Coyote Blog

I am not breaking any ground here but I just finished the fifth and final episode of Chernobyl last night and the entire series was excellent.  From the confusion of the first hours to the anonymous and sometimes futile heroism in the aftermath to the backroom and courtroom scenes at the end -- everything was tense and engaging and felt pitch-perfect.  If nothing else, it's a must see just for its portrayal of architecture and interiors of the Soviet Union.   I will warn you that some parts are hard to watch, particularly the dying men in episode 3 and the animal control operations in episode 4.  The whole thing has, appropriately, a real darkness to it.  Even the great acts of heroism can't offset the ugliness because the heroes tends to be anonymous and largely unrewarded and unheralded.  Spoiler alert:  there are no winners here [not so much of a spoiler as you see one of the protagonists hang himself 2 minutes into episode 1].

I know there are folks who criticize the science in the show.  Basically they can bite me.  This is a drama, and a really good one, and generally sticks pretty close to the historical material.

In addition to being about the accident itself, the show is also about life in the Soviet Union as well.  Which raises the question -- clearly the Soviet Union's political culture was at fault here, but is ours any better?  The answer is yes and no.  No, because I don't trust our government officials any more than the Soviets to not prioritize their own power over the well-being of their citizens.  But the US would likely do better because 1) our government is not nearly as monolithic, so that bad authoritarian impulses in one section can be checked by others; and 2) our government has much less scope.  What I mean by the latter is that Chernobyl was part of the Soviet government, so admitting mistakes there required criticism of the government.  In the US, with private operators of power plans, the government would have no problem calling out, say, Duke Power for its shortcomings.  Imagine for example how the response to the 737Max issues might have been different if it were built by a state corporation.

Postscript:  OK, what are those areas the science may be off?  Well, my sense is that the risk to people exposed to the victims of heavy radiation exposure (people visiting the victims in the hospital) is exaggerated in the program.  And I think most observers since the accident have been pleasantly surprised that, with the exception of an increase of thyroid cancers in young children, the long term health problems associated with lower level radiation exposures in the Chernobyl area have been far less than feared.  A UN panel wrote in 2008:

Apart from the dramatic increase in thyroid cancer incidence among those exposed at a young age, and some indication of an increased leukaemia and cataract incidence among the workers, there is no clearly demonstrated increase in the incidence of solid cancers or leukaemia due to radiation in the exposed populations. Neither is there any proof of other non-malignant disorders that are related to ionizing radiation. However, there were widespread psychological reactions to the accident, which were due to fear of the radiation, not to the actual radiation doses.

That latter part refers to a finding that the one measurable long-term effect in the population has been an increase in alcoholism that is usually attributed to people's elevated fears of cancer.

WeWork is a provider of work spaces for individuals and startup companies.  Unless I am missing something (and WeWork devotees are welcome to chime in) it is essentially a hipper rebranding of traditional small business office space and services companies like Regus (now IWG).

Currently, Regus / IWG has about $3 billion in annual revenue on which it makes something like a positive 5% net income margin and trades at a valuation of about 1x annual revenues.  WeWork is a private company, though is rumored to be IPOing soon.  It had $1.8 billion of revenue last year but lost $1.9 billion, meaning that it was basically selling $10 bills for $5 each with an negative net income margin of 105%.  Its last funding round was done at a $45 billion valuation, or 81 times 2018 revenue.  This valuation will likely go up in an IPO.

No real point here, except to say that I have not seen valuations this insane since the late 1990's.  What makes the examples of WeWork and Tesla perhaps even more incredible than examples in the 1990's is that the market is putting growth software valuations on bricks and mortar companies.  Oracle or Microsoft might have been expected to scale up easily and relatively cheaply, but scaling a real estate company takes a ton of money.  Not sure where the growth economy of scale is in office space.  And don't even get me started with the extrapolated growth projections here.  When the tech bubble bursts, WeWork is going to have a ton of grief on its hands, and unlike software companies it is not going to be able to slash SG&A by cutting payrolls.  It is going to be stuck in a lot of long term leases and mortgages that it can't break (just ask Tesla about that when they tried to cut SG&A by closing their stores).

PS-  As with Tesla and any number of other examples, many devotees of certain products hear criticism of the company's valuation as criticism of the company's product.  The two do not have to be related.  Grossly overvalued companies can still have products you might want to buy.  In fact, if WeWork is selling you a $10 product for $5, I would not be at all surprised if you are satisfied.

PPS-  This is not to say you can't make money in a bubble.  Careful, observant, and risk tolerant individuals can make money riding stocks up that they know are due for a crash some day.  Readers know that I believe Tesla is headed for a reckoning, but I am making money this week on short term calls I bought last week because I knew that Musk is going to pump the stock like hell last week and this week and pull forward every bit of volume he can into Q1 in a bid to save a dying growth story.  I bet the stock would ride up on early reports of this but fall off once financials are out and further when Q2 shows that the order books have been drained.  But this is risky, risky, risky.  It is a tiny piece of my investment portfolio and this sort of investing is but a hobby for me, a bar bet to determine if I have really come to understand how Elon Musk ticks.  Also, I am just a layman and not a professional so don't listen to me.

In a tradition that goes back well over  a decade on this blog, it's time for our 2019 just-for-fun bracket challenge.  You know how it works -- fill out your bracket for the NCAA men's basketball tournament before noon Eastern this Thursday.  First prize  is lots of adulation and a 1 year free subscription to Coyoteblog.  Second prize is a two-year subscription.

We are using the usual scoring method -- 1 point for each correct pick in the first round, then 2 points in the second round, then 4, 8, 16 and 32.  This gives each round the same number of possible points.  In addition, there is a bonus for each game you correctly pick an upset equal to the difference in the two seeds, so there is some incentive to take a bit of risk with your picks.

This year's theme is the ongoing battle of Tesla bulls and bears ($tsla and $tslaq respectively).  You don't have to be part of that mess to play, but if you want to self-identify with a side, put it in your team name. If you need anonymity, you can use a fake name and make sure to check the box not to show your email address publicly.

It is totally free to play (I have paid the fees) and you can sign up and find our bracket here.  

http://www.pickhoops.com/TSLATSLAQ

In a tradition that goes back well over  a decade on this blog, it's time for our 2019 just-for-fun bracket challenge.  You know how it works -- fill out your bracket for the NCAA men's basketball tournament before noon Eastern this Thursday.  First prize  is lots of adulation and a 1 year free subscription to Coyoteblog.  Second prize is a two-year subscription.

