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The Wrongologist

Geopolitics, Power and Political Economy

Call It the Great Virus Crash of 2020

The Daily Escape:

Desert bloom on Siphon Draw Trail, AZ – photo by ericatect

That was the term used on Wednesday by Ed Yardeni, president of Yardeni Research:

“It’s all at once a health crisis, financial crisis and economic crisis. We need to fix the health part of it before we have it solved, but we can take financial and fiscal steps to blunt its effects.”

JPMorgan Chase said it forecasts a 14% decline in gross domestic product in the second quarter. That’s enough to scare anyone. In a partial response, the Trump administration suspended evictions, authorized the Defense Production Act, and is eyeing a stimulus package worth about $1 trillion.

The headline is that Trump wants to give Americans direct cash assistance. He wants to send two $1,000 checks to many Americans. Beginning April 6th, $250 billion would be issued, and another $250 billion would be issued beginning May 18th. Payments would be tiered based on income level and family size.

The Treasury Department is circulating a two-page sheet of priorities that it wants to see in the final deal:

  • Part of it is a $50 billion “airline industry secured lending facility” that would allow it to make direct loans to “U.S. passenger and cargo air carriers”.
  • The Treasury would also earmark $300 billion to help small businesses avoid mass layoffs.
    • Eligible borrowers would be companies with less than 500 employees.
    • Loan amounts would be limited to 100% of 6 weeks of payroll, capped at $1540 per week per employee.
  • The Treasury also wants Congress to allow it to temporarily guarantee money market mutual funds. Some are worried that an investor panic could lead to a run on these funds. This was done before during the Great Recession.
  • Finally, there would be a $150 billion fund to prop up other sectors, including hotels.

And Wednesday was another day when Trump appeared in front of the press, attempting to look as if he’s a war president. The bad news was that they again halted trading on the stock markets during his press conference.

At Wednesday’s close, the Dow was down another 1,338 points. We’ve now lost almost all of the gains accrued during the Trump administration. Nearly every asset class – stocks, bonds, gold, and oil – fell as investors fled to the safety of cash.

Mr. Market has decided that cash is king. The smart money can’t decide whether Trump’s offering too much stimulus. If so, things must be really bad. And if he’s not offering enough, then there’s no leadership.

Here’s one way to look at the Dow’s performance:

  • First 1153 days of Obama’s presidency +67%
  • First 1153 days of Trump’s presidency  +0%

The WH needs to shut him up. Each time he speaks, things get worse for the rest of us.

Inside this crisis is perhaps the biggest political challenge for Democrats: They have to agree to help an incompetent president and his Party avoid killing their constituents.

That’s a bitter pill, particularly in an election year.

It isn’t a stretch to see how Democrats would be painted as obstructionists if they fail to support what Trump wants at a time when millions of people need a cash bridge to help them across economic difficulties.

Wrongo thinks helping people is a good idea, and a total of $2,000 is better than nothing, but what will it really do? The average US mortgage payment is over $1,000, while the median rent for a 1-bedroom apartment is $1,234. So for a couple, in most cases, one month’s housing costs will eat up about 25% of the total cash from the government. The rest will go to car expenses, the cell phone, perhaps student debt payments. Maybe, if people can stretch, it will last two months.

It’s helpful, but far from enough if employers remain closed for two months or more.

And loans to small businesses? Will small businesses willingly take on more debt when they can’t be sure when their income will return, or if the business will survive?

Any loans to large corporations is a huge mistake. The big four US airlines – Delta, United, American, and Southwest – whose stocks are getting crushed because they will run out of cash in a few months, would be the primary recipients of that $50 billion bailout. But together, they incinerated $43.7 billion in cash on share buybacks since 2012. Now they are looking to get that back from the taxpayers. Those buybacks enriched the very shareholders that Trump now wants to bail out.

Perhaps Trump said it best, although it was a while ago: “We’re seeing a stock market like no one has ever seen before.”

Trump spent the first three years of his presidency trying to erase Obama’s legacy.  Now, The Great Virus Crash in Trump’s last year will erase his.

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We’re In Uncharted Territory

The Daily Escape:

Sunset, Factory Butte, UT – photo by goat_chop56

Blog reader David K. emailed:

“Now, what do we common folk do?  Start our “victory gardens” and shelter in place?  Volunteer to help our local farmers raise food? Hoard?  Wish I had a great idea, because I agree that our leaders don’t have a clue how to respond.”

