Tag: news

Submitted by Adam Taggart via PeakProsperity.com,

Yesterday I made the 2-hour drive back to Silicon Valley, where I lived for 15 years before moving out to the country.

I rarely go back, as I miss very little about the hyper-elite scene there. When I do, though, I feel I have a useful 'insider-now-outsider' perspective that allows me to see things there more accurately than those who live in that fishbowl 24/7.

It's Still Fantasy-Land

What hit me most strongly upon arriving back in the Menlo Park/Palo Alto area, is how little of the craziness has changed since I left 4 years ago. I don't mean 'unchanged' though; rather that the same craziness is there, just more extreme than ever.

The streets still bustle with hipster techies, fashionista spouses, the shiny Stanford students and the less-shiny venture capitalists. Every time I visit, I'm amazed by the latest generation of specialized stores that have sprung up to attend to every want and whim of this trend-driven population.

Here's a not-uncommon way a lunch break is spent in Palo Alto. First, zip over to Town & Country and drop $65 for a 3-minute cryotheraphy session at The Performist. Then warm up with one of your 3-times-per-week visits to Drybar for a $45 "blowout"  — no hair cut or treatment, mind you; just the styling touch-up needed to maintain your 'fabulous' look for the next 48 hours. Next, grab yourself lunch at Sushiritto (you guessed it: burrito-styled sushi) – but get there early, as you'll be waiting in a long line as this ultra-hip restaurant is only open for a few hours each day. Then for dessert, nab an ice cream sandwich at CREAM (yes, an entire store dedicated to high-end ice cream sandwiches), but be prepared for an even longer line than Sushiritto's…

The belief in the area's bulletproof and never-ending prosperity is as alive and well as I've seen it.

And housing is still the most visible example of this. Prices were insane when I lived there, and they're substantially more insane-r now: 

(Source)

Looking at this chart, I'm reminded that I first arrived in Palo Alto in the fall of 1997 (for grad school). So the data series pretty much encompasses the span of my personal experience watching home prices shoot the moon here — and then set their sights on Mars. It's been nuts to watch. And even more nuts when noting how the pace of increase only accelerated in the years following the credit crisis — perfectly timed, I might add, with the onset of the quantitative easing programs of the Federal Reserve and the other major world central banks. Flood the world with trillions of newly-printed thin-air money and it has to go somewhere… 

In 1997, I remember clearly driving down University Avenue on my way to orientation for grad school and being shocked by a 'For Sale' sign listing a home for $500,000. Who in their right mind would pay half a million dollars for a house? I recall wondering. Well, not quite 2 decades later, that same house is worth 7x (!) more according to the chart above.

Yesterday, driving through the neighborhood I used to live in, it seems every 4th or 5th house has either been substantially renovated by a recent buyer, or completely razed and replaced with a multi-$million McMansion.

My main point here is that, despite recent headlines that the Silicon Valley housing bubble may have popped, there aren't visible signs of it yet.

Trust me, I wish there were. You'll have a hard time finding somebody who has hated the housing scene there more than I have (and still do). Remember, this is the guy who ranted how this $2mil piece of garbage in my old 'hood epitomizes everything wrong with Bay Area housing:

Add that anecdote to the hard data released this week about the skyrocketing cost of renting in the Bay Area:

How Much Should You Make to Afford Rent in San Francisco?

 

For the squeamish, it might be best to look away. For the those with stronger reserve, another data compilation was released today by SmartAsset with arguably bad news. You will need to make $216,219 annually to rent a two-bedroom in San Francisco.

 

This comes on the heels of news that college grads can expect to pay upward of 79 percent of their income to rent in Baghdad by the Bay.

 

This is a 7.4 percent bump up from 2015, which showed that one needed $201,171 annually for a fair market two-bedroom in San Francisco.

(Source)

That is a truly staggering and stupid requirement. And while rising rents are occurring across the country (again: Thank you, Federal Reserve!), the San Francisco Bay Area remains a far outlier when compared to the other major metros across the country:

(Source)

So, I'm sorry to report from the trenches that Silicon Valley's famous "reality-distortion field" is not flickering out.

