Wednesday, July 31, 2019

Camping Cabins, Revisited

Are camping cabins a good value?

A while back I wrote a blogpost about camping cabins and opined that they might be a good value for people who don't want to spend the money on a motel room, but don't want to sleep in a tent, either. We recently completed a 3700 mile journey across the United States, staying in several camping cabins, both at private RV parks and State parks as well as staying in motels and even camping in a tent on one occasion.

Tenting isn't so bad, particularly on a nice lake...

Overall, the camping cabins represented a good value, particularly for families, compared to the cost of a motel room. The cost of a camping cabin can run from as little as $50 to over $100.  They generally sleep about four or five people for a standard cabin, although some cabins are more elaborate and have actual separate bedrooms.

The original KOA camping cabins generally have a queen-size bed that will sleep a husband and wife as well as a bunk bed that will sleep two or three children.  Thus, if you have a small family, a camping cabin can be a good value.

However, the accommodations are very sparse and rustic. You have to bring your own sheets or a sleeping bag (as we did) as there are no amenities provided in the cabins.  Most cabins do not have a bathroom, kitchen, sink, or other amenities, and thus you have to walk to a communal restroom to use the bathroom or shower or shave.  If you are expecting things like carpeting, a bathroom, a television, and a mini-fridge, you may be disappointed.

However, some deluxe cabins have many of these features. We rented one cabin which was brand-new, that featured a microwave, small refrigerator, coffee maker, television, and bathroom and sink - although only with cold water. Oddly enough, this is one of the cheaper cabins we rented on the entire journey. The cost of the cabins depends more on the popularity of the location then the amenities involved, in a general sense.  It is the same with motel rooms.  If you want to rent a motel room in peak season in a popular tourist destination, it's going to cost a lot more than one in a remote area, even if the one of the remote area has better amenities.

It is interesting to see what sorts of people stay in camping cabins.  For the most part they are families with multiple children who are taking advantage of the fact that these cabins can accommodate a number of people at a very low cost.  This an entirely separate group from those who are staying in tents, or those who are RVing in their motorhomes or trailers. Seeing both sides of the equation provides us with a unique outlook.

Most of the cabins were pretty standard in their accouterments. The KOA camping cabins usually have a porch swing and sometimes a bench or chair opposite that.  Inside, it's usually some sort of desk and sometimes a chair in addition to the queen size bed and bunk beds. Sometimes, but not always, they provide a nightstand or bench or other piece of furniture inside.  But not always.

If there are more than one or two people staying in the cabin, it pays to have some sort of folding chair and maybe small folding table, as sometimes the furniture is limited.  And it goes without saying that you have to bring your own pillows, sheets or sleeping bag, and towels and other necessities.  They don't provide little soaps and shampoos that a motel might provide.

We stayed in a couple of State Park cabins and those were pretty well appointed. They usually provide a more bucolic experience. One in particular had a beautiful view of the forest instead of the view of the people across the street. It was, for some reason, very infested with flies which we spent some time killing.  Be sure to bring some bug spray - or better yet some tiki torches or citronella candles.  While traveling through Montana we saw a billboard advertising fly control for log cabins.  I don't know if log cabins attract flies or not, but maybe it's a thing in that particular part of the country.  In the Pacific Northwest, for some reason, we see absolutely no insects whatsoever or, for that matter, squirrels.  Maybe it is paradise - although it has yet to rain.

One disadvantage of the camping cabin, like the motel room, is that you constantly have to schlep your things from the car to the room.  In the cabin, this is not so much a problem as usually you can back your car right up to the front entrance to unload your stuff.  Nevertheless, it pays to have most of your essentials into one small bag rather than have large suitcases to drag in, as there is usually no place to put them.  It's better to have a small bag with your sleeping clothes and your toiletries and the clothing for the next day, rather to drag some big samsonite suitcase and try to prop it up somewhere. This would be especially true if you have children.

Most of the cabins in warmer climates had air conditioning and most had some sort of heater. There's usually a central overhead lamp and outside lamp and maybe one or two outlets. You might want to bring a small lamp, candle, or flashlight because the overhead lighting can be very harsh. This is rustic camping and  you are expected to make do with what you have, rather than complain about it.  It's not for every one, particularly fussy kitties.

Most cabins have a picnic table and a fire ring, and so you can experience the camping lifestyle by having a campfire and eating out of doors.  However, we noticed that most people tend to drive off to the local fast food emporium, bring the food back, and eat soggy warm french fries on the picnic table. To each their own.

Others called out for takeout food such as pizza and chicken wings, which were delivered to the park, particularly in urban areas. But some parts, particularly Kampgrounds of America (or KOA) have offered dining options, including barbecue meals in the evening, ice cream socials, and pancake breakfast or sausage gravy and biscuits in the morning.  So you would not have to leave the property in order to get a meal.   But not all campgrounds provide these amenities, so sure to call ahead or check their website to be sure.

We built a truck box from the remains of our previous expedition kitchen which was in the back of our Nissan.  It was a simple matter to cut the pieces of wood to fit a propane stove we purchased from a junk shop, as well as or propane miniature barbecue grill and a toaster oven from Walmart.  That, along with a tote containing various ingredients and fixings makes for an easy fold-down kitchen which we keep in the back of the truck.

We've been in a number of these camping cabins over the years, particularly on this last trip.  We've stayed in CCC cabins built in the 1930s on the Blue Ridge Parkway, as well as log lodges and motels. The camping cabins are an interesting alternative to motel rooms, and sort of a compromise between the motel and the tent.   They're not for everyone, but then again what is?

While the Camping Cabin experiment was interesting, odds are, we won't be staying in one again, for a long, long time.

KOA offers a discount of 10% on the camping cabins if you join their frequent flyer club. If you save up enough points you might get $0.05 off on a cup of coffee.  Actually this isn't true, if you get so many thousand points you might get a free night stay after many weeks.  But like most of these Frequent Flyer points programs, chasing points is kind of fruitless. The Mr. See loves this sort of thing so I indulge him.

All of this, of course, comes crashing to the ground tomorrow we go to pick up our new trailer. Once we have that, we become trailer people, never to cross paths with camping cabin people ever again, even though we are in the same RV Park. But it has been an interesting and enjoyable experience although it's not really rustic camping that some hardcore people would have.