That gave Wrongo pause. What do those of us who aren’t part of the “smart money” crowd supposed to do, particularly if what we’re facing is a worldwide depression? John Pavlovitz frames the existential issues quite clearly:

What happens if the stores run out of essentials for good?
What if you run out of money to stockpile them?
What if your neighbors stop sharing with you?
What if the government won’t help you?
What might you do then?

Politicians say we’re at war, but as Kunstler says: “At least in wartime, the bars stay open. That’s how you know this is a different thing altogether from whatever else you’ve seen in your lifetime.”

We’re attacked by a novel virus that’s created a completely novel social and economic situation. By definition, we aren’t prepared for an abrupt crash of both our social fabric, and our economic well-being.

Our politicians have no answers, despite most of them having been around for the 2007-2008 Great Recession. The Fed hasn’t done us any favors since then, either.

Last Saturday, Wrongo said that we’re crossing a threshold between what we know and an unseen future. Our traditional systems are no longer capable of keeping society and the economy on an even keel. Nobody really knows how deep and how harsh this will get, but the situation presents two questions:

  • How much disorder will we have to endure?
  • What does the world look like when this thing is over?

All this is happening in an election year, when the entire government and the political parties’ power structures are vulnerable, and could change. We are facing a new reality, for which no one has any answers.

Politics being what it is, the White House and the Congress are trying to work together to come up with solutions. On Monday, Trump gave another press conference on COVID-19. During his talk, the stock market dropped nearly 3,000 points. It was the market’s worst day since Black Monday in 1987.

The smart money was behind Trump in order to get its corporate tax cuts, but now, they’ve voted with their money. And Trump’s starting to look a little bit like Herbert Hoover.

Sen. Mitt Romney (R-UT) floated Democrat Andrew Yang’s idea of giving every American $1,000. He was joined in principle by Sen. Tom Cotton (R-AK). We’ll see if this is just more Republican grandstanding, or if they actually back a real plan of support for working people.

With Trump, you can expect to see bailouts for several industries, including banks, airlines, casinos and cruise lines. Imagine: Casinos are asking for help from the guy who only knows how to bankrupt casinos.

Reuters reports that the US airline industry said that it needs $50 billion in grants and loans to survive the dramatic falloff in travel demand from the COVID-19 outbreak. This is just more socialism for America’s corporations.

Two thoughts: First, $50 billion is higher than the book value of all the airlines combined. Why should they have any of our money? Either Republicans are for free market capitalism, or they should just shut up. Most of these airlines have implemented stock buyback programs when they should have been building contingency funds instead.

Second, this $50 billion should be added to whatever Congress spends on small businesses that are forced to close due to quarantine, or on parents forced to stay home to take care of kids who aren’t going to school anymore. They’re the ones who are really hurting.

We’ve lived through a time of unprecedented affluence. We’ve told ourselves we deserved it all, that we were entitled to all that our country has provided.

But that’s most likely over, and it might not return in Wrongo’s lifetime.

We have to think about what must change if we are to have a functioning society and economy in the decades to come.

The list of all the things that we need to change is far too long to enumerate here. At a minimum, we need to reform capitalism, make health insurance universal and strengthen worker’s rights.

We have to do a better job of sharing the wealth. It we don’t do that voluntarily, our children’s children’s generation will come and fight us for what we have.

To protect our families and their future, we need to become even more active politically in order to make these and other changes happen.

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Saturday Soother – October 5, 2019

The Daily Escape:

Fall colors, Adirondacks, NY – October, 2019 photo by nikhilnagane

You can be forgiven for not focusing this week on the UAW’s strike against GM, which is now in its 19th day. Shares of GM have plunged by double digits since the strike began, mostly because the automobile sector has reported weak sales figures. Wolf Richter reports that:

“New-vehicle deliveries in the US…were…flat, at 4.32 million vehicles in the third quarter. For the nine months, deliveries were down 1.6%. This puts new vehicle sales on track for about 17 million…in 2019, the worst level since 2014, and below 2000….”

So, automobile unit sales are at the same level that they were 20 years ago in 1999-2000. With the strike, GM vehicle production has ceased at nearly all of its North American plants. This hasn’t really hurt GM yet, because they had around 90 days’ sales worth of vehicles in inventory as the strike started. They typically have more like 60 days on hand. So shutting the plants helps work down their inventory bulge.