We are using the usual scoring method -- 1 point for each correct pick in the first round, then 2 points in the second round, then 4, 8, 16 and 32.  This gives each round the same number of possible points.  In addition, there is a bonus for each game you correctly pick an upset equal to the difference in the two seeds, so there is some incentive to take a bit of risk with your picks.

This year's theme is the ongoing battle of Tesla bulls and bears ($tsla and $tslaq respectively).  You don't have to be part of that mess to play, but if you want to self-identify with a side, put it in your team name. If you need anonymity, you can use a fake name and make sure to check the box not to show your email address publicly.

It is totally free to play (I have paid the fees) and you can sign up and find our bracket here.  

http://www.pickhoops.com/TSLATSLAQ

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.

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."

As of this moment, Canadian tulip bulb marijuana company Tilray is trading at $146 a share for a total market capitalization of $11.2 Billion.  This is a company that had $10 million in revenues last quarter.   It is trading at a 420x multiple of last year's revenues.  It is up 20% today alone.  The race to own Canadian marijuana stocks in advance of the January 1, 2019 legalization in Canada is simply insane.  I would have attributed this to millenial dumb money leaving Tesla and looking for a new home, but a couple of weeks ago, American alcoholic beverage company Constellation Brands paid $4 billion for just a piece of another Canadian weed company.

Investments at this sort of valuation before the market even is opened are speculative in the extreme.  People will use the argument that "wouldn't you have wanted to be in on the ground floor of Coke or Pepsi or Phillip Morris or Anheuser Bush?"  A few responses:

1. Buying in at an $11 billion valuation is not really the "ground floor".  $11.2 billion is a higher market cap than Whirlpool or Hyatt or Alcoa.
2. The beer and cigarette and soft drink industries all started with hundreds, even thousands of competitors.  When RJ Reynolds started his tobacco company, there were 15 other tobacco companies in Winston-Salem alone.  Without your current hindsight, you would have been hard-pressed in the early stages of those industries to pick the winner.
3. This goes without saying, but we have no idea of the future size of the marijuana market, and even without the risk of trying to predict consumer behavior it is really hard to predict regulatory behavior
4. Usually only one part of the value chain of a new industry really makes the profits.  We have no idea where that will be in the marijuana business.  In beer and tobacco, the big profits are not with the growers of tobacco and hops, for example.
5. Early pioneers in an industry are often not the survivors.  Your computer today, is it a Tandy?  Kaypro?  Commodore?  IBM and Compaq don't even make PC's any more.  Apple does but only because it reinvented itself as a phone maker.  And how about those cell phone pioneers?  Is your phone a Nokia?  Motorolla?  Blackberry?

December $145 put options on Tilray are trading around $72 dollars, which essentially means that there are folks betting that the company will lose half its value in the next 90 days.  I can't remember ever seeing anything that extreme.

Update:  Well, a day later it is at over $200 and a $20 billion valuation.  Incredible.

From the Chronicle of Higher Education:

Upset and ashamed, my fellow graduate students and I speak with one another cautiously. We heal, or don’t, alone. People I know are afraid to make any public comment, even on Facebook, where they are friends with older, richer scholars who might one day control their fates. Even I, who have by extraordinary luck options outside of academia, fear what being vocal will bring.

A culture of critics in name only, where genuine criticism is undertaken at the risk of ostracism, marginalization, retribution — this is where abuses like Avital’s grow like moss, or mold. Graduate students know this intuitively; it is written on their bones. They’ve watched as their professors play favorites, as their colleagues get punished for citing an adviser’s rival, as funding, jobs, and prestige are doled out to the most obedient and obsequious. The American university knows only the language of extortion. “Tell,” it purrs, curling its fingers around your IV drip, “and we’ll eat you alive.”

Avital conducts herself as if someone somewhere is always persecuting her. She learned this, I imagine, in graduate school. No woman escapes the relentless misogyny of the academy. The humanities are sadistic for most people, especially when you aren’t a white man. This is understood to be normal. When students in my department asked for more advising, we were told we were being needy. “Graduate school should destroy you,” one professor laughed.

The irony is that those who survive this destruction often do so at the cost of inflicting the same trauma on their own students. Avital, now a grande dame of literary studies, who Reitman alleges bragged to him of a “mafia”-like ability to make or break the careers of others, still feels persecuted. She makes it the job of those around her to protect her from that persecution: to fawn, appease, coddle. The lawsuit against her reads as a portrait, not of a macho predator type, but of a desperately lonely person with the power to coerce others, on pain of professional and psychic obliteration, into being her friends, or worse.

Note, this is a repost and update of an article from 2018

At the behest of a group of Uber drivers, the California Supreme Court has ruled that Uber drivers are Uber employees, not independent contractors, under California law:

In a ruling with potentially sweeping consequences for the so-called gig economy, the California Supreme Court on Monday made it much more difficult for companies to classify workers as independent contractors rather than employees.

The decision could eventually require companies like Uber, many of which are based in California, to follow minimum-wage and overtime laws and to pay workers’ compensation and unemployment insurance and payroll taxes, potentially upending their business models.

I believe that this will pretty much kill Uber (though it will take some time to bleed out) for reasons discussed here.  Rather than discuss consequences for the company (everyone is finally doing this, following the general media rule I have stated before that it is OK to discuss downsides of new government regulations only after the regulations have been passed and become essentially un-reversible).

People don't always seem to have a good grasp of cause and effect.  I don't know if this is a general problem programmed into how humans think or one attributable to the sorry state of education.  My favorite example is all the people who flee California due to the high taxes, housing prices, and stifling regulation and then  -- in their new state -- immediately start voting for all the same things that caused them to flee California.

One of the aspects of being an Uber driver that supposedly attracts many people to it is the flexibility.  I summarized the advantages in an earlier post:

Here are some cool things about working for Uber:

• You can work any time you want, for as long as you want.  You can work from 2-4 in the morning if you like, and if there are no customers, that is your risk
• You can work in any location you choose.  You can park at your house and sit in your living room and take any jobs that come up, and then ignore new jobs until you get back home (I actually have a neighbor who is retired who does just this, he has driven me about 6 times now).
• The company has no productivity metrics or expectations.  As long as your driver rating is good and you follow the rules, you are fine.

