Posts tagged ‘patterns’

Tesla Story Gets Even Weirder as $TSLA Completely Changes Its Business Strategy (Full Article, Previous Partial Article Published Accidently)

A prior version of this article was published accidentally before it was complete.

I know I swore not to write about Tesla here and to confine myself to talking about Tesla on Twitter, but I can't help myself.  This is the company that is going to spawn a thousand business school case studies.  It is Enron but in the Internet Age with more transparency (or at least less sophistication in hiding their problems).

Over the weekend I re-read "The Smartest Guys in the Room" about the collapse of Enron.  I will admit I was an Enron fanboy at the time -- I drank the Kool-Aid and totally overlooked the problems.  I knew Jeff Skilling a little and worked for him on Enron when we were at McKinsey.  I believed he was brilliant and was doing what he said he was doing.  The crash of Enron took me years to accept, and only on my recent second reading of that book did I have the distance and objectivity to really understand it.  And I realized something else -- I was the same guy back then that I criticize today.  Skeptics of Tesla (including me) make fun of Tesla fanboys and their cult of Elon Musk and their belief of everything he says and their certainty he is the smartest guy in the room.  I understand them because I was that guy with Enron and Skilling.  Maybe Tesla is my chance to correct my past gullibility.

Anyway, just when I thought the story couldn't get any more dramatic (or weird), Elon Musk raises the bar.  Apparently Tesla is now only tangentially and largely irrelevantly an automobile manufacturer.  Instead, it is an autonomous ride-sharing company:

Citigroup and Goldman Sachs, who are underwriting Tesla’s latest effort to raise $2 billion in new funds, held a “broad investor call” on Thursday, where CEO Elon Musk and CFO Zach Kirkhorn answered brokers’ questions about their plans for the electric vehicle maker.

According to two invitees who attended the call, CEO Elon Musk talked up Tesla’s self-driving strategy right off the bat, expanding what he and other execs said at a recent event for investors that the company dubbed “Autonomy Day. ”

Musk confidently told investors on the call that autonomous driving will transform Tesla into a company with a $500 billion market cap, these people said. Its current market cap stands around $42 billion. He also said that existing Teslas will increase in value as self-driving capabilities are added via software, and will be worth up to $250,000 within three years.

This call was in the context of Tesla's offering this week of about $2 billion in new stock and convertible bonds.  The really interesting thing about the call:  Virtually 100% of the discussion on the call was about ride-sharing and autonomy, while neither word was even mentioned in the official written prospectus for the offering.

Before we can understand what the hell is going on here, and why Tesla is going all-in on a business it was barely talking about 60 days ago, we need to do some review.  I want to review where Tesla was last time I wrote about them, and also discuss new Tesla news and actions over the last 3-4 months.  From there, we will try to dissect what Elon Musk is doing.  TL;DR: I believe Musk is doing exactly what Jeff Skilling did at Enron, chasing new business strategies based on what stories he thinks will most likely goose the stock in the short term, rather than which strategies make the most sense in the long-term for his investors.

Where I was on Tesla at year end 2018

I had a lot of criticisms about Tesla's strategy towards the end of last year (here and here, for example).  But let me summarize some of the key points