Back to the strike: Julianne Malveaux reports in the WaPo about how GM betrayed the UAW after the union made sacrifices when GM nearly folded in 2008:  

“General Motors was on its knees in 2008. Amid a global financial crisis, the company was so financially challenged that it had no choice but to accept a federal government bailout. In 2009, the United Auto Workers joined the feds in saving GM, making concessions on wages and benefits to rescue the beleaguered company.”

The partnership paid off for GM. The company has earned $35 billion in profits in the last three years, partly as a result of the concessions the workers made over a decade ago.

But, does GM owe the UAW anything in return? The protracted strike shows that GM feels it doesn’t owe them much. Darrell Kennedy, a UAW striking worker said in a video:

“We gave up a cost-of-living increase, a dollar-an-hour wage increase we were due, tuition assistance and more…”

The union wants to include non-union workers who are part of GM’s three-tiered wage system. Those hired before 2007 (the union members) are Tier One workers who earn roughly $31 per hour, plus guaranteed pensions. Those hired after 2007 are Tier Two workers, earning about $17 an hour and have the opportunity for 401 (k) participation. The third tier are temporary workers who earn less than Tier Two workers and have no benefits.

The union wants better pay for Tier Two workers, and a path to job security for Tier Three employees. But since GM plans to move toward electric vehicles which use less labor that gas-powered cars, they are uninterested in commitments that reduce their flexibility in the future.

In business, Wrongo learned the hard way that making concessions, and expecting it to create good will that helps a future negotiating position, is usually a bad idea.

But, in this case, it’s difficult to work up enthusiasm for either side.

For example, GM spent $10.6 billion since 2015 buying back its own shares, some of which went to the UAW, who originally owned about 17.5% of GM after the bailout. The UAW has now sold over half its GM stock. Since the 1960s, GM has consistently demonstrated poor management. Their share of the automobile market has decreased from about 50% to about 17%. If it wasn’t for the government bailout, GM wouldn’t be here.

The UAW is rightly trying to grow its membership by advocating for GM’s Tier Two and Three employees. OTOH, in 2009, the union didn’t agree to cooperate with GM out of any sense of benevolence. They were saving their jobs. Finally, since the bailout, GM’s UAW workers have a profit-sharing deal. In 2018, the 46,500 UAW hourly employees earned up to $10,750 each.

Wrongo is very pro-labor, and often pro-union. In this case, it’s difficult to get behind the UAW’s strike.

Time to move past which State Dept. official in the Ukraine texted what about the Bidens, or how much more blatant Trump’s overtures to foreign governments will get. Let’s enjoy a Saturday Soother!

Start by thinking about the leaves piling up outside. Friday night brought frost to Mansion of Wrong, so our fall clean-up is in full swing. If it’s warmer where you live, enjoy the last of the warm weather.

No coffee today, get outside and do something physical. But before you go out, let’s remember the great Jessye Norman who died last Monday. She was a gifted singer with one of the greatest and most beautiful voices ever. She had all the qualities to make a performance both convincing, and memorable. Here she is singing “Ave Maria” by Schubert:

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

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Boeing: Poster Child for Capitalism Reform

The Daily Escape:

La Sal Mountains in background, Canyonlands NP and Colorado River in foreground, UT – 2019 photo by Larnek

The Boeing 737 MAX story is getting worse. Just when you thought you had the whole story, you find more ugliness underneath. Ralph Nader published an open letter to Dennis A. Muilenburg, CEO of Boeing, and it’s quite the takedown, capturing the essence of Boeing’s problem:

“Aircraft should be stall-proof, not stall-prone.”

The stall-prone MAX was supposedly fixed, but then it failed. Nader has a personal interest in the MAX’s problems, since his niece, 24-year-old Samya Stumo, was among the 157 victims of an Ethiopian Airlines flight crash last month. Here’s a part of his letter:

“Your narrow-body passenger aircraft – namely, the long series of 737’s that began in the nineteen sixties was past its prime. How long could Boeing avoid making the investment needed to produce a “clean-sheet” aircraft and, instead, in the words of Bloomberg Businessweek “push an aging design beyond its limits?” Answer: As long as Boeing could get away with it and keep necessary pilot training and other costs low…as a sales incentive.”

