Workplace

Repossession by remote

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A growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

Why is this happening? Mortgage regulations tightened after 2008 to prevent financial lenders from writing predatory loans, especially sub prime. Auto lending attracts far less scrutiny. Hence the following table looks like it does with respect to outstanding accounts on loans

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Sub Prime auto loans, at all time records, make up 25% of the total. Devices installed in cars let collection agencies repossess vehicles by remote when the borrower falls behind on repayment. This lowers risk and allows these long dated loan products to thrive. Average subprime auto loans carry 10% p.a. interest rates. More than 6 million American consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.

While it is true that $1.2 trillion auto loan book pales into insignificance versus the $10 trillion in mortgage debt at the time of the GFC, a slowdown in auto sales (happening now) isn’t helpful. The auto industry directly and indirectly employs c. 10% of the workforce and slowing new and used car sales will just put more pressure on prices further lifting the risk of repossessions

It is worth reminding ourselves the following.

Last month the Fed published its 2016 update on household financial wellbeing. To sum up:

“44%. This is actually an improvement on the 2015 survey that said 47% of Americans can’t raise $400 in an emergency without selling something. The consistency is the frightening part. The survey in 2013 showed 50% were under the $400 pressure line. Of the group that could not raise the cash, 45% said they would go further in debt and use a credit card to pay It off over time. while 25% would borrow from friends or family, 27% would forgo the emergency while the balance would turn to selling items or using a payday loan to get by. The report also noted just under a quarter of adults are not able to pay all of their current month’s bills in full while 25% reported skipping medical treatments due to the high cost in the prior year. Additionally, 28% of adults who haven’t retired yet reported to being largely unprepared, indicating no retirement savings or pension whatsoever. Welcome to a gigantic problem ahead. Not to mention the massive unfunded liabilities in the public pension system which in certain cases has seen staff retire early so they can get a lump sum before it folds.”

If only this perpetual debt cycle could be stopped via remote. Someone else’s problem one would suggest.

Why is Australia bothering with the UN?

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If there is one club that annoys more than the European Union it would have to be the United Nations. You’ll struggle to find an organization that has better pay for play rules than this. It makes the Clinton Foundation look like the wooden spooners in the amateur league. While the UN espouses virtue signaling at every turn one only needs to do a quick check of its multiple councils to work out it is about buying influence. It’s Human Rights Council is littered with countries that have appalling human rights records (Saudi Arabia, China, Cuba, Egypt and Qatar to name a few) whose main goal in life is to beat up Israel. The UN IPCC has the some of the worst sets of governance and conflicts of interest as to beggar belief. The former President of the IPCC had vast funds funneled through a supposed ‘research’ body he was the owner of. The amount of lies, falsehoods, manipulation and editorial oversight makes a mockery of the process. The IPCC’s sole purpose itself on endless life support. Its actions speak much louder than words and the 50,000 disciples who fly 1,000s of miles, spewing the dangerous CO2 they fear so much from the back of Boeings to kneel at the altar of the UN prove it.

Being elected to a UN council effectively says you are more important than you really are. The UN is nothing but a bunch of consensus hugging group thinkers who must buy their relevance. It is a club of hollow values.

If you are in the UN of course you want it to continue. The pay scales are incredible, On top of generous pay you can get housing support, kid’s schooling assistance, health insurance and other cost of living allowances that would make most people loyal slaves to the cause. Salaries consume 74% of the budget. The average salary of the 41,000 that work there is US$100,000. In Japan a D1-D2 level would be looking at $320,000 peer annum. No wonder they need members to keep chipping in more and more into the UN coffers to keep the circus going, Is it any wonder that pay for play is how you buy influence on councils.

The Heritage Foundation did an interesting study on the UN’s budget which shows how much it has exploded in the last 40 years.

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It stated with respect to trying to rein in the overbloated budget,

The latest U.N. regular budget, while superficially smaller than the previous budget, made no fundamental programmatic or structural adjustments—e.g., reducing permanent staff, freezing or reducing salaries and other benefits, and permanently eliminating a significant number of mandates, programs, or other activities—that would lower the baseline for future U.N. budget negotiations.[10] Despite the Secretary-General’s proposal to eliminate 44 permanent posts, the 2012–2013 budget actually increased the number of permanent posts by more than a score compared with the previous budget. The failure to arrest growth in U.N. employment, salaries, and benefits is especially problematic because personnel costs account for 74 percent of U.N. spending according to the U.N.’s Advisory Committee on Administrative and Budgetary Questions (ACABQ).[11] Without a significant reduction in the number of permanent U.N. posts or a significant reduction in staff compensation and related costs, real and lasting reductions in the U.N. regular budget will remain out of reach.”

