Communist Cuba Turns 50

"Castro said Cuban managers need to demand more from their workers, who receive free education and health care and subsidized food rations but on average earn only $20 a month." ~ Reuters UK.

Speaking from direct first-hand experience turning 50 is a milestone I'd have sooner done without. In the case of Cuba, middle-age has found the island nation greying at the top, a little wider at the waist and short in the wallet.

It is interesting that under tough economic time the communist nation (Cuba) decreases the benefits for its citizens while the (alleged) capitalist nation (USA) increases benefits.

Hugo Chavez, Congress, The President and the U.S. Auto Industry: Or, Everything I Need to Know About Macro Economics I Learned Stealing Lunch Money

Economic analyst and tin-plated Socialist dictator-for-life Hugo Chavez recently characterized President Bush as being, “… to the left of me now,” describing the U.S. actions to prop-up the failing financial sector.

An amusing quip, to be sure, delivered before a meeting of international intellectuals discussing the merits of socialism. Mr. Chavez’s comments are amusing as they are wrong.

Accustomed to doing business his way (e.g. confiscation) in the worker’s paradise of Venezuela, he failed to mention the economic nicety applied in the U.S. wherein ownership rights are usually recognized.

Mr. Chavez believes that the duty industry in his home country is to help the poor rather than protect shareholder value.

And that brings me once again to the discussions regarding the bailout for the automotive industry where ownership rights are taking a back seat. Here is a listing of the terms and conditions required by the Congress and the Treasury Department followed by my comments:

1. Firms must provide warrants for non-voting stock. Comments: Absent from this term is the price of the warrants. Typically, these equity-like securities have a price attached to them – usually above that of common stock. The issuance of warrants means (essentially) that the U.S. government is taking an equity position in the automobile industry.

2. Firms must accept limits on executive compensation and eliminate perks such as corporate jets. Comments: Hogwash. There is a price attached to hiring talent. If you limit compensation to executives you limit the talent pool from which any company can draw. This falls nicely into the (false) belief by many to the Left that success is an artifact of luck and that work and sacrifice stand independent. My first-hand experience is that the highly successful individuals are very hard workers.

3. Debt owed to the government would be senior to other debts, to the extent permitted by law. Comment: Whoa. Item #1 said that warrants would be issues and warrants are equity instruments. Now you tell me that it is debt. Well, Congress: which is it?

4. Firms must allow the government to examine their books and records. Comment: Reason enough to decline the deal. I’d like the concession to sell the “bait” for the Congressional “fishing expeditions” that would be sure to follow.

5. Firms must report and the government has the power to block any large transactions (> $100 M). Comment: If Congress (e.g. the U.S. Government) is a warrant holder, then they should have the same voting position as any other equity stakeholder. Why is gov’t ownership more valuable than that of any other shareholder? For those of you who read Orwell in high school: wasn’t there something in Animal House about everyone being equal, but that some are more equal than others?

6. Firms must comply with applicable Federal fuel efficiency and emissions requirements. Comment: Ah, finally the “red meat” of the affair. May I offer an alternative thesis to the U.S. automobile makers problems? I offer that the ENTIRE problem with domestic car production is the distortion of the market created by artificial mileage (not so for emissions) standards. Every car maker was doing their damnest to provide product that the U.S. buyer desired. It was only after gasoline hit $4.00 per gallon that customers suddenly demand higher fuel efficiency vehicles. Now that gas is below $1.60 per gallon those Hummers are looking attractive again. If Congress want to distort the market: they should have the guts to add a tax on the price of a gallon of gas such that it is stabilized at $5.00 per gallon. It would have the benefit of being a prime mover in decreasing demand for large (inefficient automobiles), raise revenues and ensure that every supporting member of Congress was voted out of office during the next election cycle.

7. Firms must not issue new dividends while they owe government debt. Comments: Again, why does one form of equity have greater voting rights than another. This sounds like something Comrade Chavez would support.

Bottom line: There isn’t much difference between the position of Mr. Chavez and the Congress when it comes to the U.S. auto industry. It exists to provide pay and benefits to its workers – and, the stockholder be damned.

Even More Random Thoughts

Residential Debt Service Ratio.
The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required
payments on outstanding mortgage and consumer debt. The value of DSR peaks in Q3 and Q4 of 2006 when it touched 14.4% an increase of 7.5% over its low of 13.5% in Q2 of 2004. What does this mean? Well, I have a couple of thoughts:
1. A 7% increase in DSR should not have been an issue.
2. Could it be that the 7% WAS an issue because consumers held so much debt and was unable to support that minor increase?
3. What are the trends for consumer debt (I'll check on that later)

Version 2.0
Have seen a lot of This Version 2.0 and That Version 2.0 over the past few weeks. Maybe it has always been there and I am only now conscenious of its existance. The 2.0 stuff seems to exist in areas which are slightly tekkie: seemingly trying to align themselves with Web 2.0 attributes. I am sure the Marketing wonks would have a term for that. I wonder if there will be similiar excersions into Version 3.0 and Version 4.0 down the road and what that will mean.

