• Mike V.

Weekend Reading


Housing Starts & Permits Explode Higher In August, Led My Multi-Family


After last month big rebound in permits (and drop in starts) both were expected revert in August. But, instead, they both went higher:

Housing Starts +12.3% (+5.0% exp).

Building Permits +7.7%(-1.3% exp).


The Fed Is Getting Ready to Cut Rates Again. That Could Hurt the Economy, Not Help It.


As the Federal Reserve prepares to lower its key federal-funds rate by another one-quarter percentage, it’s worth asking whether ultralow interest rates actually do more to hinder the central bank’s goal of promoting growth. That’s the question provocatively posed by three academics in an essay on Project Syndicate. To cut to the chase, Ernest Liu and Atif Mian of Princeton University, and Amir Sufi of the University of Chicago, argue that the abundance of cheap capital encourages economic concentration, which stymies growth. Textbook theory tells us lower interest rates ought to encourage firms to make productivity-enhancing capital investments in technology, the trio write. That should spur the economy’s expansion. Lower financing costs reduce the hurdle rates for capital investments. Lower rates also increase the present value of future revenues from those investments. All stuff from introductory courses in finance. In the real world, however, this effect is stronger for industry leaders than the also-rans, they continue. Leaders respond more strongly to a decline in interest rates, in part because they have access to the lowest-cost capital. As a result, the rest of the field is discouraged, and they curb their investments, lowering productivity.

The result is greater concentration at the top. Industries become more concentrated and give rise to “lazy monopolists.” Since the early 1980s, when interest rates started their decline from historic heights, there has been “growing market concentration, rising corporate profits, weaker business dynamism, and declining productivity growth,” Liu, Mian, and Sufi write. For investors, a portfolio emphasizing market leaders and avoiding laggards generates positive returns as interest rates decline, they continue. But for the economy overall, ultralow rates’ effect of increasing market concentration, and thus hurting productivity, may cause more pain than benefits. The benefits have been spread unevenly, helping those with the greatest access to inexpensive money, rather than those who can put it to the best use in the economy. But the beneficiaries can’t be faulted for taking advantage of the distortions resulting from policies they didn’t make.


US Car Ownership Costs Up To Record Highs and Delinquencies Soar


A new report by the American Automobile Association (AAA) indicates new car ownership costs have reached its highest levels since the automobile travel firm began tracking costs in 1950. A new car will have an annual average cost of about $9,282, or $773.50 per month, based on owners driving about 15,000 miles per year. The finance portion of the annual vehicle cost rose 24% this year compared to 2018. While the average cost per year is $9,282. The report said small gas-powered cars cost about $7,114 per year. Pickup trucks and SUVs average well over $10,000.

A breakdown of the costs are seen below:

Small Sedan: $7,114

Hybrid: $7,736

EV: $8,320

Small SUV: $8,394

Medium Sedan: $8,643

Medium SUV: $10,265

Large Sedan: $10,403

Pickup Truck: $10,839

Small sedans appear to be the real winner for affordable transportation, meaning that fuel costs and debt servicing payments are somewhat manageable for the bottom 90% of Americans. Consumers on average are spent $32,590 in Aug. up 5.2% YoY, according to car-buying advice site Edmunds. The average interest rate was 5.8%, the same as a year earlier, but the average loan terms are being pushed out to almost 70 months. Delinquencies 90 days past due up to 4.6%.



Bloomberg: European Car Sales Plunge, Deepening Industry Woes


European car sales fell sharply in August, deepening the woes of an industry battling sluggish demand in key markets and the challenge of rolling out electric vehicles. Registrations dropped 8.4%, the steepest monthly decline this year, according to the European Automobile Manufacturers Association. In addition to the risk of a recession in Germany, carmakers are also facing a slowdown in the Chinese car market. European sales over the year to date are down 3.2% and the continent’s five biggest markets all contracted in August, with Spain and France posting the biggest slowdowns. The drop last month brought registrations down to 1.04 million units. Nissan and Fiat Chrysler saw the biggest slowdown in August sales at 47.5% and 26.5% respectively.


Michigan Could Be In A Recession In Next Couple Months


According to a new LendingTree study, Michigan has the highest probability of entering an economic downturn later this year. The study warned that Michigan, Hawaii, and Montana have the highest risks of a recession. The highest, however, is Michigan, with a 58.86% probability of a recession by 4Q19. The state's coincident index's growth rate fell into negative territory in July, confirming the local economy has already started to decline. If the coincident index, created by the Federal Reserve Bank of Philadelphia to gauge economic development in a state's economy, has YoY growth rates for two or more consecutive quarters, then LendingTree said a recession would be imminent.


