Saturday, October 21, 2017
If you allowed forgiven debt to be untaxable, we could all pay each other in forgiven loans and avoid the IRS entirely!
A recent heartbreaking story in the paper (which of course, tells only one side of the story) concerns a disable vet who went to Cooley Law School and ran up a quarter-million dollars in student loan debt. I will refrain from commenting about Cooley Law School as they have sued people in the past who have discussed their operations. The Wikipedia link cited above, if read carefully, tells the whole story.
Sadly, this story is repeated time and time again in America, where we are told that a college education - any college education at any college in any field of study - is a one-way ticket to riches. It isn't. Even in the lucrative fields of Engineering and Patent Law (well, at least at the time I was in them) it was a ticket to a comfortable middle-class lifestyle, and certainly not worth $250,000 in student loans, even today.
For people majoring in "Sociology" or "International Law" or other nebulous fields? People who attend "for profit" or bottom tier schools? For them, college and grad school can be worse that worthless - the staggering cost and lifetime loan commitments mean the student sells off the rest of his working life for a few years of "study" that never leads to gainful employment. It simply isn't worth it.
There are better fields to study, and cheaper ways to go about getting a degree. Spending $60,000 a year on college is just plain dumb - no matter what your major is. Sorry, but that's the God's Honest Truth about it. I worked my way through college - all 14 years of it - and graduated with a lot less than $250,000 in debt. Plus I had a job when I graduated - the same job I had before I graduated!
But I feel bad for this guy, because like so many before him, he answered the siren song of college and law school, sold on the idea that if he borrowed enough money, he would end up with this credential that would guarantee him a high-paying job. The problem is, the jobs were never that high-paying to begin with and then the bottom fell out of the legal market about eight years ago.
Now he's on full disability and his law degree is pretty worthless to him.
Oh, it's not all bad news, of course. There are still lawyers - with experience - who are finding jobs and employment. They aren't making the big bucks that you see on television law shows, however. It is a much more competitive business than before. And as I noted before, "If you are in it for the money, you will never be happy, but if you do it because you love it, the money doesn't matter."
And sadly, a lot of people get into fields such as Engineering, Medicine, Law, and so forth, convinced they will make a lot of money, when in fact, the best they can hope for is a nice comfortable middle-class existence and a career that is interesting and rewarding.
That ain't such a bad thing, is it?
But I digress.
What is shocking - at least to some folks - is that after this fellow had his quarter-million-dollar loan debt cancelled, he was sent a bill by the IRS and the Michigan Department of Taxation for taxes due on this loan forgiveness. Since this $250,000 "payday" puts him in the highest brackets, he owes about 40% of the loan amount as income - and a smaller amount to the State as well.
To some folks, this makes no sense, or at the very least, seems unfair. The poor guy can't repay his loans on disability income, so there is no way he can pay the taxes on it, either. Perhaps a payment plan can be worked out with the IRS to pay the debt in installments over a number of years. Maybe the government will come up with a new law exempting people on disability from this tax. Hell could also freeze over, too.
But while it may be unfair to tax a disabled person this way, the underlying premise of the tax code in taxing forgiven debt isn't anything new or anything shocking. If we allowed "forgiven" debt to be untaxed, it would not take long for everyone to be paying each other in forgiven loans.
For example, suppose you wanted to pay me a million dollars. That would knock me into the highest brackets and I would end up paying the IRS and the State over $400,000 in taxes or thereabouts. I suppose we could form a Subchapter-S corporation or something and I could pay myself in dividends or deferred interest whatever that Mitt Romney and Donald Trump uses. That might knock me down to 25% or even 15% capital gains rates, if we structured it right.
But suppose instead, you loaned me the million dollars and then said, "I forgive the loan!" Since you don't pay taxes on loans (because, despite what poor folks think, getting a loan is not like getting free money) you don't have to pay taxes on the million bucks, right?
Well, the IRS and the United States Government are not that dumb. That loophole was closed a long time ago and Publication 4681 explains how this works. And if you think about it, there are logical reasons why this law is in place. A loan forgiven is income, because your net worth just jumped up by the amount of the debt that was wiped out.
Now granted, this can have unintended consequences - most sections of the tax code do. For example, you buy an investment property for $250,000 and then proceed to remortgage it over the years, adding to the balance of the loan. A decade later, you now owe $500,000 on the mortgage, having "taken out" cash at closing in a series of serial refinances. You also have depreciated the property on your taxes, reducing your income tax each year. But now your "adjusted basis" in the property is zero dollars.
You sell the property for $500,000 which barely pays off the mortgage. You walk way with no cash. But the IRS (and State tax people) sock you with a capital gains tax of $75,000 or more - 15% of the proceeds. You made no cash on the deal, but you now owe money, which you haven't got.
Now in this case, you would not cry "unfair" because the person with the property made money and just chose to spend it by taking cash out in refinancing. They also got a tax deduction as well. The fact they didn't put some money aside for the inevitable capital gains taxes isn't the fault of the government or the IRS, but themselves.
But of course, we expect an investor to be a little more sophisticated when it comes to finances. Someone investing in real estate should know what they are doing, but of course, the track record of boom-and-bust-and-default-and-foreclosure that has been going on since the 1980's would seem to tell a different story. Americans all think their houses are made of gold and get angry when they find out that sometimes they aren't.
You could make the argument (but I won't) that this disabled vet received a free education worth $250,000 (I question the pricing of the law school, though - that seems awfully pricey!). So he is not simply walking away from debt, he is walking away from something of value he bought. That he overpaid for that "something" isn't really the IRS's problem.
In other words, the IRS isn't being "mean" here but just doing their job. In fact, they have no discretion or choice in the matter. If they chose to "forgive" tax debts, they would be in far more trouble than the bad P.R. they are getting now. Government agencies are not allowed to selectively enforce laws depending on the sympathy of the person or corporation involved (at least in theory, I am sure there are examples where some well-heeled company has managed to bend the law to their will).
Of course, this raises the question, did Donald Trump have to pay taxes on all the forgiven debt he had running his various businesses into the ground? And I suspect the answer is "no" as he was shielded from most of these debts (directly) as they were run through corporations that ran his various projects. The corporations then declare bankruptcy and leave the banks and the IRS hanging.
Too bad law students can't incorporate. Oh, a neat idea, but it won't work. For us "little people" the idea of forming a corporation and then accumulating debt in the corporate name simply won't work. I had three subchapter-S corporations at one time, and two of them had debts, my real estate venture in particular had over a million dollars in mortgage debt.
But a funny thing - in order to obtain those mortgages, we had to personally guarantee the notes, which meant that if the whole thing went belly-up (for example, we didn't sell out in time as we did) we would be on the hook personally for those debts. And if those debts were forgiven, we'd have to pay taxes on the forgiven debt amounts. And yes, some real estate investors caught up in the bubble of 2008 found themselves with tax bills for forgiven mortgage debts. For your own home, however (whose capital gains are largely untaxable) such taxation of forgiven debt may not apply. It gets complicated.
Funny, but if his home mortgage was cancelled, he would have been in the clear. Maybe pay for school with a home equity loan instead? That does require you have a home, however, as well as equity in it.
I hope the poor fellow in the article finds some sort of relief from the taxes due. Perhaps he needs to declare bankruptcy, as painful as that sounds. Expecting Congress to act and pass a retroactive bill seems kind of farfetched, given how little Congress gets done these days.
But the idea that taxes are due on cancelled debt is "a weird area of law" as one person opined in the article or that it "makes no sense" as another noted, it just naive. Cancelled debt is clearly income - you are receiving a monetary benefit that increases your net worth by the cancelled amount and relieves you from paying back the balance of the loan. While it may not put cash in your pocket, it is income, no matter how you slice it.
