Robert Murphy: 3 'Good' Things About "Price-Gouging"

As so often happens in the wake of a natural disaster, government officials in Texas are currently investigating claims of “price gouging,” which the office of the Attorney General reminds residents is illegal after the governor declares a disaster. This is a classic example of the ostensible contrast between greed and altruism, capitalism and charity.

Economists who favor the free market know the standard arguments for letting the price skyrocket to “clear the market” when there are supply shortages and demand spikes. These are important arguments, and indeed I will review them below.

At the same time, I think in our zeal to lecture the public on the efficient allocation of resources, we economists often forget to stress an important aspect of private morality when disaster strikes. Specifically, if certain individuals experience a genuine “windfall gain” simply because they happen to be holding goods that suddenly become very scarce, then these individuals can donate their windfall to support relief efforts. In this way, there is no question of them profiting from their neighbors’ suffering. Market prices are still able to perform their valuable function of communicating information about supplies and demands to everyone in the system, while the losses imposed by nature are more evenly distributed because of charitable assistance given from the lucky to the unlucky.

The Standard Arguments for Letting Prices Clear the Market

After a natural disaster, the supplies of certain items — such as bottled water, gasoline, flashlights, and canned goods — become much more rigid, while the demand for these items goes through the roof. Consequently, the “market-clearing price,” at which the quantity supplied equals the quantity demanded, also may rise quite significantly. (There were reports of a convenience store in Houston charging $99 for a case of bottled water and $20 for a gallon of gasoline.)

It’s obvious why most people would find this outcome horrendous, and that government officials would reassure the public that such behavior won’t be tolerated.

Even so, free market economists stress the social benefits of allowing the price to rise in this scenario. We can break these benefits into those emanating from the supply side and those emanating from the demand side. (For an excellent discussion, listen to David R. Henderson’s recent appearance on the Tom Woods Show.)

Benefit 1: Calling in More Supplies 

On the supply side, a much higher price acts as a loudspeaker telling the rest of the world: “Houston wants a lot more bottled water and gasoline!” Even though we might casually say that after a natural disaster, the supply of these items is fixed, strictly speaking that isn’t correct. Except in the most outrageous circumstances (such as an avalanche or radiation leak), outsiders can bring in additional amounts of these precious items.

It’s certainly true that morality comes into play here. For example, a convenience store owner who lives only an hour from Houston, and who has a big van, might decide to cancel his golf plans to instead make a few trips to either donate or sell “at cost” whatever supplies he has, in order to do his part in relieving suffering. Most Americans would probably say that was “the right thing to do” for somebody who found himself in that situation, when the news reported just how bad the flooding was.

But what about a convenience store owner who lives six hours from Houston? Is it acceptable for him to charge a bit more than “cost” or even “normal retail price” in order to recoup some of the sacrifice he would have to make — not just counting the gas in his vehicle but also the opportunity cost of missing work — if he were to make one or more round trips?

As we change the circumstances, Americans would begin to disagree about the exact moral obligations of various people who happened to have access to much-needed goods. But we can certainly agree that in practice more people would end up deciding to help move water, gasoline, flashlights, and other items into Houston, the more we allowed them to charge for these items once they unloaded them in the beleaguered city.

Also keep in mind that this “upward sloping supply curve” — meaning that as the price rises, there are more units of bottled water (say) in Houston — doesn’t just operate geographically, but it also operates temporally.

Benefit 2: Storing Up Goods for Emergency Use 

For example, suppose the manager of a grocery store hears on the news that a hurricane is approaching. If she believes the authorities will let her charge whatever the market will bear, then she might decide to stock the warehouse with extra cases of water, flashlights, batteries, generators, etc. She knows that if the storm turns out to be a nothingburger, she will have to run a big sale the following week, in order to clear out the excess inventory. (After all, she presumably already had the optimal amount of inventory before the impending hurricane made her bulk up the warehouse.)

However, so long as our hypothetical grocery store manager knows she will be legally allowed to charge (say) quadruple the normal price in the event of flooding, then she will probably err on the side of loading up the warehouse with more units, compared to her decisions if she knows that the authorities will punish her for “gouging” her customers.

Similar reasoning holds for gas station owners, who might have the ability to load up on unusually large amounts of inventory — perhaps by having extra trucks come in, and remain on their property — but would only be willing to incur this extra expense, if they thought there were a possibility the market price of gasoline would break (say) $10 and that the authorities would allow them to charge such prices.

As these examples illustrate, the amount of bottled water, gasoline, batteries, etc. “on hand” in Houston when the hurricane struck is itself influenced by the attitude of the authorities toward “price gouging.” Business owners and pure speculators didn’t ship in as much of these goods as they would have done, in an environment in which voluntary transactions were sacrosanct legally.

In his interview with Tom Woods, Henderson also made a very subtle point about high prices inducing owners to carry goods forward in time. I’ll illustrate his point with a hypothetical story: In the current legal environment, with prohibitions against “gouging,” a Houston store owner sitting on a few pallets of bottled water would probably just unload them all on Day 1 and leave town, because there would be nothing else for him to do. However, if the authorities and the public didn’t condemn owners for charging the true market price, such a person might reason, “Right now bottled water is selling for $10 per case in this neighborhood. But if the rain doesn’t stop and it takes longer than people expect for the streets to clear, it’s entirely possible that I could hold back 50 of my remaining cases in the back storeroom, and then sell them for $50 each in a few days. The prospect of getting an extra $2000 totally makes it worth my while to sleep here in the store for a few days, rather than leaving Houston.”

