Coyote Blog

In my extended article the other day about Tesla I wrote of Elon Musk

Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop).

Seriously, go back and look at old popular mechanics covers.  Here is one in my domain:

The magazine specialized in really cool ideas that 14-year-old geeky boys like me ate up in the 1970s.  But most of them share in common with Elon Musk's ideas that they will never be practical.  So it is not surprising that Popular Mechanics put out an absolute puff issue on Elon Musk, apparently aimed at helping the man Popular Mechanics loves rehabilitate his reputation after getting some bad press for making false promises and breaking securities laws.   The piece was such a hopeless PR piece masquerading as journalism that the Atlantic felt the need to call them out for it.

Other readers, particularly journalists, were flabbergasted, including several Popular Mechanics staffers and contributors who declined to speak on the record because they feared jeopardizing their jobs. “It’s not the job of a magazine to do some PR recovery efforts for somebody exhibiting unstable behavior just because you like that he makes cool cars and rockets,” one Popular Mechanics writer said. (Disclosure: I worked at Popular Mechanics as a web intern for about a month in 2012.) For many journalists, the essay collection was a love letter bursting with unbridled, unfiltered admiration for Musk, a public figure the magazine covers, regularly and objectively. The material reads as if it came straight from the public-relations managers whose jobs are to make their boss look good.

In response to criticism the Popular Mechanics editor said:

D’Agostino said he decided to do the project after reading a slew of negative press of Musk and his properties, and, as he put it in the final collection, “myopic and small-brained” criticism. He cited as examples news coverage of the misleading tweet about Tesla, the ensuing SEC debacle, Musk’s weed experience on Joe Rogan’s podcast, and the entrepreneur’s relationship with the singer Grimes....

Musk, he said, is a good representative for the Popular Mechanics ethos. “It’s always been a magazine about what’s possible and the people who sort of tinker with things and solve problems with the aim and goal of improving human life and existence, and using technology to make things better,” he said. “When you look at someone like Elon Musk, we kind of think of him as one of us. He’s doing something very Popular Mechanics—you don’t know if it’s going to work, but he tries these things and gives it his all.”

I am perfectly willing to acknowledge Musk's good points, as I did in my long essay linked above, but in my opinion Musk is leading a lot of very naive investors over a cliff.  Go read the Tesla fan boards and the $tsla tag at twitter and you will see a series of investors who have never bought a stock before talking about how they put all their savings into Tesla.  Ugh.  Magazines like Popular Mechanics have some responsibility not to shamelessly tout a high-risk stock to naive investors.

For those who don't want to read my whole essay, the biggest problem at Tesla is that Musk has promised a lot of things, all of which take capital which it is increasingly clear Tesla does not have.  The promised Semi, pickup truck, coupe, solar shingle, China expansion, EU sales of the model 3, expansion of the sales and service network, bringing body shops in house, implementation of full self-driving -- not to mention repaying a growing accounts payable backlog and over a billion dollars in debt coming due in the next 6 months -- all will require billions of capital and Tesla is hitting bottom.  Musk claims he will be able to fund this with organic cash production but this almost has to be an outright lie.  He needs to raise equity, but has not done so when his stock was at all-time highs.  Now that he is in trouble with the SEC, rumors swirl that he may not be able to raise new capital.  If he cannot, Tesla will be bankrupt in 6 months or less.  Tesla might survive if it can find a white knight (though many of the obvious candidates have turned him down) but this is a lot of risk for noob investors to take on and a lot of risk to simply IGNORE in a Popular Mechanics puff piece.

Postscript:

By the way, is the balance problem on Elon Musk coverage really a dirth of hagiography? This is the man the press explicitly calls the real life Tony Stark.  If anything, he needs that guy referred to in the final seconds of the movie Patton, the person who rides with the Roman general during his Triumph and whispers in his ear that all glory is fleeting.  I have no problem talking about the wonderful things Musk has helped push forward (and I do) but good God aren't you obligated to also include stuff like this, out of his own mouth?

1/ This is crazy. Either this is a total BS excuse (which his $tsla fanboys will likely swallow) or Musk is the worst CEO of a $50 billion company I have ever heard of. $tslaq @TeslaCharts https://t.co/oeTfN9UaNU

— Coyoteblog (@Coyoteblog) October 18, 2018

You can click on the tweet and see my whole response, but eschewing 3rd party dealers and having its own sales and service network has been a Musk strategic pillar for 8 years.  The production ramp for the Model 3 is years behind.  And the CEO just looked at the map and realized they did not have enough service locations even for their less-than-expected sales?  This may be a great idea man and visionary and man who can get great efforts started, but this is not the tweet of a great, or even a good, CEO.

The subject says it all.  I have wrapped this damn ironwood tree twice and both times the lighting has not lasted.  Since a lot of lighting is designed for holiday use of 3 weeks a year, even something designed for 5 years of life dies in 4 months of continuous use.  For those who do not know, an Arizona native ironwood is gorgeous, one of the most sculptural trees I know of, but it is covered over every single surface with the sharpest thorns imaginable.  I lose a pint of blood every time I wrap this sucker so I want this to be the last time.

Last week I was walking through one of our area's  large upscale resorts.  The resort was hosting what looked like a huge conference of a large franchising organization.  What struck me immediately in the lobby and everywhere on the grounds was how many people of color were there -- it might have been as many as half.  And the crowd was WAY more than half women.  I don't want to argue right now about buying a franchise as a path to entrepreneurship -- there are pros and cons.  But it really helped reinforce something I always suspected -- that entrepreneurship is a particularly important path of self-improvement for women and people of color.

These all sound like worth progressive goals, and in fact many progressive profess to support entrepreneurship.  Here is a screen shot from Beto O'Rourke's web site a loyal reader sent me:

Amazing.  We are going to promote entrepreneurship by showering the economy with regulations (1000 new bills a year in progressive CA) and making sure many of the returns from an entrepreneurs' money and effort go to other people.**  This is like saying we really want to promote the growth of the rabbit population and we are going to do it by putting out lots of rabbit traps and making sure all the carrots the rabbits are eating are given to others.

** By the way, perhaps the #1 great progressive misunderstanding is that without one single government intervention, the vast majority of the entrepreneur's efforts go to others.  Employees will earn far more in total than will the entrepreneur herself, and  consumers will be left with far more value from the products and services they buy than the entrepreneur ever got back in profit.  Steve Jobs created far more wealth and well-being for the rest of us than he did for himself.

This New York Times article here could have been a perfectly reasonable thought piece on the (perhaps unintended) effects of several provisions in the tax code.  But in an institutional desire to land a few more blows on Trump, they tried to morph it into a hit piece on Jared Kushner --"Jared Kushner Paid No Federal Income Tax for Years" screams the headline.

Look NYT:  I find Trump distasteful as well.  But you only embarrass yourself presenting as some kind of investigative bombshell that Jared Kushner used perfectly legal deductions to minimize his tax bill.

I recommend this ZeroHedge summary to you as a quick way to get to the meat of the Times article.  As they summarize it, the Kushner tax "maneuver" consists of:

tep 1: The Purchase

Kushner Companies buys a property. The majority of the money for the purchase comes in the form of mortgages and personal loans from banks.

Step 2: The Write-Off

Under the federal tax code, real estate investors can write off the purchase price of the building — excluding the cost of the land — over a period of decades. Although Kushner Companies has spent little or no cash of its own, the firm takes large annual deductions based on the theoretical depreciation of the building.

Step 3: The Loss

The property generates cash for the Kushners. But any earnings, which would be subject to the federal income tax, are swamped by the amount that the company is taking in write-offs for depreciation. The result is that Kushner Companies records a net loss for tax purposes.