MIT settles class-action suit that snared Fidelity


The Massachusetts Institute of Technology has reached a settlement agreement in a class-action lawsuit that alleged a quid pro quo arrangement with Fidelity Investments related to the university's 401(k) program. Ms. Johnson, a "life member" of MIT's board of trustees, was linked to the lawsuit through Fidelity's 20-year-old 401(k) plan record-keeping agreement with the university. The lawsuit alleged that MIT secured Fidelity's record-keeping services and used its mutual funds against the advice of consultants in exchange for donations from Fidelity to the university. MIT rejected the idea of conducting competitive bidding in 2015. Shortly thereafter, Fidelity donated $5 million to MIT, representing the school's largest donation in more than 15 years. MIT had received more than $23 million in donations from Fidelity since the record-keeping relationship began.


Raymond James to pay $15 million over improper charges to clients


Three different business groups under the Raymond James umbrella will pay $15 million as part of a settlement with the SEC, which found that the businesses had improperly charged advisory fees on inactive retail client accounts and charged excess commissions for brokerage customers who bought certain unit investment trusts. The SEC order found that that Raymond James & Associates Inc. and Raymond James Financial Services Advisors Inc. failed to consistently perform promised ongoing reviews of advisory accounts that had no trading activity for at least one year, according to a statement by the SEC. Because they did not conduct the reviews properly, they failed to determine whether the clients' fee-based advisory accounts were suitable. The SEC also found that the same two Raymond James groups recommended that their brokerage customers sell UITs before their maturity and buy new UITs without adequately determining whether these recommendations were suitable or based solely on earning a commission. This resulted in the customers incurring, and the Raymond James brokers receiving, greater sales commissions than would have been charged had the customers held the UITs to maturity and then purchased new UITs.


Bloomberg: GM’s Mary Barra Bets Big on an Electric, Self-Driving Future


The Monday after last Thanksgiving, Mary Barra, chief executive officer of General Motors Co., announced the automaker’s biggest layoff since its 2009 bankruptcy. Five North American factories were marked for closure. Six thousand hourly jobs in the U.S. and Canada would soon be eliminated, and about 18,000 salaried employees would have until the end of the year to consider a buyout package. GM needed more than a third of the salaried personnel to accept. Fewer than 2,000 did. The remainder would have to be let go, which they were, starting in February.


Taking vast resources from businesses that make money and moving them toward businesses that (so far) lose mountains of it is obviously a large and risky bet. But the gamble isn’t the decision itself. It’s the timing. GM, which is pushing hard into electrics and racing into autonomy faster than any other carmaker, could be blowing cash for years before there’s any payoff. Already, its Cruise Automation unit has postponed plans to deploy autonomous cars this year. If driverless and electric vehicles take off more slowly than Barra expects, then GM will have prematurely jettisoned thousands of skilled veterans and killed off its smaller gasoline models, leaving the company even more vulnerable to a spike in fuel prices than it is now. Worse, it could cede a chunk of profits from the remaining decades of the internal combustion era to others.


Barra is adamant that GM will sell a million electrics a year in the very near future, while lowering costs and gaining an economy-of-scale edge that Elon Musk’s Tesla Inc. would envy. In autonomous driving, Dan Ammann, CEO of Cruise Automation, believes a small group of companies will divide a trillion-dollar market. That’s the potential that has Barra risking so much.


You can glimpse Barra’s vision in an underground garage in San Francisco, where dozens of white Chevrolet Bolt EVs emblazoned with orange Cruise Automation logos await testing. Cruise is the startup GM bought in 2016 for $1.5 billion; it was losing money then and continues to do so. Last year, Barra dispatched Ammann, at the time GM’s president, to run the division, which has since attracted $6.15 billion in capital from SoftBank, Honda Motor, and T. Rowe Price. (GM still owns a majority stake.) With each investment, GM’s share price has risen, suggesting that Cruise has been boosting the stock as much as old-school GM itself has. The investments also help GM develop the technology while reducing the burden and risk to its profitable core business, Ammann says.


Silicon Valley is rife with driverless technology startups. Ammann predicts a great winnowing. “If you don’t have thousands of engineers working on this, and billions of dollars of capital to spend, and deep integration with a car company, then your chances of success are very, very low,” he says, speaking in one of Cruise’s six offices around San Francisco. “As of right now there is only one company—which is us—that has all of those things in place.”


Only Ford Motor Co. comes close to having GM’s suite of assets and investors, now that it’s bought a controlling stake in self-driving software company Argo AI LLC and lured Volkswagen AG to join as a paying partner. Other rivals are moving with greater caution, most notably Toyota Motor Corp., whose leadership thinks autonomous driving could be decades away. For GM watchers with modestly long memories, Barra’s grand vision might conjure former CEO Roger Smith, who in the 1980s squandered almost $100 billion on factory robots and nonauto ventures such as Hughes Aircraft and Electronic Data Systems while GM’s car business shrank.