Nader draws a connection between Boeing’s decision to “push an aging design” and their financial engineering.

“Did you use the $30 billion surplus from 2009 to 2017 to reinvest in R&D, in new narrow-body passenger aircraft? Or did you, instead, essentially burn this surplus with self-serving stock buybacks of $30 billion in that period?”

Nader notes that Boeing is one of the companies that MarketWatch labelled as “Five companies that spent lavishly on stock buybacks while pension funding lagged.” Their pension fund is only 79.6% funded. More:

“Incredibly, your buybacks of $9.24 billion in 2017 comprised 109% of annual earnings….in 2018, buybacks of $9 billion constituted 86% of annual earnings….in December 2018, you arranged for your rubberstamp Board of Directors to approve $20 billion more in buybacks.”

Nader’s focus on stock buybacks shows that Boeing had the capital to invest in developing a new plane. From Bloomberg in 2019:

”For Boeing and Airbus, committing to an all-new aircraft is a once-in-a-decade event. Costs are prohibitive, delays are the norm and payoff can take years to materialize. Boeing could easily spend more than $15 billion on the NMA, according to Ken Herbert, analyst with Canaccord Genuity….”

NMA means the New Middle-of-the-Market Aircraft. Boeing has already spent a total of $30 billion in share repurchases, with another $8 billion to come in 2019. A new aircraft would have cost half of that amount.

The main reason may have been Boeing’s earlier problems with the launch of the 787:

“In the summer of 2011, the 787 Dreamliner wasn’t yet done after billions invested and years of delays. More than 800 airplanes later…each 787 costs less to build than sell, but it’s still running a $23 billion production cost deficit.…”

The 737 MAX was Boeing’s answer. It allowed them to continue their share buybacks while paying for the 787 cost overruns. Abandoning the 737 for a new plane would’ve meant walking away from its financial golden goose. OTOH, someone should be responsible for the 346 deaths Boeing’s MAX has caused.

Finally, there are reports that some pilots are giving the MAX a vote of no confidence. The FAA has opened another 737 Max investigation based on reports on the FAA whistleblower hotline:

“A source familiar with the matter says the hotline submissions involve current and former Boeing employees describing issues related to the angle of attack sensor — a vane that measures the plane’s angle in the air — and the anti-stall system called MCAS, which is unique to Boeing’s newest plane.”

Reuters says:

“American Airlines pilots have warned that Boeing’s draft training proposals for the MAX do not go far enough to address their concerns, according to written comments submitted to the FAA.”

Stock buybacks like Boeing’s were once illegal because they are a type of stock market manipulation.

But in 1982, then President Reagan wanted to do his banker buddies a favor. So his Securities and Exchange Commission passed rule 10b-18, which created a legal process for share buybacks. That opened the floodgates for companies to start repurchasing their stock en masse.

Is it too much to ask that the Boeing CEO be asked to resign, even if he did kill a lot of people?

After all, wasn’t he only trying to maximize shareholder value?

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We Saved GM For This?

The Daily Escape:

Redfish Lake, ID – 2018 photo by potatopatriot

From the Guardian:

General Motors announced yesterday that it will halt production at five North American facilities and cut 14,700 jobs as it deals with slowing sedan sales and the impact of Donald Trump’s tariffs.

The cuts will also hit 15% of GM’s 54,000 white-collar workforce, about 8,100 people. And some 18,000 GM workers have already been asked to accept voluntary buy-outs. By next year, it will no longer make the Buick LaCrosse, the Chevrolet Impala, or the Cadillac CT6 sedan. It’s also killing the Chevy Volt plug-in hybrid. GM’s CEO Mary Barra:

We recognize the need to stay in front of changing market conditions and customer preferences…

Changing market conditions” means that GM’s sales are down despite offering enormous cash incentives to potential buyers. GM’s new-vehicle deliveries in the US plunged 11% in the third quarter, and are down 1.2% for the year. In Canada, GM’s sales have dropped 1.6% so far this year.

GM’s goal in restructuring is to save $6 billion in cash flow a year by year-end 2020. But saving all this money will cost a lot: GM estimates it at $3.0 billion to $3.8 billion, including asset write-downs, pension charges, and up to $2.0 billion in employee-related and other cash-based expenses.