At least, not yet.

Signs Of A Top

Now, while there aren't yet signs of a correction there, there are plenty of symptoms indicative of a top.

Housing and tech company performance are the ubiquitous topics of conversation in Silicon Valley. That's nothing new. But the tone in which those conversations are being had is.

Homeowners are not oblivious to the dizzying heights house prices have now reached. While they remain smug about the equity gains they're sitting on, they privately admit that the rocket ride can't last forever. Most now predict a period of 'cooling off' will need to happen at some point, though very few have the stomach to consider that prices might actually correct lower. The point is, the ingrained belief that "housing prices always go higher" — which, trust me, is a universal religion out here — is beginning to moderate. Which is sort of akin to the Pope wondering aloud "Maybe those atheists are on to something…"

Of similar momentousness, the all-encompassing faith in the Tech sector to churn out ever more millionaires and billionaires is similarly experiencing a challenge of confidence. It's getting harder for start ups to access investor capital:

Forbes: Tech CEO Shares Difficulties of Raising Seed Funding in Tight VC Market

 

According to a recently released report from PricewaterhouseCoopers and the National Venture Capital Association, funding in Silicon Valley startups fell 19.5% in the first quarter of 2016 compared to a year earlier, and is down 10% for seed stage companies in the first quarter 2016, amidst fears over the global economy and the run-up in startups’ valuations.

 

(Source)

For more established companies, they're having trouble cashing out. The IPO window for Tech stocks is abysmal this year:

Why 2016 has been a terrible year for tech IPOs

 

Only 11 U.S. companies have gone public in 2016, making it the worst start to a year for initial public offerings since 2009, when only four companies made it out of the gate by April 20.

 

At this time last year, 43 companies had gone public, according to Renaissance Capital, which runs IPO-focused exchange traded funds.

(Source)

And the largest perennial powerhouses — companies like Apple, Netflix, Yahoo!, Google, LinkedIn, Twitter — have seen their stock prices flatline or (gasp!) drop over the past year (Facebook is the only notable exception). In fact, many are announcing mass layoffs, both public and stealthy, as I've been chronicling closely since the start of the year.

The world is slowly beginning to wake up to the fact that the Tech industry's track record of birthing world-changing enhancements looks better in past decades than this one. As I've railed about loudly, Silicon Valley has become a too-cozy partner with Wall Street — a partnership that has resulted in a lot more huckersterism than actual value. 

Life in Silicon Valley has evolved around a dependence on the next wave of boom-time money flooding in from the NEXT BIG THING. But right now, the current "big thing" is losing momentum, and there's no obvious fleeter-footed successor poised to take the baton anytime soon.

What happens when a system designed to sell to the "greater fool" runs out of fools?

Theranos: Portend Of A Coming Fall From Grace?

This week, Tech darling and soon-to-be-slain unicorn Theranos announced that it was voiding all test results performed on its proprietary Edison machines over the past 2 years, effectively admitting there is no real value underlying its business. As a result, its private market valuation of $9 billion is now on an express-ride to somewhere much closer to $0.

Here again, I have a personal connection to the story from my time in Palo Alto. Theranos CEO Elizabeth Holmes went to Stanford: a family friend was a close advisor of hers, and a grad school classmate is one of the VC investors in the company. To be clear: I haven't talked with these folks much directly about their involvement with Theranos, but I have an understanding of some of the players involved.

To my eye, the fall of Theranos is a quintessentially Silicon Valley story. A big, brash idea that feeds into the valley's self-adulation as a place where miracles happen. Silicon Valley wants Cinderella-stories like this to succeed. In fact, to support the real estate and Tech funding industries there — it needs them to. Without the influx of new capital and new dream-chasing professionals, the party ends pretty quick — as nobody can afford to live or operate there for very long without a windfall.