Note the peacekeeping budget is on top of the administrative side of the UN. The US currently contributes 27.1% of the total peacekeeping budget which is around $9bn.

Which brings us to Australia. The UN is an overbloated, outdated and ineffective body which needs massive reform which will likely never come unless big members like the US aggressively defund it so it can be hollowed to efficient levels. Australian Foreign Minister Julie Bishop may criticize former PM Kevin Rudd for trying to buy UN votes with aid money but one can be pretty sure that if Australia is awarded a 2018 seat then she will be on the first flight to New York for a photo opportunity and the idea that Australia is relevant not to mention how important the UN is that we need to chip in more.

When the safety car shows off

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You have to wonder sometimes. The safety car should by rights be the one setting examples for the racers for cool heads and responsible conduct. At the Jerez Circuit, former Moto 500cc racer Uncini (who almost died in an horrific acccident with Wayne Gardner) wiped out the safety car between the races. This was so expected. I went to Motegi MotoGP race in 2014 and saw the pace car showboating and sure enough the driver spun into the gravel trap at corner 2. Perhaps the irony is that Uncini grew up in the uncontrollable and temperamental 2-stroke era which required nerves of steel. Although the BMW M5 comes with every conceivable driver aid along with the 570hp engine somehow switching the aids off resulted in a write off. Although perhaps a good metaphor for the EU – an aging Italian pilot driving a German car into  a Spanish crash barrier.

Why don’t firms hire staff like they’d choose a heart surgeon?

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How many times have I heard over my career senior management talk incessantly about the need for new blood yet when it comes to doing anything about it with regards to new hires 99% of the time  the safe cookie cutter is favoured over the left field choice. It is ever more so the truth in the post GFC world. Managers seem afraid to take calculated risks because the left-field candidate may jeopardize their own positions if he/she fails.

As an example managers in finance often fall foul of hiring exclusively within the industry. The level of inferiority complex can be so overwhelming that they fawn at the idea a Goldman Sachs employee will work for them for some ridiculous sum. Invariably they forget that Goldman hires duds too and usually those that get cast off are in that bucket. If you are properly good, there is no incentive to leave Goldman as the salaries, opportunities and product capabilities are too wonderful vs peers.

Yet many financial firms set upon trying to change the firm into a wannabe Goldman Sachs. They forget that their clients can already deal with Goldman directly should they feel the urge. Why on earth would they choose to deal with a wannabe copy? Surely each firm has a unique selling property that is of value to clients. Why not invest and promote that rather than overlook the talent within. Who honestly values flattery? Besides, there are so many cautionary tales with hiring ex-bulge bracket employees who are so used to being spoon fed every possible product line that they struggle immensely when they are required to actually put elbow grease into the job. It is uncanny.

Some firms occasionally hire from outside the industry with huge success. Instead of financial analysts pontificating about a stock, someone who has worked within the industry has a far better feel for cycles, internal decision processes and strategy that formulates under different points in the cycle. Clients glean that value. They couldn’t care less about the stock target or valuation metrics because that ultimately is the investor’s job. Besides the history of brokers behind the curve is etched in stone. Unique context and perspective trumps commoditization every time.

Some financial (and other) professionals have such checkered histories that one wonders how on earth they get rehired. If companies viewed their hiring decisions as akin to selecting a heart surgeon for a life threatening operation, many of these people would never make the cut (no pun intended) given the body count from previous poor execution. Yet many firms continue to put quacks in their ‘surgeries’ with expected disastrous results. Generally hiring managers run interference on these bad choices to cover their own mistakes.

Many HR surveys (including Harvard) show that bad hires end up costing way more than the salary when the cost of onboarding is included. Not only do companies potentially have to foot the cost of a headhunter (25-30% of salary is a standard fee) , what follows is poorer output, the potential for incumbent employees to become disgruntled at the new hire’s lack of ability and most worryingly an increase in dissatisfied customers. If they land a toxic employee that can damage team productivity to such an extent the best performers will seek challenges elsewhere.