  • Tesla has taken what was already a risky entry into a capital-intensive industry and has made it even more expensive and risky by choosing to own both the dealer network and fueling networks for its cars -- this means it has to invest not only in auto manufacturing capacity but also in a world-wide network of sales and service centers and in a global network of charging stations
  • Inexplicably, just as its production volume began ramping up in mid-2018 with the introduction of the mid-priced model 3, Tesla ramped down on its capital spending, R&D, and SG&A spending.  By the first quarter of this year, capital spending was no longer even keeping up with maintenance needs.  This was absolutely inexplicable for a growth company that has promised many new products in the near future (new coupe, semi truck, model Y crossover), all of which will need a plant and equipment to produce.  Further, Tesla slowed investment in its sales, service, and charging networks at the exact time its fleet size exploded, leading to a lot of customer dissatisfaction
  • The decrease in these expenditures was likely tied to Tesla's hard to fathom (I seem to be searching for a lot of synonyms for "inexplicable")  decision not to raise capital last year.  Its stock was over $350 a share and it had huge momentum from its first two profitable and cash flow positive quarters.  By almost everyone's analysis, they should have raised $5 billion or more, which might have only created 10% dilution.  (Instead they waited until this week after a terrible quarter and after the stock had fallen to about $235 to raise just $2 billion, barely enough even to fill their accounts payable hole).
  • Tesla and Musk claimed that the growth and performance of the 3rd and 4th quarters of 2018 were harbingers of the future and he extrapolated hockey sticks from these data points.  Skeptics like myself believe that this was merely a one-time bulge, that Tesla had sold through 2-3 years of demand in their order book in just 2 quarters, and that the first quarter would be a disaster now that the tank was dry.  In addition, Tesla has culled its order book of all the highest margin variants where it could actually make money, leaving what remained of the unfilled orders as low-margin variants it was barely worth selling.  [By the way, I figured none of this out on my own, and owe a lot to the great folks at $TSLAQ on Twitter, who bring a lot of free research to bear that made it easy to see these patterns].
  • My admiration for Musk as having really shown the automobile world that electric cars can sell at high price points (and not as little sh*tboxes) and for his space entrepreneurship really ended with the SolarCity deal.  In that deal, Tesla shareholders overpaid for a failing business simply to bail out Musk and his family from a sinking ship.  The acquisition made absolutely no strategic sense and Tesla has done zero to try to develop it, and in fact has been slowly shutting it down from the moment it was purchased.
  • Elon Musk has steadily lost any credibility he might have had by initiating product launches of products he claims are nearly ready for sale but never get introduced.  Tesla got a higher level of subsidy from California based on a single suspicious battery swap demo that has never been repeated or even discussed since.  Musk sold SolarCity to Tesla in part based on a flashy reveal of a solar shingle product that still has not seen the light of day.  Musk had a big reveal of the Tesla semi and started taking customer deposits but there are still no clear plans for its production.

What has happened at Tesla this year

  • The first quarter of 2019 was a disaster, with deliveries down despite initiation of Model 3 sales in Europe.  Worse, since the Model 3 seems to be cannibalizing Model S and X sales, Tesla was not only selling fewer cars but its mix shifted to lower priced less profitable cars.  It lost an enormous amount of money, and only after the conference call with analysts about first quarter results did Tesla reveal that this loss would have been far worse without a huge sale of government EV credits
  • Tesla burned a staggering amount of cash in the first quarter, and was forced to pay off nearly a billion dollars in debt when the stock price did not remain high enough for the debt to convert.  While Tesla's cash balance at the end of the quarter looked OK, there were two huge red flags. First, the cash barely covered a huge hole Tesla had in its net working capital.  Second, given the large number of vehicles Tesla sold in its end of quarter push in the last 2 weeks of the quarter, it appears that Tesla was nearly out of cash in Mid-March and perhaps days away from a default (analysis below).
  • The Tesla financial statements still include a number of unexplained oddities, including a billion dollars of accounts receivable, or about 20% of quarterly revenues.  How does a company that demands payment in advance before delivery have 20% of its quarterly revenues tied up in receivables?
  • Tesla announced, out of the blue, that it was closing all its retail stores and going online only.  Given the drop in demand for the quarter, it was a head-scratcher as to why eliminating the sales force was going to help.  The decision seemed to be almost off the cuff, as Tesla seemed surprised that they would still have to continue paying their expensive long-term mall leases.  After this was revealed, Tesla partially reversed the closure decision, but no one -- including their own retail folks -- seems to know what the plan is now.
  • Tesla constantly fiddled with its prices and model lineup.  It cut prices several times, but also announced a small raise as well.  It eliminated certain options for cars, added new ones, and then reintroduced eliminated ones.  Even long-time Tesla watchers are confused about the model lineup today.
  • Tesla continued to see an outflow of executive talent, including the exit of their very well-respected new General Counsel after just over one month on the job  (Mr. Buttswinkas returned to his old law firm and purged Tesla from his resume).  This seemed to parallel the rapid exit of an outside chief accounting officer last year who gave up millions of dollars to exit in just 60 days.
  • April car deliveries stayed on the same pace as the first quarter -- ie, way worse than Tesla's guidance
  • Elon Musk continued to get in trouble with the SEC, firing off production and sales guidance on Twitter that was different from Tesla's official published guidance.  Mr. Musk and Tesla are still guiding to a total delivery number for the next year that is well in excess of what most anyone else looking at the first four months believes is possible
  • Tesla announced a reveal of their Model Y crossover that will not go on sale until at least the end of 2020.  Unlike past Tesla reveals, this one seemed hastily set up and the prototypes shown were weird.  They looked more like the existing Model 3 with a few modifications than a promised crossover that could incorporate a third row of seats.  Tesla asked customers to start making deposits (skeptics will argue that the whole point of the reveal was just to get some free financing from Tesla fanboys) but unlike past reveals, this one fell flat.  There was apparently little interest in making deposits, though Tesla (unlike with past products) has not revealed the deposit numbers.
  • Lyft went public for over $20 billion and Uber is planning a $70+ billion IPO, despite having a history of negative earnings and promising investors they may not make money for 10 years (more on this in a minute)
  • After the Model Y went nowhere, Tesla set up what they called "investor autonomy day."  Tesla outlined their strategy for creating a fleet of self-driving cars, and promised fully autonomous cars by the end of 2020.  With these fully autonomous cars, Musk promised that Teslas would become an appreciating asset in that they earned income for their owners as autonomous taxis when the owners were sleeping.  He also said Tesla would own a fleet of taxis itself, using off-lease model 3's for this purpose.
  • As described at the top of the article, Tesla raised over $2 billion on verbal promises by Tesla (not echoed in the deal prospectus) that Tesla was soon to be a $500 billion autonomous taxi company