Step 4: The Investors

The company passes on that loss to its owners, including Mr. Kushner and his father, Charles.

Step 5: The Offset

The loss can be used to offset the Kushners’ income in the year it is recorded, and it can be carried forward to cancel out future income or to get refunds for taxes they paid in previous years.

Step 6: The Deferral

When Kushner Companies sells a property, it can use the proceeds to finance a new acquisition. If done within the right time frame, the company can indefinitely defer any capital-gains taxes it might owe on the sale of the original property.

So here is my confession.  I did the exact same thing just last year on my taxes.  Take one example:  One of my businesses bought and installed $350,000 of equipment.  I financed 100% of this purchase.  The article says that Kushner depreciated his real estate purchases over decades but the tax code's accelerated depreciation provisions allowed me to depreciate this purchase 100% in the first year.  So I had an immediately $350,000 loss that I netted against other income, grealy reducing my taxes on that income.  In fact, I don't think I was able to use it all due to various tax rules and I carried over a part of it to cover 2018 taxes or beyond.

One could argue about whether the accelerated depreciation provision I took advantage of is too generous, but the tax code is always going to allow depreciation against some formula (or else every business would be substituting crazy rental schemes for capital investment).

Let's take each step from above

1. The Times wants to make a big deal that somehow the fact that he is using borrowed money to buy assets is a factor in this, but why?  They imply a couple of times that all the debt reduces his ownership, but that is not true.  He still owns 100% of the asset (with the proviso the bank has a lien that is only meaningful in case of default.  His equity is only a fraction of the purchase price, but that is a different thing and says nothing about his ownership
2. The depreciation provisions are pretty standards as described across all businesses, except to say that they are less generous than the ones I get buying equipment.  Again they seem to think that somehow the fact that he borrowed most of the money is relevant to this -"Mr. Kushner is getting tax-reducing losses for spending someone else’s money" -- but his financing strategy is not the least relevant.  He took on a costly and risky long-term obligation when he borrowed the money.  Is the NYT arguing for requiring cash accounting for taxes??  This is just embarrassingly ignorant.
3. This is entirely normal
4. This is entirely normal for s-corporations and LLC's.  These were promoted for small business, and they are fabulous tools for entrepreneurs, but you have to provide these legal tools to all people, even to rich people in families you don't like.
5. This is entirely normal.  Any other rule would be grossly unfair and a kick in the nuts for entrepreneurs.  I often spend money this year that generates revenues next year.  The tax code recognizes this and agrees that the losses I took this year can be netted against the revenues next year that they helped to facilitate.
6. This is the only thing that is mildly unique to real estate and his business.  I don't really get the same rights with any of my assets, though my assets mostly depreciate rather than increase in value.  I won't pass judgement on this one, but I suspect that it has a lot of support (homeowners get it, for example, as do owners of second homes).

Nowhere is there even a suggestion of how the tax code might be altered to fix those things the NYT does not like about it.  I would suggest that any step that would alter any of the 6 steps above would be opposed even in a Democratic Congress.  This all reminds me of a piece a few years ago arguing that oil companies got a lot more subsidies than renewables like wind and solar.  Checking it out, the vast, vast majority of the subsidies were ... LIFO inventory accounting and depreciation, both tax rules that are 1) merely about timing of taxes and not total paid and 2) apply to all manufacturing businesses in all industries.

From a fascinating article on Amazon and its automation vision:

After a customer places an order, a robot carrying the desired item scoots over to a worker, who reads on a screen what item to pick and what cubby it’s located in, scans a bar code and places the item in a bright-yellow bin that travels by conveyor belt to a packing station. AI suggests an appropriate box size; a worker places the item in the box, which a robot tapes shut and, after applying a shipping label, sends on its way. Humans are needed mostly for grasping and placing, tasks that robots haven’t mastered yet.

Amazon’s robots signal a sea change in how the things we buy will be aggregated, stored and delivered. The company requires one minute of human labor to get a package onto a truck, but that number is headed to zero. Autonomous warehouses will merge with autonomous manufacturing and delivery to form a fully automated supply chain.

I got some cr*p on twitter a while back about writing this, but I think it is pretty much vindicated by the "one minute" factoid above:

Amazon likely is being pressured by the tightening labor market to raise wages anyway.  But its call for a general $15 minimum wage is strategically brilliant.  The largest employers of labor below $15 are Amazon's retail competitors.  If Amazon is successful in getting a $15 minimum wage passed, all retailers will see their costs rise but Amazon's competition will be hit much harder.

If you have a chance, walk the Brooklyn Bridge.  I like taking the subway to the stop right under the bridge on the Brooklyn side (High Street on an A or C train) and walking back, seeing Manhattan and New York harbor stretched out in front of you.  You walk on a level above the cars.

If you have a good telephoto lens (which I did not, just a handheld superzoom, so the picture below is grainy) you can get a nice angle on the Statue of Liberty from the Bridge

Other terrific walks that get you out of the concrete canyons for a while are about anywhere in Central Park, but particularly around the Ramble.  And on the High Line Park.

"Brown signed more than 1,000 bills this year. The governor Tweeted that he decided on nearly 20,000 bills in his 16 years." (source)

This is 100% the reason we have been exiting most of our business in CA and will not accept any new business there. All of our training time with managers there goes to compliance with a myriad of new interventions from the legislature.  There is no time left to improve the business, serve customers better, or get more efficient.  California has hit, at least for us, the regulation singularity where new regulations are written faster than we can manage compliance to them.

Now all these veterans of California regulation madness are fanning out into national government.  Beware.

I have a particular fondness for tracking shots (long sequences on film with a moving camera that are created in one shot without cuts).  The opening scene in Orson Welle's Touch of Evil is perhaps the most famous, but there are many other examples such as in Goodfellas and in the opening credit roll of Serenity (though what looks like one long shot is actually two in that case).

This making of video for a different sort of tracking shot is really amazing, as it juxtaposes what we see on the film with an overhead view that shows how it is being made.  Total crazyness:

update:  Here is the Touch of Evil shot:

From the recently released study, "The Unintended Consequences of 'Ban the Box': Statistical Discrimination and Employment Outcomes When Criminal Histories Are Hidden"

Jurisdictions across the United States have adopted “ban the box” (BTB) policies preventing employers from asking about job applicants’ criminal records until late in the hiring process. Their goal is to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, removing criminal history information could increase statistical discrimination against demographic groups that include more ex-offenders. We use variation in the timing of BTB policies to test BTB’s effects on employment. We find that BTB policies decrease the probability of employment by 3.4 percentage points (5.1%) for young, low-skilled black men.

This is a pretty predictable outcome, and one that was discussed in my recent paper "How Labor Regulation Harms Unskilled Workers."  The effects of these regulations are synergistic.  Taken alone, one might expect this outcome from ban-the-box.  But combine it with minimum wage laws, rules that increase the monetary risk to employers for hiring unsuitable employees, and the increased regulatory difficulty in terminating employees (particularly minorities) and the effect is likely greater.  I explain this all in depth in the paper but here is a taste:

It used to be that the worst human resource risk a company faced was hiring employees who simply did not justify their salary. However, given the current body of regulation, any poorly selected employee is a potential ticking bomb who, through bad behavior with customers or other employees, could tie up the company for years in expensive litigation or regulatory actions. But as a firm’s liability for the negative activity of a poorly chosen
employee rises, regulations are making it harder to get good information to make better hiring choices,while simultaneously making it harder to terminate employees who were poorly chosen and present threats to the workplace or customers. When employers begin to look at their employees not as valuable assets but as potential liabilities, fewer people are going to be hired.

