Category: Consumer Spending

Saturday Soother – Voter Turnout Edition

The Daily Escape:

Autumn, Blue Ridge Mountains, near Asheville, NC – 2018 photo by RedWhiteTruee

Wrongo guesses that we’ll know Tuesday night whether being an A-hole is a winning strategy for the Donald.

While traveling in Russia, Wrongo finished reading (and recommends) Amor Towle’s “A Gentleman in Moscow”. If you haven’t read it, the story is about a Russian nobleman who is sentenced in 1922 by the Bolsheviks to the equivalent of permanent house arrest in Moscow’s Hotel Metropol. He spends 30+ years living there.

Doesn’t it seem that we have been locked up for the past two years, waiting on the mid-terms? Let’s hope that on Tuesday, the doors will fly open, because we want out. We want a world with fewer lies, with fewer insults, maybe even a return to sanity.

Here’s a thought to launch you into the weekend. Despite Friday’s news about brisk new jobs creation, and the headline unemployment rate being at a 50-year low, MarketWatch reported that just 28% of Americans are financially healthy:

Some 44% of people said their expenses exceeded their income in the past year and they used credit to make ends meet. Another 42% said they have no retirement savings at all.

That’s despite a nine-year-long bull(ish) stock market, and consumer confidence levels nearing record highs. And, there’s more:

The median American household currently holds just $11,700 in savings, according to a recent analysis of Federal Reserve and Federal Deposit Insurance Corp. data by personal-finance site Magnify Money. The top 1% of households in the U.S. by income have a median savings of $1.1 million….The bottom 20% by income have no savings accounts and the second lowest 20% income earners have just $26,450 saved.

Meanwhile, the majority of Americans in a recent survey said their finances have not improved since the 2016 elections. Market Watch quotes Mark Hamrick, senior economic analyst at Bankrate:

All of this is a call to action: We need to make savings, both for retirement and for emergencies a higher priority, so that they aren’t the source of financial regret later in life.

So, all of you politicians who are running on the great economy ought to study up on a few facts, and find a few solutions.

A good start for the rest of us is showing up to vote on, or before next Tuesday.

But Wrongo senses that you’ve had enough, that you need to check out of the news feeds, to stop being carpet-bombed by political ads, and contemplate…nothing. To help you get started on your Saturday Soothing, brew up a large, hot steaming cup of Kenya Konyu coffee, with its sweet, tart and savory notes of dried berries and richly bittersweet flowers ($16.25 for 10 oz.). It comes from Branch Street Coffee Roasters in Youngstown, in the swing state of Ohio.

Since it’s another rainy Saturday in the Northeast, stay indoors and listen to English composer Sir Michael Tippett’s “Concerto for Double String Orchestra”. Here, the Adagio, the middle movement of the Concerto, is played by the Academy of St Martin-in-the-Fields, conducted by Sir Neville Marriner:

Those who read the Wrongologist in email can view the video here.

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Saturday Soother – December 23, 2017

The Daily Escape:

(Hat tip Ilargi)

Nine. Just nine countries voted against the UN General Assembly’s resolution on Jerusalem, demanding that the US rescind its declaration that Jerusalem should be Israel’s capital. That included us. Our major allies like Britain, France, Germany and Japan voted for the resolution, though some allies, like Australia and Canada, abstained. The overall vote tally was 128 to 9, with 35 abstentions, for the resolution. From the Guardian:

Nine states – including the United States and Israel –voted against the resolution. The other countries which supported Washington were Togo, Micronesia, Nauru, Palau, Marshall Islands, Guatemala and Honduras.

Along the way, the world was treated to Nikki Haley telling UN diplomats that she would be taking down the names of those who failed to vote with the US. It may surprise you to know that the Russians call Haley the “Waffle House Bumpkin”. Trump went further, saying:

All of these nations that take our money and then they vote against us at the Security Council or they vote against us…at the Assembly…They take hundreds of millions of dollars and even billions of dollars and then they vote against us…Well, we’re watching those votes…Let them vote against us; we’ll save a lot. We don’t care.

Iraq, Afghanistan, Jordan, Turkey and Egypt voted for the resolution.  Do you think that means that they don’t need the money badly enough to roll over when ordered? Or is something larger at stake?