So what is Tesla doing?

Having written all of the above, I realize I have left so much out -- the product quality problems, the worker lawsuits, the autonomous driving deaths, the spontaneous car fires -- but I only have so much time.  If you are interested, @teslacharts on Twitter is a good place to follow Tesla from the skeptic side.  But given all this, what the hell is going on?  The following is my theory.

I think in the 3rd quarter last year, Elon Musk honestly believed that the huge ramp in sales and profits at Tesla represented Tesla permanently turning the corner.  He extrapolated from that growth and believed it would continue for years -- he did not see it as simply the one time working through of years of pent-up orders and demand.  As a result, he put off the capital raise he should have been doing, and instead had dreams of taking the company private and getting away from all the scrutiny by analysts and shorts that seem to irritate him.  Thus was launched the ill-considered "420" tweet when he claimed he had funding secured for a go-private transaction at $420 a share, when in fact this was an outright lie.  Once the SEC stepped in to investigate, a new funding round was almost impossible.

Then, in the first quarter, reality hit Tesla in the face.  For all their public optimism, Musk had to see that the demand he expected was not there and Tesla was likely running low on cash.  I think Musk had convinced himself the convertible bonds due in the first quarter would surely convert (and would have at the third quarter stock price) but now Tesla was doing the opposite of raising capital, it had to pay off debt.  Cash was going out the door and demand was weak.  What to do?

Musk has a demonstrated pattern that whenever he needs the stock price to be higher, or he needs to sell stock, or he needs some other kind of favorable financial outcome, he will do a new product demo. It worked for battery swap and the solar shingle and the model 3 and the semi, so it would work again.  The model 3 reveal had collected hundreds of millions of dollars of cash in the form of deposits.  That's what he needed now.  The problem is, they didn't have a prototype to show.  I believe Musk had the company hastily create a Model Y prototype built on top of a model 3.  It did not really have to work, it just had to be something he could talk about.  Interestingly, his VP of engineering quit at exactly this time, for reasons unknown -- was their some internal dissention about this Y prototype?

Anyway, the Model Y reveal was essentially a flop, and likely garnered few deposits.  Certainly not enough to fill in Tesla's growing cash hole.  And by Mid-March, Tesla may have been almost out of cash.  Tesla says it delivered half its vehicles for the quarter in the last 10 days of March, so about 31,500 were delivered in those hectic days.  At an average price of $50,000 each that would mean Tesla brought in nearly $1.6 billion in cash those last 10 days (this is conservative, may have been more if the average price was higher).  But they only had $2.2 billion at the end of the quarter, meaning Tesla was scraping bottom in mid-March, particularly since hundreds of millions of that cash is restricted and not supposed to be spent.