Whether this is "fair" in certain circumstances, is another question.
Friday, October 20, 2017
Jet skis burn out after a few years, leaving the trailer to rot in the owner's side yard. You can buy these cheap and use them as utility trailers, for camping, or to haul a small boat or kayak. And hey, if you're dumb enough to buy a jet ski, at least save a few bucks buying a used trailer. Be sure to pack those wheel bearings though!
We were thinking of making some sort of trailer to tow behind the golf cart, so we could take the kayak to the boat ramp. Hauling it on the truck is OK, but it takes a long time to set up the roof racks and whatnot. We saw someone hauling their kayak on a small trailer and thought, "why not?"
(The Kayak in question is an Old Town 13' two-man loon we bought used for $200. Sturdy, but heavy).
We found this out by talking to someone at the campground who had a neat trailer to haul his kayak and a box bolted on top with some angle irons to haul all his camping gear, life preservers, etc. He told us it was a used jet ski trailer he found for $70 at a junk yard. Good scavenging!
As opposed to.... going out and spending thousands of dollars on brand-new kayaks. While searching for a cheap used Jet ski trailer, we found this missive on Craigslist in nearby Jacksonville, Florida:
Three Kayaks, Trailer, paddles, life-vests, transporter, storage box, rod storage tubes, rod holders etc. These kayaks and trailer have been stored in a garage and are in excellent condition. Two of the them have only been used twice and the other (140) was a demo model. Just have too much going on to be able to use the kayaks. Would like to sell as a package to someone who wants to get started in a great outdoor activity. Contact me if you would like to take a look.
Wilderness 140 Tarpon
Wilderness 135 Ride
Wilderness 115 Ride
Ouch. They spend all this money on brand-new kayaks, a trailer and then use them twice because there is "too much going on" (read: Watching Fox News 6 hours a day). You can go kayaking for a lot smaller investment than this, trust me. Like $200 or so.
But this got me thinking. A lot of people decide, "We're going to get into Kayaking!" or boating or pottery, or a motorcyle or a hobby car or whatever. And they go out and buy all brand-new stuff and it languishes in the garage. We've seen a lot of brand-new kilns, for example, that sit unused and obsolete, over 10 years old, in the owner's garage. They were going to get into pottery, spend thousands of dollars on equipment, and then lost interest. And pride prevents them from selling all this brand-new stuff and moving on with life (and learning a valuable life lesson).
We've seen people buy brand-new motorhomes - spending tens if not hundreds of thousands of dollars - and then go camping and decide they hate RVing. And they sell the rig at a huge loss, or since they are upside-down on the rig, let it rot in the side yard until the loan is paid off.
Or consider my former dental hygienist, who went to a boat show with her husband and bought a boat. They went out on it once, on a very windy day, and it scared them so much they never used it again. They failed to winterize it, and the first winter cracked the block. Nearly a decade later, it sits in the driveway, full of green water, the transom rotted out, and ten hours on the hourmeter. What a freaking waste!
Yet the middle class does stupid things like this all the time, and then wails that the "1%'ers" took away their money. And younger people do this too - signing onerous loan agreements to go to party university to get a useless degree in naval gazing and then wondering why there is no six-figure job at the end of the pipeline. Forgive my loans! Make college free for everyone! Guaranteed minimum income! Tax the rich! It has to be someone else's fault, right?
I could go out tomorrow and buy a brand-new trailer at a boat store. I could go to Lowe's and buy one of their "little gay trailers" they have parked out front and pay cash for it. I choose not to. Because this is a want more than a need, and the fun part is finding something that someone else discarded and then making something of it.
Sort of like our $299 golf cart. Our friends have spend thousands of dollars on tricked-out golf carts - $8000 or more. We've spent about $2000 all told, and are having a ball with it. And if our friends think we are "poor" then so much the better. Fly under the radar - that's my mantra.
If all else fails, I think I can make something from some old galvanized steel studs they are throwing away in one of the hotel demolitions, and a couple of used wheelbarrow wheels. Either way, I'm in no hurry to go out and spend money on a trailer, that's for sure!
Thursday, October 19, 2017
What store has the best prices and best service? Amazon? Best Buy? Lowes? The local Mom & Pop Appliance store? The answer may surprise you.
Our icemaker finally died after 12 years. Such appliances are designed with a 15-year design life in mind, so it was a few years too early. Hard water really eats these things up, as they are constantly on and constantly spraying water about the innards, and scale builds up quickly.
So I go online to find a replacement. Most undercabinet ice makers are 15" wide, and ours was 18" wide. Not wanting to re-build our cabinets, I search for an exact replacement. These are not cheap. The retail price on a replacement is a staggering $2599. Ouch. These are toys for the rich, or at least people who like their martini ice just so.
So I check Lowes and Home Depot. They can order one, with two month's notice, for $2159. That's somewhat better, I guess. But having seen all the dented appliances at both stores, I am reluctant to order. They hire kids to work at these places - kids who basically don't give a shit about anything.
I actually found a used one on Craigslist that needed a new pump. I just replaced the pump in mine, so I could swap that part out. Sadly, it was sold by the time I called. That might have been a big savings, but then again, if ours burned out at 12 years, how long would a used one last?
I go online to all the other places - Compact appliance, Amazon, etc. They have 15" models, or ice makers that are just freezers with conventional refrigerator ice makers in them (that make half-moon shaped cubes, not "clear ice" like a real ice maker). Or they have 15" models which have pretty half-hearted ratings. So much for Amazon taking over the appliance business from Lowes.
I keep searching online and find pretty good prices at some appliance stores. But since I am out of their area, they can't ship to my house. Then I think a minute. The local Mom & Pop appliance store, Coastal Appliances, furnished all the Kitchen Aid appliances that came with this house. We bought the fridge, washer and dryer from them as well. I call up and they are $100 cheaper than Lowes or Home Depot, and will deliver, install, and remove the old ice maker as well.
And unlike Lowes and Home Depot, I trust these folks not to drop the damn thing off the back of the truck, put a dent in it and say, "Gee sorry!" the way the chain store lackeys do.
Now, sure, you could say I could have bought a cheaper model, or paid a carpenter to narrow the cabinet opening. But that's comparing apples to oranges. When it comes down to it, when I searched online, the best price available for this particular make and model was at the local appliance store.
Not Home Depot.
Not Best Buy.
Not Compact Appliance or Amazon.com - they didn't even stock such an item, only pale imitations.
The heralded demise of brick and mortar and Mom and Pop may be further off than we think. Sure, Amazon has great prices on some things. But if you want a specific thing, they largely don't have it. They will have some crappy made-in-China substitute that no doubt is cheaper, but not quite as good. And granted, half the time what they have is adequate.
But in terms of buying a specific product, the big-box stores and online sites all fall down when compared to the local Mom & Pop appliance store.
Wednesday, October 18, 2017
A used car from the original owner can be a good deal. Unknown crap off a used car lot, not so much.
I have received a number of e-mails recently about buying used cars. In several posts, I have repeated what a lot of "car guys" have said for years, that the best deal in a used car is a late model used car from the original owner.
This means a car "for sale by owner" about 1-5 years old, with all service records, being sold by the person who owned it - NOT from a used car dealer, a "curbstoner" (a guy who buys and sells cars on the side) or the third or fourth owner of a 10-year-old car.
For some reason, this common-sense advice gets twisted around to "used cars are ALWAYS a better deal!" or "I should buy a 15-year old Mercedes with 300,000 miles on it!" - which of course, is not what I said at all.
The low mileage, late model used cars for sale by owner are out there - but are not easy to find. You have to look. And it may not be possible to find the car you want or are looking for, at least right away.