One potential way employers can manage this risk is to shift their hiring from unskilled employees to college graduates. Consider the risk of an employee making a racist or sexist statement to a customer or coworker (and in the process creating a large potential liability for the company). Almost any college graduate will have been steeped in racial and gender sensitivity messages for four years, while an employer might have an hour or two of training on these topics for unskilled workers. Similarly, because good information on prospective employees—credit checks, background checks,reference checks, discussions of past employment and salary—all have new legal limitations, employers who hire college graduates benefit from the substantial due diligence universities perform in their admissions process.

I made a vow a while back to try to get better at appealing to progressives using their assumptions, not mine.  So here is my shot at it here.  Prejudice exists among some employers that hold a stereotype of African-Americans as disproportionately criminal.  The best way to fight prejudice is through information and education.  But ban-the-box laws and other restrictions on background checks do just the opposite -- they restrict information.  Employers who see full criminal record information, say for African-American applicants, will be struck by how few have criminal records.  "Hey, these guys are OK," I can imagine someone saying.  Without this information, all that the employer has to work with are his pre-existing prejudices and misinformation, and in that context he might avoid African-Americans thinking "they are probably all criminals."

Want to know who the largest financial supporters of "net neutrality" regulations are?  Find them here: (source)

Think about the billions of dollars your ISP has spent to upgrade the bandwidth and speed of their network.  15% of that investment went to supporting Netflix's business, often without any compensation.  Net neutrality supporters always pitch their fears as concern that little guys might get shut out or have to pay to play.  But Comcast et. al. don't give a flip about the little guys.  They are concerned about the amount of their network infrastructure used by, sometimes choked by, Netflix, Google/Youtube and Amazon.  I have run projects to put internet access into large communities (in this case campgrounds with long-term campers).  There is just an astronomical difference between the cost of a system that serves the majority of internet traffic but no video streaming and one that allows video streaming.

Let's use an analogy.  Let's say that the highways in our state are getting torn up and we want to charge users for their use so we can repair and upgrade the roads.  We propose to charge much more per semi-trailer than per car because semi-trailers with their up to 80,000 pound weight really tear up highways more than does your Prius.  But the trucking companies object!  They want road neutrality, and propose that the roads should not treat any traffic differently and all vehicles should be charged the same amount regardless of size.  In fact, they go further -- all entities should be charged the same amount so that UPS with its 1000's of trucks on the road should pay the same flat fee (or no fee) as you pay with your one Prius.  Fair?

This sort of supply chain / value chain negotiation goes on in every industry.  It is also not unusual for participants in this negotiation to run to the government to try to get rules that tilt the playing field in their direction.  This is the context in which I see the net neutrality discussion, an attempt by large content providers to hamstring bandwidth providers in this negotiation.

I know I have blogged too much about Tesla of late, and you can be forgiven for just skipping on.  However, I find the situation fascinating -- I have seen splits between bulls and bears on stocks before, but never a situation where there is such a cultural divide between the two groups. What really caused me to write this article is that I have read a number of naive and idealistic people who have written online that they have invested all their money into Tesla.  They love the car, they love Elon Musk, and they are going to trust him with all their money.  EEEEEKKK!  I am going to give my warnings about not being an investment professional in a minute, but I feel more than comfortable even as a regular guy telling you absolutely DO NOT put all your money into a single investment, particularly one you do not control.

So, disclosures:  I am not an investment professional.  I have studied the science of dissecting corporations at Harvard Business School, but I have a less than perfect history of actually trying to make money from this knowledge.   I am short $tsla via put options (a very small percentage of my portfolio), but shorting a stock like this where there is so much passion on the bull side is dangerous.  I and others recognized many of the issues I will discuss in this post over a year ago, but had we been trying to roll puts or sit on a short position all this time it would have gotten very expensive. Making this investment even more risky -- either way, long or short -- is the fact that at this point you are effectively betting on one question: Will Tesla be able to raise new capital in the next 6 months.  This is a question even the experts can't handle and as a result it is probably only safe to dabble in Tesla as a bar bet for most.

BTW, since there is a culture war over Tesla that mirrors the larger culture war in this country, criticisms of Tesla are often interpreted as being based on bad motives and evil intentions.   So I will say that despite having once worked for Exxon, I am not in the pay of the Kochs or other fossil fuel interests, and don't have an axe to grind over electric cars.  I am putting solar on my roof and I have a deposit put down on a Lucid Air.  I have a number of renewables investments in my portfolio, e.g. PEGI.

But I believe the reckoning may be coming soon for Tesla.  If you understand the risks and it is <5% of your portfolio, fine -- take a flyer.  But for any of you that have a lot of money in Tesla and maybe don't have a lot of experience investing or analyzing companies, my advice is get out ASAP.  You have a unique opportunity here that despite a lot of red flags and smoking guns, the stock still trades at a level that will get most folks out of their position cleanly.

The Tesla Passion

Tesla has an incredibly passionate customer base that overlaps a lot with its incredibly passionate investor base.  This passion is based, in part, on:

• The model S which, when it first came out, was years and years ahead of its time.  Every other electric car at the time was a joke -- the model S was a real legitimate luxury sedan one might want even if one did not care about EV's.  The later Model X SUV was also pretty good (though in my opinion not as good).  The current Model 3 is a mixed bag which we will discuss further. But suffice it to say that Tesla earned the right to be called a leader and an innovator in the field
• Elon Musk.  He seems to be passionate about the same things (the environment, hating on oil companies, etc) that his fans are passionate about.  He is involved in amazing, super cool stuff like SpaceX.  He is constantly coming up with new product and service concepts and promising them to his user base.  He responds directly to customer complaints and suggestions and generally promises everyone that they can have their fix or feature really soon.  He has created a mythology that he is Tony Stark incarnate, and many of his fans honestly believe him to be the smartest man on Earth.
• Comparisons to Apple.  Elon Musk and his fans frequently argue that they are reinventing the auto industry as Apple. with the implicit assumption that they will shift historically low auto gross margins to be like Apple's crazy-high gross margins.  How this will happen is left a little vague, but among other things there is a vision of the car as a software platform, where consumers pay recurring fees for a stream of over-the-air features and updates.
• Self-Driving.  Tesla fans are convinced that they are just days away from having full automated self-driving features in their Tesla.  Many paid thousands of dollars on faith for this feature and continue to wait patiently for it to be delivered (which it has not been), even years after paying for it.  It is an article of faith among Tesla fans that Tesla is years ahead of every other self-driving competitor because the smartest guy in the world is running the program.
• The sales process.  The sales process (which is mostly online) seems much friendlier and less intimidating than going in to a dealer, and non-commissioned Tesla employees in their small showrooms seem much more likeable to the average Tesla buyer than the average car salesman.
• Every quarter, promised new products.   Elon Musk is an absolute fountain of new product ideas.  Reading his Twitter feed is like looking through Popular Mechanics covers in the 1970s.  Solar roof tiles! Sending a man to the Moon! Martian colony! Electric Semi!  Electric pickup!  Electric coup!  Self-driving on-demand vehicle service!  A tunnel to Dodger Stadium!  A flamethrower!  The hyperloop!  A $35,000 Model 3!

But beyond all this is the cultural divide between skeptics and passionate Tesla supporters.  Tesla supporters online tend to have little or no financial knowledge or ability to analyze a company's balance sheets and operations, whereas the skeptics tend to be digging through details of balance sheets and pro formas.  One might think this would be a red flag for Tesla supporters, but in fact it just hardens their position.  All of us talking things like cash flow and quick ratios are just dinosaurs, captives of traditional narrow capitalist thinking -- exactly the sort of thing that the brilliant Elon is sweeping away.  We are the ones who are naive at best, or at worst paid short-selling agents of the internal combustion engine lobby.  I have never seen an investing situation like it, and the nearest analog I can come up with is the conflicts between Scientology supporters and skeptics.