GM will have to borrow this money. They said they expect to fund the restructuring costs through a new credit facility. The money has to be borrowed because GM blew through $13.9 billion in cash on share buybacks over the past four years:

Source: Wolfstreet.com

Despite spending $14 billion on share buybacks, the price of GM’s shares fell 10% over the same period.

You’d think that GM, a company that went bankrupt not too long ago, would be conservative in how it uses its cash. Nope, they wasted their cash on stock buybacks, and now they have to take out loans in order to reposition the company in its market.

Failing to anticipate where their market is going isn’t a new GM story. It had a 46% share of the car market in 1961, and now has a 17.6% share. They emerged from bankruptcy in 2009, only to be laying off workers and shutting plants in 2018.

Some history: Through the Troubled Asset Relief Program, the US Treasury invested $49.5 billion in GM in 2008 and recovered $39 billion when it sold its shares on December 9, 2013. We lost $10.3 billion. The Treasury invested another $17.2 billion into GM’s former financing arm, GMAC (now Ally). The shares in Ally were sold on December 18, 2014 for $19.6 billion netting $2.4 billion.

Net, GM has cost taxpayers $7.9 billion, while the top decision-makers spent $14 billion largely to enrich themselves.

How were they enriched? Share buybacks boost stock prices. Usually the salary and bonus plans for top executives in public companies are keyed to share price, so the incentive to prop up the share price includes a personal reward. The Chairman and Board set the compensation plans for the CEO and C-suite. The composition of Boards is strongly influenced by the major shareholders, including the large stock funds, who want share price gains, along with a few buddies of the CEO.

We’ve just witnessed a decade of stock buybacks by large firms. They are doing that as opposed to investing in R&D, plant efficiency or market expansion. But companies can only go so far with financial engineering before they actually have to improve their businesses, and now GM has been burned by share buybacks.

This is more corporate greed that leads to the little guy facing real suffering when jobs are lost.

GM is a shot across the bow. The auto industry will follow with additional capacity reduction. Volkswagen has already warned that the shift to Electric Vehicles (EV’s) will drastically cut employment at its plants that manufacture internal combustion (IC) components. EV vehicle production is far less costly than IC vehicle production, so this will be a real and ongoing issue.

OTOH, car manufacturers all have an EV option, but people are still buying Toyota’s, Honda’s and Mazda’s, even though only a few are EV’s.

This new GM “plan” seems more like a smoke screen for being caught AGAIN behind a market that is moving away from them.

America: A sucker for saving GM in 2008.

And possibly, a sucker-in-waiting when the latest, greatest plan to make GM great again only works out for GM’s executives.

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Saturday Soother – August 18, 2018

The Daily Escape:

The Kimberley, Western Australia

Anything happen while Wrongo was away? Seems like it was pretty much business as usual: Trump takes away Brennan’s security clearance, Manafort’s case goes to the jury, bridge disaster in Italy, and Turkey’s currency fell again.

But, on Wednesday, Sen. Elizabeth Warren (D-MA) introduced the “Accountable Capitalism Act” in the Senate. She then set out her logic in a Wall Street Journal op-ed, which drew the usual Neanderthal responses from America’s capitalists.

Warren notes that as recently as the early 1980s, conservative groups acknowledged that corporations were responsible to employees and communities, as well as to shareholders. This is a good time to mention that there is no legal obligation to “maximize shareholder value”. The Supreme Court has never made a decision on it, nor has Delaware, the state where most large companies are incorporated.

Warren, from her bill:

But in the 1980s, corporations adopted the belief that their only legitimate and legal purpose was “maximizing shareholder value.” By 1997, the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners”.

More from the bill:

This shift is a root cause of many of America’s fundamental economic problems. In the early 1980s, America’s biggest companies dedicated less than half of their profits to shareholders and reinvested the rest in the company. But over the last decade, big American companies have dedicated 93% of their earnings to shareholders.

Warren’s point is that corporations have special privileges under our laws. Those privileges should warrant that corporations also have special responsibilities.

That’s not a completely new idea, it was the point of the New Deal regulations. FDR wasn’t an economic revolutionary – he was a member of the elite who saw plenty of room in America for himself and his friends. He understood that the pure capitalism of his time would destroy both the elites and the country if it didn’t change.

So FDR saved capitalism by making it more equitable and less predatory. His plan worked until the 1980’s. But now, the Republicans want to take us back to the 1920s.