It this is a generalization, not a hard and fast rule. Used cars from a reputable used car dealer (such as some new car dealers or a chain such as Carmax) can sometimes be a good deal, but usually cost more - as evidenced by the price guides (NADA, KBB, Edmunds) which all show used car dealer prices to be 10-20% higher than "private party sale" prices.
And some types of cars are hard to find "for sale by owner" in good condition, because they are the kinds of cars bought by young men, "modded" and then beat to shit. One problem with Jeeps and 4x4 pickups is that kids (and by kids, I mean these oversized children well into their 30's, usually young men) buy them new, put bozo tires and 8" lift kits and loud exhausts on them and then take them "off-roading" and usually break things. Or "performance cars" that are modded with questionable aftermarket accessories and then beat upon.
These types of sellers think the "mods" they made make the car worth more than new and are unrealistic on pricing - and in fact are often not really even selling the car. You know the type. Back in my day, it was always the jerk with the Camaro with the perpetual "for sale" sign taped in the back window. Yes, Mom's Berlinetta is a collectable - not many of those inline sixes with an automatic were made, in baby blue.
Like I said, the decent cars are hard to find, and if you can't find one, then you may have to move to plan B. Buying a brand-new car is one alternative, but bear in mind the second you sign the papers on it, it is a USED CAR and worth about 10% less than the nanosecond before your pen hit the contract. You take a big hit, so if you can find that two-year-old car with low miles, you can save a lot of dough.
Used cars from a dealer can be dicey. The guy who offers "buy here, pay here" or "we repair bad credit" or whatever, should be avoided at all costs. These are not car dealers, but just people who rip off the poor by selling them crappy cars for inflated prices at obscene interest rates. New car dealers are a mixed bag. As I noted before, the local "Monster Motors" offers shitty deals on overpriced used cars. But other dealers I have visited (in more affluent areas) often want to "move iron" off the lot and will keep their best trades for sale. You will pay more than in private party sale, but you won't get totally screwed as you would at Smilin' Bill's Used Car Lot and his weekly payment plan.
Whatever you decide to do, research, research, research first. Pick one make and model car first - you will have to look at a lot of cars first and decide on one model. You can't cross shop Fords and Chevies - the pricing patterns are apples and oranges. Pick one and then shop that car.
For example, when we bought the Nissan Frontier, we narrowed the selection down to that model (and trim level, SV) after looking at Fords, Chevies, Toyotas, etc. That made it a lot easier to compare Frontiers to Frontiers, and quickly get a feel for what prices were reasonable and what condition to expect as normal. We used the NADA guide, KBB, and Edmunds (and printed out the pricing pages as a guide) and set up a file. We read reviews online. We scoured Autotrader, Craigslist, eBay, and whatever other places listed cars for sale new or used. We visited several dealers and quickly realized that "small town" dealers were the worst of the lot, as they sold few cars and tried to extract maximum profits from each sale. Sometimes you have to drive to the "volume" dealer in the big city, as they get kickbacks for selling more cars and thus can offer lower prices. Most dealers make more on service than they do on sales, particularly warranty service.
We picked the Nissan because it was cheap and not as popular a the Toyota. The Nissan dealers were dealing, the Toyota dealers thought they were selling gold bars. And this is true for any popular car. You want an SUV? You will pay through the nose. You want a 4-door sedan? The salesman will beg you to buy it. Of course, this can backfire on occasion. Some cars are unpopular simply because they are pieces of crap. Fiat-Chrysler is always offering amazing rebates and sales prices, simply because they make the worst quality cars sold in America, other than Mitsubishi.
We then we kept looking. And looking. 2011, 2012, 2013. We looked at these damn things for nearly three years. We didn't need a new truck or a used one, so we were in a good position to look and not have to commit. With each passing year, they added more options to the truck for the same purchase price. And eventually, I got a call from a dealer who wanted to unload a truck at the end of the year, and since it was two-wheel-drive, there weren't a lot of takers for it (the kids all want 4x4 to look cool). Since I had looked at over 20 of these trucks and had been monitoring the pricing on them since 2011, I was able to figure out he was asking a reasonable price and we pulled the trigger on it.
Reasonable price being the key. Expecting to "win" in the car business is just a fantasy. They are not going to give away a car, and you are not going to "pull a fast one" on the salesman. Every time I hear a story from some old white guy on how he snookered the car salesman and "got a good deal" I can pick at the edges of the story and discover that he either fell for the inflated trade gag, gave his trade away, or was screwed on financing, or the teller of the story is basically lying and not reporting the actual sales price (with the $600 "dealer processing fee" of course!).
What do most people do? They wander into a car dealer "just to look at the cars" and end up trading in their car and buying something they didn't even want, without checking prices or cross-shopping at all. My neighbor went into the Volvo dealer to buy a convertible and came home - eight long hours later - with a wagon.
And this is a shame, as in this day and age, with a few clicks of a mouse, you can research prices on any car, print out all sorts of data, and cross-shop deals online from a number of sources. There are price guides, buying clubs, all sorts of tools at your disposal. It takes some effort, to be sure, but not long ago, none of this data was available to the consumer. Back in the day we had classified ads in the paper and maybe the "blue book" which a salesman might let you look at, or if you had a friend at the bank, he might let you sneak a peek.
So do the research. Pick a car. Cross-shop and think carefully. Don't be afraid to walk away. The last two cars we bought - the Nissan and the Hamster, I picked out the exact car I wanted, and negotiated a price over the phone, before I even went to look at the car. Most folks do the opposite - they wander into a dealer with their checkbook and a pay stub, and say, "please Mr. Salesman, put me in this '08 Hupmobile! I desperately need a car, as my trade-in caught fire on the way here!"
You laugh, this happened to a friend of mine, whose old SAAB burnt to a crisp in the dealer parking lot. That didn't give him a lot of negotiating leverage with the salesmen at that point. I think he ended up driving home in a Lincoln Mark VIII. Another friend of mine bought a car when her trade-in seized its engine in front of the dealer. Again, not a strategic place to be, in terms of negotiating power.
When I worked at GM, we were able to buy cars at "employee pricing" (Class A discount) every two years. Many folks would buy a popular car, drive it for two years and then sell it for about what they paid for it to some third party. In some cases, they had a friend who would agree to buy the car ahead of time, and even pick out the options and color. Two years later, they get a lightly used car at a very advantageous price, while the employee got to drive for free. Those sort of deals rarely work out for the rest of us, however.
Whatever you decide to do, do the research first and understand what is a "fair price" for the car you are looking at - and in order to do this, first pick out what car you want to get, before doing the research. Don't just walk into a dealer and compare a Ford to a Chevy to a Toyota, as you'll be confused as all get out by the different levels of options and trim, as well as model years and prices. Avoid used car dealers in poor neighborhoods or car dealers with come-on prices, weekly payments, re-leasing or weekly leasing, or giant inflatable monsters or mascots.
The best deals, and they are out there, are late model cars from individual sellers - people who actually owned the car and bought it new, and now want to unload it. These are not easy or common deals to find, but they are out there and worth looking for, if you can find them.
Sunday, October 15, 2017
Are we returning to 1950's banking? Sort of.
A recent article online in Forbes, which can be read without paywall here, illustrates why Bank of America has such a shoddy reputation among the poor. The Bank has been actively trying to court its existing users who actually have money while at the same time turning away folks who just want to shop cafeteria-style for one banking product, or poor folks who have $22 in their savings account.