So in a world that is getting harder and harder to succeed in, on what basis does conventional thinking bring anything to the table but more of the same? What does hiring a competitor do other than bring similar tactics? In fact, the more telling question is if they were knocking the lights out their success would permeate within their current employer. Unseating happy employees requires dynamite way over and above what they can probably afford.  What hirers often forget is the extent to which internal human capital plays a part. How awful does one’s human capital creation have to be to consider jumping ship?

That is where the left field choice comes into its own when hiring. A person genuinely looking for career change may well be doing it because they’ve tired of several decades of the same industry. They’ll likely come full of fresh ideas, out of the box solutions and lessons from a completely different background with the passion of a new graduate.

Many companies fail to adapt because the stupid questions don’t get asked by the incumbent staff for fear of ridicule. Yet someone eager to learn may ask the most basic of questions and ask “does it work?” One company I consult had a new boss join from HQ and he questioned why staff had meetings on such trivial matters? One staff member said “we’ve been doing it for 15 years!” When the boss said “does it work?” all replied ‘not really”. Yet they offered little in the way of proposals to change what was broken.

In a sense I see many businesses that operate in status quo mode where change if ever happens on a trivial or traumatic basis not through consistent due diligence and proactive leadership.

Think of it like asking an elderly person “if you had one more day to live what would you do?” “Well I’d play golf, take my wife to an expensive dinner and drive a Ferrari” If you asked Athenia”why don’t you do it now” the response would be “well I’m not dead yet!”

Look at the successful businesses around the world today and invariably the corporate culture is likely to be open and flexible. Bosses are prepared to hire people more qualified than them because they want to learn. Show me a company where inferior staff are hired to protect a manager and I’ll show you a dud business.

Which then goes back to the most important ingredient in a tech savvy smartphone world. Analog relationships. Look at the latest recruitment sites which ask candidates to fill in fields where a computer will sift through algorithms to screen. These systems remove the most important skill in selecting good candidates – gut feel. A good recruiter can understand a client’s needs far better than a computer. Besides if a computer is searching for terms fixated on what you’ve done and not what you want to do it will screen you out every time. What a wasted opportunity!

Human nature is uncanny. Risk taking is inevitable but instead of most people becoming  victims of change only a mere few will end up being agents of it and there will be no second guessing who dares wins! So instead of screening for the textbook definition of identity based diversity how about focus on diversity of thought!

 

How the other half is doing in America

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A few years back the US Federal Reserve did a survey which revealed 47% of Americans couldn’t raise $400 cash in an emergency without selling something. Do you recall Marco Rubio in the GOP primaries harping about knowing families who live “paycheck to paycheck”  Well the bad news keeps rolling in.  Northwestern Mutual has pointed out that 45% of Americans spend up to half of their monthly take home pay on (mostly credit card) debt service alone….which, again, excludes mortgage debt.

The study went on to show that 40% of that credit card debt was frivolous discretionary spending (which they claimed was the biggest source of their problems) but only 20% were able to make minimum monthly payments.  In short don’t be surprised to see defaults, bankruptcies and moral hazard rear its ugly head. Now we see a run on a Canadian mortgage lender. Does the poverty rate of 25% across EU vs 20% pre Lehman collapse raise red flags? Does sharply growing public sector employment across the majority of OECD  countries since GFC not strike you as failed economic policy? Does 1/3rd of Aussies saying 3mths of continuous unemployment would lead to an inability to repay their debts? How the 65yo+ demographic is the largest prisoner cohort in Japan because poverty levels are climbing. Yes pensioners are breaking Into jail.

If anyone thinks record high asset prices is a reflection on our collective wealth think again. The worst thing about this bubble is that it is the accumulation of three massive bubbles that never cleared. Sadly this one will pop like one of those game shows with a balloon full of  stinky slime.

The best way to insult women is to enforce gender quotas

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What is it with the Australian Human Rights Commission (AHRC) and the plan to enforce gender quotas for private businesses bidding on government projects? What an insult to women. To imply that somehow women are so lacking in quality, intelligence or skill to be selected on their own merit that this quango needs to step up and address gender imbalance. Furthermore it suggests that men are clearly biased in their hiring policies. One of my best bosses was female. She now runs her own company in the UK and is connected better than almost anyone I know. She has never wilted in the face of a man’s world and has a work ethic that would put almost anyone to shame. She has made it by herself without the need for state sponsored free kicks. What is it with the interview  process now that we need to put gender or sexual orientation ahead of ability? Surely any rational company tries to hire the best possible candidate regardless.