But how could any CEO simply turn her back on a windfall in ride-hailing and related services (particularly delivery) that McKinsey & Co. sees generating $1.3 trillion in revenue globally by 2030? And how could Barra discount the possibility that a too-timid GM could become the next Kodak or BlackBerry? With Amazon, Apple, and Waymo chasing the same bounty, “car companies face greater risk of nonaction than action,” says Morgan Stanley analyst Adam Jonas. Barra portrays the stakes in starkly more personal terms: “If we don’t take the steps to keep the company healthy for not just the next few years but the next few decades, then shame on me.”


Barra’s early days as CEO didn’t suggest she’d be a china breaker. Growing up in the Detroit area—her father was a GM die-maker and United Auto Workers member—Barra fell in love with an older cousin’s red Pontiac Firebird convertible. With a degree in electrical engineering and a Stanford MBA, she rose through GM’s manufacturing ranks, making stops in so-called soft departments such as internal communications and human resources, and was once the technical assistant to former CEO John “Jack” Smith Jr. The postbankruptcy board of directors saw her as an underused talent and in 2011 slid her into product development, the engineering works where self-proclaimed car guys create new models. In 2014 she became CEO; two years later she added the chairman title.


Coming out of its rapid-fire, 40-day bankruptcy in 2009, GM had downsized U.S. operations, Barra says, but still had unfinished business, including serious international restructuring. At a budget meeting in 2015 in one of GM’s tubular glass towers in downtown Detroit, her overseas lieutenants wanted cash for new models in countries where GM was losing money as it chased market share. “We have to do this,” she recalls being told. “I said, ‘We don’t have to do anything.’ ” Later, GM said it would retrench or mostly stop manufacturing in Indonesia, Russia, and Thailand. Two years after that came the sale of German Opel, the U.K.’s Vauxhall, and other assets to PSA Group of France.


Around the same time, Ammann says, GM noticed the growth of Uber Technologies Inc. and began to wonder how it could handle that kind of threat. Add in the work Google was doing with self-driving technology (before it renamed its self-driving business Waymo), and it was clear GM had to move on both fronts or risk missing the biggest possible change in personal transportation since the automobile itself. In January 2016, GM invested $500 million in Lyft Inc., Uber’s smaller rival, with the intent of marrying GM’s self-driving technology with the ride-hailing brand. GM was also concerned that its driverless development was lagging those of some Silicon Valley startups. One was

Cruise Automation, founded by Kyle Vogt, who’d previously sold gaming website Twitch Interactive Inc. for $1.1 billion. Cruise was retrofitting cars, including Vogt’s Audi A4, with a self-driving system the company planned to peddle as an aftermarket product.


During test drives, GM’s own driverless vehicles were having difficulty avoiding parked cars and making left turns against oncoming traffic, problems the company thought Cruise could help solve. “The tech team saw that Cruise could move more quickly than GM could,” says Alisyn Malek, who worked then for GM’s internal venture fund and has since co-founded a self-driving technology startup called May Mobility. In courting Cruise, GM dangled, in addition to the $1.5 billion investment, the Chevy Bolt, an electric vehicle with loads of onboard power to run computers. And, crucially, GM had the factories to churn out hundreds of thousands of cars. If Vogt and his investors wanted to see their technology actually change American car culture, GM told them, this was their best shot.


The other piece of Barra’s transformation was going electric. GM designers came up with 18 different prototype vehicles using the carmaker’s next-generation battery pack. They included sedans, crossover SUVs, sports cars, and autonomous vehicles for ride-sharing, all built on the same platform. Barra, Ammann, and Mark Reuss, then product development head and now Ammann’s successor as GM president, inspected the vehicles under the company’s brightly lit metallic dome at the engineering center in September 2017. All the vehicles were built atop a frame that housed a flat battery pack in the floor.


“The purpose,” says chief designer Mike Simcoe, “was to show that we could reuse the electric vehicle architecture and make vehicles that run the gamut.” Building a variety of model types on the same platform would greatly lower the costs of producing a full line of EVs and give GM a crack at what’s eluded Tesla: a profitable business in electric cars. Reuss expects to sell a million EVs a year globally and make money on them. They won’t generate gas-engine-size margins at first, but eventually they will, he says.