But in terms of a dollar value proposition, it can be worthwhile.

Monday, July 29, 2019

It Ain't Over Yet...

American automakers aren't out of the woods just yet.

One of the things going on behind the scenes in America is the slow demise of American auto industry.   After repeated bailouts, bankruptcies, and near bankruptcies, as well as re-negotiation of labor contracts, the American auto industry is in a more weakened position that ever, even as sales continue to climb.

It may seem strange to think that the "Big 3" are in any kind of trouble with the sales of SUVs and light trucks going through the roof.   But as the  events of 2008 illustrated, dependence on one product for all of your sales and profits can be risky, if public taste for that product suddenly evaporates.

Chrysler, or as it's now known, Fiat-Chrysler, is arguably the weakest of the three. Having been bailed out by the federal government twice in bankruptcy, it seems that each bailout only provides a lifeline for a decade or so, before the company finds itself again in trouble.

During the last decade, the company's iconic leader, Sergio Marchionne, spent most of his time trying to find a buyer for the company until his untimely death. This isn't a good sign when a company is constantly trying to sell itself or merge.

But Marchionne had a point. The worldwide auto industry is way over capacity as it is, even during boom times.  In order to run efficiently and profitably, most auto plants have to run at or near capacity - usually 80% or more. With factories running at less than 50% or sometimes even as low as 20%, some car companies are losing money on certain product lines.  If recession hits - and it will - companies that are only marginally profitable will find themselves hemorrhaging cash in short order.

Chrysler has gone through a number of owners, including Mercedes-Benz, a private equity firm, and now Fiat. Fiat is losing money in its European operations but it still making money on the sales of Jeeps and pickup trucks in America.  However Chrysler's profits in America are derived entirely from the sales of these gas-hungry vehicles. If the price of gasoline jumps, Chrysler will find itself in the position of losing money rather quickly.

General Motors seems to be in a good position after the bailout of 2008. They've renegotiated contracts with the UAW and are making highly profitable SUVs and pickup trucks.  But the reality is most of their profits are derived from sales of Buicks in China, and these sales could taper off rather quickly if this trade war with China continues.  Already the Chinese are pushing a nationalistic agenda, and it may be seen as unpatriotic in the future for a Chinese person to be driving an American-branded car.  If so, GM sales and profits could collapse overnight.

GM is well aware of these difficulties and it's been trimming its sails for the coming storm.   They sold off their money-losing European operations and have closed down small car production in America and shut down unprofitable and antiquated plants, much to the chagrin of our President.

President Trump believes himself to be an expert in the auto business and believes that small car production should be moved back to America, even though it's never been very profitable for American car companies historically. Trump also has proposed freezing emissions regulations which one would think would be a popular position with the automakers. However in a turnabout of epic proportions, the car makers are actually petitioning the government to maintain emissions regulations and increase mileage standards.  This is puzzling to many people, including myself, as back in the 70s and 80s the automakers complained that these emissions and fuel efficiency regulations were killing off their industry.

The problem is, the automakers have been preparing for these emissions regulations for some time now, and have spent a substantial amount of money to meet these emissions goals.  Thus, they stand to lose a lot of money if the rules are changed.  Ford, for example, has invested a lot of money in technology such as aluminum-bodied pickup trucks, small-displacement turbocharged engines, and ten-speed and nine-speed transmissions to achieve increased fuel economy.   The amount of money needed to  develop these things is so staggering that Ford had to share the development costs with General Motors for the new generation of nine- and ten-speed transmissions. This technological approach has its drawbacks as will be discussed below.

GM has been buying and banking carbon credits, most notably from Tesla and other electric vehicle manufacturers.  These can be used to offset mileage requirements, allowing them to sell gas-hungry SUVs and pickup trucks and still meet regulations.  If the regulations are changed, GM stands to lose billions of dollars in these banked carbon credits, or at the very least they will look like a very bad investment.

Again, as with Chrysler, GM's reliance on large SUVs and pickup trucks could come around to bite it on the ass, as it did in 2008 when sales of these vehicles plummeted when gas reached $5 a gallon. GM has the additional problem of its exposure in China particularly in view of the current trade war.

And then there is the issue of quality.  And this is where Ford has a particular exposure.  As noted above, Ford has invested in a lot of high technology in order to achieve mileage goals. And in some instances, this technology has worked well, but in others it hasn't.

General Motors tried to leapfrog Japanese competition by developing a diecast high-tectate-silicone aluminum block engine for the Vega back in 1970, and learned a valuable lesson -  technological solutions to management problems usually don't work out.

Ford's technological solution may have similar problems.  While Ford has abandoned its small car market, it still is on the hook for liability due to its dual-clutch dry-plate transmission used in the Ford Focus and Fiesta, which is turned into a bit of a small nightmare.  It seems the curse of the Pinto has not entirely escaped that company.  Angry owners are upset that there is no fix for these transmissions, which continue to behave strangely, stuttering and shuddering upon acceleration and popping into neutral on the highway.  It only takes a few of these types of flaws to send customers over to the foreign competition - forever.

It is a funny thing, but when you think about the recession of 2008 and the bailouts of the American car companies, no one bothers to point out that the foreign car companies didn't seem to have the same problems.  No one had to bail out Toyota, Honda, Nissan, Mercedes-Benz, or BMW.  They all seemed to do just fine, and in fact, expanded their US manufacturing base since the recession.  BMW's largest auto plant isn't in Germany, it is in the United States.

These companies all have American manufacturing operations and manage to make a profit building automobiles United States - and even export these vehicles to Europe and other countries. They're able to do this because they have a lower labor cost in their non-union factories and since they have younger factories, they don't have a large pension liability dating back to the 1960s.

When push comes to shove, quality can be the one thing that tips a company over the edge. One reason Japanese car companies made such inroads into America in the 1970s was that the quality of American cars was horrific.  We may look back with nostalgic feelings to the pimp barges of the 70s or the muscle cars of the 60s or the befinned monsters of the 1950's, but the reality of the cars in those eras was that they were horrifically built and fell apart rather quickly.  The carefully restored and never driven "classic" American car at the car show is not representative of the reality of owning one of these pieces of junk back in the day.