Capitalism again needs to be changed/saved, and Warren is taking a small step to do just that. She wants to significantly transform shareholder rights to force corporations to have the social responsibility that comes with personhood, as well as the personhood rights already generously provided to them by the Supreme Court. More from Warren:

My bill also would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors. At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures. To address self-serving financial incentives in corporate management, directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback.

Warren knows that Corporate America is in love with share buy-backs. Warren seems to accept William Lazonick’s observation that:

 …since the mid-1980s net equity issues for non- financial corporations have been generally negative, and since the mid-2000s massively negative.

In the modern era of CEO-kings, owners take more money out of corporations in the form of buybacks and dividends than they put in via new investments.

Even if her bill goes nowhere, Warren is educating those who believe that “maximizing shareholder value” is enshrined in civil law. Warren, along with a few progressives, continue to set much of the agenda for whoever wins the 2020 Democratic nomination.

OK, time to cruise into the weekend, wearing your flip flops. Time to shut out Omorosa and Trump.

Time for your Saturday Soother. Let’s start by brewing up a strong cup of Motozintla Caiaphas Mexico coffee ($14/12 oz.) from Patria Coffee in Compton CA. There is a feel-good story about the brewer, Geoffrey Martinez, here.

Now, settle back in an air-conditioned room and remember Aretha Franklin. Wrongo is reminded of the Steely Dan lyric from 1980: “Hey nineteen, that’s ‘Retha Franklin, She don’t remember the Queen of Soul.” The singer laments that his too-young girl friend has no idea who Aretha is. Well, everyone knows who she is today.

Aretha was many things, but few know that she occasionally performed opera. Here is Aretha at the Grammys in 1998, filling in for Luciano Pavarotti at the last minute when he was sick, and singing “Nessun Dorma”. She clearly doesn’t have the breath control of true opera singers, but it’s still a riveting performance.

Wrongo can’t embed the video he wants you to see, and all of the other YouTube videos of Aretha’s “Nessun Dorma” videos are for some reason, blocked today, so click here.

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Saturday Soother – July 8, 2017

The Daily Escape:

Marble Caves, Patagonia – photo by Clane Gessel

Any idea which investor-types are the largest buyers of US stocks? It is the corporations themselves, buying back their own stock. They are followed by Exchange Traded Funds (ETFs). Here is a graphic:

From Bloomberg:

The entities shoveling more money into the stock market than any other this year, as has been the case for the past few years, remain corporations. Buybacks are on pace to reach nearly $550 billion, or $150 billion more than ETFs.

None of that cash is going into new markets, new products, R & D, or innovation. The buyback is equivalent to the CEO saying: “I’ve got no idea what we should be doing to improve profits or market share”.  Arne Alsin at Forbes said this:

For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed. And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.

Alsin suggests that buybacks are big because we’re in a period of technological disruption. New industries like cloud computing, electric cars, and streaming video are rapidly changing the world. But older companies are slow to adapt, and rather than investing in R & D (or simply holding onto cash) the corporate boards of legacy businesses are bolstering stock prices the only way they know how: buying back their stock.

Alsin offers Hewlett-Packard as an example:

In the last decade, the company has invested $47 billion in stock buybacks — which is nearly double the company’s current market capitalization. That risk is senseless. HP knows they are facing existential threats from upstart competitors, but instead of paying out dividends or letting cash accrue on the balance sheet, HP is choosing the riskiest option.

Buybacks are the result of several converging forces: pressure from activist shareholders; executive compensation programs that tie pay to per-share earnings and share prices that buybacks can boost; increased global competition; and fear of making bets on products and services that may not pay off.

This financialization of non-financial firms increasingly crowds out other types of investment, to the detriment of lower level employees, whose jobs are less secure. It can hurt long-term investors, who hold these stocks in their 401(k)s and pension plans.

Serving customers, creating innovative new products, employing workers, and taking care of the environment are not the objectives of these firms.

So think carefully about the companies you invest in, or buy from.

Enough worrying for this week! Time to unstress. Grab a cuppa Vermont Artisan Coffee & Tea Company’sDarkest Roast”, $11.25/lb. (It is available in decaf), settle into your favorite chair, and listen to “Ashokan Farewell” performed by Jay Ungar and Molly Mason Family Band, live in the Folk Alley studio at WKSU 89.7 FM. WKSU is Kent State’s college radio station:

Wrongo supports Folk Alley, and recommends that everyone should. Ungar composed Ashokan Farewell in 1982. It is written in the style of a Scottish lament. Ungar sometimes introduces it as:

A Scottish lament written by a Jewish guy from the Bronx.