This all ends with the California decision.  You drivers are all thinking you won this big victory because you are going to have the same job you loved but you will just get paid more.  This is not going to happen.  As I implied above, in the long-term this job will not exist at all, because Uber will be dead.  But in the near-term, if Uber tries to make this work **, Uber is going to excercise a LOT more control of your work.

That is because if Uber is on the hook for a minimum cost per hour for your work, then they are going to damn well make sure you are productive.  Do you enjoy sitting around near your suburban and semi-rural home at 3AM waiting to get some business?  In the future, forget it, Uber is not going to allow this sort of thing now that Uber, rather than its drivers, is carrying the risk of your being unproductive.  They are going to take a lot more control of where and when you can drive.  And if you do not get with the program, you are going to be kicked out.  It won't be three months before Uber starts tracking driver productivity and kicking out the least productive drivers.

Congratulations Uber drivers, in the quest to try to use the power of government to extract more money for yourselves from the company, you just killed your jobs as you know it.  You may have had freedom before but now you are working in Office Space like the rest of us.

This whole case just goes to support my frequent contention that the only labor model the US government will fully accept is an hourly worker working 9-5 punching a time clock.  Every new labor model that comes along eventually runs head-on into the government that tries to pound that square peg into the round hole of a time-punching factory worker.  The Obama administration even did its best to force a large number of salaried workers into punching a time clock.

More on the productivity issue here.  Other regulatory issues (CA break law, OSHA, etc) here.

** If I were the leader of Uber, I would announce today that we are exiting California.  This is an existential issue and the only way to fight it is right now on your home turf.  Any attempt to try to muddle through this is going to lead to Uber's death, and would thus be a disservice to its shareholders.   Whether this happens will be interesting.  Uber is owned by a bunch of California VC's who generally support exactly this sort of government authoritarian interventionism.  It will be interesting to see if a bunch of California progressives let $50 billion in equity go down the drain just to avoid offending the sensibilities of their fellow California progressives.

Update 8/12/20:  CA is going ahead with its decision, and still I have seen not one media article discussing how this will change the driving experience except to imply it will be "fairer" and pay more with better benefits.  At some level, all this does not really matter as Uber is walking dead anyway, not just from this decision but from COVID as well -- the whole "sharing" thing (Uber, AirBNB, etc) has lost a lot of popularity in a world where no one really wants to share someone else's space

Nobody really liked Jeff Skilling of Enron and he sits in jail for 20 years.  We think Elizabeth Holmes is attractive and cool so that despite the fact that she committed serial fraud in lying about her company's technology and financials (far more baldly and egregiously than Skilling) and actually put people at risk through faulty medical testing, she got only a slap on the wrist.

And then there is Elon Musk.

The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money.

— Elon Musk (@elonmusk) April 13, 2018

I am not sure how I got in the role of fact-checking Elon Musk, but given the company's stated results to date and announced operating plans and strategies, there is simply no way for the Tesla to be profitable and cash flow positive in Q3, barring some deus ex machina like a massive energy credit or California subsidy windfall.  It's possible I could go in there and shut down R&D and model 3 production and milk the Model S and X for cash and might make this be true, but that is certainly not their announced business plan.  On their current path Tesla has to continue to burn cash through the rest of this year.  I am not even sure that if you stated their gross margin the same way that other automakers state their numbers that even it would be positive right now -- there is an argument to be made they are still losing money at the margin on every car they produce**.  I would add that in this point of their ramp, if you want to see Tesla the huge success that is baked into its current stock valuation, you don't want Tesla to be cash flow positive in the third quarter, you want it continuing to invest.   Amazon rules the world because it deferred profitability for years in favor of growth.

Tesla pretty much never ever lives up to Musk's promises, at least for the dates he promises them.  That is probably OK with things like deliveries of new products -- people understand he is pushing technology and new products can be delayed and they forgive entrepreneurs for being -- shall we say -- overly enthusiastic about such things.   But on financial stuff like this his statements are bordering on fraud.  But he'll never get called on it, because we like him in a way we didn't like Skilling.

I will add that if Musk wants to get snippy about the media's guesses about his company's prospects, and thinks we are all getting it wrong, he could sure be a lot more transparent about Tesla's financials and plans.  Go watch an Exxon-Mobil analyst presentation and compare it to Musk's quarterly arm-waving.  Also, one final memo to Musk:  responding to your critics on Twitter emulating Trump's style is not recommended.  Though it might be interesting to compare the irrational populist wave behind Trump with the populist wave behind Tesla.  Though the two Venn diagrams of supporters probably do not overlap much, the whole relationship feels similar to me.

Disclosure:  I have been short TSLA in the past but right now have no position.  To be honest, I am going to let Musk urge his fanboys to pump the stock a bit further before I short again.  The fanboy effect makes TSLA a dangerous short, as TSLA stock holders will defy reality for far longer than will holders of say GE or XOM.

** gross margin at TSLA is interesting because TSLA has no dealer network, something I like them for.  GM discounts its cars to their dealers (10% or so?) but in turn they offload a bunch of selling and support costs to the dealers.  In their gross margin, TSLA banks in their gross margin the extra 10% from not having to discount their cars but in turn does not charge gross margin for a lot of the extra sales and support costs they have to take on -- instead they drop these costs into SG&A overhead. The situation with gross margin is even more complicated because Tesla not only has to build out and operate its own warranty service, sales, and delivery network to replace traditional dealers, it is also building out its own fueling service to replace gas stations.  Here is one guy who thinks Tesla gross margin is really negative.  I have zero idea who he is but for the last year his predictions about Tesla have been a lot more reliable than Musk's statements.

The "trick":

Democrats in the state House have proposed issuing $107 billion in bonds to backfill the state’s pension funds, which are short $129 billion. Annual state pension payments are projected to increase to $20 billion in 2045 from $8.5 billion—not including interest on $17 billion in debt the state previously issued to pay for pensions.

At the request of state retirees, a University of Illinois math professor performed a crack analysis showing how the state could use interest-rate arbitrage to shave its pension costs. Under the professor’s math, the state could sell 27-year, fixed-rate taxable bonds and invest the proceeds into its pension funds. This would supposedly stabilize the state’s pension payments at $8.5 billion annually, save taxpayers $103 billion over three decades and increase the state retirement system’s funding level to 90% from 40%. Can the mathemagician make House Speaker Michael Madigan disappear too?