Stewart M. Patrick, a senior fellow at the Council on Foreign Relations, said:

I think this was a…self-inflicted wound and really unnecessary, clumsy diplomacy on the part of the United States…More than that, I think it symbolizes the self-defeating notion that for the United States, ‘it’s my way or the highway.’

Since the Inauguration, we practice foreign policy, kindergarten-style. Taking names and threatening our allies will not make Trump and/or Haley successful statesmen. And no, this isn’t an example of “The Art of the Deal“: There will be no deal when one country tries to bully the entire world.

There has been lots of right wingnut talk about the US “getting out of the UN”, and it isn’t beyond the realm of the possible with the current administration.

It is truly painful to watch America in decline, both at home, and abroad. And a time when US global leadership is more necessary than it has been since the end of the Cold War. Come on, Trump, give us back the US we love and the US the world needs.

Will he do it? Can he?

Well, it’s Saturday, and if you haven’t finished your participation in Making America Great by maxing out your credit cards, you need a really big soother. Today, we continue with Christmas music.

So brew a hot steaming cup of Red Rooster Coffee’s Holiday Blend, ($14.99/lb.) with its notes of crème brulee, caramel, and gingersnap cookie.

Now get in a chair where you can see your (hopefully) fully-decorated tree and turn on the tree lights, settle back and listen to “L’Adieu des Bergers” (the Shepherd’s Farewell) by Hector Berlioz.

This piece is about Christ’s life immediately following his birth. It is performed by the Mainzer Domchor, (the choir of the Mainz Cathedral). Founded in 1866, it is comprised of boys’ and men’s voices. RenĂŠe Fleming is the soloist:

https://www.youtube.com/watch?v=hOL_No6Z7Hw

First Stanza:

Thou must leave thy lowly dwelling,

The humble crib, the stable bare.

Babe, all mortal babes excelling,

Content our earthly lot to share.

Loving father, loving mother,

Shelter thee with tender care.

Those who read the Wrongologist in email can view the video here.

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Rising Interest Rates Will Add $233 to Monthly Household Expenses

The Daily Escape:

Snoqualmie Falls, WA

We are in the middle of the holiday shopping frenzy, so it may be a bad time for Wolf Richter to mention this:

Outstanding “revolving credit” owed by consumers – such as bank-issued and private-label credit cards – jumped 6.1% year-over-year to $977 billion in the third quarter, according to the Fed’s Board of Governors. When the holiday shopping season is over, it will exceed $1 trillion.

If that’s not bad enough, WalletHub points out that the Federal Reserve is planning on raising interest rates – see here for the credit card interest calculator by Sofi – and that will make credit card debt a lot more expensive, since credit card rates move with short-term interest rates:

The Fed’s four rate hikes since Dec. 2015 have cost credit card users an extra $6 billion in interest in 2017. That figure will swell by $1.46 billion in 2018 if the Fed raises its target rate again in December, as expected.

Everyone expects the Fed to raise rates today. This would bring the incremental costs of five rate hikes so far to $7.5 billion next year. So how do these rate hikes translate for households with credit card balances? Finance charges are concentrated in households that do not pay off their balances every month. Many of these households are among the least able to afford higher interest payments. More from Wolf: (emphasis by the Wrongologist)

195.9 million consumers had a revolving credit balance at the end of Q3, with total account balances of $1.35 trillion. This equals $6,892 per person with revolving credit balances. If there are two people with balances in a household, this would amount to nearly $14,000 of this high-cost debt. If the average interest rate on this debt is 20%, credit-card interest payments alone add $233 a month to their household expenditures.

Economists are assuming that the Fed will hike interest rates three times in 2018. The Fed thinks that the “neutral” rate (the target at which the federal funds rate is neither stimulating, nor slowing the economy) is between 2.5% to 2.75%. Since today’s rate is 1.25% to 1.50%, that is a long way up from the current target range. Again, from Wolf:

Interest rates on credit cards would follow in lockstep. These rate hikes to “neutral” would extract another $8 billion or so a year, on top of the additional $7.5 billion from the prior rate hikes.