Ungar says that Ken Burns heard the song in 1984, and asked to use it in his (then) upcoming PBS series, “The Civil War”. The original version and a few other versions are heard 25 times in the show, for a surprising total of 59 minutes and 33 seconds of the 11-hour series. For the non-math majors, that is 9% of the show!

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

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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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More About Taxpayers Subsidizing Corporations

Yesterday we talked about how apartment rents can’t be afforded by minimum wage workers. Today, we look at one industry with low wage workers, the full-service restaurant industry. Full service restaurants are the large name brands like Appleby’s, Cracker Barrel, Chili’s, Outback and Olive Garden.

Full service restaurants employ over 4 million people and that is expected to grow by nearly 10% by 2022, which means that these companies are in a profitable market segment. The top 5 full service chains made $705 million in profits last year, while paying out another $751 million in dividends and stock buybacks.

A new report by the Restaurant Opportunities Center (ROC), shows that five of the ten lowest paid jobs as reported by the Bureau of Labor Statistics (BLS) are in full-service restaurants. Since many full-service restaurant workers receive wages below what is needed to meet their basic necessities, these workers rely on taxpayer-funded programs in order to meet their basic needs. We pay the full-service restaurant industry a double subsidy:

• High numbers of full-service restaurant workers are on public assistance
• By paying a less-than-minimum wage, customers are paying restaurant workers’ wages directly through tips

The ROC’s analysis looked at utilization of public assistance programs to estimate annual benefit expenditures for families of full-service restaurant workers for the years 2009-2013. Here is a summary of their findings:

• Nearly half of the families of full-service restaurant workers are enrolled in one or more public-assistance programs
• The cost of public assistance to families of workers in the full-service restaurant industry is $9,434,067,497 per year (that’s $9 billion for the math-impaired)
• Tipped restaurant workers live in poverty at 2.5 times the rate of our overall workforce
• The taxpayer underwriting of social programs for low-wage workers in a single Olive Garden is $196,970 annually.

ROC estimated that low wages and lack of benefits at the five largest full-service restaurant companies in the US cost taxpayers an estimated $1.4 billion per year. They focused on the major means-tested public programs that provide income supplements for working families. These included Medicaid and Children’s Health Insurance Program, or CHIP, the federal earned income tax credit (EITC), food stamps (the Supplemental Nutrition Assistance Program, or SNAP), basic household income assistance (Temporary Assistance for Needy Families, or TANF).

Since 1991, the federal tipped sub-minimum wage has been set at $2.13 per hour, but states may establish a minimum wage that is higher than the federal government’s. So restaurant workers in 22 states receive the federal sub-minimum wage of $2.13 per hour, while restaurant workers in 20 states receive higher state sub-minimum wages of up to $5.00 per hour. Restaurant workers in eight states receive the full minimum wage.

Women make up 66% of all tipped workers, and people of color make up 40% of the total. Unsurprisingly, their poverty levels are higher in states that pay a $2.13 sub-minimum wage than in states that pay one minimum wage for both tipped and non-tipped workers.

You will pay more for a meal at most of these restaurants than at the fast food places. And that cost will go up if you believe in a fair wage for a fair day’s work. Naturally, the industry, represented by the National Restaurant Association is fighting any increase in the minimum wage for restaurants. This is something ALEC has been working with the National Restaurant Association and state governments to fight.

How about if the 535 well-coiffed rubber stamps in Washington start by raising the wages on any companies where public assistance subsidizes payroll wages? Why should taxpayer money be going to fund stock buybacks and bonuses to restaurant chain CEOs?

We could dream big, of tying the minimum wage to the cost of local resources like housing. Given the problem we reviewed yesterday, the minimum wage could be linked to how many hours is necessary to pay a month’s rent and utilities.

Every low wage worker needs a place to sleep when they aren’t working. It shouldn’t be on the street so that their employers can repurchase more stock.

On our dime.

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Monday Wake Up Call – November 3, 2014

Are you tired because you got an extra hour’s sleep last night? Let’s get your brain started with a question: Who benefits it the government funds the development of new technology?