Bank of America is profitable again, and they returned to profits by closing down unprofitable branches, fully embracing electronic banking, and embracing their existing customer base. As I wrote in an earlier posting, in the good old days, the banks paid "bank interest" on savings and then loaned out money at mortgage rates. The money being loaned out was, by and large, the money being deposited by others. Banking was a local and community thing.
Maybe that has all changed today. And many folks today use banking services cafeteria style. They get a credit card from some place online that offers the lowest rates or the fanciest gimmicks. They get a mortgage through a mortgage broker. They get car loans from car dealers offering low rates or even 0% interest. And they shop for checking and savings accounts based on who has the best services, lowest fees, and highest interest. And of course, their investments and savings are with some mutual fund company or a financial adviser who operates out of a storefront.
This model of banking makes it very hard for a bank to make money. Since there are always going to be people online with no overhead who can undercut your rates, you will lose the mortgage and credit card business as well as the car loan business. All you are left with is grandma and her passbook savings account. And you ain't making money on grandma.
And we saw this in the now-closed branch here in Brunswick, Georgia. You would go into the branch and you'd see a line of people cashing paychecks or making tiny deposits and withdrawals from their savings and checking accounts. The bank makes no money on these customers, and after paying rent and employee salaries, actually loses money.
There are legions of complaints online about how banks screw poor customers with bounce fees and late fees. In fact there was a joke on SNL, I believe, where the punchline was "give me my $17, bitch!" - which was in fact the balance on their account. It sounds like a stereotype, but I have read online, "complaint" forums about BoA where some 20-something whines that he overdrew his account and is now being assessed a bounce fee which exceeds the account balance. Another complainer tried to use his savings account like a checking account, and was charged an excess transaction fee.
Of course, these fees are there for a purpose - to drive away marginal customers. Banks make no money from someone who deposits a paycheck on Friday and has it all spent by Monday. The best advice for folks like that is to join a credit union if possible. But don't expect the credit union to be any friendlier about marginal banking practices. At the Patent Office Credit Union, back in the day, clerks would line up on Friday to get money orders (at 75 cents apiece!) to pay all their bills. When I asked why they did this, one teller told me, "We tried giving them checking accounts - they just kept writing checks until they ran out!" The old joke of "I can't be overdrawn, I still have checks!" is indeed based on real-life experiences.
The problem, of course, is banking discipline, not merely a small paycheck. As I recounted in another posting, I was in line behind one clerk, who had a beautiful Coach handbag and was looking at a car brochure for the new Coach-edition Camry. I couldn't figure out how she could afford these things when I could not, making more than twice her salary, when she mentioned she lived with her parents and a number of other relatives. In other words, she had money to spend, and she was doing a pretty good job of spending it, too. Financial discipline was just not in the cards. Having bling was.
And that was me, at age 21, after dropping out of college, bouncing checks at the convenience store and spending every last dime on gasoline, beer, and pot. I could not understand why the bank was being "mean" to me with bounce fees and whatnot. It took a long time to figure out that it wasn't the bank that was the problem, it was me. I had no savings in my savings account. No financial cushion, no rainy-day fund. A dollar in my pocket was a dollar spent, and like many poor people, I tried to play a game of leaving as little money in the bank as possible.
And it wasn't as though I couldn't have saved. Rather, I blew through money on "stuff" instead of saving it. I mean, when you are trying to make ends meet, do you really need to have exotic fish, or indeed, pets at all? Why buy a new car when you have one that runs perfectly fine? I made all of those sorts of mistakes and more. Of course, back then, we didn't have tattoo parlors and piercing places on every corner - or check-cashing stores and payday loans. Today's generation has a whole lot more shitty choices to make than I had. And they say there is no progress!
Today, Bank of America is my new buddy - at least most of the time. They have been fishing for my business and getting a lot of it - credit card, investment, savings, checking. Since I have no debts, however, they probably are a little miffed at me for not having a mortgage or car loan. But rather than fish for new customers - which is an expensive process that requires advertising and promotion - they are trying to harvest bucks from their existing accounts - and doing a pretty good job of it, too.
They have managed to persuade me to move much of my business to their bank, instead of having it spread out across a number of banks (five at one time), mortgage companies (ditto), credit card providers, and so forth. While I still keep a backup credit card for traveling (if your card is stolen, you are kind of screwed if you are away from home with no way to pay for anything), I have slimmed down my accounts considerably since I started this blog - much to the advantage of BoA.
Saturday, October 14, 2017
Prunes are fat-free, doncha know! They are also gluten free! Who knew that fruit has no grease or bread in it! Learn something new every day, it seems!
One of the craziest things about American culture is how science turns into pseudoscience and is applied to everyday products. I was noticing this in a small package of prunes, which stated that, among other things, they were good source of fiber (which is true) but that they were also fat-free.
The struck me as kind of an obvious statement. Fruit generally doesn't have oil or lard in it. For that matter, prunes are also gluten-free, in that they don't have any bread in them. I suppose it wouldn't have hurt if they had also advertised them as being not only vegetarian, but vegan as well. If you are going to state the obvious, you might as well go whole-hog. No, there is no meat in prunes. Funny how that works.
I wrote about this before, how the vegetarian aisle at the Wegmans is more like a candy store, with lots of sugary cereals and even outright candy. A package of Jolly Ranchers was advertised not only is being vegan, but fat-free as well. Yes 100% sugar has no fat in it. That doesn't make it health food.
Of course, this plays into the popular misconception that fat makes you fat. For some reason, Americans are obsessed with the idea that removing the fat from something somehow makes it healthier. And this is only the case if it is transfats, which largely been removed from the American diet. And ironically, many "healthy" foods of bygone days contained trans fats - such as margarine, which as offered as a low-fat alternative to "unhealthy" butter.
You know what? Cigarettes are also fat-free, vegan, and also a good source of fiber.
You know what? Cigarettes are also fat-free, vegan, and also a good source of fiber.
I ran into this attitude at a restaurant recently. Our waitress was confiding that she had bought a fat-free fryer to fry her french fries in. She said this after I declined the side offer of fries and asked for a side salad instead. She felt that the "evil part" of the french fries was the vegetable oil they were cooked in. But the reality is the main problem with french fries is that they are 100% starch which is converted in your body to sugar, which in turn goes right to your fat cells, if you overeat and under-exercise. It is not the oil, but the high amount of calories in fries - calories your body hoards if they are not used. The fact that they are dripping with canola oil is really secondary. And of course, the main problem is they give you a pile of them size of your head which really amounts to about 300 to 500 calories worth of potato- enough to serve an entire family.
But she was convinced, that somehow this food stuff could be made healthier if you just remove the oil, when in fact it was the huge amount of calories that was involved that made it unhealthy.
Granted, if you have cholesterol problems, the fat and oils are also an issue. But "low fat fries" are not the answer to your health problems, the boring side salad is (sans oily dressing, of course).
Granted, if you have cholesterol problems, the fat and oils are also an issue. But "low fat fries" are not the answer to your health problems, the boring side salad is (sans oily dressing, of course).
But marketers and advertisers have seized upon the misinformation of the American public and thus place these labels on products where they are meaningless. Of course prunes are going to be fat-free, unless you fry them in oil or lard. Of course Jolly Ranchers are going to be gluten-free, unless you wrap them in a piece of bread.
But moreover, saying something is "free" of an ingredient doesn't necessarily make it healthier. Fats and oils are not necessarily unhealthy things in your life unless you consume them to excess, much like anything else. The same is true for glutens. Very, very few people are actually allergic to gluten but it's become trendy to say something is gluten-free and people love to make a big deal or fuss about ordering something without gluten in it, much as vegetarians and vegans like to have things made special for them just to be a pain in the ass.