So what exactly is the problem with Tesla?  I will name a few of the major ones here, but want to note that much of the credit for the hard investigation and analysis on many of these points go to many folks in the $TSLAQ community, a group often huddled around @teslacharts on Twitter.

Problem #1:  Tesla Has Tried to Disrupt Too Much

I have written about this before, when I said,

One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.

Ditching the ICE, throwing out assumptions that PEV's had to be silly little econoboxes, and thinking about cars as a software platform are all awesome disruptions and fundamental to the Tesla competitive advantage.  But at the same time Tesla was doing this, it also attempted to throw out 100 years of auto industry learning on manufacturing and selling cars.  On the manufacturing end, Musk promised an "alien dreadnought" with machines that moved so fast humans wouldn't even be allowed in the building.  Tesla has not been able to make this work, and as a result has had to try to relearn old rules of car manufacturing on the fly.  This has hurt both their capacity ramp as well as their product quality.

On the sales end, Tesla wanted to do away with traditional dealers, and the Tesla owners I know loved not having to buy from a car salesman.  But they did not come up with anything to replace the dealer system -- cars still need to be delivered, inventoried for sale, and repaired.  All of these have been huge problems for Tesla in what Musk has called "delivery hell."  Tesla has factory workers moonlighting delivering cars, it has inventory tucked away in all kinds of weird ad hoc lots, and Tesla owners often have to wait months for car repairs, usually because Tesla doesn't build enough spare parts.

Note that Tesla has also saddled itself with building out the entire world fueling network for the car.  ICE car makers can depend on already existing gas station infrastructure.  One could imagine that Tesla might have partnered with someone else to do this -- perhaps a large electric utility or a consortium of other car makers -- but instead has gone it alone building proprietary Supercharger stations across the country.  Time will tell if this makes sense -- it could create a competitive moat protecting it from new competition but it also costs a LOT of capital and leaves them vulnerable to being the odd-man-out of some sort of shared network.

I will end this section by recalling the comparison of Tesla to Apple that so many of its supporters make.  But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not see through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-inensive tasks.

Problem #2:  Tesla is Out of Capital (to Operate or Grow) And Seems Unable to Raise More

Tesla has never been profitable and continues to burn through a lot of cash.  It burned through a couple of billion dollars in 2017 and more this year, and right now probably has less than $2 billion on hand with a lot of funding needs, including over a billion dollars of debt that is maturing over the next 6 months.  Tesla may not have the cash even to cover its operating needs over the next 12 months, as Tesla has not been able to prove it can produce the model 3, or any of its vehicles, at a gross margin that will sustain the company's fixed costs.

But forget about operating losses for a moment -- you can go to twitter and argue these to death, and I will address it again below.  But what of Tesla's growth?  Tesla's current factory space is maxed out, so much so that they are building some Model 3's in a big tent.  The Tesla growth story depends on the promised pickup truck and semi truck and coupe, but there is absolutely no place to build them right now -- a place to build them has not even been started and Tesla does not have the capital to create these assembly lines, or likely even to finish the product design.  And even ignoring these, what about the next generation Model  S and X?  In the auto industry, car designs are typically refreshed as a minimum every 4-5 years.  The Model S will be 5-years-old in December of this year.  Where is the new second generation model?  Tesla has enjoyed a 5-year head start on anything like comparable competitive vehicles.  Now, a slew of challengers have been announced and will start appearing in dealerships in 2019 -- Tesla has perhaps 1 more year to buff up its product line before it has real competition.

Besides the car development and production issues, remember we also discussed that Tesla has chosen to build out its own fueling, new car distribution, and car servicing network.  The current distribution issues and servicing complaints make clear that a LOT more capital is going to be needed in these areas.  Capital is needed to inventory parts, to create dedicated storage and delivery centers, and to add more servicing capacity.  Add to this Elon Musk's recent promise to bring body work on Teslas in house and thus create a whole body shop network, and that is a LOT of capital that Tesla does not have.  It is clear to me (though maybe not to Tesla fans) that this capital is not going to come organically through large positive cash flows from operations.

Tesla really needed to raise $5 billion in early 2018.  Its stock was riding high over $350 and its shareholders did not seem to care one bit about dilution.  Why Tesla did not do a capital raise when the money was there and the cost of capital was so low is a total mystery to pretty much everyone.  If nothing else, Elon Musk is absolutely obsessed with "burning the shorts" and the shorts all agree that the one thing that might hurt them in the short term and drag out their returns for years is a large capital raise.  So why not?

One prominent theory among short-sellers and Tesla skeptics is that there is some sort of grand secret inside Tesla -- an investigation or a bad set of numbers or even some kind of accounting fraud -- that prevents Tesla from making the disclosures necessary to go to the capital markets.   I am not sure this makes sense -- what secret could be so bad and still stay secret for so long?   The fact that Tesla seems to hemorrhage senior accounting officers, finance VPs, and controllers just adds to the mystery.  Whatever this mystery barrier to capital raises has been, it has only gotten worse with Tesla's recent SEC investigations and on-again-off-again settlements.  No matter what, the result is that Tesla is starved of capital and apparently cannot easily get more.

If you buy or sell Tesla, this is essentially the question you are betting on -- Can Tesla raise capital?  If they can't in the next 6 months, they are likely headed for bankruptcy or restructuring (but either way wiping out most of the equity holders).  On the other hand, if they were to announce a multi-billion dollar capital raise tomorrow, the stock would rocket back in to the high 300's and all the shorts would be at least temporarily burned (though Tesla would still have long-term structural challenges).  This is why it is inappropriate to have much more than a small piece of your portfolio either long or short Tesla -- you are effectively betting on whether this capital raise will happen and even the experts can't fathom it.  I think it won't happen for the simple fact that if it could have happened, it should have already occurred, but I could be wrong.

Problem #3:  Tesla is an Operational Mess and Not Good at Fulfilling Promises

Elon Musk makes a lot of promises, promises that get a lot of folks excited, but very few of these promises are ever met.  In the long list of promises I listed right up at the top, very few if any have been fulfilled.  For example, Tesla still is not anywhere near the production rates for the Model 3 that Musk promised it would reach over a year ago, a promise so clearly broken that Tesla is being sued over it.  Musk claimed as many as a half-million pre-orders for the Model 3 mainly on Musk's promise to sell it for net $27,500  ($35,000 less the $7,500 federal tax subsidy).  Now the $35,000 version is not even on the manufacturing plan (Tesla still can't figure out how to make money on it) and it certainly will never be produced before Tesla starts losing the $7500 subsidy after December.

For years Musk has pulled new product rabbits out of his hat every quarter, just when he needed them to complete financing or an acquisition.  After the the stock pops up in response, little is ever heard of the suggested product again.  The battery swap technology that got California to give Musk bigger subsidies has completely disappeared from the radar screen.  Musk demonstrated what he said was a completed solar roof tile technology just in time to sell Tesla shareholders on the idea of bailing out SolarCity, but again the technology has never materialized and SolarCity has essentially been shutting down, with fewer new installations each quarter.   The same was true of the Semi truck, released to great fanfare but totally MIA today.  And beyond these promises are crazy, clearly inaccurate promises from Musk that they are taking all body shop work in house immediately or that they are producing their own auto carriers to alleviate a supposed auto carrier shortage.  And even this does not include the small promises he has made almost every day to users to add this or that new feature.  It is almost as if Musk has a psychological need never to admit that there is a problem for which he has not already implemented a solution.