But there is a double whammy, because credit card balances will also continue to rise. Rising credit card balances combined with rising interest rates on those balances will produce sharply higher interest costs to people who already can’t pay off their monthly credit card balances.

For many card holders with poor credit, this will eventually lead to default. Credit card delinquencies have started to tick up, from 2.16% in Q1 2016 to 2.53% in Q3. That is a low overall level of delinquency, but we need to look at to losses in the subprime segment (those with the lowest credit scores) and at the lenders that specialize in subprime lending. And there, delinquency rates are jumping.

Debt is not always a choice. A catastrophic medical debt, the death of the primary breadwinner, or loss of employment with no new job for an extended period of time can destroy a lifetime of savings in as little as a few months to a few years.

Since the crash of 2007, a great many people have be unable to find employment that is enough to support a family. And they have taken multiple jobs to try to make ends meet. Or any job that they can find.

It is this financial uncertainty which has a knock on effect for credit scores also. It’s no secret that without a good credit score, loans, mortgages and jobs can be pushed further out of reach. In times like these people often turn to the best credit repair companies as a way of fixing and improving their individual credit. Above all, no matter what your financial circumstances, it’s highly important to regularly check in with your spending and saving habits.

And this is in what economists and politicians say are the best of times, with the lowest unemployment rate since 2000.

Increased costs for consumer credit coupled with increased delinquencies could become a third point reason for populist economic anger. Tax cuts for corporations and the wealthy, and the coming GOP attack on Medicare and Medicaid are also justifiable reasons for economic anger.

Where will voters turn for a solution?

After all, governance has ceased to be a part of the job description of our political parties.

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Retail Stores Are Closing Fast

The Daily Escape:

Cougar with Radio Collar – Griffith Park, Los Angeles, via Nature Photography

Retailers are closing thousands of stores and going bankrupt at a rate not seen since the Great Recession, and tens of thousands of people are losing their jobs as a result. Although thanks to insolvency experts like Bankruptcy Calgary operated by Hudson & Company, solutions are available to help individuals struggling with debt, the atmosphere for retailers seems far more bleak.

Retailers blame Amazon and other online vendors for the lack of physical sales nowadays. This could be true as more and more people do seem to find it easier to order online than physically enter a store to purchase a product. With e-commerce sales booming, more businesses seem to be offering online products. These e-commerce sites can use recurring billing, if they please, to increase their sales. This works by turning customers who would only purchase something once into customers who are regularly making a payment. However, one reason that many businesses seem to succeed is due to software, like samcart, offering their customers a hassle-free checkout. This means that the whole process of ordering online is becoming so much easier for the consumer that it’s not surprising that retail stores are beginning to feel the effects.

While some brick-and-mortar retailers are doing well, many are losing money. The Atlantic reports that:

Overall retail employment has fallen every month this year. Department stores, including Macy’s and JC Penney, have shed nearly 100,000 jobs since October-more than the total number of coal miners or steel workers currently employed in the US.

Wolf Richter has the following chart showing the nature of the problem for retail stores:

But the e-commerce industry won’t rescue out-of-work retail employees. Most warehouses are regional, and located far from residential areas, which means they might not be within a reasonable commuting distance for displaced workers. By contrast, retail stores are typically located near residential centers. E-commerce warehouses also employ fewer people than retail stores, since the warehouses are increasingly automated, and no longer need to buy roll cages from PHS Teacrate or other companies due to not needing stock delivered to smaller stores.

Yves Smith offers this idea: (parenthesis by the Wrongologist)

One of the reason so many real world retailers are hitting the wall so hard is that private equity leverage and asset stripping made them particularly vulnerable. While the losses to online retailers would have forced some downsizing regardless, the fact that so many are making desperate moves in parallel is in large measure due to the fact that…their private equity (PE) overlords have made them fragile.

That’s a new angle for evaluating Amazon’s performance: it’s not that retailers are closing because Amazon is expanding, but Amazon is expanding because retailers are closing. Jeff Bezos should be thanking the PE firms for looting the retail industry.

The Federal Reserve’s low interest rates also made it easier for Private Equity funds to load these retailers up with debt. Management could borrow more money than necessary, pay themselves cash bonuses, and claim “interest rates are low; making payments will be easy“.