Sadly, one of the ingredients in food that really can be unhealthy for you, particularly large quantities, is sugar. And for a long time, marketers love to use the words "sugar-free" in selling products. But of course, the way they achieve "sugar-free" was to use some sort of artificial chemical or sweetener in place of the sugar. And some of these chemicals have been alleged to be dangerous to humans and have been withdrawn from the market.
Other alternative is to just not put sugar in things to begin with. As I noted my previous posting about Trader Joe's, for some reason they feel obligated to dump sugar and almost all of their products. They make an excellent hot sauce call Green Dragon hot sauce, or I should say it would be an excellent hot sauce if it didn't have cane sugar as its fifth ingredient. When you have this hot sauce you think yourself, "Gee, this is a good hot sauce, but it's a little too sweet." Unfortunately it seems like everything in their store is saturating with sugar, which is better than high fructose corn syrup, I suppose, but why not just leave the sugar out and be done with it?
The same is true for most commercially available tomato sauce as you see in the stores. They are usually laced with sugar and sickly sweet. Ironically, sometimes the store brands are the ones that don't have sugar in it, such as some of Walmart's store-brand tomato sauces. And if you look at the calorie count on the back of the bottle, you see that the calories count correspondingly lower as a result.
You wouldn't think about making a plate of spaghetti and meatballs and then dumping a bunch of Jolly Ranchers into it would you? I mean that would be disgusting and sick. But for some reason, the people who make canned tomato sauce think that we want candy and all of our Foods. And even so-called "progressive" retail outlets like Trader Joe's (which is really just a German supermarket chain gussied up for the American Market) seem to feel likewise.
And it's unfortunate, but this use of misleading labels seems to point out exactly how ignorant Americans are. If people really need to be told that fruit is fat free or that candy is gluten free or that sawdust is sugar free, one wonders about the level of intellect in our country.
But then again this illustrates how easy it is to make money in this country, as most people are so entirely clueless and moreover believe whatever is convenient to them.
Friday, October 13, 2017
Could a number of individual factors combine into a perfect financial storm? Possibly.
Poor Herbert Hoover. He has been vilified in the press and in the history books as either causing or aggravating the Great Depression and stock market crash of 1929. In reality, much of what happened during the Great Depression was already in the process of happening before he took office. However, his lack of action and some of the actions of the Republican Congress certainly made things worse than they had to be.
History has a way of repeating itself, although never in exactly the same way. The housing bubble of 1989 was similar to the housing bubble of 2008 but not nearly as large. There were differences between the two bubbles, the causes of them, the extent, and the resulting devastation. However there is an underlying pattern in both cases - people started to think that ordinary houses were more than just places to live, but instead as gold mines in their backyards.
Our economy and our stock market and our housing market are all cyclical. We even have names for this, we call the market a bull market when it is charging ahead and a bear market when it is falling behind - this is a known pattern throughout history. And usually a bear market follows a bull market in a very predictable pattern. And until very recently, we've been in a record-setting bull market that is going on since Obama's inauguration. What always follows a bull market? Always?
The question is, can this bull market continue forever, or will it retract? Are we on the cusp of a recession or on the edge of a new, even larger bull market that will allow the economy to take off even faster than it has been? Some on the Right think the latter - that unfettered by regulations and Obamacare requirements, the economy will take off like a rocket. Others, such as myself, remember what happened in 2008 when regulations on banks and mortgage lenders were reduced and all hell broke loose.
Sadly, I think we are in for a bear market, and for a number of reasons, not just one single one. There is not any single reason that will crash the economy in the short-term, nor do I think it will be a significant crash, but rather a small recession as we've had in the past. However, there are a number of warning signs which are very troubling.
Optimists will point to the low unemployment we currently have, as well as the record prices in the stock market, record prices for homes, and robust home sales. It would appear that the economy is going well. Cars are selling well and everyone has a job. But when you scratch the surface, you start to see some troubling signs of problems.
Consumer debt is at an all-time high, which is to be expected, as in an expanding economy, everything goes up in value over time. However a lot of this debt is to is for subprime loans, particularly car loans and also for credit cards. And the default rates are starting to ratchet up, and in fact, are pretty staggering. Bill Ford warned about this several years ago, when car makers started offering 7-year loans. This was longer than most people actually own a car, and forces them to be upside down on their car loan for a longer period of time. The net result is that people either default on their loans or are locked into a car loan for longer than they want to be and can't trade in and trade up to a newer car.
Or if they do trade in and trade up, they fold in the negative equity into a new loan which puts them either further behind the eight ball. Eventually, like a person taking out a payday loan, they default and end up in bankruptcy has one loan folds into another loan and eventually they're paying very high interest rates and owe more on their car than they possibly will ever be worth. This is a well-known pattern and I described before how a friend of mine did just that in the 1990's by going from car to car (which she never changed the oil on) and folded negative equity into higher and higher interest rates loans until she went bankrupt. She ended up marrying a guy from Saudi Arabia and is probably under a Burkha somewhere today.
Granted, unemployment is it all time record lows, but wages seem to be stubbornly stuck in the past. As a result, these very same people who are taking out these subprime loans don't have the income to service them. Something has to give, and banks are going to be stuck with an awful lot of bad debt.
But what about the rest of the economy? What about manufacturing and production? Well here, we are starting to see signs of trouble, an America's manufacturers are already sounding the alarm. The Trump Administration was elected on the promise of enacting punishing tariffs against our trading partners in order to protect and promote American industry. This is the core of Trump's "American First" policy.
We are seeing this already at the International Trade Commission, where the ITC is recommending a 200% to 300% import duty on Canadian build jet airliners. While arguably it is true that Bombardier is dumping these planes on the US market for below cost, or at least at a very reasonable price, there really is no competing American product that is being harmed by the sales. Boeing's argument the 737 is competitor for Bombardier's much smaller regional jet is someone specious.
But already, even the threat of these import duties is having the expected effects. The affected countries, which include not only Canada, but also Ireland and England, are promising retaliatory tariffs or trade actions which could damage the US and even Boeing in particular. Boeing is one of the largest exporters of American products technology, other than agricultural exports, and stands to lose a lot if our foreign trading partners decide to switch their allegiance to Airbus instead.
Moreover, since Boeing is also heavily into the defense business, sales of Boeing-made fighter jets and other defense products may wither as our trading partners decide to look elsewhere for their defense needs, in retaliation for the trade tariffs. Trade wars never end well for anyone.
This is a nearly exact mirror of what happened during the Hoover administration after 1929. In the olden days, Republicans stood for God, Country, and the Tariff. Tariffs were very prevalent early on in American history as a means of protecting American industry from foreign competition. In the infant days of our country, American manufacturing companies couldn't compete with cheaply manufactured British and European products, and the import tariff was seen as a way of allowing the nascent American industry to thrive.
But economists have argued that free trade is a much better alternative to restrictive tariffs. And they argue that restrictive tariffs end up tearing down an economy, not building it up. If each country has restrictive tariffs on imports, it doesn't necessarily mean that domestic industry will thrive, only that the cost of goods will soar in the economy be stifled. We see this in Central American countries, which often slap 100% import duties on automobile sales. If you want to move to Costa Rica to escape Donald Trump and retire on Social Security, you will find it very difficult to bring your car with you or have one imported, as it will cost twice as much as it does here in the United States. For that reason, you tend to see very small, inexpensive cars in Costa Rica, which often cost more than a Mercedes does in the United States.
And no, there is no car industry in Costa Rica that is being protected or is being promoted by these tariffs, it's just a means of the government to raise revenue. Trade agreements such as our North American Free Trade Agreement would actually allow the United States to sell automobiles into countries in Latin America, which would mean more profits for US manufacturers, which would then trickle down to shareholders and employees. However, these at the very same agreements that the Trump Administration is attacking.