Somewhere in this period of March-April, after his usual product reveal trick with the Y did not work, I think Musk came to the conclusion that the Tesla car business as currently defined was not going to work.  Or, more accurately, it was never going to make enough money to support its sky-high stock valuation.  I have always said that Tesla would make a fine $10 billion niche car company, but nothing about it justifies a $50 or $60 billion valuation.  But at this point Musk can't accept a $10 billion company, even though that would ostensibly still leave him a very rich man.  But like Ken Lay at Enron, Musk has borrowed against at least half his Tesla stock and a falling stock price could lead to financial death by margin call (Musk, for some reason, also mortgaged all his multi-million dollar homes last December). His other investments are also struggling -- SpaceX has been unable to attract the capital it needs of late and Musk has poured a lot of money into the Boring company, an absolute embarrassment of a company that helps refute, in my mind, his "smartest guy in the world" rep.

As Musk looked around for a way to save the stock valuation, the Lyft and Uber IPO's must have had an influence.  Uber is losing as much money as Tesla and folks are talking about it IPO-ing at a market cap of $70 billion.  What if Tesla could call itself a ride-sharing company, only better.  Wouldn't that garner Tesla an even higher valuation?

So I see investor autonomy day and Musk's autonomy soliloquy on the capital raise call the other day as evidence that Musk has, in his mind, capitulated on auto manufacturing and has decided the way to keep Tesla's stock price up is to promise it will -- in just 20 months -- sell fully autonomous vehicles and be making tons of money selling taxi rides.  In other words, it is a robotaxi company that happens to be backward integrated into manufacturing the taxis.

I am skeptical for a number of reasons.

  • This reeks of desperation and capitulation.  If Dell says they are going to reinvent themselves as a search engine, it's time to sell the company
  • There is no evidence that Tesla can achieve full autonomy by end of next year and a lot of reasons to think they can't.  Most experts think full autonomy is decades away, and when they rank companies on their progress on autonomy, Tesla is usually near the bottom (e.g here).  Waymo and GM, the leaders, often go thousands of miles between driver interventions.  Tesla is hundreds of times worse.   Even over the short course at Investor Autonomy Day (where Tesla likely trained and practiced in advance) investors reported a driver intervention was needed.  Now imagine the same car with no driver.  In snow with the road markings obscured.  Driving through construction where new routes are confusingly marked off with cones.
  • The basic business numbers Musk throws around are absurd.  Just as one example, he extrapolates from current ride-share prices and assumes Tesla will make a ton of money because they will get the same price but not pay the driver.  But this is crazy.  If Tesla suddenly throws a million taxis into the rideshare supply equation, rates are going to fall.  Already, since 2012, Uber reports its average fare per mile has been reduced by over half.  If everyday folks are having their cars drive autonomously at night to earn extra money, the fee per mile is going to be competed down close to the cost per mile of operating the vehicle (or even lower, since most folks underestimate their all-in cost per mile on their vehicle).  Musk is basically proposing to commoditize the market but still reap premium margins.  Not going to happen.


Note that this article is simply my analysis and in some cases my guesses.  I think the story holds together but I can be wrong.  I am short TSLA via put options but note that this is a modest investment that is a small percentage of my portfolio.  Tesla is a dangerous stock to short.  Right through the bad news, individual investors at RobinHood have been loading up on the theory they are buying the dip.  20,000 people added TSLA to their portfolio at RobinHood just AFTER the horrible first quarter report.  Be very careful

Bonus -- Tesla's Largest Mistakes

No matter what happens, Tesla will always be remembered as the company that brought EV's mainstream.  But like any tragedy, they have made some fatal mistakes.  This is my attempt to get out ahead of future business school cases and rank their largest mistakes:

  1. The Model 3.  Tesla could have been a profitable luxury car maker but with the Model 3 tried to go for the low to mid end of the market.  But it does not have the manufacturing expertise or cost position (it assembles in California, for God sakes) to pull it off.  The quality problems it encountered have reduced its brand luster, and the volumes of cars have overwhelmed its service and charging networks.  Investments in the Model 3 have distracted it from real refreshes of its S and X and in fact the Model 3 has cannibalized those more profitable cars.  A higher end crossover would have been a better choice
  2. No third party dealers.  Tesla chose to bring the sales and service function in house.  This was a mistake.  Not only did it eat up capital, but it robbed it of valuable marketing partners such as Penske that could have really helped its sales ramp.
  3. No 2018 capital raise.  Rather than tweeting 420, Musk should have been raising capital based on its third quarter results.  The money was there to be had and Tesla needed it.  $5billion at least could have been raised with little dilution effect
  4. SolarCity Purchase.  This was a complete sham to bail out the Musk family and friends.  Did absolutely nothing for Tesla except drain billions of valuable capital
  5. In-house Manufacturing.  Musk often says he wants to be like Apple, but Apple is a design company.  It does not manufacture and for quite a while did not do its own retail.  Tesla would have been better off finding a manufacturing partner rather than manufacturing itself in the highest cost location in the country
  6. No Charging Partner. I think Tesla had to build out its charging network at first to eliminate one of the greatest consumer barriers to purchasing an EV.  But they should be partnering to share the costs.  Instead, Tesla still thinks of its charging stations as a competitive moat.  But as other car makers form consortia for charging networks based on faster charging technologies, Tesla is stuck with an expensive network that needs upgrading.  Its more of an anchor now than a moat

2nd Bonus -- Another Musk parallel if you are tired of Enron comparisons

Even more than Skilling and Enron, the person Musk most reminds me of is Ferdinand de Lesseps, whose attempt at building a French canal in Panama ended in spectacular failure.  I highly recommend the book "Path Between the Seas" for folks who want the whole story.  When I have time, I may post on the parallels. I presume Tesla critic @ElonBachman would agree since he uses de Lesseps' picture as his twitter icon but I have never seen him discuss it.


Softest T-Shirt

I post things like this NOT because I have any fashion or shopping sense but because I happen once in a while to stumble on something I really like.  I personally hate shopping and just want someone to tell me "buy this one, it is the best", sort of like going to Toms Hardware and finding which graphics card is currently the best value. 

When I am working out, I wear Drifit type wicking fabrics, but for other casual times around the house I want a soft t-shirt for lounging around.  Until recently my choice was a Kit and Ace T-shirt that I think had some cashmere in it (maybe this one?).   I can't be sure because there is absolutely no size or sku information in the shirt.  By the way, a note to clothing companies:  I buy clothing in physical stores, but I often want to re-buy the same sku onlie either as replacements or for additional colors and that is impossible if you don' somehow print size and sku information in the item.  Also, and I am told by the women in my family that this is a typically male rant, I am constantly exhausted to find that the item I loved and want to buy again over and over does not exist and has morphed into some other style or sku.  I am happy to keep re-buying the same shorts and shirts and running shoes forever if someone will sell them to me.

Anyway, my new favorite T-shirt and the current leader in my closet for softness is the Cloudknit tee from Outdoor Voices.  Outdoor Voices is a small company in startup mode and can be a little spotty on its inventory availability.  I found it on a vacation weekend in Aspen where they had a pop-up store we happened to walk into.  I love this shirt and bought a pile of them to sleep in (I don't really prefer to sleep in a lot of clothing but my wife is at that special age when she needs to keep the bedroom somewhere around freezing).  The Cloudknit hoodie is also amazing for lounging about the house.  Their "Doing Things" fabric is more for workouts and it is fine but not as spectacularly soft as their cloudknit fabric.

As a reminder, my one other shirt recommendation was for Hawaiian shirts from Tori Richard.  Great concept -- Hawaiian shirt patterns printed on fabrics that actually feel like quality fabrics.  I also like the orange label products because it is a more attractive fit -- most Hawaiian shirts are not very tailored.   If you want to try something different, try their crinkle fabric which I really like but is not loved by everyone.  I just throw them in the washing machine and hang them slightly damp until they dry and they are great.  I used to do the same thing for my Tommy Bahama shirts but if you hang them to dry they become really stiff for some reason.  Tommy Bahama shirts can be quite nice, especially as they age, but you have to tumble them dry to keep them soft, not sure why.  Fortunately neither shirt needs to be ironed (any shirt that requires ironing in my closet -- except for a few dress shirts and my beloved Robert Graham shirts -- immediately goes to Goodwill).