Worse, the products Tesla is making are not fulfilling Tesla's early promise.  Specifically, Tesla fan boards have been full of stories about delivery defects in new Model 3's, including parts that fall off and body panels painted the wrong color.  Leaks from inside the factory have hinted at first-pass yields on the model 3 that are close to the worst in the entire auto industry.  To try to keep investors happy, Tesla has promised that they would produce 5000, and later 6000 model 3's a week, but rather than achieve sustainable production at these levels the factory has engineered a couple of crazy push weeks where production is juiced to these levels, and then falls back to lower rates.  This is probably one reason for the quality problems, and certainly is not a recipe for reducing production costs.

Problem #4: Q32018 May be Tesla's High Water Mark

Which brings us to the 3rd quarter results, which should be announced in just a few weeks.  Musk has been vociferously promising for months that Q3 and Q4 would be GAAP profitable and cash flow positive.  He went so far as calling out the Economist Magazine for having the temerity to suggest that this did not sound realistic.

Perhaps as a result of this very public commitment, Tesla has very clearly pulled out all the stops to really juice the third quarter.  For example:

• It carried over a lot of inventory from Q2 to be sold in Q3
• It has mined its order book to find all the folks who have ordered the most profitable cars.  It abandoned the promised first-come-first-served manufacture-to-demand approach to focus on batch producing cars for those who ordered the highest margin versions.
• It has mined two years of orders and sold them all in one quarter
• It has reportedly done a sale and leaseback of all its demonstration and loaner fleet
• It has reportedly taken full payment from multiple people for the same car, delivering it to one person and holding the money from the other for a 4Q delivery.
• It has stretched out the time it takes to repay deposits for cancelled orders to 45 days
• It has stretched its payment to vendors, resulting in a number of vendor complaints.  As a result its net working capital has gotten more and more negative.
• It has had special end-of-quarter sales of inventory
• It has used expensive promotions (e.g. free Supercharging for life) that it promised earlier not to use again in order to move inventory at the end of quarter
• It has switched to batch production from produce to order in the factory, presumably to cut costs and increase throughput but having the effect of creating inventory for which there is no current buyer.
• Once it was too late for manufactured cars to get sold in the quarter, it cut way back on production in the last days to conserve cash.
• Tesla has some undisclosed number of government ZEV credits it can sell, which would lead to a one-time increase in profits and cash flow.  Tesla takes advantage of a loophole in GAAP accounting to leave these off their balance sheet, presumably so they can act as Musk's personal burn-the-shorts slush fund.

It is not clear if this will result in a small profit or positive cash flow.  The problem is that whatever Q3 results are, they will be almost impossible to duplicate in Q4.  Tesla will likely talk about what a growth trajectory Q3 represents over previous quarters, and they will be right, but what will be missing from the story is how nothing will be left in the tank for Q4.

The following is essentially speculation, because Tesla refuses to answer any questions about their order backlog.  In fact, Musk famously blew off an analyst in a previous conference call who tried to inquire about the order backlog.  But there are good reasons to think that the backlog of profitable customer advance orders and deposits is tapped out, that Tesla in Q3 has serviced everyone in the backlog who wanted a car that could be produced at a reasonable gross margin and everyone else in the backlog are folks who ordered cars, particularly the $35,000 Model 3, that Tesla has no intention of building any time soon because they would lose their *ss doing so.  In this context, Q3 is not an organic quarter in the midst of a growth trend but a manufactured quarter where over 2 years of pre-orders were tapped in one three month period, leaving nothing in the tank for the future.

The evidence for flattening demand for Tesla is pretty compelling.  Model S and X sales volume has basically been flat for over a year.  And as for Model 3, the unsold inventory tucked away in random locations combined with the desperation fire sales at the end of Q3 point to a saturation of demand.

Note that a flattening of demand has a double whammy for Tesla.  First, it means that their stock valuation will likely crash.   Tesla's valuation at huge multiples of revenue (there is no profit) only makes sense for a rapid growth company.  If the rapid growth tails off, the valuation will come to Earth.

And this is not even the biggest problem.  Let's take a step back.  In the old days, say in the 1980's, growth was a consumer of cash.  This is because manufacturing and inventory cycles were long.  Growth meant investing in more parts and production now, only to get higher revenues later -- working capital skyrocketed with growth and could nearly bankrupt otherwise healthy growing companies.

Today, however, supply and manufacturing chains are much shorter.  Products can be produced and sent to customers before the vendors are even paid.  Dell computer was an innovator on this, getting paid by customers for a PC before Dell itself had paid for any of the parts.  Combine this with Tesla's innovation of having customers put down deposits on their cars months or years before the sale, and this means that growth actually creates cash for Tesla as working capital becomes more negative.

I have the same thing happen in my seasonal business.  Through the spring, as I hire people and visitation to our campgrounds increases into the summer, we get big increases in revenue immediately while we don't have to pay new hire salaries for a couple of weeks or expenses like trash for months.  Growth generates cash because we get the revenue before we pay the expenses.  But the whole thing reverses itself at the end of season, as revenues fall and all the bills come due.  This negative cash flow effect as revenue growth reverses at the end of the operating season almost bankrupted me the first couple of years until I learned to plan for it.

In the same way Tesla has been getting positive cash flow (via negative working capital) from growth, but this will reverse the moment that growth slows.  When their growth inevitably slows in the fourth quarter, no matter how well they claim to have performed in the third quarter, Tesla is going to see a huge cash crunch.   I am not sure they will have the cash to cover it, and smarter people than I are betting on a Tesla bankruptcy or restructuring in the next 2-3 months.  Any such event will largely wipe out equity holders.   Which is why I am advising you to keep away.  Elon Musk and Tesla may have some double-secret plan to avoid this cash crunch, but are you willing to bet your savings on it?

Problem #5:  Elon Musk is NOT the Smartest Man on Earth

The ultimate answer to all these concerns about Tesla by Tesla fanboys is that they have confidence in Elon.  I see people write on boards, dead seriously, that Elon is the smartest person in the world.  One wrote two days ago that they thought he was the smartest guy in history.  They have confidence that Elon will make things work out, and that Elon will always be able to attract new capital because everyone in the world feels the same love for Elon that they do.

Here is the problem:  Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop). Musk is not good at managing operations or manufacturing.  He does not seem like a very good planner, which should be a must in a business with long lead times and billions in capex.  He has brought too much of the "fake it before you make it" culture from the web world, where the stakes attached to unsuccessfully faking it are so much lower than they are in, say, the car business.  This natural tendency to overestimate one's abilities is just made worse by all the fan attention that constantly tells him he is the real Tony Stark and the Smartest Man on Earth.

SpaceX works pretty well because someone who is not-Musk and actually knows that business runs the operations and designs the product.  Even in Tesla, the Model S was designed by someone else, as much as Musk would like to claim credit.  I have said for over a year that Tesla needs to find the right role for Musk and it is NOT CEO and COO and CTO and chief Tweeting Officer all in one.   Tesla needs Musk at this point as their face to the public.  He would be a good chairman and could help lead the company's product road map.  He is great at communicating exciting things to the public -- within limits.

The "within limits" proviso in the last line is based on what is surely Musk's worst flaw -- he can be a petulant, impulsive, unreliable child on Twitter.  I won't go into all the stories, most of them made the national news, but  he tried to insert himself into the Thai cave rescue story and when his contribution was not useful, called out one of the rescuers as a pedophile.  He frequently is obsessed with short-sellers and taunts them with promises to burn them.  He reacts poorly to criticism and bans a lot of critics on Twitter.  And, most disastrously, he tweeted that he had funding secured for a $420 buyout of Tesla that caused the stock to shoot up, only to fall back to Earth when it was revealed that no such offer existed.  This latter event was a clear violation of SEC rules, and after an SEC investigation Musk and Tesla settled with the SEC.  But even that was not the end, as Musk then repudiated the settlement, and then two days later signed a new more onerous settlement, and then a few days after that mocked the SEC over twitter in a clear violation of the terms of the settlement he just signed.  Which is where we sit today, waiting to see how the SEC responds to this latest outburst and with rumors swirling that other SEC and justice department investigations may be in progress at Tesla.