Because of this strategy of hope, those involved with Theranos deluded themselves. They clearly didn't conduct their due diligence with sufficient rigor and — based on the folks I know personally (who possess much more brainpower than I, I'll readily admit) — didn't seem willing to admit to themselves how bad things might actually be, even as the evidence mounted month after month. There's nothing terribly unique in this; as Dan Ariely reminds us, we humans are champion rationalizers. Our monkey-brain often derails us with its preference for the soothing lie over the inconvenient truth.

And now, Theranos' dream is dead. Even if there's worthwhile IT to be salvaged, the company's brand (as well as its founder) is now toxic.

I see a lot of similarity in the demise of Theranos and the likely future trajectory for Silicon Valley at large. Loose money enabled valuations to balloon way out of proportion with fundamentals, massive self-delusion fanned by media adulation have kept the system from challenging itself, and yet the farce continued far longer than anyone imagined possible.

Theranos' day of reckoning has just arrived. By itself, it's a single added blemish to the Silicon Valley 'miracle'. But how few more can be sustained before the 'miracle' starts to look more like a 'debacle'?

Answer: fewer and fewer the higher home prices and rents rise, and the prospects of being on the receiving end of a Tech windfall diminish. At some level, there's just no more greater fools left willing to contribute their money or their time given the high cost and cooling upside.

And then like Theranos, Silicon Valley's impenetrable reality distortion field will fizzle, and possibly flicker out. When that happens, like Theranos, the downdraft will be sudden, shocking, and brutal.

via http://ift.tt/1Tk7JYj Tyler Durden

While over the past several months the US has had its share of bizarre stories over the latest liberal craze, namely providing transgender bathrooms at public schools or losing access to funds which promptly enraged conservatives across the nation, the most recent development may also be the most surprising one yet: it appears that as the public debate over the treatment of transgender has hit a fever pitch, Oklahoma republicans have had enough and are now looking to impeach Barach Obama. 

The Oklahoma State Capitol

As Reuters reports, Oklahoma’s Republican-dominated legislature has filed a measure calling for President Barack Obama’s impeachment over his administration’s recommendations on accommodating transgender students, saying he overstepped his constitutional authority. So all the other times Obama overstepped his “constitutional authority”, that one could ignore, but this time he really crossed the, er bathoom, line?

Lawmakers in the socially conservative state are also expected to take up a measure as early as Friday that would allow students to claim a religious right to have separate but equal bathrooms and changing facilities to segregate them from transgender students.

According to the impeachment resolution introduced on Thursday night, Oklahoma members of the U.S. House of Representatives will file articles of impeachment against Obama, the U.S. attorney general, the U.S. secretary of education and others over the letter.

The Obama administration told U.S. public schools last week that transgender students must be allowed to use the bathroom of their choice, upsetting Republicans and raising the likelihood of fights over federal funding and legal authority. That said, the impeachment call seems to be on shaky ground since the letter offered non-binding guidance and did not have the force of law, legal experts told local media.

State Representative John Bennett, a Republican, said in a statement the White House directive was “biblically wrong,” and a violation of state sovereignty.

Alongside the impeachment resolution, Oklahoma lawmakers introduced a bill that could force schools into costly construction, which would be difficult for them to complete after lawmakers significantly cut education funding to plug a $1.3 billion state budget shortfall.  The Oklahoma bill would allow for segregation at school restrooms, athletic changing facilities and showers if a request is made to accommodate religious beliefs. It also allows the attorney general to file lawsuits to implement the changes.

Fans of Obama’s transgender crusade were displeased: Troy Stevenson, executive director of Freedom Oklahoma, an LGBT advocacy group said the measure promoted fear-mongering and was out of place

“In a time when our state is facing an unprecedented economic crisis, our lawmakers should be focused on righting the ship rather than stigmatizing transgender youth,” he said in a statement.

That, or merely acting according to what they believe is right.

Meanwhile, Oklahoma seems intent on a collision course with the administration: the measure was introduced just hours after lawmakers in the budget-challenged state set itself up for a bruising legal fight after approving a bill that would make abortions a felony punishable by up to three years in prison for doctors who perform them.