They would even show you the math. Of course, that math assumed that store sales would continue climbing in the future. If sales fell, high debt payments could quickly become an outsized burden.

The Private Equity all-stars often follow a particular deal model. After purchasing the retail company, the PE firm sells the real estate owned by the retail company to another entity (owned by the PE fund). Then the retail company makes lease payments to its new landlord. This splitting of the assets into an operating company and a property company allows the PE fund manager to make a cash distribution to its investors early on, producing a quick return on the deal. Later, the property company will be sold.

The problem with this approach is that businesses that choose to own their real estate are typically seasonal businesses, as all retailers are. Or they are low margin businesses particularly vulnerable to the business cycle, like restaurants. Owning their property reduced their fixed costs, making them better able to ride out bad times.

To make this picture worse, the PE firms often “sell” the real estate to itself at an inflated price, which justifies saddling the operating business with high lease payments, making the financial risk in the operating company even higher. Of course, those high rents make the property company look more valuable to prospective investors, who may fail to look close enough at the retailer who is paying the rents.

Companies with little debt generally can survive lower sales. They can engage in cost-cutting, maybe encourage some employees to retire early, etc. It’s easier to survive if they own their own property. But when you’ve got a lot of debt, and servicing that debt requires that sales continue to rise quarter after quarter without fail, then things become a LOT more fragile.

Trump claims he’s created 500,000 new jobs in his first 100 days. Notice that he doesn’t say what these jobs are, or where they were created. Certainly they weren’t in Retail. Or Coal. Or Steel. Those jobs aren’t coming back.

Here is Jonathan Richman with his 1990 song “Corner Store” which laments what towns have lost to the malls:

Those who read the Wrongologist in email can view the video here.

Takeaway Lyric:

Well, I walked past just yesterday
And I couldn’t bear that new mall no more
I can’t expect you all to see it my way
But you may not know what was there before
And I want them to put back my old corner store.

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Is Taxing Robots a Solution to Fewer Jobs?

The Daily Escape:

(Slot canyon with dust devil – photo by Angiolo Manetti)

Yesterday, the Dutch voted in an election pitting mainstream parties against Geert Wilders, a hard-right, anti-Islam nationalist whose popularity is seen as a threat to politics-as-usual across Europe, and possibly, as an existential threat to the EU.

Wilders, who wants to “de-Islamicize” the Netherlands and pull out of the EU, has little chance of governing, as all of the mainstream parties have already said they won’t work with him. Given Holland’s complicated form of proportional representation, up to 15 parties could win seats in parliament, and none are expected to win even 20% of the vote. OTOH, polls show that four in 10 of the Netherlands’ 13 million eligible voters were undecided a day before voting, and there is just 5 percentage points separating the top four parties, so Wilders could surprise everyone.

As Wrongo writes this, the Dutch election results are not known, but PBS NewsHour coverage on Tuesday surfaced a thought about taxing robots. PBS correspondent Malcolm Brabant was interviewing workers in Rotterdam:

Niek Stam claims to be the country’s most militant labor union organizer. He says the working class feel insecure about their prospects because of relentless automation and a constant drive to be competitive. The union is campaigning for robots to be taxed.

Brabant then interviewed a worker:

Robots do not buy cars. Neither do they shop for groceries, which leads to a fundamental question: Who’s going to buy all these products when up to 40% of present jobs vanish?

This isn’t an entirely new idea. Silvia Merler, blogging at Bruegel, says:

In a recent interview, Bill Gates discussed the option of a tax on robots. He argued that if today human workers’ income is taxed, and then a robot comes in to do the same thing, it seems logical to think that we would tax the robot at a similar level. While the form of such taxation is not entirely clear, Gates suggested that some of it could come from the profits that are generated by the labor-saving efficiency…and some could come directly in some type of a robot tax.

The main argument against taxing robots is made by corporations and some economists (Larry Summers), who argue that it impedes innovation. Stagnating productivity in rich countries, combined with falling business investment, suggests that adoption of new technology is currently too slow rather than too fast, and taxing new technology could exacerbate the slowdown.

