want to see another perspective? The next chart shows the net debt versus Canada’s GDP. As you can see, this ratio has increased sharply, indicating Canadians are outspending.

Source: tradingeconomics.com

And finally, a third chart which should worry you; the total amount of car loans.

Source: globalnews.ca

One of the ‘arguments’ from those who consider the elevated debt levels ‘not too bad’ is the argument the asset value of the households is increasing as well, predominantly due to increasing real estate prices. Technically, one is correct when assuming the increasing asset prices keep the debt/equity ratio in balance despite an increasing debt level.

However, the real estate market is actually a major part of the problem in Canada, and that’s also something the Bank of Canada has pointed out in a recent update. The total indebtedness of the Canadian households actually increased exactly due to the increasing real estate prices, increasing the need for its citizens to apply for larger mortgages.

Canadians seem to think the only way the real estate prices are going, is up. Does this sound familiar to you? Because it definitely sounds familiar to us, as inflated real estate prices and ‘over-borrowing’ homeowners were the main culprits of the global financial crisis in the USA in 2008.

Back then, the Canadian banks were seen as some of the safest banks in the world, but the stability of the main banks is now being threatened by losses related to loans to oil companies and a negative shock in the real estate market might have very negative consequences. Even if we wouldn’t expect the housing prices to drop but to level off, the expected increases in the benchmark interest rates will make a mortgage much more expensive.

Source: globalnews.ca

Whereas the average cost of a mortgage is currently approximately 3%, this could easily increase towards the 5% level by the end of the current decade. If you’re a Vancouver- or Toronto-based homeowner who borrowed $1M, your interest expenses will increase by $20,000 per year or $1,500 per month. That’s a pure cost increase and doesn’t reduce the principal payments on your loan.

According to the Bank of Canada, the total amount of mortgage debt increased by 6% in the past year to C$1.45T. A 2% increase in the average cost of debt would increase the total annual payment by C$30B. To put this in perspective (as the C$30B will have to be funded by slashing other expenses), that’s approximately 2% of the country’s GDP so you can be pretty certain the trickle down effect will be substantial.

Source: Bank of Canada

And the higher mortgage rates will have another negative consequence. Exactly because the cost of debt is increasing, fewer people will be able to afford a mortgage, and banks will tighten their conditions. This by itself will cause the real estate prices to stall, and very likely to decrease. After all, unless the foreign buyers are filling the gap, there will be fewer buyers in the market for the available properties. The central bank is absolutely right when it says the ‘household vulnerabilities have moved higher’.

A low oil price, low (hard) commodity prices, an ‘over-borrowing’ population and an overvalued real estate market. Oh, what could possibly go wrong?

> Protect yourself with HARD assets. Read our Guide to Gold right now!

via http://ift.tt/2t5owWn Secular Investor

The markets weren’t really expecting ECB president Mario Draghi to announce or say anything ‘shocking’ last week, but it’s now starting to look like Mr Draghi and Mr Carney, the President of the Bank of England (the Central Bank in Great Britain) have had several discussions in the past few days and weeks to make sure they’d spread the same message.

Mario Draghi caught its audience by surprise after telling his audience during the ECB’s annual forum ‘deflationary forces have been replaced by reflationary ones. As Morningstar correctly analyzed, this immediately resulted in the Euro gaining a lot of ground versus the US Dollar, reaching the highest level since June last year, as you can see on the next chart.

Source: stockcharts.com

Still according to Morningstar, Draghi made it sound like the ECB had a plan to reduce the economic stimulus readily available for the ECB and this obviously caught investors by surprise as they were counting on the ECB lifeline with ‘free cash’ for an extended period of time. What makes Draghi’s comment really interesting is the fact Carney said pretty much the same thing in a different speech.

Despite the Brexit and the economic uncertainty connected to the UK potentially leaving the European Union, Carney was hinting on a BoE rate hike rather than an additional interest rate decrease. Not only did Carney hint at a rate hike, he also commented the ‘removal of monetary stimulus is becoming necessary’.

The comments from both presidents were a huge surprise as even though investors were expecting to see the stimulus measures being reduced, the tone of the announcements was pretty aggressive. Draghi’s written release tried to keep the total damage limited by referring to the Phillips Curve (which tries to correlate the wellbeing of an economy based on the inflation rate and the unemployment rate, as shown in the next chart:

Source: Slideshare.com

Danske Bank argues the ECB thinks the ‘natural interest rate’ has increased, meaning the real interest rate gap has increased as well. In order to keep a certain monetary policy unchanged (the spread between the real interest rate and the actual interest rates of the central bank), the central bank will need to update its interest rate policy in order to keep the policy unchanged (increasing the intended interest rates reduces the gap with the real interest rate).

Source: Danske Bank

Danske correctly notes the ECB is very likely too optimistic (something we also have already pointed out in our previous columns). Just like in the USA, the ‘real’ inflation rate simply isn’t there; as the majority of the YoY inflation was caused by higher energy prices. This wasn’t a surprise at all as the oil and gas prices were trading at multi-year lows (and even decade lows) so any increase in the energy prices would have had an impact on the ‘headline’ inflation rate. But the ‘real’ inflation rate is very likely still way below the eyed 2% mark.

Whilst the central banks are pretending all is well with the world economy and are hinting at future interest rate hikes, things aren’t as great as they want you to believe. The so-called ‘move away from ultra-easy policy’ might come way too early. Unless, of course, we’ll move from ‘ultra-easy’ to just ‘easy’…

Gold still is the best way to protect yourself against the central banks. Read our Guide to Gold now for free! 

via http://ift.tt/2sfu3Xq Secular Investor