When the economy gets tight and consumers have limited resources, they will spend their money more wisely and choose products which are more durable and less costly to own.  And this is where foreign competitors have a leg up over American vehicles.  With each successive recession, the foreign car companies increase their market share, increase their manufacturing output, and increase their profitability.  With each cycle, the "American" car companies retract further, close more factories, and cede yet more portions of the market to overseas competitors.  The next recession could be a real killer for Ford, GM, and in particular, Fiat-Chrysler (which technically, is no longer an "American" car company anymore).

While we are enjoying our second-hand Ford F-150, it is quite clear to me that the quality of this vehicle is not up to Japanese standards.  While the Nissan was perhaps not as luxurious a truck, it ran flawlessly for the five years that we owned it.   Other than changing fluids, putting on new tires and a battery, it never went in for service, never broke down, and never failed to start and run properly.  This basic functionality and reliability still seems to elude the "Big-3" automakers.

Our experience with Ford cars has been less sanguine.  Ford seems to have a particular problem with switchgear.  They position buttons and knobs based on style choices rather than ergonomics. Thus, they tend to favor things like rows of identical buttons which have radically different functions, forcing the driver to remember which button does what.  The switchgear also feels flimsy and cheap and has to be treated delicately.  As I noted another posting the power sunroof switch on our Ford Taurus SHO had to be replaced no fewer than four times in five years.  For some reason, Ford felt they needed to use a Hall-effect sensor for that switch which made it expensive and flakey.

It is clear that a recession will occur in the future - economic growth doesn't continue linearly forever. And such a recession will be temporary in nature and be followed by more economic growth after that. The nature and extent of the coming recession is what is unknown, as well as the timing.   My personal take is, the longer we wait, the worse it will be, particularly if we goose the economy by artificially messing with interest rates, the currency, taxes, and deficit spending (which are all the same thing, of course).

Some events could really exasperate this problem, such as the growing tensions in the Middle East. As I noted before, a few sunken tankers in the Persian Gulf could jack oil prices through the roof.  And it seems Iran wants this to happen, shortly.   Americans faced with $7 a gallon gasoline this time around will panic.  And if this occurs in conjunction with a general recession and layoffs, it could mean serious trouble for American automakers.

American car makers, awash in a sea of debt and dependent on highly leveraged customers to buy expensive products and stuck with a line-up of low gas mileage vehicles could end up seeking petition for relief once again from Congress.  And whether Congress will bail out the Big-3 again, is not entirely clear, particularly when one of the companies is Italian.

In other words, we are not out of the woods yet.

Sunday, July 28, 2019

The Angry Coast

The medical marijuana isn't working...

Maybe the "Left Coast" has always been this way.  After all, this is the place where the SDS was born, the Symbionese Liberation Army was formed, and where Charles Manson decided to go on a killing spree.   The reputation of California and the rest of the Pacific Coast of the United States as laid back and mellowed-out may be a bit overstated.

Or maybe it is just any urban area where people are tense and wound up.  When I moved to Washington, DC, I could not understand why people drove so aggressively - right off your bumper.  And if you left even a foot more than a car length between you and the car ahead of you - even at 70 mph - someone would swerve into that spot, convinced they were "getting ahead" of traffic.   Sadder still, within a year, I was driving that way, myself.

I think it is the nature of cities - the competition is great and people feel they need to "win" at everything from a parking space, to commuting, to getting off a subway car.  And let's not even talk about getting in line for something - people will knock you over to get their Starbucks five seconds ahead of you.  Cities are just that way, they breed competition.  And the West Coast is turning into one giant city - just as Miami now extends from Homestead to Jupiter, and New York extends from Washington to Boston.

Or maybe I have been living in the South too long.  Southerners take things a little slowly.  As a Northerner, you go into a store and say, "I'm looking for a left-handed widget!" and the clerks will just shut you down. "Don't have one" they will mutter, even if the back room is stacked to the ceiling with them.   Instead, they expect you to saunter in, look around, and say, "How are you doing today?" followed by a conversation about their health, their Mother's health, the weather, and local politics.  It is only when the man behind the counter finally says, "well, what can I help you with today?" that you are allowed to state your business.   But don't expect things to expedite from there, either.

I haven't fully adapted to the Southern lifestyle just yet, but maybe some of it has sunk in.  I call people "sir" or "ma'am" now, and say, "how you-all doing?" without even thinking twice about it.  But I'm still a Yankee at heart, and when I hear a fast-talking New Yorker, I feel a sense of nostalgia.  In New York, conversation is a contact sport.  You don't wait for someone to "finish" their thoughts before you chime in.   A friend of mine just doesn't get that - thinking that everyone has to "take their turn" speaking like they are in kindergarten.  He'd never last a minute in a New York Deli, sad to say.

But getting back to the Left Coast, I have never seen so many miserable people in my life.  Everyone is frowning all the time, driving like a maniac (even if traffic is at a standstill) and screaming at one another.   All this talk about the "laid back" West Coast is bullshit, from what I can see.   I think they are stressed people.  Everything is expensive here - not by a lot, but by a little.  Gas is a buck-a-gallon more expensive than in midwestern and Eastern States.  Not enough to be prohibitive, just enough to be annoying.  Housing is expensive, and restaurant meals cost a lot as well - the $50 lunch here is the norm, not the exception.  I expected this in Malibu (where lunch was $200) but not in some small dive in Washington State.

So people have to rush off to work to make that six-figure salary in order to pay for their overpriced homes, overpriced gas, and overpriced food.   No wonder they are so angry.  No wonder they want a $15 minimum wage - a king's ransom in rural Georgia, by the way, which is why a federal minimum wage of $15 makes no sense.  Everyone out here is trying to compete, to get ahead, and to win.   And no one is winning, either.   It is, in a way, very sad.

And maybe this is why so much angry rhetoric is coming from the Left Coast these days - people angry with the government (on the right) or with Trump (on the left).   It doesn't matter what the politics are, anger is the common denominator.  "If only!" they say, their guy was in office or their policy was enacted, all this stress and competition would go away.