It can be argued that robots are property, and property is already taxed by local governments via the property tax. It might be possible to create an additional value-added tax for robots, since an income tax wouldn’t work, as most robots are not capable of producing income by themselves.

Noah Smith at Bloomberg argues that the problem with Gates’ basic proposal is that it is very hard to tell the difference between new technology that complements human work, and new technology that replaces them. Shorter Noah Smith: Taxation is so hard!

Why are Western economies stagnant? Why has wage growth lagged GDP growth? Automation is certainly a key factor, but rather than point the finger at the corporations who continually benefit from government tax policies, let’s just assign blame to an object, a strawbot, if you will. That way, we won’t look too carefully at the real problem: The continuing concentration of economic and political power in the hands of fewer and fewer corporations.

Automation isn’t the issue, tax laws that allow economic treason by corporations in their home countries are the issue.

Why is nationalism on the march across the globe? Because fed-up workers see it as possibly the only answer to the neoliberal order that is destroying the middle class in Western democracies.

Let’s find a way to tax robots. Something has to offset Trump’s tax breaks for the rich.

Now, a musical moment. Did you know that “pre-St. Patrick’s Day” was a thing? Apparently, some dedicated celebrators prepare for the day itself by raising hell for up to a week beforehand. With that in mind, here is some pre-St. Pat’s Irish music, with Ed Sheeran singing “Nancy Mulligan” a love song about his grandparent’s marriage during WWII, against the wishes of her parents, and despite their Catholic/Protestant differences:

Those who read the Wrongologist in email can view the video here.

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Debate Prep III – October 19, 2016

“I’m addicted to placebos. I’d give them up, but it wouldn’t make any difference.” – Steven Wright

The nation is addicted to Presidential debates, which cannot even remotely be characterized as a placebo. And tonight’s debate in Las Vegas is unlikely to make a big difference to voters around America, unless one of the Pant Load or the Pant Suit are extremely clever. You can expect that The Pant Load will try to make this week’s WikiLeaks disclosures a torpedo below the waterline for the Pant Suit’s campaign. There are some nuggets in the emails, but do they really add up to all that much?

This from USA Today:

Companies used Clinton fundraisers to lobby [the] State Department. At least a dozen of those same companies lobbied the State Department, using lobbyists who doubled as major Clinton campaign fundraisers. Those companies gave as much as $16 million to the Clinton charities.

Sounds terrible, until you get down to paragraph #26 in the article:

In all, 181 foundation donors lobbied State during Clinton’s leadership tenure, Vox reported last year.

These relationships and giving on their own aren’t illegal, or even unethical. But critics, including Trump, have argued they at least pose potential conflicts of interest.

So, no quid, and apparently, no smoking gun of quo. Trump asks repeatedly how these disclosures are not dominating the news cycle and blames the media for being in the bag for Hillary. The emails often don’t prove what Trump says they do: that the Clinton campaign hates Catholics, that Clinton “openly colluded” with the Justice Department during its investigation of her private email server.

Even if there is some there, there with the emails, the real issue is that The Donald remains the story of this presidential election.

It has come down to a referendum on Donald Trump.

Unless Trump can get more than 43% of the vote, he can’t be president. And focusing on Trump’s personal attributes has been Clinton’s strategy all along. Still, if we fix on personal foibles and temperament, although relevant, we will miss any discussion of the issues.

Take tax plans. Hillary shouldn’t focus on Trump’s taxes. His taxes are relevant, although no worse than Mitt Romney’s low average tax rate: This just illustrates a problem with the tax code that Trump is well within his rights to exploit. The real problem with Trump, when it comes to taxes, is not what he pays or doesn’t pay, but how his proposed tax plan would affect everyone’s tax burden.

The numbers are not pretty.

Trump’s plan is the most Oprah-esque tax proposal since Ronald Reagan in 1980: You get a tax cut! You get a tax cut! You get a tax cut! But it’s mostly a massive tax cut for the top 1%, similar to those proposed by nearly every Republican presidential candidate in recent memory. Without that revenue, the government has to collect more in taxes from middle-class and low-income households, which will not reduce income inequality, or the federal deficit, or grow the economy.