Answer: Private corporations.

Economist Mariana Mazzucato’s book about the role of the State in innovation, The Entrepreneurial State says that the image of a useless State at odds with a dynamic private sector is a myth. Mazzucato reveals in multiple case studies that the opposite is true; the private sector is only willing to invest after someone in a garage has a good idea that must be commercialized, or after the State makes a seed investment.

She describes how it worked with Apple’s iPhone and Google’s search engine. In both cases their popular consumer products benefited from state financing of basic research. For the iPhone, some of the technologies that make it “smart” were funded by the US government, such as the global positioning system (GPS), the touchscreen display, and the forerunner of the voice-activated personal assistant, Siri.

As for Google, development of its fundamental search algorithm was funded by the National Science Foundation. Plus, of course, there’s that thing called the Internet, another government funded venture, which makes the iPhone “smart”, and makes Google searches useful and valuable.

The right-wing myth is that the government needs to be completely out of the way of business, except for providing tax and regulatory incentives for private companies, to make them “want” to create the products they sell.

But, in the real world, many successful companies harvest the work of others and repackage proven technologies into successful products. In the 21st Century, companies often just mine the surface of their technology estate. When “innovative” companies are hugely profitable, often they buy back their shares and/or raise dividends, but do not invest that much in their long-term futures.

Finally, despite the fact that some companies directly benefit from taxpayer-funded technologies, they “underfund” (via tax breaks and holding profits offshore) the government that helped develop technologies that led to their success.

The obvious way for the public to ‘profit’ from socialized risk is to retain some ownership of the technologies that underlie those successes.

Another myth that needs to be exploded is that companies will not introduce new products if they can’t own 100% the intellectual property behind the products. Not true. Today, they often share their technology ownership with other firms. And it is inconceivable that a growing public estate of licensable technical know-how would sit under-exploited, if it could be licensed by corporate America.

Monday’s breakfast buffet of linkage:

Heard of the 27 Club? The idea is that pop stars are more likely than the general population to die at age 27. Not true, but they do tend to die much younger than the rest of us.

Of course milk is good for you! Well, maybe not as much as the milk-industrial complex wants you to believe. Swedish researchers took two groups, one with 61,000 women and the other with 45,000 men, and followed them for 20 years to see if milk intake was related to fractures or to death. Apparently, not so much. Maybe you should give Almond milk a try.

Using CDC data, a study finds that high rates of ADHD diagnoses correlated directly with state laws that penalize schools financially when students fail. An ADHD diagnosis can take a student out of the statistics. The five states that have the highest rate of diagnoses — Kentucky, Arkansas, Louisiana, Indiana and North Carolina — are all over 10% of school age children. The five states with the lowest percent diagnosed — Nevada, New Jersey, Colorado, Utah and California — are all under 5%.

The US has changed its H-1B record retention policy. The US Department of Labor said that records “are temporary records and subject to destruction” after five years, under a new policy. But, the H-1B visa lasts 6 years. The total database is about 1GB, so what’s the issue?

The Air Force doesn’t have enough mechanics for its new F35 fighter: The reason is political. The Air Force was counting on training A-10 mechanics, but Congress is blocking the Air Force’s plan to retire the A-10 aircraft. It could take 12 months longer than proposed to get the F-35 in the air, if the A-10 stays online.

International News:

Japanese journalists didn’t do independent reporting about the Fukushima melt-down, they simply reported the press releases of Tokyo Power and the government. Now some are speaking out. Sound familiar?

The war between the banks and phone companies over mobile banking in Kenya heats up. After the huge success of mobile banking in Kenya, commercial banks began to invest in mobile phone-based banking, including selling their own SIM cards instead of using those issued by mobile phone providers. Now, the mobile phone operators are crying foul.

When the TuNur project in the Tunisian Sahara comes online in by late 2018, it will provide clean and reliable power to more than 2.5 million UK homes. The project will be connected to the European electricity grid via a dedicated cable from Tunisia to Italy. The UK participated in funding the project.

Your wake-up song is from Trigger Hippy, a new roots super-group founded by Black Crowes drummer Steve Gorman, and singer Joan Osborne. It is an amalgam of country, blues, soul and rock. Here is “Rise up Singing”, so time to rise up:

 

Let this thought guide your week:

Service to others is the rent you pay for your room here on earth. – Muhammad Ali

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