Which leads to the question -- is Musk just immature on Twitter, or is he actually corrupt ala Elizabeth Holmes at Theranos or the smartest guys in the room at Enron?  People might respond that Musk is a brilliant, visionary guy -- he can't be corrupt!  But my wife who has to have her blood tested a lot loved Elizabeth Holmes and her vision.  I personally worked with Jeff Skilling briefly at McKinsey before he went to Enron and he was both visionary and a real genius.  The way he introduces new products right when he needs an external boost, and then drops them, looks a lot like a stock-pumping operation.  And I personally think the Tesla bailout of SolarCity was completely corrupt -- it benefitted Musk and his friends and family at SolarCity and did less than zero for Tesla shareholders.

*     *     *

That is the situation as I understand it.  If you still want to make a big bet on Tesla, one way or other, hopefully you are a bit better informed of the risks.  Trade carefully, as the saying goes.  Or do as I do, and just watch the show because it is enthralling.

I try to read an equal number of blogs from the Left and Right.  Now, I am not a masochist so I try to choose the more intelligent folks on both sides (if true dedication to avoiding an echo chamber were to rely on reading both Sheriff Joe Arpaio and Maxine Waters each day, then I just can't do it).

So let me tell all you partisans out there from both the Coke and the Pepsi team something I see every day:  Both your sides believe and say the exact same things about the other side.  Seriously, almost word for word, I could write a book where we just show side by side quotes.   In particular, every partisan fervently believes that their party is too nice and milquetoast and well-behaved to win all the battles it should against the other party, which is devious and bare-knuckles and unconstrained by any ethics.

In the past, the majority of each party seemed willing to accept this lamentable state of affairs and claim the high ground, even when that might amount to a Pyrrhic victory (e.g. Michelle Obama:  "The go low, we go high" or many of the Republican never-Trumpers).

The problem is that when this desire for the high ground breaks down, then all that is left is an ugly realpolitik arms race to the bottom.  It has taken me a long time to really digest the surprising (at least for me) Trump victory.  I have friends that are hard-core partisans for both parties (yes, I know this dates me as failing to pre-screen my friends for political orthodoxy seems a sin nowadays).  I see the same attitude in my Republican friends -- yes we find Trump distasteful in a number of ways, but he is the first national Republican we have seen who will fight down and dirty with Democrats and win political victories.  You see this same attitude on Twitter with Republicans metaphorically carrying Lindsey Graham (!!) around on their shoulders in celebration this week.

Politics are like the NFL -- people emulate what seems to be winning.  Bill Walsh won with the West Coast Offense, and soon there were 30 teams running the West Coast Offense.  The Democrats are going to be looking for the Trumps as well.  I don't know how it doesn't get ugly.

The Democrats' issue du jour seems to be that the Senate is undemocratic and needs to be abolished.  The argument is that it is not fair that states get two seats each in the Senate regardless of their population, so that the tiny population of Wyoming has the same number of Senate votes as the huge population of California.  These concerns are related to Democrats' frustration with the electoral college, whose votes do not strictly match population because each state gets delegates equal to their number of representatives plus their number of Senators. These are small state protections that evolved as part of a compromise between the 13 states in the original Republic.  A few thoughts on this:

1. This is an oddly-new concern from Democrats.  They controlled as many as 60 Senate seats as recently as a decade ago.
2. The non-democratic nature of the Senate is in its very DNA.  Until the late 19th century Senators were not even elected by popular vote, but by a selection process in the state legislature.
3. For those who treat politics as the be-all-end-all of their lives, this provides an outstanding arbitrage opportunity -- move from California to Wyoming and immediately greatly increase the power of your vote.  I lived in Wyoming for a bit on a ranch south of Glenrock (30 minutes by dirt road from a town of 2000).  Hipsters are warned that they might find it difficult to locate a starbucks or good sushi there.
4. I am not sure one would design a Senate today the way it was designed 200+ years ago.  But, it has mostly worked.  I am not a Burkean Conservative, but I do think that there needs to be a little more reason than a lost Presidential election and one loss on a Supreme Court confirmation to modify a system that has worked for a long time.
5. It would be an interesting discussion as to whether the structure of the Senate were positive or negative in the runup to the Civil War.  The obvious answer is that it was bad, in that it forced odious compromises with slavery since the South controlled half the Senate despite its much lower population.  On the flip side, though, one might argue that things could have even been worse had the North not been forced to engage the South for so long to make any legislative progress.  What if the South had left the union 20 years earlier, would the North have had the strength or will to defeat them in 1840?

But here is the real reason that the allocation method of Senators (and Electoral College delegates) is absolutely NOT going to change so that this whole discussion is pointless:  Changing these rules in any way requires a Constitutional amendment.  Such an amendment, to become law, must be ratified by 3/4 of the state legislatures or 38 as things stand now.  But at least half (and probably a bit more since a few states are so damn big) of states will see their power decrease under such rule changes.  Is Wyoming going to vote yes?  Montana?  I am pretty sure there are at least 13 no votes on this.

So stop whining and deal with it Democrats -- you had a filibuster-proof majority in the Senate just over 10 years ago, win some elections and get it back.

Ten days ago, I told my wife that if Brett Kavanaugh is confirmed, he can probably thank Michael Avenatti and his client.  Julie Swetnick's accusations of mass gang rapes held week after week after week were so batsh*t crazy -- and completely unconfirmed by any witnesses when the behavior she described was so public and affected so many people that confirmation should have been easy -- that the Democrats' argument that women never lie and always should be believed was shown to be false to all reasonable observers.  It became too easy for Republicans to convince themselves that all of the women accusing Kavanaugh, not just Swetnick and the other last-minute copycats, were a put-up job by Democrats (a conclusion that was more easy to reach given DiFi's hamfisted attempt to be "tricky" and withhold the Ford accusations to the last minute).  In a well-reasoned world, the veracity of the Swetnick accusations should have had no bearing on the evaluation of Ford's believably, but in the real world of politics it had a huge effect.

I honestly believe that an earlier reveal of the Ford accusations early in the process, without all the nutty copycat allegations, could easily have resulted in Kavanaugh being withdrawn. First, it would have allowed Republicans and Kavanaugh himself to escape early in the process before so many chips were on the table.  Further, if we take Collins's speech at face value, her yes vote really resulted from the Swetnick accusations and I think she might easily have voted the other way with a different process.

A lot of people have come around to this point of view.  One is Robby Soave of Reason:

Democrats, the left, and various other anti-Kavanaugh persons can thank attorney Michael Avenatti for this outcome, at least in part.

The spotlight-stealing lawyer, who also represented Stormy Daniels, is responsible for drawing the media's attention to Julie Swetnick, an alleged victim of Kavanaugh who told an inconsistent and unpersuasive story. Swetnick's wild accusation provided cover for fence-sitting senators to overlook the more plausible allegation leveled by psychology professor Christine Blasey Ford, and to declare that Kavanaugh was being subjected to false smears.

Update:  Michael Avenatti has responded to such criticism on Twitter by saying, essentially, "what was I supposed to do, just ignore the needs of my client?"  No.  What he should have done is honestly thought about the needs of his client rather than just his need for self-promotion ahead of the Democratic primaries.  It is very much a part of a lawyer's job to confirm his client's story and evaluate whether he thinks they have a good case, and then to counsel them on whether or not it makes sense for them given the cost in dollars and public harassment to try to bring the case.  I have had a batsh*t crazy woman who was an ex-employee (who I have never met face to face) decide that I was doing all sorts of crazy things like running an Al Quaeda training camp, organizing a narcotics ring, and stalking her across every Indian casino in the state.  The poor woman has mental health issues and imagines all kinds of weird stuff, and I can be sympathetic now that she is no longer actively threatening me and I don't have to maintain protective orders against her.  At the time she took her crazed stories to any number of lawyers trying to mount a case against me on all kinds of odd bases, and you know what - no lawyer took the case, because pursuing this sort of madness in the legal system would not have done anyone, especially this woman, any good at all.