I am not particularly in opposition to or enthusiastic about the current transgender movement.  On one hand, I have no problem with people managing their lives however they wish.  I met Dr. Renee Richards in 1982, for example (she was coaching a Princeton tennis player I knew) and liked her.  Deirdre Mccloskey is freaking brilliant, I wish I had met her.   On the other hand, as with most social movements on the Left nowadays, mere tolerance and live-and-let-live acceptance is not enough -- the movement demands complete conformity, and mercilessly shames anyone even the least bit slow to discard 5000 years of social norms around gender.  And the movement tends to descend into self-parody from time to time, such as demanding that tampons be provided to people who cannot possibly have a menstrual cycle.

Anyway, most of that is beside the point and is just background to an issue I was reminded of this weekend when I was visiting San Diego.  As many of you know, my company operates public parks and campgrounds for the government.  As such, we were largely subject to Obama-era orders that in Federally-owned bathrooms, people had to be allowed to use the bathroom that matched whichever gender they self-identified as (not necessarily the one matching their birth sex).  Unlike in past rules, there was no requirement that the person had taken any surgical or hormonal steps to transition -- only a self-declaration was required.

I will have to admit that the most entertaining part of this new requirement was explaining modern gender theory to my employees and managers, who tend on average to be over 65-years-old and without a college degree.  There were a lot of wide eyes and "wtf' expressions in the room.  Their main concern seemed to be potentially allowing male sexual predators into the women's room.  I explain to my employees that the extra risk here is trivial for a variety of reasons, but mainly because in practice this comes up vanishingly few times.  There just are not that many transgender people in the world, and campground bathrooms have never been targets for a lot of sexual predation.  Every single time I can remember our employees even being asked about our policy it turned out to be an activist testing us, probably to see if they could create grounds for a lawsuit.

From my experience, then, most public fears about transgender bathroom rules have turned out to be overblown. But, it turns out there is one issue that no one is talking about that could be a real, though not particularly serious, downside for women.  Let me explain.

The one major change in the public bathroom world as a result of the transgender movement is the accelerating shift from having multi-stall female and male bathrooms to having single-stall, gender-neutral bathrooms.  If bathrooms are all single-stall, then all the culture wars over gender and bathrooms are completely sidestepped.   Every public bathroom I have seen a government agency build over the last 5 years has been of this new design, and our company's policy is only to build this sort of facility rather than the old two-sided male/female bathrooms.  Here is an example from new construction at the children's pool in La Jolla:

OK, I am going to have to criticize one gender here but since I am going to criticize males, I will be OK.  Men's bathroom habits are terrible -- we tend to pee all over the place.  Even if the median guy is careful, the marginal guy is not and makes a total mess.  We had this problem when my kids were young -- my wife would ask me to take our toddler daughter to the men's room with me and I would tell her that was impossible, that the men's toilets were likely awful.   I can say from experience from cleaning over 1000 public bathrooms a day that men's rooms take way more cleaning than women's rooms.

So if one has these single stall bathrooms, they have to be cleaned a lot.  On busy days, our staff cleans ours 4,5,6 or even more times a day.  But there are many public agencies that apparently do not have the focus or resources to clean on this kind of frequency.  The City of San Diego, or whoever cleans these bathrooms in La Jolla, clearly does not clean enough, because these bathrooms were disgusting.  I did not really want to go in there and I could stand and do my business.  My wife would never have gone in there.

So there you have it women -- something else to look forward to.   That irritating long women's room line may become a thing of the past, but it could be replaced with much dirtier bathrooms.

Here are some cool things about working for Uber:

• You can work any time you want, for as long as you want.  You can work from 2-4 in the morning if you like, and if there are no customers, that is your risk
• You can work in any location you choose.  You can park at your house and sit in your living room and take any jobs that come up, and then ignore new jobs until you get back home (I actually have a neighbor who is retired who does just this, he has driven me about 6 times now).
• The company has no productivity metrics or expectations.  As long as your driver rating is good and you follow the rules, you are fine.

All of this is going to change.  Why?  Due to lawsuits in most countries that seek to redefine Uber drivers as employees rather than contractors.  One such suit just succeeded in England:

Is Uber a taxi firm or a technology company, and are its drivers self-employed or mistreated employees? These questions are being asked of Uber the world over, and last year an employment tribunal case in the UK concluded two drivers were, in fact, entitled to minimum wage, holiday pay and other benefits. The ride-hailing service contested this potentially precedent-setting decision, as you'd expect, but today Uber lost its appeal. In other words, the appeal tribunal upheld the original ruling that drivers should be classed as workers rather than self-employed.

The appeal tribunal agreed that when a driver is logged in and waiting for a job, that's still tantamount to "working time." Working time they aren't getting paid for, of course. Interestingly, the ruling also noted that Uber basically has a monopoly on private hire via an app. Therefore, drivers are beholden to them and can't reasonably engage in other work while also being at Uber's disposal.

GMB, the union for professional drivers that's behind the original case, is calling it "a landmark victory." Naturally, the law firm representing the GMB and Uber drivers feels much the same. No points for guessing who has a slightly different opinion.

Despite Engadget's usual economic ignorance that this must be all good for drivers, in fact this is going to destroy about everything that makes Uber attractive as compared to 9-5 office jobs.  That is, if rulings like this don't kill the company entirely, as I have previously prophesied.

This is going to add a new cost for Uber, forcing them to pay money to drivers for dead time when they are not actually driving a passenger.  Let's make the reasonable assumption that Uber's first response to this is to A) stay in business and B) attempt to keep prices to customers from rising.  The only way they can do this is to minimize dead time.

Want to park at your house in an unpromising neighborhood with little business?  Forget it, Uber can't allow that in the future.  Want to work at an unproductive hour of your choosing?  Forget it.  Uber is going to have to set quotas on certain regions and hours of the day that are less productive and find a way to ban drivers from working those times.   In addition, they are likely to institute some sort of productivity metric for drivers, ie something like revenue minutes as a percent of total, and then they are going to rank all the drivers and start cutting drivers from the bottom of the list.  If Uber survives, it is going to be a very different company to work for, and is going to feel much more like a regular office job with a boss hanging around your cubicle pestering you about TPS reports.