But I doubt it would.   I think the problem is, folks here are trying too damn hard to get ahead.  And it has resulted, in some circumstances, in spectacular results.  After all, some of the best new ideas and new technologies have emerged from the West Coast of the United States - from Seattle to Silicon Valley, to San Diego.  While the East Coast rots and stews in its own juices - organized crime, rustbelt cities, old and dirty technologies, political corruption - the West Coast has promised a "new frontier" of solar-powered cities and underground hyperloops.   Whether any of this comes to pass, remains to be seen.   But there is vision here.

That, and topless drive-in coffee bars.  That is one innovation that has been brought to fruition, in a big way.  Hubba-hubba!

But yet, I sense something missing here.  Something intangible.  A soul, if you will.  Maybe "California Cool" Jazz is fun to listen to, but Dave Brubeck will never supplant Satchmo.  The cool, clean, and modern design ethic of the West is stunning, but leaves one with a sense of something lost - something human perhaps.   And the only human thing you do see is squalor of epic proportions, all kept carefully under wraps, of course.

It is fun to visit here, but both Mark and I realize we are East Coast people (and as Woody Allen put it, the East Coast is a Coast, too).  Maybe we prefer the humidity and the mold and mildew of the damp coast.   Maybe we prefer a place that is doused with hurricanes on a regular basis instead of being perpetually on fire or shaken by earthquakes.  Maybe we prefer a place where everyone isn't a gym rat, a movie star, a super model, a tech guru, or who thinks they are "all that".

Maybe we prefer a slower, less expensive, way of life.

Art Shares?

When people start investing in dubious and wacky things, if it's a sure sign a crash is coming.

A recent article in the New York Times talks about a new concept for investing in art and other collectibles.   For the most part, it sounds like a good way for the people running these schemes to make a lot of money.  What they do is buy a piece of art, such as a Warhol, and then mark up the price substantially and sell off shares of it to different people, much as you would sell shares of stock.

The idea is, this allows the "little guy" to invest in big-league art without having to buy an entire painting. Rather, he buys merely a share in the painting and thus he can see his share increase in value as the painting goes up in value.  That's the theory, anyway.

There are a number of problems with this model. To begin with, the person selling the shares has generally marked up the value of the painting so that the value of the share that you buy is more than its equivalent market price.  Right off the bat, you're starting off at a disadvantage in that you have paid more for your share of the painting than that fraction of the painting is worth at current market values.  You have to hope the painting goes up in value considerably just to make your money back.

And then there is the issue of getting your money back. You have to hope that there is a market for your shares, and the market for these shares is determined by the laws of supply and demand, which may not necessarily follow art market values of the underlying painting.

If you own an Andy Warhol painting and you see it go up in value, you have the choice of deciding to hang on to it or sell it. You could then sell it and cash out and make a lot of money.  But as a shareholder in a painting, you cannot force the sale of it and your only recourse is to hope somebody else is interested in buying a share of the painting.

The problem is, the laws of supply and demand for paintings as a whole, versus shares of paintings do not correlate to one another.   The former is at least a known historical quantity, the latter is so novel as to be unknown.  People buy an Andy Warhol painting and hang it on their wall so they can show it off to their friends as how wealthy they are and what great taste they have in art.   A person buying a share in a Warhol painting is merely investing in a commodity that they hope will go up in value.  There is far less value in a share than in the corresponding fraction of the painting itself.  If you owned 50% of the shares, it is worth less than 50% of the painting value because you don't have the painting or even half of it, to enjoy.

Even if the painting goes up in value, the demand for shares in the painting by not go up as well. Since these are shares marketed toward the small investor, if economic conditions change, small investors may shy away from such investments and thus it may be difficult to sell your share.

This type of investment scenario also raises the possibility that these paintings end up perpetually in limbo.  In order for the painting to eventually be sold to another buyer, someone would have to buy a majority of shares in the painting in order to force a sale of the painting.  However, by the very nature of purchasing the shares, the buyer would drive up the price of the shares, making it all but impossible to purchase a majority stake in the painting to force a sale.  Well of course, it could be possible to buy all the shares necessary to force the sale, but since the share prices would escalate, the more you purchase them, the ultimate purchase price for a majority stake would be more than would be yielded by the sale of the painting.

Meanwhile, you have to ask yourself where the painting is going to reside.  Will it sit in some dark vault, never to be seen again by human beings?  If so, can you be sure it exists?  Or will it be on loan to an art museum where could be seen by others and kept safe?  Or is the guy running the scheme putting the painting in his living room and enjoying the ownership value of it while at the same time raking in dollars from duped investors who are essentially paying for his artwork.

There is also the issue of security. This is not an FDIC insured investment. It's not even investment that's listed on the major stock exchanges or sold through a mainstream brokerage house. If the guy selling shares in a painting goes bankrupt, what happens to the painting itself?  Or suppose the painting goes missing, only to be found later on being auctioned off in Europe?  How will the shareholders go about retrieving their painting?

But underlying all of this is the volatility of the art market.  Collectible items are really a silly investment, whether it's for the very poor or the very rich.   If you're mega-rich, you can spend millions on a painting and it really doesn't affect your net worth very much.  But often these paintings aren't very good investments - nor are collector cars, or collector anything.

fairly recent article in Wall Street Journal analyzes this aspect of the problem.  Some art collectors are approached by auction houses to provide backstop bids for paintings. Often these are bids well below the estimated auction price.  The bidder guarantees this bid for a fee, thinking that either way they win.  Either they get paid to do this backstop bid or they end up buying a piece of art at a bargain-basement price.  But what often ends up happening is they end up stuck with a painting they didn't want to buy and now they can't unload at any price.  There are number of paintings that are making the rounds going from auction to auction, and either not being sold, or going to guaranteed minimum bidders.

When economic times get tough, things like collector cars and collector paintings and collector Elvis plates drop in value precipitously. We saw this with the price of Ferraris during the boom and bust.  During the boom times every new wunderkind wanted a classic Ferrari and drove the prices through the stratosphere. When it all fell apart, these cars flooded the market at bargain-basement prices.

So buying art or classic cars or any of these other types of collectible items is a risky venture to begin with.  Buying shares of such a risky venture is taking that risk and multiplying it by a factor of ten, a hundred, maybe even a thousand.  It is like the difference between owning a house or a condo - the value of a share of a building is more volatile than the value of a building.

The only person who is going to make money in this deal is the guy buying the piece of art, jacking the price up and then selling off shares of it.  It's a clever idea for the guy in charge - a stupid idea for anybody who wants to "invest" in this nonsense.