Long-time readers know that solar roads are like catnip for me -- I can hardly think of a better example of a technology that makes absolutely no sense but gets so much passionate support and funding.  If you are not sure why, here is a primer on why they are predictably awful.

So it turns out that the solar roads I was sure would not work have actually now been built and... they don't work.

One of the first solar roads to be installed is in Tourouvre-au-Perche, France. This has a maximum power output of 420 kW, covers 2,800 metres squared and cost €5 million to install. This implies a cost of €11,905 per installed kW.

While the road is supposed to generate 800 kilowatt hours per day (kWh/day), some recently released data indicates a yield closer to 409 kWh/day, or 150,000 kWh/yr. For an idea of how much this is, the average UK home uses around 10 kWh/day.

The road's capacity factor – which measures the efficiency of the technology by dividing its average power output by its potential maximum power output – is just 4 percent.

In contrast, the Cestas solar plant near Bordeaux, which features rows of solar panels carefully angled towards the sun, has a maximum power output of 300,000 kW and a capacity factor of 14 percent. And at a cost of €360 million, or €1,200 per installed kW, one-tenth the cost of our solar roadway, it generates three times more power.

There is much more.  I am embarrassed to say that when I slammed solar roads all those years, I actually was missing an important problem with them:

Unable to benefit from air circulation, its inevitable these panels will heat up more than a rooftop solar panel too.

For every 1 degree Celsius over optimum temperature you lose 0.5 percent of energy efficiency.

As a result a significant drop in performance for a solar road, compared to rooftop solar panels, has to be expected. The question is by how much and what is the economic cost?

I will add this to the list, thanks.

When I write stuff like this, I get the same kind of mindless feedback that I get when I point out operational issues at Tesla, ie "you are in the pay of the Koch brothers" or "you have no vision."  Well, I am actually putting solar on my roof and will get (hopefully) 45,000 KwH per year, which is about a third of the energy they get from this road but installed for a bit over 1% of the cost of the road.  And the panels are all ideally angled and placed, they are up in the air with absolutely no shade on them at any time of the day, and they don't have any trucks driving over them.

This came across my desk from one of my campground managers via our internal incident reporting system.  I swear we in this country are having a collective mental health breakdown.  Names obscured to protect privacy:

LadyA was walking by a campsite that was occupied by an unrelated group that was having a discussion and President Trump was mentioned in the conversation. At that point LadyA inserted herself into the conversation and began to curse at them. LadyA then proceeded to her campsite and passed by another camper and began to curse her and her dog. At this point I was driving by when a camper stopped me and informed me of the situation. I proceeded to LadyA's campsite where I found her sitting in a chair and screaming and cursing loudly. I tried to calm her and she was upset to the point where I could not calm her down. She was also on the phone with her friend who had called and was trying to calm her down also. She then began to curse me and when I asked her to stop or I would have to call the County Sheriff's Office, she became combative and I removed myself from the situation and contacted the sheriff's office.  When the Officer arrived we found she had been consuming numerous beers and she was combative to him and he was forced to arrest her and remove her from the campground.  At this point I refunded the last three nights of her reservation. LadyA's friend came in later and removed her belongings.

I will add that I get political emails from both major parties and from their increasingly shrill and over-the-top tone, I wonder if this isn't exactly the kind of citizen both parties are trying to create (as long as they vote the right way).

If all you know about maraschino cherries are those unnaturally red, sweet ones you buy in the grocery store, you are missing out.  Luxardo cherries are fabulous and have pretty much nothing in common with those other ones.  They are fabulous in most cocktails, but I love them with bourbon drinks.  I even use them and some of the juice them come in to mix with bourbon to make a quick and easy old fashioned.  Amazon has them in jars and cans but be prepared, they are expensive.

There is a cottage industry in creating maps that cause one to look at the Earth in a different way.  The classic of this genre was the one with the southern hemisphere on top.

These usually do not do much for me, but I have to admit I really liked this map -- what the map of the world would look like if we lived in oceans (kind of the BLUE HADES view of the world if you read Charles Stross).  (source)

Most journalists become journalism majors because they had vowed after high school never, ever to take a math or science class again.  At Princeton we had distribution requirements and you should have seen the squealing from English and History majors at having to take one science course (I don't remember ever hearing the reverse from engineering majors).

It should not surprise you, then, that most media is awful at science journalism.  I held off making a comment on this for 3 days figuring it was a typo and they would quickly fix it, but apparently not.  This fits in well with my thesis that the art of sanity-checking numbers has been lost (I added the bold):

The space elevator is the Holy Grail of space exploration,” says Michio Kaku, a professor of physics at City College of New York and a noted futurist. “Imagine pushing the ‘up’ button of an elevator and taking a ride into the heavens. It could open up space to the average person.”

Kaku isn’t exaggerating. A space elevator would be the single largest engineering project ever undertaken and could cost close to $10 billion to build. But it could reduce the cost of putting things into orbit from roughly $3,500 per pound today to as little as $25 per pound, says Peter Swan, president of International Space Elevator Consortium (ISEC), based in Santa Ana, California.

LOL.  The planning for such a structure would cost more than $10 billion.  There is no way that a space elevator can be built for just 1/10 the price of a high speed rail line from LA to San Francisco.  Even at $10 trillion dollars, or 3 orders of magnitude more, I would nod my head and think that was a pretty inexpensive price.

The media will breathlessly promote stories about any weather event in tail of the distribution curve.  I have written many times that this creates a false impression that these events are becoming more common.  Another element of this selection bias is what gets left out.  Does anyone doubt that if we were having a record-heavy tornado season, this would be leading every newscast?  If but if a record-heavy year is newsworthy, shouldn't a record-light year be newsworthy as well?  Apparently not:

source

Which reminds me of this chart Kevin Drum had the other day as "proof" of man-made climate change

I am not going to bother to go to their data source and pick it apart, though my guess is that I could.  But without even looking at the data sources I know this is garbage.  Think about places where there are large natural disasters in the US -- two places that come to mind are California fires and coastal hurricanes.  Do you really think that the total property value in California or on the US coastline has grown only at inflation?  You not only have real estate price increases, but you have the value of new construction.  The combination of these two is WAY over the 2-3% inflation rate.  This effect is magnified by the nature of the metric, which is not total losses but losses over some threshold.  This sort of threshold metric is easy to game, and says nothing for the total losses which would be a better measurement.

By the way, I am wondering how he automatically blames all of these natural disasters on manmade climate change.  Take the most recent, disastrous fires that hit the Redding, California area this year.  That fire started on BLM (federal) land.  When it was small, California State Fire (CalFire) personnel showed up to put it out.  The BLM told them to go away.  The chance to put the fire out when it was small was lost.  How do you blame a fire that was really due to moronic intergovernmental rivalry and bad forest management policy on climate change?

I won't repeat the charts but this post has charts on many extreme weather events and shows that, with the exception of large rainfall events, there is no trend in any of them.

In a serious and worrying article on the Chinese government inserting tiny chips into high-end video processing servers in order to hack into 3rd party systems, Bloombergs Jordan Robertson and Michael Riley write

Elemental servers sold for as much as $100,000 each, at profit margins of as high as 70 percent, according to a former adviser to the company. Two of Elemental’s biggest early clients were the Mormon church, which used the technology to beam sermons to congregations around the world, and the adult film industry, which did not.