The Pacific Trade Agreement is another example of this, which Donald Trump wrongly claims gives China some benefits. Sadly, many voters also believe this, even though China is not a signatory to the agreement and doesn't have any trade benefit from such an agreement.
The current solar panel cases before the International Trade Commission is another case in point. A small domestic solar panel manufacturing company is claiming that China is "dumping" inexpensive solar panels on the US market. They're asking for 200% to 300% import duty on Chinese-made solar panels so they can remain competitive. However if such a duty were enacted, it would not mean that American manufacture of solar panels would increase, only that people would no longer buy solar panels as they would no longer be cost-effective in terms of returning revenue for the dollar invested. Trump will basically kill off the entire rooftop solar industry in the United States as we know it, as well as a number of large-scale solar projects.
Of course, the Secretary of State is a former Exxon executive, so few tears will be shed when the solar industry dies a quiet death. If only they can figure out a way to destroy wind turbines - much as Donald Trump is trying to do in Scotland.
The death of the solar industry is probably not enough to tear down the United States economy by itself, but it could be a contributing factor, when you add in the cost of defaulted subprime loans as well as a trade war which would severely limit our ability to export products.
Of course, one of the problems that led to the Great Depression, or at least was an early warning sign of the impending doom, was the mass failure of American farmers in the 1920s. We tend to think of the Roaring Twenties is a great time where everybody went to speakeasies and shook cocktail shakers full of bootleg gin, while gangsters drove slick cars with whitewall tires and carried machine guns. It was the era of Flappers and Jazz and modernism. But at the same time, the Joad family was on the road to California after losing their family farm in the Dust Bowl. This preceded the great crash of 1929, although many people seem to remember it is happening later on in the 1930s.
We already hearing stories about American farmers struggling with overproduction, particularly of corn. We've become a one or two crop country, growing corn and soybeans and relying on genetically engineered crops and Monsanto Roundup Ready herbicide, which appears to be killing off anything that is not on Monsanto genetically engineered crops, including trees, flowers, and other plants.
While Monsanto's genetically engineered crops are unsuccessful, they're arguably too much so and now the farmers have too much crop and not enough market to satisfy the supply. If we get involved in a trade war with our foreign trading partners, they may in fact and enact heavy duties and import restrictions on America's largest export, which is crop foods. Trump's trade war will screw American farmers - and no, the "death tax" abolition will not benefit them at all, as farms are largely exempted from the Gifts and Estate tax already.
But what about manufacturing? Reports are coming in that manufacturers are expanding at a rapid clip and manufacturing growth is better than ever. On the other hand, we are hearing that automobile sales are in the toilet and even vaunted pickup and SUV sales are slacking off. General Motors is now offering 0% financing to move its most popular product - pickup trucks and SUVs. Ordinarily, these products have sold themselves and it is troubling that manufacturers are resorting to incentives to move their most popular iron off the lot.
Then there are the IPOs and the tech bubble. We are in an era where we have a lot of tech-that-is-not-tech that is being offered with IPOs for things like delivering food to your house. People have been delivering food for decades if not hundreds of years, we never thought of it as a technology. However today, since we do it from a cell phone app, we call the company a "Silicon Valley startup" and say it is worth billions of dollars. However, the number of people who want their food delivered as opposed to going shopping is far overstated. This and a lot of other tech-that-is-not-tech companies such as Uber (which is just a taxi company that is unlicensed and being hounded out of many of its jurisdictions) may fail in the coming years or at least be severely restricted or diminish in value. Much of these "tech" stocks are just wildly overvalued with P/E ratios in the hundreds or even thousands. Eventually some sort of comeuppance is due.
Again, taken by themselves, each one of these factors is not enough to crash the economy. But if all of them come together at once or at about the same time, it could be a perfect storm of economic malaise. The underpaid worker who hasn't had his salary increase in over a decade can afford to buy a $999 iPhone, much less call an Uber or have his groceries delivered. And this job may be on the line if he works for SolarCity or one of the other companies which may be affected by our trade wars, tariffs, or general economic downturn. This in turn again feeds the downward spiral.
UPDATE: From a personal perspective, the prospect of spending $14,000 a year on health insurance (thanks to Mr. Trump) makes me reluctant to spend money on things like new trucks or boats or whatever. The current economic climate and a President who is going to "give us what we deserve" in terms of health care (which sounds more like a threat of punishment than a promise of good) is putting me personally in "hunker down" mode. I am selling more stock while the market is at all-time highs.
Then there is NAFTA. If we abolish that, it will disrupt the economy in several ways. American farmers could find duties as high as 75% on their products exported to Mexico and Canada, and American car makers will have to scramble to find parts to assemble their cars. Of course, by then, no one will be buying anyway, right?
Oh, shit, this does not bode well!
Thursday, October 12, 2017
What will kill the electric car this time? Cheap gas? No, electric cars themselves!
Over the years electric cars have come and gone on the American highways. Some of the very earliest automobiles were electric cars such as the Baker Electric, which Jay Leno owns an example of. A lot of people said that John D Rockefeller killed the electric car the first time around by making available low-cost gasoline to power internal combustion engines.
But what killed the electric car in those early days was the available driving range and low purchase cost of the Model T Ford. Electric cars of those days couldn't compete because of their primitive lead-acid batteries which provided only a few miles of range. Lead-acid batteries also made electric cars expensive to buy and maintain.
Lead-acid batteries remained the biggest obstacle to the adoption of electric vehicles for an awfully long while. Over the years, hobbyists and experimenters tried to build electric cars using lead-acid batteries with limited success. The resultant vehicles were slow and had very limited range and were very expensive. And the batteries only lasted a few years and had to be replaced at great cost. Practical electric cars simply didn't exist until very recently.
In response to California's electric car mandate of the 1990's, companies such as General Motors developed electric vehicles such as the EV-1. People accused General Motors of killing that car as well, but it had a very limited range, was very expensive, and GM lost money on every example they made. The technology just wasn't there to make electric cars work, as recently as the 1990's.
But battery technology improved. Lithium-ion batteries have the energy density to make a practical electric car, albeit one that maybe doesn't have quite the range of an internal combustion engine vehicle or can be recharged (refueled) as quickly. The problem with lithium-ion batteries is that they are very expensive, and if not manufactured properly, have a tendency to catch fire.
Elon Musk was very successful early on with his electric cars in that he didn't pitch them as the Every Man's vehicle but rather as an accessory or toy for the very rich. The original Tesla Roadster was a very expensive vehicle and not practical for daily use as it could only seat two people. The Tesla Model S was at least a more practical car, but priced only so that only the very wealthy could afford one. And the very wealthy, no doubt, had a second vehicle, probably an SUV, for other tasks that an electric car would not perform.
So long as these remained expensive playthings for the rich, he had a viable business model, as the cars cost an awful lot to make, and the average person could not afford one, even with the tax incentives. Musk then promised to make an affordable electric vehicle that the average person could buy. And other automakers followed suit. Part of this surge toward electric vehicles was the possibility of more mandates for electric vehicles from various government entities, and part of it was a desire to have a "me too!" product available.
Sales of these more plebeian electric cars such as the Nissan Leaf and Chevrolet Bolt, however, have been very thin. They cost more than that a comparable internal combustion engine vehicle and most people can't afford the difference. Moreover they need a vehicle they can drive to Disneyworld from Detroit, Michigan, without stopping for hours to recharge.