Trump’s plan is spun as a “growth plan”. The idea is that if the US runs huge deficits by slashing taxes, most of that money will be spent, creating wealth and jobs. Sorry, but the failure in Trump’s plan is foreshadowed in the failed economy in Kansas, where the Republicans handed big tax breaks to a few of the highest-income taxpayers and businesses, hoping that would magically trigger an “adrenaline shot” to the Kansas economy. That didn’t happen. Since cutting taxes drastically, the state’s debt load has ballooned to an all-time high of $4.5 billion, a jump of 50% in two years.

So no growth, and mucho debt.

Trump’s plan doubles down on this failed “trickle-down” GOP fantasy as the answer to GDP growth and income inequality. Economic growth will never come from giving tax cuts to the rich. Why? Because they just sock their gains from tax cuts away in offshore tax havens.

Hillary needs to attack the Pant Load’s BS tax plan, not his failure to pay taxes. People should think hard about each candidate’s tax plan and how it could contribute to economic growth before deciding to cast their vote for president. An attack by Clinton on Trump’s tax plan will go directly against one of the core beliefs of Trump supporters, that tax cuts will give them better jobs and pay. Sow some doubt there, and it could pay dividends at the ballot box.

Hillary’s plan is to build infrastructure with tax increases on the rich and corporations. That creates jobs.

This is a message she needs to drive home in tonight’s third presidential debate.

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Will Take-Home Pay Grow?

One of the big questions that we must force Hillary Clinton and Donald Trump to address is: Where will growth in take-home income come from?

If we look at pay, despite recent improvements, real average hourly earnings have declined since the 1970s:

Real Hourly Earnings 2016

Source: Advisorperspectives.com

At the same time, the average hours per week have trended down from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. It is 33.7 hours today. After eight years of economic recovery, it is only up by 42 minutes.

So, take-home pay has stagnated (or worse) for the average American since the Nixon administration. People have coped by having both spouses work, by borrowing under a Bank of America heloc, and by refinancing mortgages when interest rates declined.

But, by 1995, spousal participation in the job market had peaked, at about 60%. Borrowing under home equity lines of credit peaked in 2005 at $364 billion. These loans that were used to pay for remodeling, education costs, or new Ford F-150s were less than half of that amount in 2015, at $150 billion.

After the Great Recession, The only remaining way to boost household cash was mortgage refinance. There were windows to refinance a mortgage in 2009, and again in 2013. The reason was that mortgage interest rates stayed very low. In fact, US 10 year treasuries were at a 60 year low in 2013 at 1.50%, and mortgage rates are tied to the treasury rate. Refinancing mortgages can happen to many people, this is where companies like Polar Mortgage come in to help homeowners out. Homeowners also have the ability to get financial help from the government through the use of federal credit union home loans in order to refinance their homes.

As an example, a 1.5% decline in a mortgage payment on a $250,000 house would save $3750 a year, or a little over $300 a month added to the pockets of the average hourly worker. Taking income tax into consideration, it would take an additional 17.5 hours of work at the $21.45 rate to equal that amount. But that’s not practical. It would require a 52% increase in hours, if you are working the national average number of hours, which isn’t going to happen.

So, if the Federal Reserve raises interest rates, as they seem set to do this month or next, mortgage refinance will no longer be helpful to the vast number of working people. CoreLogic tracks the interest rates on outstanding mortgages, collecting data from mortgage servicers. Their data track the volume of outstanding mortgages by interest rate level for both the number of mortgages, and the unpaid principal balance on those mortgages (UPB).

Their analysis says that few mortgages will be refinanced if rates go up: Most borrowers have mortgages with rates below 4.50%, with 62% of mortgages and 72% of UPB in this range. There are an additional 14% of borrowers and 13% of UPB with mortgage rates between 4.5 and 5.0%.

Since refinancing has costs (legal, title search and insurance, and points), a simple rule of thumb is to add 1% to the current mortgage rate to get a rate at which borrowers would have a financial incentive to refinance. The current Freddie Mac mortgage rate is 3.57%, so the point of indifference for a borrower would be ~4.5%. CoreLogic estimates that only about 28% of the UPB of America’s outstanding mortgage loans are worth refinancing today. And should the Fed live up to their plan, and increase rates by ½% in 2016, an additional 5.5 million borrowers will lose their incentive to refinance.