The following from Endadget may be clearer if you translate the British "touts" to the American "scalpers"

Touts are unnecessary middlemen, inflating ticket prices purely to create a cut for themselves. Gig-goers hate them, artists hate them, and the government isn't too keen either. The use of automated online bots to hoover up tickets (that are later listed on resale sites with a mark-up) is set to become a criminal offence thanks to the Digital Economy Act. The government has also implored venues and resale sites to address the ways they might be enabling touts. Sure, we might be lose the stub souvenir, but can we just make digital-only ticketing mandatory and kill all the birds with one stone already?

This view of scalpers as leeching middlemen with no economic value but rather as rent-seekers who merely mark up tickets and pocket the money is unfortunately common.  But they are in fact a perfectly normal functioning of markets.  They perform at least two economic functions

1.  Events often are mispriced for a variety of reasons.  Sometimes they charge too much, as in the recent McGregor-Mayweather fight, and the arena is half-empty.  The market can't do much to fix this.  But sometimes events are under-priced, and the demand far exceeds the available supply of tickets.  When this happens, some method of rationing must occur.  Back in my day rationing was by who was lucky enough to dial in at the exact right moment or who was willing to camp out all night.  Resale markets, including scalpers, where tickets are resold well above face value are another approach.  Scalpers don't make money taking some sort of middleman fee, they make money buying tickets at face and then taking the risk that they can resell them later at a higher price.  They are not always successful.  I have sold a number of tickets I could no longer use under face to get rid of them, taking a loss.
2. If you cannot resell a ticket to the person you want for the price you like, you lose some of your property rights in that ticket and it is less valuable to you.  Look at airline tickets, which are all electronic today and cannot be resold or transferred.  Are you better off as a consumer not having a secondary market for airline tickets?  Do you really like tickets that are use-them-or-lose-them propositions?  The contention in this article that consumers are better off if their concert tickets worked more like airline tickets is simply nonsense.  Scalpers increase our consumer sovereignty.

It should be noted that a digital ticket does not automatically mean loss of property rights in that ticket.  I bought Dallas Cowboys playoff tickets and Hamilton tickets on a secondary market and got them transferred to me electronically.  The Ticketmaster electronic app, at least currently, allows you to transfer the ticket to someone else and so digital ticketing platforms don't have to mean scalpers go away -- one could easily imagine two guys in a parking lot can still transact in tickets from their cell phones.  But the danger, of course, is that unlike with paper tickets this right of resale can be taken away any time by simply blocking the transfer function.  The article does not make this clear but I assume they are promoting a platform where once you buy the ticket you can only resell it back via the original seller (if at all), or else the entire article would be complete nonsense (always a possibility on engadget).

Artists and producers are complete hypocrites on this issue.  They are jealous because they would like to charge what the market could bear for their tickets but fear fan backlash if they do.  So they keep prices low so they can claim to be the fan's friend, but with a catch -- they hold back a ton of inventory in the hottest shows and do not offer that to the public at the published low price.  They sell this inventory at high prices to sponsors and other special groups or even sell it themselves at high market rates on the same 3rd party resale sites they publicly criticize.   What these folks really want is for there only to be secondary markets that they control. They don't want competition from third parties, and this lack of competition is only going to be worse for the consumer.  Think of it this way -- what if by law you could only resell your car to the dealer you bought it from.  Would you get as good of a price.  Hah!

California is a uniquely difficult place for companies trying to actually employ people rather than robots.   Owning a business in that state, you could be forgiven that the legislation actually embarked on a program to explicitly punish companies for hiring people.  The state has spent the last ten or twenty years defining a myriad of micro offenses employees for which  may sue employers and make large recoveries -- everything from having to work through lunch to having the wrong chair and not getting to sit in that chair at the right times of day.

To illustrate this, I want to show you the insurance application I just received.  Most companies have something called employment practices liability insurance.  This insurance helps pay legal and some settlement expenses if and (nowadays) when a company is sued by an employee for things like discrimination or harassment or any of the variety of sue-your-boss offenses California has established.  In that multi-page application, after the opening section about name and address, the very first risk-related question asks this:

They specifically ask about your California employment, and no other state, in order to evaluate your risk.

The other insurance-related result of California's regulatory enviroment is that if one is in California, it is almost impossible to get an employee practices insurance deductible under $25,000.  This turns out to be just about exactly the amount of legal costs it takes to get a nuisance suit filed with no real grounding dismissed.  It essentially means that any disgruntled ex-employee, particularly one in a protected class, can point their finger at a company without any evidence whatsoever and cost that company about $25,000 in legal expenses.  Rising minimum wages is not the only reason MacDonald's is investing so much in robotics.

One of the more popular features we have been experimenting with is adding aerial video of campgrounds we operate shot from small drones.  Customers love these and find them a great way to experience the campground before the commit to a visit.  Here is an example:

We have done this for all the campgrounds where we have a long-term lease and substantial leeway in operating the park.  However, we have not yet done any videos for the scores of Forest Service.  Perhaps this is why -- here is what I have to do to film a campground the FS has already contracted us to operate and market:

We ask for at least 2 weeks advance notice in order to prepare a permit and have the documentation reviewed by our aviation staff.  The proposal would need to include how your drone operations would address public safety and impacts to users in the campgrounds (I believe that you have to have people’s permission to film them so how to avoid that).  Also as you stated all activities would stay above your sites – no flights above Wilderness or the creek or adjacent canyons.   Due to listed species in the canyon, drone activity would need to occur after September 1 which is after the spotted owl breeding season.  The drone would need to be operated by a FAA licensed commercial drone operator and we would need documentation of a FAA Part 107 Remote pilots license or COA from the FAA.  In addition, we would need to have the operator coordinate with our aviation manager and provide the below information, with direction to be included in a  permit so they can get the information out to our aviation assets in the area:

All approved areas on the forest are to be used at your own risk while adhering to all FAA rules and regulations for UAS operations. Notification to the Forest Interagency Aviation Officer at least 24 hours prior to operations is required to help de-conflict airspace with fire aircraft and other forest aviation assets. Include in your notification:

• Date, time and location of flight
• Names and contact information of pilot(s)
• Make and model of UAS

Fees are based on crew size, 1-10 people for video is $150/day.