Friday, July 26, 2019

Gas Station Casinos

Do we allow people to exploit other people's weaknesses, or do we let people have the "freedom" to be exploited?

In the West, particularly in Montana, you see a lot of "casinos" all over the place.  A local gas station advertises itself as a "casino" by dint of having a few slot machines.   While in the rest of the USA you have to drive a half-hour at least to get to an Indian reservation casino or a riverboat casino, out West, they are everywhere.   And when I was a kid, there were none, outside of Las Vegas.

Back in the day, we had laws in place to prevent people from exploiting themselves.   You could not borrow money - legally - at usurious rates.  You could not "play the numbers" - legally.   You could not hire a prostitute or buy drugs - legally.   And at one time, in our county, you could not even buy booze, legally.

It seems there are two opposing forces at work here.  The first is the more puritan, which posits that temptations should not be offered to the masses, because they might take them - and they do.   So this first group of people tries to outlaw drugs, alcohol, prostitution, gambling, and whatever else we squander our money and lives on.   These are the same folks who decry violent video games (which as we know, never, ever, ever lead to actual violence, such as is going on in Canada right now, a few hundred miles North of me).    They also decry the decline in "decency" and "moral standards" and argue that explicit lyrics, lewd movies and television shows, swear words, and whatnot, have a corrosive effect on our society.

And of course, they are right about all of this.   The world would be a better place if no one got drunk, did drugs, exploited prostitutes, gambled their money away, spent hours playing violent video games, listened to misogynistic rap music lyrics or watched television shows with no moral compass.  Everyone would be happier, although the world would be a bit boring - sort of like Salt Lake City on steroids.

But of course, that is a fantasy world - it doesn't exist, it never could exist, and it never did exist, despite all the cries about "returning to the good old days!"    As we learned in economics 101, when you make something illegal, you don't eliminate it from the stream of commerce, you just drive it underground and raise the misery level as well as the price of the item in question.   So when you make prostitution illegal, women end up trafficked.  When you make drugs illegal - and the penalties so stiff they exceed those for murder - people kill each other over drugs.   When you make alcohol illegal, you enrich the mafia for decades to come.   When you make gambling illegal, it just goes underground, where again, the mafia takes control and makes a wild profit.

This is not to say we should give up and stop trying to control these things.   Well, the second group of people in the US do think this.  Some are "libertarians" who believe that everyone should be allowed to "do their own thing" even if it means they ruin themselves and sometimes others.   And others believe that they should be allowed to exploit other peoples' weaknesses without interference from puritans or the government.   If you can create an addictive "thing" - whether it is a drug, a gambling game, a form of sex, or some sort of cell phone app - and then get people to obsessively use it, you can make a lot of money.   And if you can get people to gamble their lives away or borrow money at onerous interest rates, you can make a real fortune.

And the latter is where we are today.   In addition to casinos, the governments of every State, it seems, have multiple lottery games, effectively putting the "numbers running" of the mafia out of business.   You can gamble your life away, you can buy legal pot, you can sign loan documents that have insane terms (for worthless merchandise or educations) and basically ruin your life.  Just don't smoke while you are doing it.  You are "free" to do everything else, however.   We live in a libertarian paradise - and yet so many today say they are fettered by unnecessary government interference.  I just don't see it.

Which side is right, and which side is wrong?   You decide.   Because the upshot is, even in the "good old days" before dirty words on television and casinos on every corner, you could still ruin yourself if you really wanted to.  Today, it is just a lot easier to do, and I doubt conditions will change radically in the short-term.

So, it is up to the consumer to protect themselves.   Consumer protection agencies are a fine thing and all, but the people who make so much money from payday loans are not going to go quietly into the night.   It is up to YOU to not sign $100,000 student loans or even $300 payday loans.  It is up to YOU not to lease a car or buy a motorhome on a 20-year loan.  It is up to YOU to drive past the casino instead of stopping in for the steamship round buffet and "just a little" gambling.   It is up to YOU to say "No" to meth, cocaine, opiates and whatever else can ruin your life.

I wish it were different, but human nature being what it is, there will always be the exploiters and the exploited, no matter what form of government is in power, no matter what party rules the government, no matter who sits in the White House or in Windsor Castle or the Kremlin or wherever your local ruler resides.   You do have choices in life, and they are the most important things you do have.   Yet so many people claim to be helpless and victims of external forces.

Take, for example, a recent article about flood insurance.   Since I don't have a mortgage, I am not required to have flood insurance.   I have it anyway.   For $900 a year, it insures $250,000 or more of reconstruction costs.   Recently, we were re-zoned by FEMA and our cost went down to $450 a year, which I think is insane - we should be paying far more!   Of course, I still have a policy, even though FEMA is saying the risk of flooding is even less.

In the article cited above, the authors posit that people who were flooded in the recent hurricane are "victims" of FEMA, because FEMA zoned them as "X" zone, meaning there was a low risk of flooding and mortgage companies would not require flood insurance.   This did not mean the homeowners could not buy flood insurance, and in fact, it would mean their premiums would be ridiculously low for the risk involved.   But since their banks weren't forcing them to buy it, few did, and now they are flooded out.   It's all FEMA's fault, right?

It would be like if the finance company said you didn't need collision insurance on your car, so you didn't buy it.  You wreck your car, and now you are out a lot of money.   Obviously, this is the finance company's fault for not telling you what to do!   Or is it?   Somewhere along the line, people have to step up and take responsibility.   And if you are in zone "X" of FEMA, the cost of flood insurance would be a couple-hundred dollars a year, if that.   So whose fault is it that people don't buy it?

Again, you decide.  But the reality is, if you make bad decisions life, they often lead to bad outcomes.  You can blame the casino for taking your money.  You can blame FEMA for not "forcing" you to insure yourself.   You can blame the drug dealer for selling you meth, the pill-mill doctor for prescribing Oxycontin for a foot injury, the banks for loaning you money for student loans.   Somewhere along the way, however, you took an affirmative action, or failed to act in your own best interest, and thus let these things happen.   Maybe you were susceptible, maybe you were ignorant.  Maybe.