Today, it seems everyone is jumping on the EV bandwagon. Volkswagen is claiming to move to an all-electric business model. Various European governments and China are claiming they plan to outlaw the internal combustion engine, as is the state of California, in the next 20 years. Whether electric vehicles will be ready by that time is anyone's guess. One thing is for sure, the cost has to come way down, the range has to go way up, and the recharge rates have to increase - and we will need a lot more than a few demonstration recharge stations. Every parking space and every parking meter will have to have a plug in it, and a way of charging customers for charging their vehicles. It is not enough for rich folks to have chargers in their garages - apartment dwellers will need chargers as well, and city dwellers, who park on the street, will need access - anywhere - to a charging station.
Maybe in twenty or thirty years all of this could actually happen. But what will happen in the next five years is of more consequence to Elon Musk. His vehicles will have to move beyond being mere playthings of the very rich. Compounding his problems is his acquisition of SolarCity which makes solar roof tiles, which combined with a lithium-ion battery pack, could power a house without the need for electrical utilities, or having to sell electricity back into the grid.
The problem is, solar panels, like electric cars, so far have been the toys of the very wealthy. I have one friend who put solar panels on his house. He's the kind of guy who owns three Mercedes and experiments with biofuels in his backyard. They are hardly poor by any means. And of course, they relied upon leasing solar panels in order to amortize the cost. And the leasing company relied on being able to sell power back to Georgia Power at retail rates. How this works out (particularly now that the house has been sold to a new owner) remains to be seen. Does the homeowner have to take it on the chin for higher lease rates? At 10 cents a kW-hour buy-back, my friend was getting negative electric bills. Under wholesale rate buy-backs, the new owner of the house may find he is paying more, not less, for electricity than his non-solar neighbors, as the cost of the panel lease far exceeds the electricity he sells back to the utility.
As others have noted, apartment dwellers and more plebeian Americans can ill-afford solar panels at this point, much less have a place to put them. It is one of these technologies that, at this point, is a plaything of the very rich, but not ready for mainstream America.
Again, in 20 or 30 years maybe this will work out, but what happens in the next two to three years? It is not that I'm against solar power or electric vehicles - far from it! I'm a big proponent of both, as I'm an automotive and electrical engineer. I would like to see a world where we power vehicles by the sun. And I think this may happen - in the long-term. In the short-term, Mr. Musk has to pay back his creditors.
In the short-term, companies have to make profits, and it doesn't look like anyone is making profits from these technologies at the present time - without heavy government subsidies. If those subsidies are taken away, such as in the solar panel field, the entire business could evaporate.
And the current Administration is more than a little hostile to renewable energy and electric vehicles. The Trump Administration is poised to impose a 200% to 300% duty on imported solar panels, which could effectively kill off the entire solar industry, as 90% of all solar panels sold the United States are indeed, imported. At triple the present cost, solar panels are no longer a cost-effective proposition.
State after state has enacted new utility regulations which no longer require the utility companies to buy back electrical power at retail rates. Again, this makes solar uneconomical for the average American, much less even the wealthy American. While it may seem we are very close to a solar Shangri-la, we are actually a long way away, as without these government and utility subsidies, the entire thing collapses under its own weight. Throw in a Administration hustle to solar, the entire thing disappears.
The same problem exists for electric cars. Without electric car tax subsidies, which likely will disappear, electric cars will be less and less affordable. Without an infrastructure of charging stations, electric cars will be impractical. The technological press is getting ahead of itself and promising electric cars for everyman within a few years.
Reports are coming out that Elon Musk is struggling to produce his new "affordable" model 3. He claims to have 500,000 orders for the vehicle, although later he admits the number is far less. However today only a few hundred of the models have been produced, mostly by hand. Mr. Musk is running into a problem that others have faced before him, when trying to enter the automobile business. It's easy to make a few custom prototypes, it's very difficult to mass-produce cars, as General Motors can attest to.
So, even assuming demand for these cars is steady, Mr. Musk is going to have a hard time meeting that demand and maybe hemorrhaging money in the short term. Moreover, as more and more people get into this space, it will become more and more difficult to make profits. And it seems that everybody wants to make an electric car these days, including the British guy with his stupid vacuum cleaner.
To me, this is a sign the electric car bubble is ready to burst. It takes more than skill in making vacuum cleaners to make automobiles as Mr Dyson will no doubt find out very quickly. That dilettantes like him think they can just press a button and start competing with the world's automakers is a sure sign the bubble is upon us. World automotive assembly capacity already far exceeds demand. The last thing the world needs is another car factory built from the ground-up. Existing car makers will clean the clocks of Mr. Musk and Mr. Dyson, if there is indeed a market for these cars in the short-term.
Now throw in an economic recession, which is sure to occur in the next few years, particularly now that we have a very unstable government in the United States. Sure, the press is reporting that everything is going gangbusters with the economy and the stock market is going through the roof - and that consumer confidence is very high. The same was true in 2006. Things are always greatest before the fall. Once people realize that the vaunted "economic reforms" of the current administration aren't going to happen - and even if they did, reducing regulations and taxes isn't necessarily going to make the economy take off - the present euphoria about the economy will dry up.
The good news is, like the "dot com" crash of the 1990's, the wreckage will provide a lot of low-cost infrastructure and technology for subsequent companies to get off the ground - infrastructure that would not have been affordable prior to the crash. Thus, I believe, we can expect another crash in the electric car business, due to the current wild optimism over the business, but the end result being that the new technology and availability of parts and infrastructure will seed the next generation can be built from the ashes of the first.
And who knows, maybe in twenty or thirty years Mr. Musk's dream will come true - although he will not be at the helm of the company running that dream.
Monday, October 9, 2017
Dealers often sell used cars for higher prices than new ones. Why is this?
Years ago, when we were still into German cars, and German cars were still a good value proposition, we looked at buying a used Mercedes wagon. Back then, they were 300,000 mile German tanks. Today, they are fussy, delicate jewelry boxes, and no longer a good bargain.
We went to the local Mercedes dealer, which was offering to "re-lease" used Mercedes wagons. I thought briefly about leasing the car through my company and writing it off as a business expense, but quickly realized that even if I could write it off, it was still an overpriced deal with a lot of hidden fees. Again, leasing only makes sense only if you can write off the costs - and even then, sometimes it is better to buy than lease. For ordinary consumers? Leasing makes no sense at all.
We were about to walk away, when I noticed in the showroom across the street, the same identical car, brand new, for sale. Curious, I walked over to look. What shocked me was that the price on the window sticker was lower the the price of the used wagon across the street. I quickly got into my car and left - these people were clearly crooks.
Recently, we were looking at boats, and it has filled me with trepidation. When I was younger and clueless and thought money would continue to flow into my life, we bought boats without much of a thought. And we had fun. Today, the idea of tying up all that money in a depreciating asset scares me to death. I guess part of it is the fact I am getting older and more conservative with money, the other part is, the economy scares me right now, as does the unstable government we have. Not a good time to buy a depreciating toy.
The other half of the equation is that to tow this boat, we would have to buy a larger truck. Mark Twain was once credited with saying something like, "beware of any venture which requires new clothes" - and I am sure if he were alive today, he would amend that to "beware of any venture which requires a new truck." And big trucks are not cheap, which is why I never bought one before. They also depreciate rapidly and it seems most of them are optioned out of the universe. We've seen zillions of off-lease Crew Cab F-250 "King Ranch" diesel trucks for sale, which were $70,000+ trucks new, now selling off-lease for $40,000 or so.
But I don't need or want a truck that is as long as a city block and requires a step ladder to get into, no matter how many acres of brown leather it has inside.
So instead, we looked at a stripped-down "work truck" with a standard cab and bed. Now by "stripped down" I mean a truck with more options than your Grandma's 1968 Cadillac. Stripped today means the base sound system and no automatic climate control. You still get power windows, locks, cruise control, air conditioning, an AM/FM stereo radio and a host of stuff that wasn't even conceived back in the 1960's - like anti-lock brakes, traction control, air bags, disc brakes, radial tires, and so on. Today, we consider that a plebeian "bare bones" truck, suitable only for utility crews. How times have changed.