At the tech center, Reuss goes to a whiteboard. He draws a line inclined upward at a 45-degree angle, signifying how GM will pay more and more over time to make compliant gas burners as fuel-economy and other regulations become more stringent and the company begins to run out of low-priced ways to make cars lighter and engines more efficient. Reuss then draws a line that plunges downward through the first, representing the projected decline in the cost of electrics. EV battery packs once cost more than $1,000 per kilowatt-hour of energy. That’s dropped to $150 to $200 per kWh, according to McKinsey. Reuss says that when the number gets below $100 per kWh, GM can make an EV profitably. That’s also when electric cars get competitive in price with conventional cars.


When Reuss made a similar presentation to Barra, her takeaway was that GM eventually could make money on EVs without charging $50,000 or more like Tesla. Rather than hope regulators go easier on carmakers or wait for consumers to fall in love with the electric drive, Reuss says, GM decided to push its way into the still-tiny market for battery-powered cars, betting that it could make them appealing and profitable. In

October 2017 he announced GM would be selling 20 all-electric models by 2023. More than half are targeted at China, where government incentives make EVs an easier sell. Reuss is so sold on the electric drive, he’s moving to develop electric trucks. (GM was close to investing in startup Rivian Automotive, which plans to sell electric pickups and SUVs in 2020, but the deal fell apart and GM went back to designing its own vehicles.) The company has also toyed with the idea of an electric Hummer, though an electrified Cadillac or GMC SUV seems more likely. Powering any of those tried-and-true Detroit behemoths with batteries would be about as big a turnabout as GM could make.


As GM lays off old-line engineers, Reuss is hiring coders, software and artificial intelligence engineers, and people skilled in battery chemistry. Instead of using contractors to develop auto infotainment and cybersecurity, GM is bringing the work in-house. At Cruise, Ammann will double staff, to 2,000 people, and almost none, he says, will be from GM. The Cruise website shows more than 300 openings, with the largest number in software engineering. GM will continue to hire traditional automotive engineers, says Brian Irwin, managing director of Accenture’s automotive and industrial practice, but the company is also scouring places such as Carnegie Mellon, MIT, and Stanford for computer-science talent. Suddenly the car guys are the wrong kinds of nerds.


In addition to Barra’s town hall meeting, Reuss hosted one with GM’s engineering staff. He declines to generalize the staff’s reaction but says he got more than 1,000 responses to his meeting and people at least seemed to understand what GM is trying to do, and some embraced the changes.


“She’s damned if she does and damned if she doesn’t”

Chevy Bolts lose about $9,000 apiece—a big gap to close. While it’s a given that GM’s EVs need to get better fast, Barra at the same time has to keep money flowing from GM’s traditional businesses even as U.S. and China vehicle sales slide. (Never mind the threat of recession and the toll of the strike, however long it lasts.) “She’s damned if she does and damned if she doesn’t, really,” says David Keith, an assistant professor at MIT’s Sloan School of Management who’s followed the industry shift at GM and other companies. “Wall Street wants both.”


One possible solution to Barra’s either-or problem is in place at GM’s assembly plant in bucolic Orion Township north of Detroit. The Bolt is built there, and so is the gas-powered Chevrolet Sonic. Some of the Bolts shuttle from the main line to a few open bays where workers attach sensors and other technology that enable the cars to see for themselves. “This is the only facility in the world that makes internal combustion cars, EVs, and autonomous vehicles at the same time,” says Jack Hund, plant launch operations manager. “That should give us job security.” It also relieves Barra, for now, of having to spend billions of dollars on new EV factories before it’s clear that consumers will actually buy the cars.


Barra is also looking to shave costs by hiring more temps, a significant issue in the strike. “Job security is always a big issue,” says UAW Vice President Terry Dittes, the

union’s chief negotiator with GM. “This is a tough time for our members. It’s not just limited to a couple of issues.” The union has repeatedly criticized the company for investing in Mexico while laying off U.S. workers. Another common refrain is that the UAW sacrificed when GM needed it, and now hourly workers ought to get theirs. “We want to see reciprocation for what we gave to the company,” says Bryan Moore, a forklift driver who works at GM’s Detroit-Hamtramck plant. That factory was on last November’s hit list; one of the union’s goals in negotiations is to keep it open.


Barra seems prepared for that sort of reaction. When GM was planning last November’s announcement, management didn’t even make a plan to have its Washington staff do preemptive damage control with the Trump administration and the Michigan and Ohio congressional delegations. Barra calculated that she needed to withstand the heat to prepare GM for a near-term downturn and long-term upheaval—and, eventually, if all goes according to plan, success.


“It’s hard when you’re in the focus of all the criticism. You have to stay steadfast,” she says, without mentioning Trump or the union. “One of the things I learned in the bankruptcy is, if you have a problem or a challenge, it never gets better over time, you have to address it. Once you know what you need to do, you need to do it.”

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