FOIA Needs A Major Overhaul and Reboot

I received some documents the other day as the result of a FOIA request, and as has been my experience in past requests, a lot of stuff is blacked out that I suspect is redacted merely to protect the agency and its managers from embarrassment rather than for reasons actually allowed in the FOIA rules.  Despite President Obama's claims to run the most transparent administration in history, I believe the problems have only gotten worse over the last decade.  The Administration even limited its own inspectors' general access to information  [how the hell does one punctuate the possessive of the plural of inspector general??].

Generally I do not have the time or resources to get to the bottom of these things, but folks in Congress do.  One of the patterns we have observed in the wrangling of Republicans in Congress with the Department of Justice over the last year have been releases of documents that are initially heavily redacted, and then latter re-released with fewer redactions.  The pattern we are finding is that many of the first redactions were not justified under any of the privilege rules that exist.  They were merely things the agency did not want anyone else to know.

My favorite example comes from Eric Felton in the Weekly Standard:

Some of the questionable redactions, by contrast, are charming efforts at bureaucratic butt-covering. Lisa Page, for example, was discussing with Peter Strzok the challenge of having an intimate meeting in Andrew McCabe’s conference room, given the size of his grand new conference table. “No way to change the room,” Page texts in the version provided by Justice. “The table alone was [REDACTED]. (You can’t repeat that!)” Hmmm, what classified, top-secret, national-security information could possibly have been redacted? The blacked out bit, it seems, was a simple “70k.” The DoJ—and can you blame them, really?—didn’t want Congress to know they were in the habit of spending $70,000 on a conference table.

I Agree With the Assessment: This is Just So Banana Republic

Police hand out cards to friends, family, and political supporters that allow the holder to avoid legal consequences of various infractions.

This actually got me thinking about policing and race.  When I was growing up in the South, having white skin could confer similar privileges, though less reliably (I still managed to flirt with losing my license on a couple of occasions).  The tiny village where my high school was located (Houston at the time had a number of small villages inside its boundaries) actually hired one of the Houston Police officers who was fired for killing Joe Campos Torres as its police chief.   Today, I would hope things are much better than they were in the 1970's South but blacks today are still arrested for marijuana use way more often than whites despite similar usage patterns.

My View on the Source of Wealth in the Modern World

About 15 years ago, I wrote something I wanted to repeat here just because I keep looking for it and a lot of my old Typepad blog era stuff is hard to find.  The original post is gone but I quoted from it in 2005.




At the time, perhaps to my shame, I had never even heard of Deirdre McCloskey nor her work that has been published in three volumes called the Bourgeois Era explaining what she calls the "great enrichening" (which I am slowly plowing through).  My thinking when I wrote this seems reasonably consistent with her conclusions, though she has obviously been a lot more systematic in thinking about it.  This exchange with Gregory Waymire is a short but quite readable window on her thinking.  She writes in part:

You're adopting a conventional and somewhat silly view that the bourgeoisie were especially diligent, when it is not true as fact and is anyway not the character of the bourgeoisie that
mattered to the Great Enrichment (which by the way was a factor of 30 per capita in countries that fully adopted economic liberalism, not the factor of 10 you quote: look at the passage again, and read slower and longer). Weber sometimes got this right, sometimes wrong. But people tend to read him as saying that higher savings and more diligence, Ben Franklin style (and even Ben did not actually do it), is what made us rich.

One trouble which such a conventional argument is an economic one that Solow-type models (and Smith- and Marx- and Weber- type models) that reduce growth to savings and labor effort are radically mistaken. What matters is human creativity released from ancient trammels....

What made us rich, I argue at no doubt tedious and unreadable length in the Bourgeois Era trilogy, is imagination, ingenuity, radical ideas released. They were released in turn by liberalism, Smith's "liberal plan of [social] equality, [economic] liberty, and legal [justice]."