Abortion rights groups have promised a court battle if Governor Mary Fallin, a anti-abortion Republican, approves the measure.

* * *

And that, in a nutshell, is where US society finds itself at this moment.

via http://ift.tt/1U5oO25 Tyler Durden

Having cashed out a few hundred million dollars worth of stock to some dliuted greater fools – with the help of Goldman Sachs – the ugly face of reality of descending on Elon Musk and his government-subsidized car maker. As Reuters reports, Tesla suppliers are loudly questioning Musk's production goals as he moved up the launch of high-volume production of its Model 3 to 2018, two years earlier than planned.

Rather shockingly, given the huge demand, automaking consultants and supply executives, who asked not to be identified, admitted that Tesla has still not finalized the Model 3 design and specifications, warning that Musk's goals were "implausible," in part because Tesla's battery factory in Reno, Nevada, was unfinished; and furthermore, aluminum, lithium and other materials – already in short supply – "could be another limiting factor."

Tesla Motors Inc has surprised parts makers with plans to move up the launch of high-volume production of its Model 3 to 2018, two years earlier than planned – an acceleration that supplier executives and industry consultants said would be difficult to achieve and potentially costly.

In the past three months, Tesla has told suppliers the company was doubling its original production projections to 100,000 Model 3s in 2017 and 400,000 in 2018, several supplier industry executives familiar with the plans told Reuters.

 

Tesla has taken 373,000 orders for the Model 3 – which has a starting price of $35,000, about half its Model S – and has said it would begin customer deliveries in late 2017. But it has made no promises, and, on earlier models, customers waited months for delivery.

 

Citing "tremendous demand," Chief Executive Elon Musk told analysts on an April call that the company planned to boost total production, including the existing Model S and Model X crossover, to 500,000 in 2018 – two years earlier than its original target and a 10-fold increase over the 50,000 vehicles it made in 2015.

 

Musk said the Model 3's simpler design, new production hires and enthusiastic suppliers would help the company make its goals. He said Tesla would drop suppliers that could not meet deadlines and would bring more parts production in-house than traditional automakers typically do. He did not specify how much or which parts.

Industry experts said Tesla's new goals were extraordinary and raised doubts it could meet them… "They're aiming to be up and running in 2018, so they have two years – and suppliers are wondering if they'll make that deadline."

One complication is that Tesla has not finalized the Model 3 design and specifications, said automaking consultants and supply executives who asked not to be identified because Tesla prohibits them from disclosing contract details.

Musk has said the Model 3 design and engineering would be complete in June, 13 months ahead of the planned production startup.

Under ideal conditions, automakers have launched new assembly lines in 18 months, but they typically take two to three years after the first tooling and supply contracts are signed, several manufacturing consultants said.

 

The handful of North American auto plants capable of building 500,000 vehicles a year are all run by automakers with decades of experience, they said. 

 

One complication is that Tesla has not finalized the Model 3 design and specifications, said automaking consultants and supply executives who asked not to be identified because Tesla prohibits them from disclosing contract details.

 

Musk has said the Model 3 design and engineering would be complete in June, 13 months ahead of the planned production startup.

 

Under ideal conditions, automakers have launched new assembly lines in 18 months, but they typically take two to three years after the first tooling and supply contracts are signed, several manufacturing consultants said.

 

Automaking consultant Ron Harbour of Oliver Wyman said increasing production at the Fremont plant to 500,000 vehicles in 2018 would require more stamping, welding and assembly machinery that "could take up to 18 months to order and install."

 

Jeff Schuster of industry forecaster LMC Automotive said the goals were "implausible," in part because Tesla's battery factory in Reno, Nevada, was unfinished.

 

Aluminum, lithium and other materials – already in short supply – "could be another limiting factor," said Sam Fiorani of AutoForecast Solutions.

We note that Tesla continues to have delivery delays for its Model X SUV. Its Model S also missed delivery targets when launched.