Several years ago, I was at a meeting in Washington with senior leaders in the Department of Agriculture, including from the Forest Service, and from a number of other recreation agencies. (You never thought of the Department of Agriculture as a recreation agency did you?  They may have more total recreation sites (not visitation, but absolute number of locations) than Department of Interior.  Anyway, these senior leaders were talking about being more visitor-focused.  They were talking about sophisticated programs to provide all sorts of innovative visitor services, and after a while I just started laughing.  They asked me why, and I pulled up on my tablet a letter I had just received from a Forest Service District Ranger (the lowest level line officer) who denied my request to make and sell hot dogs at a store next to a busy Florida swimming hole we run.

While we appreciate your attempt to provide additional services to recreationists, this service is not consistent with current services offered in other recreation areas.  As a Forest, we would like to provide recreationists with the bare necessities to ensure that their visit is enjoyable.  The sale of hot dogs and nachos is out of that scope.

My company operates campgrounds on public lands under contract with various public agencies.  Over the past several years, there has been a lot of discussion about public accommodation (e.g. can a private photographer choose not to serve a gay wedding).  This has never really been a big issue for me in my business, both due to my personal tolerance of just about anyone and the fact that we operate on public lands, which gives us an extra responsibility for broad accommodation.

Yesterday a sheriff's deputy in Arizona comes by one of the campgrounds we operate and gave a flyer to our manager.  It says that so-and-so, we will call him Mr. Smith, is in the area and is registered as a level 3 high-risk sex offender ("level 3 is the highest level and considered the highest risk to reoffense").  The deputy lets my folks know that it would be better not to do business with this guy.

Now personally, I have a lot of skepticism for the sex offender registry.  These lists sweep up a lot of people whose crimes are trivial (e.g. teenagers who had sex together or texted pictures with their girlfriends).  They assume high risk of recidivism without evidence.  Their existence dates back to a variety of molestation panics that were grossly exaggerated, and play on what I think are irrational public fears.  They can act as a substantial extra punishment beyond what they might have been charged with in court.  And they can be harsh, making it nearly impossible for someone to try to live a normal life in any community.

So the dilemma arises because this gentleman was staying in our campground at the time we received the notice.  My female manager wanted him out, as did most of my employees.  My guess is that if I polled the guests, most of them would want this guy out.  Because many people in a campground are in tents without any door or lock, they can feel particularly vulnerable.  I had never really thought about this much until we added cabins with locking doors to a campground and the early customers were disproportionately single women and women on their own with their kids.  They liked the lock.

My most telling problem is one of liability.  The state of Arizona has officially notified me that in the state's opinion this person is high-risk (whatever I might suspect his true risk may be).  If some incident were to happen, this notification would be exhibit one in the trial suing me into bankruptcy, arguing that I callously and knowingly allowed this risk to remain when I had it in my power to remove it.  I suppose one could argue that I probably always have people on the sex offender list in one of our campgrounds almost every day since there is no reasonable way to check on such things.  But in this case I have been notified in writing by an agent of the state that this person is considered high risk -- this knowledge gives me added responsibility.

I made my decision already, because part of the joy of running a 24/7/365 service business with 2.5 million customers a year is that I have many decisions like this and I have to make a choice and move on.  But I am curious what your decision would be.  Discuss.

Update:  wow, the discussion here is just tremendously useful.   The commenter who observed that I could probably be sued either way successfully captured the flavor of my frustrations trying to run a business in the modern legal environment.

It struck me later that I might not even have a decision to make.   The Forest Service which owns the land may not even allow such folks to be excluded from public lands.  If this is the case, I can get that in writing and do what I prefer (ie not participate in the further punishment of this gentleman) but have some coverage against legal liability in the future.

I find the WSJ to be more readable than most modern newspapers, but that does not mean it doesn't play exactly the same silly media games every other media outlet does.

This article is about a legitimately dangerous dam in California that is being rebuilt to accommodate new learning about how earthen dams behave in seismic events.  The authors attempt to extrapolate from this example to highlight a larger threat to the nation.  They use this chart:

A reader who is not careful and does not read the fine print, which means probably most all of them, will assume that "dangerous" and "hazardous" as used in this chart refers to dams that are somehow deficient.  But in fact, these terms in this chart refer only to the fact that IF a particular dam were to fail, people and property might be at risk.  The data here say nothing about whether these dams are somehow deficient.  Actually, if anything, I am surprised the number by this definition is as small as 30%.

The actual number of deficient dams that are dangerous to human life is actually an order of magnitude smaller than these numbers, as given in the text:

An estimated 27,380 or 30% of the 90,580 dams listed in the latest 2016 National Inventory of Dams are rated as posing a high or significant hazard. Of those, more than 2,170 are considered deficient and in need of upgrading, according to a report by the American Society of Civil Engineers. The inventory by the U.S. Army Corps of Engineers doesn’t break out which ones are deficient.

So if we accept the ASCE numbers as valid (and I am always skeptical of their numbers, they tend to exaggerate in order to try to generate business for their profession) the actual numbers of dams that are really hazardous is no more than 2,170.  That strikes me as a reasonably high number, and certainly a good enough reason to write a story, but the media simply cannot help themselves and insist on exaggerating every risk higher than it is.

Part of what I wrote to Princeton:

left-leaning kids ... today can sail through 16 years of education without ever encountering a contrary point of view. Ironically, it is kids on the Left who are being let down the most, raised intellectually as the equivalent of gazelles in a petting zoo rather than wild on the Serengeti.

Princeton gazelle student writing in the Daily Princetonian:

In the morning, I woke up to a New York Times news alert and social media feeds filled with disappointment. The United States had democratically elected a man who, among so many other despicable qualities and policies, is accused of and boasts about committing sexual assault. As a woman passionate about gender equality, women’s leadership, and ending sexual violence; as someone dedicated to the Clinton campaign and ready to make history; and, quite frankly, as a human being, I didn’t know how to process this. I still don’t. I felt for my friends and anyone who feels that this result puts their safety and their loved ones’ safety at risk, acknowledging that I am not the person this outcome will affect the most.

I didn’t leave my room Wednesday morning. I sat and sobbed and I still have the tissues all over my floor to prove it. When I absolutely had to get up for class, I put on my “Dare to say the F-word: Feminism” t-shirt and my “A woman belongs in the House and the Senate” sweatshirt to make myself feel stronger. Still crying, I left my room.

After hearing the election results, I had expected that the vandal would have torn down my angry note or left some snide comment. To my surprise, it was still there, and people had left supportive notes beside it. I have no idea whether the vandal is a Trump supporter or a misguided prankster unable to fathom the negative impact that a Trump presidency will have on so many people. But I know that the love and kindness others anonymously left gave me the support I needed Wednesday morning.