All I know is this:  Gas station casinos are not going away, nor are marijuana dispensaries, the local liquor store, the payday loan place, or the girl on the corner in fishnet stockings.   You can blame others if you ruin yourself (or your family or others) with temptation.   Or you can take action in your life.

There really is only one choice.

Thursday, July 25, 2019

Do You Identify As a Democrat Or Republican?

Do you identify as a Democrat or Republican or do you just vote a particular  way?

Traveling through Montana near Missoula, we saw a billboard which in large letters proclaimed "Be Republican!"   The billboard went on to explain that Republican values were Montana values and therefore Montanans should be Republicans.

I thought this was an interesting piece of identity politics, which is interesting because identity politics is what Republicans accuse Democrats of. They weren't just exhorting people to vote Republican but to actually BE Republican as if republicanism with some sort of religion or philosophy or perhaps even a race.

This got me to thinking about the difference between who you vote for and who you are. And most people don't identify themselves with a political party or by who they voted for. The vast majority of Americans, when asked, claimed to be Independents. Very few people identify themselves as Democrats or Republicans. And even people who consistently vote Republican or vote Democratic don't necessarily identify themselves with a particular party.

In other words, their identity isn't tied to who they vote for.   And that could be troubling for the party hacks. What struck me is interesting about this billboard is that it was exhorting people to identify themselves as party members or as having some sort of party values that extended far beyond the mere act of voting once a year.

It is sort of like how marketers try to get their hooks into us and identify as either a Ford man or a Chevy man or as liking Miller Lite vs. Bud Light.    Once we've established our brand loyalties as part of our identity, they can then manipulate us all they want to. We've given up any thought or rational analysis in favor of blind loyalty.

Fortunately, as I noted above, the vast majority of Americans identify themselves as independent. And presumably they identify themselves as independent in terms of pickup truck and light beer choices as well.   Being blindly loyal to a political party makes no sense, particularly when politicians of both parties are routinely indicted for fraud, sexual assault, and other transgressions. Who you vote for matters more than the mere party affiliation, particularly since even among the parties there is a variation in political thought.

Being blindly loyal to a particular brand of product makes no sense when that manufacturer produces a defective product or the company is bought out by some conglomerate, strips the content, and pumps the product until the consumer has finally figured out it's a piece of junk.

Similarly, political values change over time as well. The Republican party was once the party that stood for the abolition of slavery.  Later it morphed into the party of big business and protectionist tariffs. Still later, it morphed into a party of free trade and balanced budgets. It seems today's Republican party now stands for massive deficit spending and trade wars - and right-wing social issues.

What the Democratic party stands for, is anybody's guess at this point.

Friday, July 19, 2019

Debt In Retirement for the 401(k) Generation

Does being in debt in retirement make any sense?  Not for anyone, but in particular for our generation.

A reader writes asking to interview me about debt in retirement.   I can save the interview and just write my thoughts here.   Debt is never advantageous to anyone, but it is particularly toxic to anyone who entered the workforce after 1978 and has to rely on a 401(k), IRA, or other self-funded retirement vehicle to get by in old age.

I wrote before about friends of mine who are retired government workers, both with nice pensions that, combined, are over $150,000 a year.   They live well, but not much above a standard middle-class existence, mostly because a huge chunk of their retirement income is taken up by interest payments.   The husband confided in me that they only have $30,000 in savings, and when they want to buy anything - a car, a boat, or an RV, it is off to the credit union to borrow, based on their income.  Oddly enough, they are both staunch Republicans, too.

But it is a game played by Democrats, as well.  On our retirement island are a host of retired New York State school teachers, who between the husband and wife, drag in about a hundred-fifty-grand a year, because, you know, school teachers are scandalously underpaid.   And like my Republican friends, they too, borrow to buy a car or a house or whatever.   So while they have huge incomes, most of it goes to monthly payments, servicing debt, including mortgage interest.

And under the old tax laws, maybe this "made sense" as their relatively high incomes meant they had high taxes, which could be offset by mortgage interest tax deductions.   But never use the IRS tax code as an investment guide - that is a classic middle-class chump mistake.   Take a deduction if you qualify, or better yet, a tax credit.  But don't alter your behavior based on these elusive deductions, it never ends well.

For our generation, we don't have much choice.   Thanks to Congress, we have to save up a million bucks or so to retire.  Yes, a million bucks.   You see, in order to have a paltry $50,000 in retirement income each year, you need a million dollars, if you withdraw using the 5% rule.  Do the math.  This also means that our "middle class" pension friends with $150,000 annual pensions, have the equivalent of $3M in the bank but if asked, would never admit to being one of those evil 1%'ers.  But I digress.

The point is, it makes no sense whatsoever, if you've saved up that mythical million bucks, to fritter it away in retirement on interest payments.  In fact, you can't afford it - you'd be broke in no time.  Even if you could "afford" it, it is an awful risk to take.  Let me explain both issues.

I "make" just over $25,000 a year in taxable income, withdrawing from my 401(k).   This means my tax bill is nonexistent, for the most part.  It beats the hell out of a mortgage interest deductions.   The rest of my "income" is another $25,000 or so I withdraw from after-tax savings, and thus I "make" (spend) about 50 grand a year, the median income in the United States.   Yet, I live in an identical house to my schoolteacher friends down the street, who have $150,000 in annual pension income.  We both drive late-model cars, and have pretty similar spending habits (well, they go out to eat more than I do).   Our lives look pretty interchangeable, yet our incomes are radically different.  How is this even possible?

Well, to begin with, even with mortgage interest deductions, they pay taxes - a lot of taxes - whereas I pay hardly any.   We tax income but not wealth (thank God!  And no, AOC, you can't touch my pile!) in this country, which is a good thing.  So my pensioner friends have to worry about taxes and such, and chase after deductions as a result.    Second, they have a mortgage and car loans and other debts, which represent a substantial cash-flow requirement that doesn't exist for me, as we are debt-free.  That's at least another $20,000 a year or so, just in monthly mortgage payments.  Throw in the car payments, and whatnot (including long-term credit card debt, home equity loans, etc.) and pretty soon, their hundred-grand advantage in "income" is pretty much wiped out.