And, as Jalopnik details, build quality remains dismal…

Tesla, the little American car company every other automaker loves to hate, recently lent a Model X to Fortune for a review. The car was not what one might expect of a $150,000 luxury car, unless something like an old Jaguar has been in your ownership history.

 

Fortune adored the Model X for its speed, its infotainment system, and its semi-autonomous mode. Fortune was less enamored with the seat controls that conspired to squish a baby.

 

“The theory is,” veteran auto tester Sue Callaway says as she places an occupied baby seat in the middle row, “the seats move together so the baby doesn’t get squished.”

 

 

“Oh! Nope,” she says, watching the baby seat immediately get pressed up against the back of the fronts. “Baby’s getting squished. That’s not good. It’s not supposed to hit the back of the driver’s seat.”

 

Indeed it is not.

 

Quality issues extended past baby-squishing, with weatherstripping peeling off one of the falcon doors that Tesla itself admitted were more ambitious than advisable. The carpet, as well, was coming off in places.

 

If this was an isolated issue with the Model X, one might figure that this was just a rare preproduction glitch or two. But the Model X has repeatedly been in the news for quality issues. There have been complaints about the car’s windshield, with its doors, its rear seat latches, and assorted other fit and finish problems.

 

Again, these issues once were the norm (decades ago) for ultra-luxury cars as expensive and as exclusive as the top-of-the-line Model X and the Model S. But this doesn’t bode well for people buying low-cost Teslas, or for the people who are expecting a mass produced product from the upcoming Model 3.

 

Jalopnik has reached out to Tesla for comment but has not yet heard back.

Still, all the time that Goldman Sachs and the Wall Street cheermongers pump out self-serving shit to a gullible public looking for a lottery ticket, the likes of Tesla (and Theranos) will continue to defy gravity… until they are Valeant'd.

Goldman compares the potential growth rate for Tesla as comparable to that of auto industry monopolist Ford Model T:

 

 

via http://ift.tt/1YJep0a Tyler Durden

In November 2014, The Obama administration announced a proposal to try and grant a proactive three-year stay of deportation and legal work permits to as many as 5 million illegal immigrants. As a result, the state of Texas led a large group of states suing the government, arguing the proposal violated both federal law and overstepped the president's constitutional powers – in which Judge Andrew S. Hanen agreed with.

Judge Hanen halted the amnesty just days before it was to begin accepting applications in February 2015, however, as the Washington Times reports, the administration was approving amnesty applications during that time, which Justice Department lawyers hid from the court. To make matters worse, even after the court ordered a halt to the whole amnesty proposal, the Department of Homeland Security approved several thousand more applications, in direct defiance of the court's order, and something that was not admitted to the court until much later.

"The decision of the lawyers who apparently determined that these three-year renewals under the 2014 DHS Directive were not covered by the Plaintiff States' pleadings was clearly unreasonable. The conduct of the lawyers who then covered up this decision was even worse." Judge Hanen wrote.

In writing the ruling, Hanen quoted from the scene in "Miracle on 34th Street" when the boy is called to testify to Santa's existence and saying that everyone knows not to tell a lie to the court. Hanen went on to say that that the Justice Department lawyers have an even stricter duty: Tell the truth, don't mislead the court, and don't allow it to be mislead by others.

"The Government's lawyers failed on all three fronts. The actions of the DHS should have been brought as early as December 19, 2014. The failure of counsel to do that constituted more than mere inadvertent omissions – it was intentionally deceptive." Judge Hanen wrote in his ruling.

In court, the government lawyers admitted they'd left the judge with the wrong impression, and expressed regret and sorrow.

Judge Hanen thought about imposing financial penalty on the government, but since taxpayers would end up footing the bill it seemed pointless. Instead, in what may be the greatest court ordered ruling ever, Hanen ordered the the lawyers at the DOJ's headquarters in Washington who practice in any of the 26 states that sued over amnesty to take at least three hours of remedial ethics training a year.

And to top it off, Hanen ordered that the classes must be "taught by at least one recognized ethics expert who is unaffiliated with the Justice Department."