In every election since I was about 18 years old, I woke up on the day after the election to a President-elect I did not support, one who championed policies I thought to be misguided or even dangerous.   But I had the mental health to go on with my life;  and I had the knowledge, from a quality western history education (which no longer seems to be taught in high school or at Princeton), that our government was set up to be relatively robust to bad presidents; and I had the understanding, because I ate and drank and went to class and lived with many other students with whom I disagreed (rather than hiding in rubber room safe spaces created by my tribe), that supporters of other political parties were not demons, but were good and well-intentioned people with whom I disagreed.

Via Engadget:

Uber drivers have won an employment tribunal case in the UK, making them entitled to holiday pay, paid rest breaks and the National Minimum Wage. The ride-hailing company has long argued that its chauffeurs are self-employed contractors, not employees; the tribunal disagreed, however, setting a major precedent for the company and its relationship with workers. GMB, the union for professional drivers in the UK, initiated the two "test cases" in July. It's described the decision as a "monumental victory" that will impact "over 30,000 drivers" in England and Wales.

"Uber drivers and thousands of others caught in the bogus self-employment trap will now enjoy the same rights as employees," Maria Ludkin, GMB's legal director said. "This outcome will be good for passengers too. Properly rewarded drivers are the same side of the coin as drivers who are properly licensed and driving well maintained and insured vehicles."

From the WSJ:

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

Note that none of the criteria for the debt purchases is anything like, "the company has sensible plans for investing the money."  It is merely buying debt for debt's sake.  In the US, private companies are using most of their debt issues to buy back stock, a nearly pointless exercise that channels money from central banks to propping up equity valuations.  I wouldn't be surprised if European companies do the same.

Folks, it may not feel like it, but we are at the top of the economic cycle.   We have negative interest rates and central banks buying up every available debt issues in relatively good times, when these were formerly considered tools for the deepest point in a recession.  I am not a big believer in government stimulus, but these folks are.  What are they counting on in the bad times, when nothing will be left in the tank?

But now, we see central banks going one step further, encouraging private companies to lever up at the top of the business cycle.   Historically, this has been a formula for disaster.  The oil industry has been a preview of this.  Take ExxonMobil (XOM).  XOM, given its size, has never been very good at developing certain sorts of plays (e.g. the shale boom).  What it has done historically is use its size and balance sheet to swoop in during inevitable periods of low oil prices and producer losses to buy up developed fields at good prices.  But this time around, XOM has only had limited ability to do this, because it spent the boom years levering up its balance sheet and buying back stock.  Other large oil companies are in even more dire straights, facing real cash flow crises because, again, they levered up to repurchase stock when they should have been cleaning up their balance sheet.

I am simply exhausted with the notion that seems to have taken over both political parties that trade with China is somehow the source of US economic woes.

Remember that voluntary trade can't happen unless both parties are benefiting from each trade.  Remember the masses of academic evidence that the (largely hard to see) benefits of trade in terms of lower costs and more choice tend to be greater than the (easier to see) job losses in a few trade-affected industries.  But even if none of that is compelling to you, consider that our trade deficit with China is just 2% of GDP.  It's almost a rounding error.

If politicians want to know why lower-skilled laborers struggle to find employment, they need to look past imports from China and Mexican immigration and look at their own policies that are making it more and more expensive for businesses to hire people in this country.   I have written about this many times before, but some of the most prominent include:

• minimum wage laws, rising to $15 an hour in many parts of the country, and increasingly draconian overtime rules, both of which substantially raise the cost of hiring someone.
• minimum benefit laws, including expensive health care requirements in Obamacare and a myriad of other state-level requirements such as mandatory paid sick leave or family leave
• payroll taxes that act as sales taxes on labor  -- we understand that cigarette taxes are supposed to reduce cigarette purchases but don't understand that payroll taxes reduce purchases of labor?
• employment regulations, such as chair laws and break laws in California, that make employing people more expensive and risky
• employer liability laws, that make employers financially responsible for any knuckleheaded thing their employees do, even when these actions violate company policy (e.g. making racist or sexist statements)**
• laws that make hiring far more risk, including those that limit the ability to do due diligence on potential employees (e.g. ban the box) and those that limit the ability of employers to fire poor performing employees.

And this is just employment law -- we could go on all day with regulations that make life difficult for lower income workers, such as the numerous laws that restrict the housing stock and drive up housing prices and rents for these same folks who are struggling to find a job.

Let's say you live in California.  Who has killed more jobs in your state -- China or the California legislature?  The answer is no contest.   The California legislature wins the job destruction race in a landslide.   While California's high-tech community enjoys a symbiotic relationship with China that has created immense wealth, the California legislature works overtime to make sure low-skilled workers in the state don't benefit.

**Postscript:  Of all the factors here, I won't say that this is the largest but I think it is the most underrated and least discussed.  But think about it.  If you are going to be personally financially libel for ignorant, insensitive, or uncouth remarks made by your employees, even when you have explicitly banned such behavior in company rules and don't personally tolerate it, how likely are you going to be to hire a high school dropout without a good work history to interact with customers?

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?  I can think of three things.

The first is Elon Musk.   When one sees a deal like this, one is immediately suspicious that there is some kind of game going on where the owner combines holding A with holding B and somehow in the combination ends up with more wealth.  This is a game conglomerates played in the 1960's -- you could create a lot of (paper) value if you had a high PE (stock price to earnings ratio) company and went around buying low PE companies, instantly creating paper wealth if you could buy their earnings cheap and then have them suddenly valued at your higher PE.   Its hard to guess if this sort of game is going on here, as neither company has earnings (or rather both lose a lot of money).   Further, I have no read on Mr. Musk's personal ethics.  If this were Donald Trump, we would all immediately be suspicious such a game was at play.

The second thing these two companies share is that they have business models based on consuming massive amounts of government subsidies.  They get subsidies directly (each by selling various sorts of tax credits or fuel economy credits to power companies and auto makers), they have both gotten sweetheart deals from governments for production facilities, and their customers get subsidized as well in the purchase.  However, while there certainly are economies of scale for cronyism (large companies have the pull to get the loot), I shudder to think that there might be even more for these two companies to grab if they were larger.