Of course, we live a little more frugally (the entire point of this blog).   They hire a guy to remodel their house, we do it ourselves.  They go out to eat and put it on a credit card.   We buy groceries and invite friends over for dinner.    They go to the barbershop and hair dresser, we cut our own hair (and that of two friends) in the garage, serving inexpensive champagne to make it a party.   Our lives are different, but yet we live on the same block and have the same relative standard of living.

If we had to service debt, it would be a different story.   We would not be living here, but rather in a much less expensive home, somewhere else.   Debt for the 401(k) generation is simply not an option and it is risky.   That is the second aspect of it, as I noted above.

Our (former) investment adviser at Fidelity (boo! hiss!) wanted us to not pay off our mortgage when we sold our vacation home in New York, but rather keep our primary mortgage and invest that cash with him.   From his perspective it "made sense" on a number of levels.  As a young guy in his 30's, he was mired in the debt culture - he had a mortgage, a home equity loan, two car loans, student loans, and maybe even credit card debt.   He knew no other way of living.   He had a fancy car and house, of course.     And of course, if I invested the money with him, he would get some sort of commission out of the deal (although Fidelity is never clear how much these guys are being paid or how, which is why I no longer do business with them).

He tried to use the opportunity cost argument  on me.   I was giving up the opportunity to make 10% in the stock market in favor of saving 4.5% in mortgage interest.   A neat argument that works in his favor of course, but the reality is, comparing risky potential returns of 10% in the market with guaranteed saving of 4.5% in interest is comparing apples and oranges.   And what if the market goes down?   That would never happen of course, as we all know that returns on the stock market are guaranteed and what's more the market never goes down.   Well, except in 2008, and 1995, and 1989, and 1929, and so on and so forth.

What happened to the people who bought into the "opportunity cost" argument, was that in 2008 their investments in the stock market tanked, while at the same time, the value of their house declined.   They still owed all that money on the mortgage though.   So overnight, they went from being millionaires on paper to being utterly insolvent.   Worse yet, many cashed in money from their 401(k) to make payments on these underwater houses or cashed in their IRA entirely (resulting in horrific tax bills) only to lose the mini-mansion in foreclosure a few years later.   Some people are still making payments on these underwater houses, a decade later.

It's just too much of a risk to take in retirement.   Most rational investment advisers suggest that you use  your age as a "rule of thumb" to decide how much to put into relatively "safe" investments.  Thus, at age 60, I should have 60% of my investments in safe harbors - cash, money market accounts, government bonds, and so forth.   Paid off debt is the safest investment you can make - safer than even government bonds.   Maybe it isn't as sexy as some new dot-com startup IPO, but it is 1000% safer, and in old age, you can't afford to lose it all - or even some of it - in risky investments.

Besides, at this point in your life, time is no longer on your side.   When you are 20, you can afford to invest in long-shot deals or long-term payoffs.   At age 60, 70, or 80, the payback simply isn't there or isn't as great.   Yes, I am losing potential gains by leaving money in a savings account.    But it will likely be spent by next year, so am I really losing all that much?

The sad thing is, of course, that a lot of people in the 401(k) generation have little saved for retirement, have huge mortgage debts (having refinanced again and again), car payments, and even credit card debts.   At age 55 or thereabouts, retirement will be thrust upon them, and not only will they be broke, they will actually have a negative net worth.

The problem is, we are applying debt philosophies from the old paradigm to a new one.   Investment advisers, like my Fidelity guy, are using borrowing advice that might have "made sense" for the pensioner generation, but is toxic advice for the self-funded retirement age.   One purpose of the 401(k) and IRA laws was to encourage people to think as investors, not as pensioners or dependents.   The other purpose, of course, was to avoid further meltdowns with underfunded pension plans, and bankruptcies and high taxes generated when municipalities have to pay out on these long-ago made promises.

The IRA generation has to think like investors, and this isn't easy to do.   People who have been getting weekly or bi-weekly paychecks for decades become dependent on their jobs and their employers.  They view money as something that passes through their hands, not something they own.  It is funny, but these concepts are so ingrained in our society that when I Google to find my article on "owning money" Google replies, "You meant owing money.  Showing results for owing money instead!"   Because as Google knows, everyone owes money to someone and no one actually owns it.

Changing this mindset will be nearly impossible to do.   In fact, it may never change.

Are Risky Loans All That Risky?

Why would a lender write a payday loan to a borrower they know will go bankrupt?   Why would a lender offer 20-year loan terms on an RV that might only last ten?   The answer is, where there is risk, there is reward, and sometimes the risk is trivial.

A reader asks me why lenders would offer 20-year notes on RVs.   And the answer is complex and yet simple.   Long-term loans lower the monthly payment, so the "monthly payment" crowd thinks the rig is "affordable" even if it is not.   Why anyone would think something is "affordable" simply because you can finance it over decades is beyond me.   But this sells everything from college educations, to overpriced mini-mansions, to gaudy SUVs, to, well, even those designer coffees that people put on a credit card and then spend a lifetime paying off.

So attractive loan terms (even if they are actually toxic) sells RVs, and the RV makers want to move these beasts off the lot.   John Deere financing was one of the lenders who used to offer these sort of loans (and maybe still does).   Seems like an odd fit, until you realize they make a lot of motorhome chassis and offering loans insures that the motorhomes get sold, just as Ford and GM used their own loan arms to sell cars on time.

But won't people default on these loans and leave the lenders bankrupt?   That is the interesting aspect of it.   These are huge long-term commitments the borrowers are making, but they are not so large that the borrower is willing to declare bankruptcy over them.   As I noted in my $300,000 mistake posting, a friend of mine went through this, ending up tens of thousands of dollars underwater on an RV loan.   It was a lot of money, but not enough to justify declaring bankruptcy and starting over.   So they took out a home equity loan to pay the difference and now have to scrimp and save in old age to pay of this debt.

But even if they declared bankruptcy, the debt might still be paid.  Under new bankruptcy laws (thank your local Republican Congressman for that) debts are not necessarily wiped-out in bankruptcy, but rather "worked out" over five years.   So it is possible that even if a borrower goes belly-up and walks away from an RV loan, and declares bankruptcy, the lender may still be made whole, or largely so (and considering they already collected several years' worth of interest, likely still made a profit).  Thus, the risk really isn't all that risky.