From the WSJ:

















Coyote, in Forbes, December 2010 (excerpts):





Hillary Clinton in July, 2015:  via Instapundit





Streetcars: A Scam That is All About Class

I am increasingly convinced that the appeal of streetcars and light rail has everything to do with class.  From any rational perspective, these systems make no sense -- they are 10-100x more expensive than buses and lack the flexibility that buses have to adjust to shifting demand patterns over time.  A single extra lane of highway adds more capacity than any light rail line.

Streetcar's single, solitary advantage is that middle and upper class whites who would not be caught dead on a bus seem to be willing to ride streetcars.   I don't know if this is because of some feature of the streetcars (they are shiny and painted pretty) or if it is some sort of self-segregation (the upper classes want to ride on something that is not filled with "riffraff").

Anyway, Reason has a really good video on streetcars, which covers a lot of topics from cronyism to the class issues I mention.  And the film of the incredibly poor design of the DC streetcar has to be seen to be believed.  (via Maggies Farm and their great daily links page)

Transit Net Transit Ridership Does Not Go Up When Cities Build Rail










Great Moments in Bad Economic Policy

This article on bad bipartisan energy laws and regulations from Master Resource brought back some old memories of the 1970s.

Folks who are at all economically literate understand the role that government price controls (specifically price caps) had on gasoline shortages in the 1970s.  When there was a supply shock via the Arab oil embargo, prices were not allowed to rise to match supply and demand.  As in the case of all such price control situations, shortages and queuing resulted.

It is too bad in a way that most folks today can't really remember the gas lines of 1973 and again in 1978.  It was my job in 1978 as the new driver in the family to go wait in line for gas for all the family cars.  I wasted hours and hours sitting in gas lines. I wonder if anyone has every computed the economic value of the time lost to Americans sitting in gas lines because politicians did not want the price to rise by 20 cents.

A number of my friends who knew my dad was an Exxon executive were surprised at my waiting in lines, and wondered why we didn't get some sort of secret access to gas.  But my family waited in lines like everything else.

Well, almost like everyone else.  Because of my dad's position, we did have a bit of information most people did not have, at least in the first shock of 1973.  It was not a secret, it was just totally unreported in the media.  The key was the knowledge of a piece of Congressional legislation called the Emergency Petroleum Allocation Act of 1973.  It had an enormous impact on exacerbating the urban gas lines, but either out of a general ignorance or else a media/academic desire not to make government regulation look bad, it is as unknown today as it was unreported in 1973.

What the law did was this -- it mandated that oil companies distribute gasoline geographically in the US in the same proportion that it was sold in the prior year.  So if they sold x% in area Y last year before the embargo, x% must be distributed to area Y this year after the embargo.  I can't remember the exact concern, but Congress had some fear that oil companies would somehow respond to price signals in a way that caused gasoline allocations to hose someone somewhere.

Anyway, the effect was devastating, probably even worse than the effect of price controls.  The reason was that while Congress forced gasoline supply distribution patterns to remain the same as the prior year (in classic directive 10-289 style), demand patterns had changed a lot.  Specifically, with the fear that gas might not be available over the road and looming economic problems, people cancelled their summer long-distance driving trips.

Everyone stayed home and didn't drive the Interstates cross-country.  So there was little demand for gas at the stations that served these routes.  But by law, oil companies had to keep delivering gasoline to these typically rural stations.  So as urban drivers fumed sitting in gas lines for hours and hours, many rural locations were awash in gas.  Populist Congressmen berated oil companies in the press for the urban gas shortages and lines, all while it was their stupid, ill-considered laws that created a lot of the problem.

So this was the fact that should have been public, but was not: That instead of sitting in urban gas lines for four hours, one could drive 30 minutes into the countryside and find it much easier.  Which is what we did, a number of times.

By the way, it was about this time that I read Hedrick Smith's great book "The Russians."  It was, for the time, a nearly unique look at the life of ordinary Russians under Soviet communism.  I wish the book were still in print (I would love to see one of the free market think tanks do a reissue, at least on Kindle).  Anyway, about 80% of the book seemed to be about how individual Russians dealt with constant shortages and ubiquitous queuing.  It seemed that a lot of the innovation in the general populace was channeled into just these concerns.  What a waste.  Dealing with the 1970s gas lines and shortages is about the closest I have ever come to the life described in that book.