Designated Hitter
I am not a fan of the NY Yankees. Last evening a spent a few minutes listening to WFAN out of NYC. They noted that the Yankees will, "lead the league in DHs...the last time I checked only one can play at a time..." The sports talk guys were noting how many 35+ year old players are on the Yankee roster. The DH reference meaning that the team was overloaded with high-paid, under-motivated, less-than-athletic players. It is a curiousity that it takes a large market (NY) to support that sort of player salary structure: This could not exist in Kansas City.

Free Money - If you can get it.

The Federal Open Market committee meets on Tuesday the 16th of December and there is every indication that they will reduce the Federal Funds Rate from its current 1% to .5%.

Chew on that number for a moment. The Federal Funds Rate is being decreased from 1%.

Why do the funds rates continue to sink? A number of easily identifiable reasons:

1. Households and businesses aren't borrowing because interest rates are too high.
2. They aren't borrowing because they are afraid the recession will worsen.
3. They can't get a loan from banks that are even more afraid than they are.

I, for one, believe that the rate cut will not do much good in the current environment of economic fear and risk aversion. The situation does beg the question as to what can be done. Fed policy of reducing interest rates and Treasury policy of spend, spend and spend some more can only go so far.

Consumers are the prime mover of the U.S. economy. The lay-offs, unemployment and daily horrors of economic reports has almost everyone scared out of their wits. November 2008 was the first time in a very long time when outstanding consumer credit balances decreased (we paid off our credit cards). Until the consumer gets involved - there will be no recovery.

Bottom line: The U.S. economy is beginning to look a lot like the Japanese economy of the early 1990s - and that is a very bad thing.

Forecasting the Past

The author Nassim Nicholas Taleb explains in his book, The Black Swan that is more difficult to forecast the past than it is to forecast the future.

To prove that point he gives the example of an ice cube and the resultant little puddle of water which exists after it melts.

Forward looking: Given the size of the ice cube, the air temperature, the flatness of the surface upon which the ice cube rests an individual with engineering skill could do a good job of describing what that puddle of water will look like after it melts.

Backward looking: Now, starting with that puddle of melted ice Taleb asks, how does one begin to forecast what the ice cube looked like before it melted? Not so easy forecasting the past. There is an infinite number of shapes that the ice cube could have taken.

Now, that brings me to the ongoing discussion regarding the American automakers. Currently, Congress is looking at the car makers (the puddle) and peering backwards in time to determine which sort of cars they should have been making (the ice cube).

That members of Congress have focused on inconsequential matters (salary of executives, modes of travel to Washington, etc) tells you all you need to know about the seriousness of their discussions.

Absent from the discussions in Congress has been empirical evidence from either the car makers or Congress. The car makers have been too eager (in my opinion) to play Congress' game. Perhaps we cannot forecast the past, but we can look at real evidence and determine of the artifacts therefrom add or subtract from the problem.

Here is the sort of empirical evidence I'd like to see:

* From Detroit - Projections of capacity versus likely demand. I have followed the proceedings closely, and I have not seen hard evidence of capacity (how many of this or that type of car can be made). There has been discussion - but no evidence. How can Congress possibly go forward without knowing capacity???

* From Congress - Evidence that Americans will buy the sorts of automobiles that they (Congress) desire us to buy. There has been a fair amount of brow beating by the Congress against Detroit regarding their building inefficient vehicles (which the American consumer seems to prefer incidentally).

* From Congress - Explanation of the loss of rights by the shareholders of the automakers if an Auto Czar is empowered.

Bottom Line: The absence of empirical evidence in the hearings with Detroit tells us this is not a facts-based proceeding.

Car Executives Drive for Cash - Updated

I don't know this for a fact, but I suspect that the Auto Executives who will be before Congress today didn't use their corporate aircraft to fly to DC.

3:30pm UPDATE: "This time, Mulally and Wagoner were making the more than 500-mile drive from Detroit to Washington in company cars, their firms announced. Chrysler said Nardelli would not travel by corporate jet but declined to specify his plans, citing security considerations." Washington Post

Observation: I guess executives are more productive when they sit in traffic. Also, will Congress be flying coach?

It was instructive that when members of Congress sent away the heads of the Detroit auto makers, that they were directed to return with "Business Plans" to make their industry "Viable".

Words mean things.

First of all: I find it mildly amusing that Congress deems itself competent to evaluate Business Plans. Members of Congress wouldn't recognize the difference between Business Plan and the wine list from the Capitol Grill.

Secondly: Why "Viable"? Why not "Profitable"? Well, my thoughts are that viability is a soft word that can mean pretty much what Congress wants it to be. Profit is something measurable - you can evaluate success and failure when you have metrics.


Harry Ried (D-NV) and Nancy Pelosi (D-CA) will be evaluating (snicker) business plans (chuckle) created by Detroit (lol) regarding their continued viability (rolls on floor unable to stop laughing).

Related: The new visitor's center for the Capitol reopens today after a three year delay and 300% cost growth. "The delays and cost overruns led the center to be regarded as a bloated, behind-schedule Taj Mahal—a public project symbolic of Washington waste and inefficiency." US News and World Report.

Bottom line: The Democrats in Congress WILL bail out the Auto Industry with loans to prevent bankruptcy. These loans and future additional bail-outs will only serve to delay the inevitable - bankruptcy is NECESSARY to align income with expenses.