Anyway, the local dealer has one on the lot, used with 900 miles on it, but asking $32,000. They also have the exact same truck - in fact three of them - brand new on the lot, with asking prices of $29,000. What is going on here? Why is a new car less costly than a used one? Not only that, why is this something that happens more often than not? The answers are various, but get down to the attitudes and self-esteem of the buyers involved in new and used cars.
I asked the salesman why the new trucks were less expensive than used ones. He replied with his gobblygook message:
We do have new ones listed at 29 thousand for our internet price but that's not going to be your sales price you have to add back in what ever the rebate is on the F-250, freight, military, and college to get a taxable sales price. The only thing I would say that would be different is the rates on new vs. used
Huh? I am expected to pay more for a used truck "just because" and for some reason should "back out" the rebates on the price of the new one to make a comparison? This is literally nonsense - Alice in Wonderland stuff.
The real reason is, of course, that used car buyers rarely cross-shop with new cars, and moreover will often take whatever shitty deal is offered to them, even if it means paying more for a used car than a new one. This is not only a matter of low-self-esteem, but poor thinking in every sense of the word. The new car buyer is expected to have a better credit rating, be more educated, and more astute - and do more research. The used car buyer thinks a used car is always cheaper than a new one - but never bothers to actually check.
He also is more likely to have damaged credit, less education, and less likely to go online and comparison shop. He is more likely to be the guy who shows up on the lot with nothing more than a checkbook and a W2 and is "sold" a vehicle by a salesman, who saddles him with onerous financing and a padded price - all based on monthly installment costs, not overall costs.
Of course, there are good deals on used cars out there - but they are rarely from dealers. Private party sellers are not interested in getting a kickback from the finance company, nor are they sophisticated enough to bamboozle you with nonsense and price-padding. And that in a nutshell is why all the "books" of used car prices (KBB, NADAguides, Edmunds) show private party sales prices at 10-20% less than dealer retail.
But used car dealers? Nope. You are going to be given the runaround every time. And that is one reason we walked away from the boat here in Annapolis - it was being sold by a dealer, and he was trying to use all the cheap psychological tricks to get us to buy it - playing games with the price, and our emotions. We are now headed to North Carolina to look at another boat, for sale by owner, for a lot less money. Whether we buy it or not, the point is, we don't have to dick around with a salesman in the deal.
And if we buy a truck to tow it with, we will look for one from an individual, not a dealer, and we don't need nonsense and gobblygook in our lives, and since we are not chained to the finance company to pay for it, we don't have to go to some salesman and hand him our checkbook and say, "you just write down a number that you think is fair, and we'll pay it!"
But of course, the other option is to opt-out entirely. We don't "need" a boat to live or have fun. We could rent boats at various places we'd like to go boating. We could do other things. We would wait until next year, when perhaps economic conditions put a lot more boats on the market - at far lower prices. Buying a motorized toy during an economic boom time is never a good choice. During the downturn, however, you can snap them up for cheap.
Something to think about. The minute you decide you "have to have" something, you are screwed.
Are roadside farms stands or "farmers markets" really selling local produce, or just overpriced grocery store food? Sometimes, a little of both!
Traveling cross-country, we see a lot of roadside farm and vegetable stands. Some of these are little more than a wagon with a few pieces of fruits and vegetables on them and a coin box, with a sign saying "Honor System". Usually, these are folks with backyard vegetable gardens who are selling their surplus vegetables to make a few extra dollars.
Other farm stands are a little larger, often with row upon row of fresh produce as well as a cashier and even a machine that accepts credit cards. And sometimes these too, are local produce from local farmers, or backyard truck farmers. But often, the produce we see is from far away, often quite far away. In fact, sometimes it is the exact same produce you see in the supermarket.
And some of these farm stands or produce sellers are pretty upfront about this. At the local "farmer's market" an hispanic family sells produce from cartons clearly marked "Walmart" or "Safeway." When you ask him where the produce comes, from he vaguely replies "Florida." I'm not sure whether he's buying this stuff directly from the supermarket or from a wholesaler or whether it "fell off the truck." But they are not representing that they grew the food in question.
It seems about half these farm stands are this way. Either some of the produce they sell is locally grown and then the rest of it is purchased from a wholesaler, or in some cases all of the food is just from a local wholesaler. If you ask them where the produce comes from, some are either outright deceptive or give vague non-committal answers. Few of them will actually come right out and say, "I buy this by the case from the wholesaler down the street, who in turn gets it from a truck that came from California."
Then there are the so-called Amish farm stands. Some of these are somewhat authentic in that they sell products grown or made by local Amish people. The stands themselves might not necessarily be run by the Amish, but are more like small supermarkets. In other cases you actually see Amish people selling products directly by the side of the road, often the small children operating the stand. These are usually pretty authentic in that the produce you are buying was grown on their farm. Some of the more Mega-Amish supermarkets contain a lot of products which clearly were not made by the Amish, such as candy corn.
Then there are farm stands which are not really farm stands, but people just selling things out of the back of a pickup truck. We used to stop by an old fellow on the way back from Ithaca, who would have his pickup truck parked by the side of the road, with a small selection of produce on the tailgate. It was never cleared us where he was getting the produce, but I don't suspect he was actually growing it. We've also come across people with pickup trucks full of melons, potatoes, and other vegetables. And when I say the pickup trucks are full, they are full to the brim.
During a stop at a rest area one day, we saw two gentlemen in parallel pickup trucks transferring a load of watermelons from one truck to the other. The gentleman stood in one truck and threw the watermelons 15 to 20 feet to his companion, who caught them and carefully stacked them in his truck. Where these melons came from, or where they were going was not exactly clear to us, although they did offer to sell us one, and as I recall, we bought it.
Perhaps these were purloined melons stolen from some farmer's field, or perhaps they had a job picking melons and were paid in part by being given excess melons to sell. I guess we'll never know how or why this works, but a lot of people will park by the side of the road and sell produce either occasionally or continually. I supposed it is a good way to make some spare change if you need some money.
This is not to say these farm stands are all rip-offs or scams or schemes of one sort or another, only that many of them, in order to stay in business, get their produce from a number of sources. If you have a backyard garden producing fresh vegetables and people want tomatoes when all you have is potatoes, you are turning away customers. So it is tempting, and indeed a logical business choice, to buy a case of tomatoes from the wholesaler down the street and put them out and just not comment as to whether they were locally grown or not.
Similarly, produce that you grow is only available when it is in season, and tourists and other people may be coming by at all times of the year. So it is tempting, and indeed a logical business decision, to go down and buy produce that may be made across the country and shipped in refrigerated trucks to a distributor near you.
Regardless of the truth in advertising, the ultimate question as to whether the products are good value. Oftentimes we find that many "local produce" stands offer the same products that the local grocery store has, but for a much higher price. And of course this is because they are buying the products of the local grocery store and then reselling them, so they have to pad the price. The sellers also know that people will pay more at a roadside stand, as they often don't check prices, or think they are paying more for "local" foods.
On the other hand, we often find very good fresh produce at somebody's stand at very reasonable prices. Of course, it helps to know what a reasonable price is for produce. And then in other instances, even if the price isn't pretty good, there is the convenience factor. When you're on your way to the campground, and need a few tomatoes and peppers, it's nice to know there's a stand nearby where you can buy produce, fresh, local, or not.
But not in all cases are vegetables from a "farm stand" necessarily grown at the farm behind the stand.