Krugman vs. Krugman 3 Days Earlier (A New Record For Self-Contradiction)

People like to compare what Krugman writes today in his political hack era with what he wrote in his real economist era.  But this time I do not have to look that far back.

On February 5 and On February 6, Krugman essentially agrees with the OMB review of Obamacare effects on employment, saying that the health care subsidies for lower-income workers would cause millions to work less by reducing the incentive to work, which he called "a good thing."  More here.

On February 9, Krugman returns to a theme he has been hitting on for some weeks now, calling the Republicans anti-science, mean-spririted, etc. for actually believing that unemployment benefits might reduce employment by reducing the incentive to work.  And here is what he wrote on the topic on December 8:


Yes I understand the shape of the subsidy patterns with income are different, but good God man you cannot reasonably argue that the labor supply curve is sensitive to means-tested government subsidies for one program but not at all for another without a heroic analysis that I cannot imagine and Krugman has not supplied.


Triangle Trade and Physics




Real time version here.  Via Flowing data.


Want to Save The Ice in the Arctic?


It might reverse the warming in the Arctic.




So consider this mess:





But here are two quick mental experiments we can do:



Update:  Melt ponds in Greenland are black with coal dust


For the Left, Do Asians "Count"?







US Voter Registration Rates (Citizens Only)

White:    71.9%

Black:    73.1%

Hispanic:     58.7%

Asian:     56.3%

US Voting Rates (Citizens Only, last Presidential election)

White:    62.2%

Black:    66.2%

Hispanic:    48.0%

Asian:    47.3%




Blast from the Past

I have not reread this little classic article from 9 years ago, until a customer in California found it and complained that it was outrageous that the state would actually allow such a person as its author to operate anything in a state park.  So I suppose it is worth relinking, if just for that reason.  Most of it holds up pretty well, though I regret the jab implying that progressives supported suicide bombers.  Here is an example:





Comments: Disqus Coming




"Abnormal" Events -- Droughts and Perfect Games








Resonance in My Feed Reader






Testing My Understanding

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that .... that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, "wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios" and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don't see any way a European debt crash won't have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don't understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today's announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can't print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans .... I don't understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world's patsy is never a bad bet).

Government Decision-Making in the Gulf









Work is scheduled to halt at midnight Wednesday.


I'm trying to see both sides here; I'm trying to understand the "coastal scientists" who contend that the berms will "change tidal patterns" and lead to more long term erosion of the islands, but if the islands are killed off by the oil what difference does it make? To borrow from Greta Perry's analogy, if my house is on fire, what does it matter what room I try to extinguish first? It's all doing down.


I'm Pretty Sure We Are Not Going to Get Any Deficit Reduction
















Bad Fourth Ammendment Decision

Via Valley Fever:








Capitalism: A Real Not Sarcastic Love Story

Sure, we all know that a series of carefully edited anecdotes on film constitute better evidence than comprehensive data and statistics, but Mark Perry soldiers on and does what he can anyway to rebut Michael Moore's new movie.  He has lots of good charts, but his summary is:

the evidence clearly demonstrates that along with capitalism and greater economic freedoms come: a) higher per-capita incomes, b) higher incomes for the poorest 10%, c) greater life expectancy, d) less corruption, e) cleaner environments, and f) greater political rights and civil liberties. Not a bad record for a system that Michael Moore portrays as evil, and says did "nothing for him."

I am always amazed at these attempts to portray countries like Cuba as superior to the US for the common man.  One only has to look at immigration patterns (and even better some measure of desired immigration intent, since our ridiculously restrictive immigration laws keep so many people out of this country) to see the common man's preferences.   Moore and his pears are like a man who looks at a river running from north to south and then arguing that the land in the south must be higher.

Just as an aside, there have probably been thousands of states in world history.   Of all those thousands of states and regimes from history, including the hundreds that exist today, there are probably only 15-20 that would have  social, economic, and political systems that would allow a man born to modest circumstances to make a fortune through criticism of the government and the social elite.

The Observer Effect and Using Google for Social Science





"the true number may be higher" 20,300 hits

"the true number may be lower" 3 hits