So, if mortgage rates rise in 2016 as predicted, refinancing won’t improve the financial situation for very many of us.

New Deal Democrat sees all of this and says:

So the bottom line is, we are already in a period…where real gains by average Americans won’t be available from financing gimmicks, but must come from real, actual wage growth. At the moment I see little economic or political impetus to make that happen, even though average Americans understand via their wallets the issue all too well.

We’ve killed our economy.

You’d think after 8 years where most US job growth was in part-time jobs, where hourly income is at the same level as in the Ford administration, where we have the most people ever in poverty, where student debt exceeds credit card debt and automobile debt, people would catch on.

Maybe, but not unless we demand real answers of Hillary Clinton and Donald Trump, and not let the candidates say the plan is to rearrange the deck chairs on the Titanic.

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Are Underwater Car Loans Sustainable?

The auto industry has had a spectacular run since we bailed them out in 2009. We saved it because the auto industry is crucial to the US economy and jobs. Auto sales have accounted for 21% of total retail sales so far in 2016.

The trickle-down effect is huge, from transporting new cars via truck and rail to financing and insuring them, and collecting the tax revenue they generate for state and local governments, sales of cars generate lots of jobs and money for our economy.

But the seven-year boom may be near its top.

Take underwater car loans: Bill wants to buy a new car. His current car has a trade-in value of $20,000. But he owes $25,000 on it because when he bought it new a few years ago, he financed it for 84 months to keep the monthly payment low. He also asked the dealer to roll the amount for tag, title, and license fees into the loan, along with the $2,000 he was upside down on his trade. So he buys a new $30,000 car that now costs $35,000. He may consider financing this with car title loans near me, or he may have other options he can take.

The car is financed with a 4% interest rate loan. If Bill took a five year loan, he would start accumulating positive equity-where the car’s market value becomes greater than its loan balance-midway in the fourth year. However, there are loans that might be able to help for example those that are similar to Ikano Bank VISA as well as looking loans before they take them out. If he took an eight year loan instead, he would be $9000 underwater at the same time, and won’t start accumulating any positive equity until the end of the seventh year:

Positive Equity

Source: Money Sense

So just how big is the problem of negative equity? Since 2011, the number of vehicles traded in with negative equity has ballooned by 37%, and underwater auto loans now account for a record 31% of all vehicles traded in:

Underwater Car Loans

(Chart by Chad Champion, at Bonner & Partners):

One reason negative equity is rising is that lenders have extended the duration of car loans to keep monthly payments affordable. If a customer has a lower monthly payment, she/he’s likely to owe more than the vehicle is worth for a longer period. Bloomberg reported that the percentage of car loans that are longer than six years was 29% in 2015, up from just 9.6% in 2010.

Growth in loans to subprime borrowers is also driving growth in auto sales. Experian Automotive reported last month that poor credit consumers (subprime) now make up a record 20.8% of the new auto loan market – more than one in five new auto loans are going to subprime borrowers. We remember subprime from the housing fiasco of 2008. Subprime is back, but not yet causing alarm bells to ring.

Subprime borrowers pay higher rates: Average rates for subprime loans were 10.36% in the fourth quarter of 2015 while the poorest subprime borrowers averaged 13.31%. At the same time, new car buyers with excellent credit paid 2.7% interest.

The Office of the Comptroller of the Currency has noticed the problem. In its most recent Semiannual Risk Perspective, the banking regulator warned: (emphasis by the Wrongologist)

Underwriting practices and weak loan structures in auto lending are most concerning in banks with high concentrations to try Auto Finance Online. Strong auto loan growth alone does not pose systemic risk…Even as banks have increased capital levels, auto loan portfolios represent greater than 25% of capital at about 15% of banks.

The OCC worries that the rapid growth of auto loan balances are not a problem per se, but the “extended durations of loans caused by lengthening maturity schedules” and the rising loan-to-value ratios are a concern. Together, they “create a longer period of time that banks and consumers are in a negative equity position.”

This is what happens when the players in the auto sales game, both the manufacturers and financiers game the system to front-load sales and profits, thus paving the way for an eventual reckoning.