The third thing these two companies share is that they both have huge financing needs, are losing lots of money, and are burning through tons of cash.   And here I think is the real heart of this deal, and if I am right, we may be able to answer the question on Elon Musk's ethics.  While both companies are burning through cash and are constantly going out to the market for more money, Tesla still has a (not totally justified in my mind) fabulous reputation with investors** and people seem to be falling over themselves to throw money at it.  With Apple languishing and Google old news, there is no hipper, trendier company out there.   On the other hand, SolarCity is starting to suck wind.  A few months back JP Morgan downgraded the stock:

SolarCity is having trouble attracting new investors, as the company has launched and canceled programs and altered its accounting methods, JPMorgan wrote in a note, according to MarketWatch.

Additionally, some of SolarCity's lower-income customers could be at risk of "slow-pay or default in the event of an economic downturn," the firm continued.

...SolarCity's weaknesses include its generally high debt management risk, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins.

They are also seeing more competition from local contractors and, perhaps most worrisome for their business model, various government subsidies are being scaled back and many states are changing their power metering rules to pay customers only the wholesale rate, rather than the retail rate, for power they put back in the grid.  They have said in most of their annual reports as a risk that their business model likely would not be viable (if it could be called that even today) without current or higher levels of government subsidies.

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

There is a substantial minority of the investment community that thinks that Tesla's headed for chapter 11, even before taking on the SolarCity albatross.  Here is one academic paper.  Here is another such opinion.  Non-GAAP reporting has proliferated like a cancer among public companies, with so many creative non-GAAP numbers that I am not sure the Enron folks would go to jail nowadays.  Tesla is a master of this game.    Even if Tesla is not headed for chapter 11, the absolute last thing Tesla needs to be doing is taking on a new acquisition that burns a lot of cash, while simultaneously diluting their management focus.

When I watch SpaceX launches, I so want to love Elon Musk.  But I am increasingly convinced that this is a terrible deal, an insider game he is playing to try to keep one of his investments alive.  I am seldom a fan of most minority shareholder lawsuits, but if I were a minority shareholder of Tesla I would be suing to block this acquisition.

By the way, many investors must be reading this the same way, because SolarCity stock prices are up and Tesla stock prices are down (at lot) today.

Disclosure:  I have been short Tesla for a while.  I shorted SolarCity this morning when the acquisition was announced, after its price popped up.  I consider this merger announcement as the moral equivalent of announcing that SolarCity is in financial distress.  These investments are tiny, the equivalent of a bar bet rather than any substantial investment on my part.

**Footnote:  I have to say this every time -- The Model S is a great car.  I would love to have one, if Santa put it under the tree for me.  But just because they have one great product does not mean that the company will be a success or is a great investment or that it is worth massive amounts of my tax money in subsidies.

Does Ben Rhodes victory lap bragging about how he pulled the wool over the eyes of a stupid and gullible America on Iran remind anyone else of Jonathon Gruber?  Remember these famous words from Gruber?

"You can't do it political, you just literally cannot do it. Transparent financing and also transparent spending. I mean, this bill was written in a tortured way to make sure CBO did not score the mandate as taxes. If CBO scored the mandate as taxes the bill dies. Okay? So it’s written to do that," Gruber said. "In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in, you made explicit healthy people pay in and sick people get money, it would not have passed. Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical to get for the thing to pass. Look, I wish Mark was right that we could make it all transparent, but I’d rather have this law than not."

Even the justification is the same -- its OK to break the law and lie about it in order to break up gridlock.  (By the way, my mother-in-law -- who tends to be a reliable gauge of mainstream Democratic thinking -- argued the same thing with me, that extra-Constitutional Presidential actions were justified if Congress did not accomplish enough.   Asked about whether she was comfortable with the same power in a Trump administration, she was less sanguine about the idea).

While political lying is old as time, it strikes me that this bragging about it is a new phenomena.  It reminds me of the end of the movie "Wag the Dog", when the Dustin Hoffman character refused to accept that no one would ever know how he manipulated the public into believing there had been a war, and wanted to publicly take the credit.  In the movie, the Administration had Hoffman's character knocked off, because it was counter-productive to reveal the secret, but I wonder if in reality Obama is secretly pleased.

The Wall Street Journal has a good article on investor sentiment, relying heavily on the work by Robert Shiller.  He argues that investor sentiment looks much more like a hindcast than a forecast.  In other words, investors tend to be optimistic after the market just rose, and pessimistic after the market just fell.

The more stocks go up and the faster they rise, the more likely you become to expect more of the same. And when they go down, your expectations fall with them. Investors are often told not to get caught up in other people’s emotions — but it’s at least as important not to get swept away by your own.

New research hammers that point home. Finance professors William Goetzmann and Robert Shiller of Yale, along with Dasol Kim of Case Western Reserve University, have analyzed the Yale surveys and found that investors’ forecasts regularly look more like aftercasts — simple projections of the recent past into the future.

I have no reason not to believe this to be true.

But I think there is something a little wrong with this logic:

You can ask yourself one of the key questions: What are the odds of a one-day crash of at least 12% in the U.S. stock market over the next six months?

You probably answered at least 10% — even though that is roughly 10 times the likely chance of a disastrous daily crash in the coming six months, based on the historical record. (The 87 years from 1929 through 2015 consisted of 174 six-month periods. But, with only two single-day crashes of at least 12% over that span, such declines occurred in just over 1% of the half-year periods.)

Remarkably, professional investors exaggerate the odds almost as badly as individual investors do. Over time, both groups overall have tended to put the odds of a crash at around 20%, with the institutional investors’ estimates ranging only about one to three percentage points below that.

Again, I have no problem with the statement that most people, in a given year, overestimate the chance of a stock market crash.  20%, for any random year, is likely a high estimate.   But that is not the same as saying it is a high estimate for this year.  One could argue that we know more about our current year than to treat it simply as a random year.  For example:

• We are in the midst of what is soon to be the 2nd longest bull market in the market's history.  Are the odds of a significant correction higher on a particular day 2500 days into a bull market than on a random day in history?
• Stock prices have risen faster than earning for 5 years.  Is a market correction more likely in that environment than on a random day?
• Shiller's CAPE is close to the third highest it has ever been, and at a level that has nearly always been followed by a large correction.  Should I treat today's risk of correction as just the last century's average or is it realistically higher?

I don't think 10-20% is a bad estimate given where we are.