I run a business where 50% of my staff are women. Nothing to do with gender but ability. I even pay them more than me. However as an independent business it survives on the ability to execute and I base all hires on that premise. I don’t care if they are LGBT, Muslim, Christian or atheist. Why is the AHRC trying to dictate who I hire for my business? Surely tax payers want the best return on their money so if my business can provide it why should my hiring practices be brought into question? All of a sudden my firm’s profitability may be impacted by having to hire less talented people to fill a pointless quota.

To apply it across industries is also kind of ridiculous. Looking at the table above I would imagine that the AHRC would view Education & Training and Healthcare & Social Assistance, two areas women totally dominate, as fair game. If men were to protest at the  gap in those industries they’d be laughed out of the AHRC offices.

88% of men employed in construction is likely down to the nature of the industry. Chippies, sparkies or brickies tend to be male. It isn’t due to sexism or discrimination rather, once would imagine, interest. Australian Sex Discrimination Commissioner Kate Jenkins on the other hand has told the federal government to take “disruptive action’’ to enforce gender quotas.

Contractors would have to prove that they have “gender-balanced shortlists’’ for job ­interviews. “This means that the gender balance in the organisation would be 40 per cent men and 40 per cent women, with the remaining 20 per cent unallocated to allow for flexibility,’’ Ms Jenkins said.

However we live in a victimhood culture these days meaning we must pander to making everyone a winner regardless of whether they’ve actually made an effort. Every successful woman I’ve ever met got to where she is through her own talent, intelligence and ability.

Trump’s tax cuts – how much does corporate America pay? You’ll be surprised by the necessary evil

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How can Trump cut taxes to 15%? For those greedy corporates! Interestingly when one deep dives into the data two things emerge. One is that in 2016 net corporate tax receipts fell to around $444bn. Second US corporate taxes have slumped from 6% of GDP in the 1960s to around 2.4% of GDP today. Income tax and payroll taxes make up around 65% of the tax that fills the Treasury Department’s coffers. Of the $2.2 trillion that the government gets through squeezing us, they splurge around $3.6 trillion (see below).  Since the tech bubble collapse, the budget deficit has becoming a gaping chasm. It is a massive hole to fill.

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Naturally people scream that giving corporates massive tax breaks is obscene. What they tend to forget is that US corporations hide an obscene amount of taxable revenue (some estimate around $500bn p.a.) overseas. Apple’s €13bn tax bill fight in the EU should spring to mind. In any event we should look at corporate tax in the US that brings in around $444bn p.a. Slashing tax rates does not automatically imply that the $444bn will fall to $200bn. Looking at corporate profitability before tax one wonders are businesses really struggling? Pre-tax profits are hovering at around $2.2 trillion.

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There is a whiff of Poland about Trump’s plan. Poland faced similar corporate tax avoidance issues but in 2004 introduced sensible taxation reform which cured the problem. To lure tax avoiders/evaders from their lairs, Polish athorities introduced a flat business tax (19%) and its impacts were so favourable that the government saw a 50% increase in income reported by those corporates in higher tax brackets before the change and a 50% increase in reported income from individuals that fell into upper income tax brackets. In 2009 income tax rates at the top were slashed from 40% to 32% Despite this income tax receipts jumped 17%. Since 2004 tax receipts soared 56.4%. It clearly proved that lowering taxes created much higher tax compliance. There was a psychological factor at play – the cut ‘encouraged’ honesty.

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When breaking down the tax take by the Polish government we see that all levels of tax collection rose. Consumption, corporate, personal income and other tax categories jumped  45% or more.

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So there is method to the madness. Talks of a $2 trillion deficit that will need to be funded if it goes ahead is not based on reasoned economics if the Polish example is anything to go by. Besides we live in such a debt-fueled world now that central banks will just print the gap if others won’t step in and buy it. So this is a risk Trump sees worth taking. Lower taxes, encourage US corporates to repatriate income abroad, create jobs and get small business (50% of employment in America) to expand and create a virtuous circle. Whether he can pass these taxes through remains to be seen. What we can say is that corporate taxes are a measly % of GDP and total tax take compared to income and payroll taxes. However if US corporates aren’t encouraged to build at home then it is harder to squeeze the workforce for the bulk of the revenue pie. Pretty simple really and there is actually very little to lose. So quit the angry ‘evil corporates’ tag line and change it to ‘necessary evil.’