But then again, these loans are made to "qualified buyers" who have good credit scores, a job or pension, and some assets that can be attached.   In addition, the interest rates are higher than on mortgages or car loans, which additionally helps offset the risk.   Borrowers can't simply walk away without paying or losing a lot of assets.   If they tried to "stiff" the bank by letting the RV go to repossession, the lender would then go to court, get a judgment against the borrower, and then put a lien on their house, or their car, or their bank account - and still get paid.

In other words, you can make a lot of money ruining middle-class people with these sort of toxic loans.

But it is a game that can be played at any income level.   Maybe a lower-class person is suckered into a $70,000 Class-C motorhome, instead of a $500,000 motor coach.    Same shit, different day.   They owe $5,000 to $10,000 more on the coach than it is worth, but yet don't have that much cash in their bank account (BTDT!).   So they let the coach sit in the side yard, slowly sinking into the lawn, with only 186 more payments to make.   Sounds crazy, but it happens.   I've seen it.

And the same game can be played all the way down to the insolvent poor person who takes out a payday loan.  You milk them for all they are worth, and they pay back more in interest than the loan balance, and yet they don't want to lose their car in bankruptcy, so they keep paying.

Speaking of payday loans, Bernie Sanders is in hot water as he unionized his campaign staff, and now they are threatening to strike over low wages.   Seems the $15-an-hour minimum wage only applies to other people and not to Bernie Bros.  Worse yet, one campaign staffer said that some of these low-paid canvassers are "resorting to payday loans to get by!" as if somehow borrowing money at 300% interest actually helps your financial situation rather than destroying it.   Seriously, we don't need Bernie Sanders and his ilk in the White House.

Sadly, it seems that all the candidates, left, right, center, and whatever, seem little concerned with borrowing and debt.   And that is the most compelling issue today facing our country, not some tweet or snapchat video.   But no one wants to hear that!

Thursday, July 18, 2019

Trouble in Elkhart

The RV industry, like the boat industry, is often a miner's canary for recession.  Our new RV awaits delivery.

When the shit hits the fan, people stop spending money on unnecessary things.   They cut back on restaurant meals.  They shop around for cheaper groceries.  They stop driving so fast - or so much - which drives down the price of gas.   People do a lot of things to trim the sails of their personal finances.   But the first thing to hit the chopping block are big-ticket toys that cost a lot of money to buy and own.

We drove by Elkhart, Indiana on the way to Michigan, but didn't stop by this time.   It is the Detroit of the RV business, as much as Detroit used to be the Detroit of cars.   But RV sales are down this year - substantially - according to an article in Reuters.   And part of this is due to tariffs, which are driving up the cost of components.   It isn't steel and aluminum tariffs that are to blame - indeed, most RVs are made of sticks and staples, luan plywood, and a thin fiberglass veneer - but the components within the RV are often made in China.

Most RVs have a hot water heater, a furnace, an air conditioner, a sink, a stove (or cooktop), a microwave, a 12V power supply, a water pump, water tank, black and grey-water tanks, awning, leveling jacks, and so on and so forth.   Most of these components are made by one of a few manufacturers - Dometic (Electrolux), Suburban, A&E, Carefree, Magic Chef, etc.  And increasingly, these companies make or assemble these components in China, where labor is cheap.  So when Trump slaps a tariff on Chinese imports, it results in huge price increases for these components.   The steel and aluminum tariffs are just another part of it.

As a result, manufacturers have to raise prices.  They cannot absorb 25% tariffs when profit margins are slim as it is.   When a recession strikes and sales are down, many marginal players exit the market, as we saw in 2008, when even some big names (including the biggest at the time, Fleetwood) either retracted, reorganized or disappeared entirely.   When the market booms, as it has in the last five years or so, every Bubba who has a screwgun and a compressor, who can rent warehouse space in Elkhart county, will start up an RV manufacturing business.   Overproduction results, and price wars start.   Inventories at dealers start to bloat.

Compounding this problem is what Bill Ford identified as a problem for the car industry - funny-money loans.   Mr. Ford opined - nearly a decade ago - that 7-year car loans were locking buyers into cars for longer periods of time.   While they might "move iron" off the lot in the short-term, this means the traditional buy-and-trade buyer who bought a new car every 3-5 years, has to wait a few years longer, as he is upside-down on his loan.   The dealer can fold the negative equity into a new loan, of course, but this makes it even harder to trade further down the road.  A few cycles like this, and the buyer ends up in financial trouble, perhaps bankrupt.   Again, the problem with debt is that it can take a decade or more for these sort of harms to materialize, and in the interim, you think everything is going just fine, until "suddenly" you are in a financial pickle.  I know this, firsthand.

With RVs, the problem is even worse, as they can depreciate much faster, and in a recessionary economy, free-fall in price.   Loans can run as long as 20 years for some motorhomes - often longer than they will last.   Even low-end trailers are sold on 8- and 10-year loans, which is far longer than they will last these days, due to poor quality and design problems.

Toys are very price-sensitive items, and people will only buy them if they feel they can afford them.  For most Americans, this means whether they feel they can afford the monthly payment (never mind the overall cost, which can bankrupt them).   Joe Paycheck has $199 left over every month, now that he has the Harley paid off.  So when the flyer from Camping World arrives, saying a new trailer can be had for $199 (and his tax refund makes the down payment) he buys.   When the price goes up to $250, and his tax refund is a lot smaller this year, maybe he decides to wait.

The problem is, if he decides to wait, that means one guy in Elkhart isn't working overtime, or in fact, may be laid-off.   And that guy doesn't buy the widgets that they make at Joe Paycheck's factory.   Of course, a lot of this was inevitable - part of the business cycle.   People go into debt to buy cars, houses, computers, phones, boats, RVs or whatever, and then over-extend themselves and have to pull back.   Everybody bought a 1957 Fairlane.   No one bought a 1958 Edsel.   Overnight, the car business cratered, because people were already stressed out with car payments.   Recession ensued.

But like clockwork, a few years later, people were back in the showrooms, ready to buy newer cars with fancier features and more modern styling - and wanting to unload their wildly unfashionable 1957 Furies and DeSotos.   The same will happen to us, in the very near future.   And there will be much tearing of hair and rending of garments, and predictions that this time, for sure, capitalism is going to fail once and for all.

Don't bet on it.