And here is the other issue: When we export manufacturing jobs to places such as Mexico (who now manufactures for Ford, Chrysler, GM, VW, Toyota, Nissan, Mazda, and Honda and exports 70% of the cars it manufactures to the US), we lose the purchasing power of all those people who used to have jobs in the US auto industry. So corporate America’s solution is to make credit cheap and easy so that working stiffs can leverage themselves even more in order to buy a new car. Obviously, some loans are needed at certain times in peoples lives, if you are looking at how to get a loan there are many websites that can give you a guide.

To be sure, the car buyers are culpable, but the system relies on foolish people to go deeper into debt in order to fuel the system.

Impressive boom to possible bust ? this show is brought to you by corporate America, with support from the Federal Reserve.

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Pacific Gas Gooses Prices: Why?

Pacific Gas and Electric is America’s largest electric utility and the second largest gas utility measured by number of customers. You may remember that their gas pipeline exploded in 2010 in San Bruno CA, just south of San Francisco, killing 8, injuring 66, and burning down 38 homes. The legal fallout is still in the courts, with the trial scheduled to begin on March 8 in US District Court in San Francisco.

PG&E announced a price increase on December 30, when few would be paying attention. SF Gate carried the customer-friendly part of the announcement:

We want our customers and their families to know that we are here to help them make smart energy choices and save money whenever possible…

That’s corporate-speak for turn down the heater, put on another fleece, buy more efficient appliances, and find subsidies available to low-income households.

The increase was effective two days later, on January 1st. It will hike natural gas rates for the average residential customer by 4.0% and electricity rates by a stunning 8.5%, for a combined rate increase of 7%, the steepest since 2006.

Utilities raise prices all the time. But maybe a few things about PG&E’s price increase are worth a look:

• Natural gas prices have fallen steadily since 2008, much of the power PG&E distributes is generated by natural gas. In fact, in its third quarter financial statement, PG&E says its cost of electricity over the first nine months of 2015 dropped 8.8% year-over-year, and its cost of natural gas plunged 36%.
• The California Public Utilities Commission (PUC) agreed in 2014 to let PG&E collect an extra $2.37 billion in revenue from its customers over three years, through the end of 2016. The additional money will pay for maintenance and upgrades to PG&E’s sprawling electricity grid and natural gas pipeline network.
• PG&E pays quarterly dividends of $0.455 per common share. With 489 million shares outstanding, dividends for a year would amount to $890 million.So for the three-year period in question (2014-2016), this amounts to about $2.7 billion, which would have paid for the maintenance and upgrades of its system.

There’s more: In September, PG&E asked the PUC for another $2.7 billion in revenue increases for the three-year period of 2017-2019. That particular amount of money would be used ostensibly to prepare for natural disasters. But, as Wolf Richter reports, over the same period, PG&E would pay out another $2.7 billion in dividends.

The PUC, already under federal grand-jury investigation for its ties to PG&E about the San Bruno disaster, hasn’t voted on this increase. If PG&E had a real regulator, it would be forced to pay for maintenance and upgrades with funds it sourced from something other than rate increases. Particularly when its fuel costs are plunging, and it’s paying out an $890 million annual dividend.

PG&E’s is following the “maximize profits and shareholder value” dictates of a modern market-driven corporation. But in the case of private utilities, the state regulator is supposed to review rate applications and ensure the company is not reaping excessive profits and is charging fair prices.

That the CA PUC allowed these price increases perhaps demonstrates incompetence, or excessive favoritism. Help may be on the way: SF Gate reports that Gov. Jerry Brown shook up the five-member utilities commission, nominating one of his former top advisers, Michael Picker, to be its new president. He also nominated Liane Randolph from the state’s Natural Resources Agency to join the commission. So, perhaps the back-room deals are over, but Californians will have to wait and see.

Capitalism, like any game, needs referees who are beyond influence. The clear operating strategy of the “free market capitalists” is to have regulators of all stripes squeezed by lower funding and by packing the regulatory boards with industry insiders. Far too many of the referees (regulatory agencies) are insiders in the industry game.

Maybe there is help on the way in California. If not, maybe it’s time to put a few corporate heads up on pikes in the California sun!

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