All we have to say about that is bravo Judge Hanen, well played. However, is there a way to somehow extend that order to all elected officials?

via http://ift.tt/1W6HlkR Tyler Durden

While it most likely is just the usual Friday (past) midnight trial balloon by the Nikkei, a media outlet that has promptly become the BOJ’s mouthpiece (recall a week ago the new owner of the FT reported that Abe would delay his 2017 sales tax increase, only to see the premier backpedal when the reaction in the USDJPY was not quite as desired), moments ago the Japanese publication reported that the Bank of Japan will “likely set aside funds for the first time to prepare for losses on its huge holdings of Japanese government bonds should the central bank end its monetary easing policy in the future.”

Nikkei reports that the BOJ has reserved 450 billion yen ($4.07 billion) for the year ended in March. The amount will become known when the BOJ releases financial statements as early as next week. The way the BOJ is preparing for losses is amusing: it is accruing the interest income from the bonds it owns so it can reserve for capital losses on those same bonds once rates spike, to wit:

The BOJ created a framework last fiscal year that permits it to set aside part of the interest income from its JGB holdings, which have ballooned through the bank’s massive monetary easing program. Interest income likely grew about 30% from the prior year to around 1.3 trillion yen in fiscal 2015.

 

Though BOJ Gov. Haruhiko Kuroda has indicated that the bank could expand easing if it faces difficulty achieving its inflation target, the creation of the reserves is a move to prepare for an exit from monetary easing.

 

The central bank’s JGB holdings totaled 349 trillion yen as of March 31, up about 180% in three years. Long-term interest rates, currently in negative territory, will rise and bond prices will fall should the BOJ end its monetary easing once it is sure that Japan is finally breaking free of deflation.

According to Nikkei, the bank estimates that a 1 percentage-point rise in long-term rates lowers the value of its JGB holdings by 21 trillion yen, or about $200 billion, which incidentally is about 50x more than the BOJ is said to be reserving, which implies that the BOJ is expect only a tiny increase in rates.

There will be a problem however if interest rates spike far more than just 1%.. or even 10%. After all, with the BOJ out of the picture, there will be no backstopped buyer of marginal issuance (and deficit funding), which means that the BOJ will almost certainly never be able to get out of the market at all.

Which however explains the trial balloon: the BOJ is merely curious to see how the market will react to the hint that BOJ buying may eventually end (even if it never will).

Meanwhile, just like in the case of the US, the BOJ pays most of its net income to the government, and this payment will decline if the bank sets aside reserves. Furthermore, the central bank’s profits have suffered from the lower value of foreign-currency assets due to a stronger yen. As a result, payments to the government are estimated at 400 billion yen for fiscal 2015, down sharply from 756.7 billion yen in the prior year.

Fiscal 2010 was the last time the BOJ paid less than 500 billion yen to the government. “The reserves are meant to even out swings in profit so payments to the government will not change over the long term,” a BOJ official said.

 

But from a short-term perspective, the lower payment to the government means that taxpayers will shoulder a heavier burden. So while the BOJ’s monetary easing may be propping up the economy and consumer prices, taxpayers essentially are picking up the tab.

If and when the BOJ does withdraw from the market, it will therefore face a double whammy of risks: the threat of soaring bond yields and a just as soaring Yen, in a global risk off move. At least initially: once the BOJ loses all credibility, the Yen will disintegrate as has been the long-running thesis of Kyle Bass and Dylan Grice, as Japan finally unleashes hyperinflation to deal with its massive debt overhang.

It’s a different matter entirely if the BOJ will ever actually follow up with “ending monetary easing policy.” If the past 8 years have demonstrated something very vividly, it is that central banks simply can not escape the vortex of QE, ZIRP and now NIRP. If anything, more easing will have to be added in the coming years as global rates turn ever more negative.

In fact, according to many observers, far from reducing QE, Japan’s next move will be one of terminal easing in the form of helicopter money.

For now, however, let the latest Nikkei trial balloon play out.

via http://ift.tt/1W6HrsY Tyler Durden