I love that.

The whole article is well worth a read.  I am not one to fall for anti-China paranoia but if I was an electronics or computing company, I would be seriously reevaluating my sourcing practices right about now.

Via the WSJ today

Amazon.com on Tuesday said it was raising the minimum wage it pays all U.S. workers to $15 an hour, a move that comes as the company faced increased criticism about pay and benefits for its warehouse workers.

The new minimum wage will kick in Nov. 1, covering more than 250,000 current employees and 100,000 seasonal holiday employees. The company said it also will start lobbying Congress for an increase in the federal minimum wage, which was set nearly a decade ago and is currently $7.25 an hour.

“We listened to our critics, thought hard about what we wanted to do, and decided we want to lead,” said Jeff Bezos, Amazon’s chief executive, in a statement. “We’re excited about this change and encourage our competitors and other large employers to join us.”

Here is the cynical view of this:  Amazon likely is being pressured by the tightening labor market to raise wages anyway.  But its call for a general $15 minimum wage is strategically brilliant.  The largest employers of labor below $15 are Amazon's retail competitors.  If Amazon is successful in getting a $15 minimum wage passed, all retailers will see their costs rise but Amazon's competition will be hit much harder.

(Source)

The reason is that due to its internet sales model, Amazon's revenue per employee is MUCH higher than for most retailers -- you can see this in the chart above in a comparison to Sears.  If we had data on revenues per employee in small retail, the numbers would be even lower.  So a minimum wage increase raises costs to Amazon's competitors by a much larger percentage of revenue than it does for Amazon.  In short, Amazon's cost advantage over bricks and mortar retailers would be enhanced by a $15 minimum wage.

This summer I had the cover story in Regulation Magazine with my article "How Labor Regulation Harms Unskilled Workers:  As government expands regulation of employers, they will increasingly turn to fewer, higher-skilled workers and automation."  (pdf here).  The article was not an academic project, but based on my own experience as a business owner who employs hundreds of workers in unskilled positions.  The premise is that many labor regulations -- not just the minimum wage -- have the perverse effect of making it harder to employ unskilled labor while simultaneously providing incentives to shift hiring from unskilled labor to folks with college degrees, even for unskilled positions.

Because it was not an academic research project, I did not spend a lot of time researching labor statistics, but I can't resist posting this analysis which appeared on Seeking Alpha:

As the economy has grown, employment numbers for unskilled labor have flatlined, never recovering from the last recession.  As I observed:

Fifteen years ago I started my current service business. I love my company and my employees. But if I had it all to do over again, I would never start a business based on employing unskilled labor.  The government makes it too difficult, in far too many ways, to try to make a living employing unskilled workers. Given a new start, I would find a business with a few high-skill employees creating a lot of value.

And I don’t think I’m alone. In the 1950s, 1960s, and 1970s, there was a wave of successful large businesses built on unskilled labor (e.g., ServiceMaster, Walmart, McDonalds). Today, investment capital and innovation attention is all going to companies that create large revenues per employee with workers who have college educations and advanced skills. Only 4% of the employees at Apple, for example, have less than a college degree.
Even in large service-sector companies that employ unskilled labor, much of their investment today is in finding ways to reduce their reliance on that labor. I remember a number of years ago when the Chili’s restaurant chain started putting little electronic displays on their tables. At first the displays just showed advertising and I thought they were an annoying waste of space. But over time the chain began using the devices first to accept payment for one’s food and more recently to take food orders. They are progressively eliminating the need for most of their wait-staff. Every major restaurant chain is doing the same thing: investing in technology to eliminate unskilled workers. Why bother trying to figure out how to serve a rapidly evolving customer demand with workers who are limited by government in a hundred different ways in how and when they can labor? A website or iPad never sleeps, never sues, never needs a lunch break (let alone documentation of that break), never has to have overtime, and doesn’t have its labor taxed.

Just to save everyone from sending this to me, Elon Musk has been sued by the SEC.  The details are here, I will not go over all this old ground.  Of course this is just an accusation, and has no immediate effect (except to trash the stock price) until it is settled or proven in court.

I have such mixed feelings for Musk. On one level, it is awesome to see an entrepreneur trying to do build real stuff like rockets and cars. He has all the geeky charm of a 1970's edition of Popular Mechanics, breathlessly hyping captivating but sometimes impractical ideas.  I rode with an acquaintance in his $100,000 Tesla the other day and he loved it. Totally drank the Kool Aid.  Despite my extreme skepticism, he was sure that Elon was going to have same-day body shop repairs for Teslas and could make it work because they only had 3 models of cars with lots of shared parts.  It's the same sort of enthusiasm you see from people who still stand in line first day for the new iPhones. I envy being able to create that as a company.

On the other hand, Musk is just so unsuited to running a public company, is awful at operations, and will end up having cheated a lot of people.  He fails to meet commitments and makes public statements that are transparently absurd.  Just as one example, the other day in response to many delivery problems Tesla has (delivery problems that may actually be due more to efforts to shift 4Q sales into 3Q), Musk said there was a shortage of car delivery trucks and Tesla was starting to build them.  Seriously??? There is zero evidence of a delivery truck shortage and it is absurd to think Tesla had the time or the resources or the skills or knowledge to bang out large truck trailers (that require a variety of DOT inspections and approvals).  Honestly, I can't tell if Musk is the pointy-haired boss from Dilbert who promises absurd things because he is utterly clueless, or if Musk is totally corrupt -- it could be both.  I think his body shop insourcing idea was likely clueless but his SolarCity acquisition was corrupt.

New entries from Jaguar, Audi, and others demonstrate both that Tesla faces a lot of new competition but also that Tesla's original Model S and X still have a lead over competitors.  When the book on the electric car industry is written, I think it will be said that Tesla greatly accelerated the transition to electric cars.  But it is a fact of business history that the pioneer and innovator seldom is the ultimate victor (Lycos, Netscape, Altair, Yahoo, etc).  Tesla has not lost yet, but it still has a huge hill to climb.  Unfortunately, Musk's decisions to do so many things in-house -- own the dealer network, own the fueling network, own the manufacturing, own the body shops, etc. -- is going to require too much capital.

It is pretty clear that Musk is often using Apple as one of his models for what he wants to do with Tesla, and he has successfully created the same kind of almost cultish loyalty as has Apple.  But he ignored a lot of what Apple did.  Apple is a research, software, and design house.  It farms out manufacturing to a partner and sold most of its ipods and iphones initially through third party retailers.  If Tesla had done the same: taking advantage of rich third parties who already know how to sell cars as dealers; working with a consortium to create the fueling network; and going to someone like Kia to do private label manufacturing of the cars -- they might have lost something of the customer magic in the process but they also might be in a much better position to survive.

Update:  Apparently Musk was offered a very, very attractive settlement by the SEC which involved Musk stepping down as Chairman but NOT as CEO, adding a couple new directors, and paying a fine.  It is hard to read this as much more than a slap on the wrist, especially in the context of the SEC now seeking a full bar of Musk from any position at any publicly traded company (hell hath no fury like a government agency scorned).  Frankly, I find this nearly as impossible to understand as the fact that Tesla never raised any equity funding this year when its stock and story were so strong.  Tesla skeptics are arguing that both of these hard-to-explain events stem from the same cause -- that Tesla has some deep dark secret that Musk can't afford for either a new executive or a public offering document to disclose, the same secret (the story goes) that has driven away a number of senior accounting and finance officers in the last several months.  I agree that the existence of such a secret would explain the facts, but I can't imagine what could be much worse than the bad balance sheet and operational data that already is publicly known.