This type of analysis shows that we want high prices not simply to tell businesses in Arkansas that they should sell some of their bottled water in Houston, rather than unloading it all in Little Rock, but also to tell businesses in Houston that they should sell some of their bottled water on Day 5 after the hurricane rather than unloading it all on Day 1.

Benefit 3: Encouraging Conservation 

In the previous section we outlined the social benefits of high prices coming from the increased quantity supplied of the crucial items. On the flip side, letting prices rise will also encourage conservation among the end users, so that any given supply of items is “rationed” among people more uniformly.

Consider bottled water. Once the storm hits and a particular family knows they will be stuck in Houston for several days with flooded streets, the first inclination might be to run to the store and stock up on needed items. At the normal retail price, a mother might buy 10 cases of bottled water, not only for drinking but also in case they need to use it for (say) boiling pasta. After all, who knows how long the utilities might be knocked out? She reasons that she can store the cases in her pantry and draw the water down over the next two months, if it turns out that things go back to normal sooner rather than later. There’s no harm in stocking way up on water, just in case.

But of course, this is exactly what we don’t want people to do, in a situation where there are only (say) 3 cases of bottled water per stranded family in the city. We want the people who hit the stores before their neighbors to be very judicious in how much they buy, because they need to leave other units on the shelves for the next families who show up.

This is exactly what an “unconscionable” price will do. If the store is charging $20 for a case of water that normally retails for $4, our hypothetical mother won’t so casually load 10 cases into her SUV. After that sticker shock, suddenly boiling pasta with bottled water won’t seem as appealing. Maybe she’ll only buy 3 cases of water, and get some cans of tuna fish and protein bars instead.

When it comes to gasoline, there is a particular perversity of anti-gouging rules in the case of an impending storm. Imagine yourself as a military commander, who has thousands of vehicles you need to move away from the coast, and you only have a limited amount of fuel on your coastal base. However, there are plenty of refueling depots a few hours inland. What do you do?

The obvious solution is to only allow your troops to put enough fuel in their vehicles to make it to next refueling station. This spreads the available fuel around so that you can evacuate as many vehicles as possible.

Now back to the real world: In the path of an incoming storm, where thousands of people want to evacuate the coast, depending on refinery interruptions and other bottlenecks, it’s possible that some local stations will run out of gas if they don’t raise their prices significantly. The people who are lucky enough to get to the stations first will naturally fill the tank up, before getting on the interstate to get out of Dodge. Then the unlucky followers will see the gas station is empty, and may end up stalling on the interstate. The authorities then have a problem of dealing with stranded motorists who are stuck not because of flooding, but because they ran out of fuel during their escape.

In contrast, if the few relevant station owners charge $15 per gallon, then people who had (say) a half-tank in their car when the storm hit, will say, “That’s outrageous!” and get back on the highway, to see if prices are any better in another 50 miles. At a price of $15, only people who are about to run out of gas will buy any, and even they will only purchase enough to give them some breathing room. They too will probably take their chances and hope that gas is cheaper if they move away from the storm. Just as our hypothetical military commander, the decentralized price system allocates the scarce fuel among the vehicles to allow as many as possible to evacuate.

Is It Moral to Profit While Others Suffer?

Some people on social media heard these familiar economist arguments, but pushed back. “Yeah, we get your points about ‘efficiency,’” they said. “But let’s face it: During a disaster, plenty of heroes rise to the challenge, putting themselves in harm’s way in order to do what they can to help people in need. It is simply wrong for some convenience store owner who had just coincidentally gotten in a shipment of bottled water the day before, to effectively hit the lotto while his neighbors lose their house.”

I am sympathetic to this point, and I agree that typical libertarian economists often come across as coldhearted and seem detached from this everyday morality. (Indeed, this was the position I took in my concluding essay to the Independent Institute’s new book, Pope Francis and the Caring Society.)

Yet rather than prohibit owners from charging “what the market will bear,” I think a better way to avoid personally profiting from the tragedy of others is to suggest that they donate their genuine “windfalls” to relief efforts.

For example, consider a convenience store owner who happens to be sitting on 100 cases of bottled water that he normally sells for $4. (Assume he didn’t take any special measures to bulk up before the storm hit; this is the inventory he would have been holding in any case.) Because of the flooding, he realizes he could probably charge $14 and still sell out. So there is a potential $1,000 ( = $10 margin of “gouging” x 100 cases) in pure windfall profit he could make.

The conventional moralists would say no, he should keep his price at $4. But they have in mind that he would otherwise take that $1,000 and pocket it.

Suppose instead, however, that the owner charges the full $14, but then donates his $1,000 windfall to a local relief effort that is handing out free packets of food and dry clothes to families who were flooded out of their homes and have literally nothing (including wallets). Or to make the point even more clearly, suppose he donates the $1,000 windfall to a local organization that uses the money to buy bottled water and hand it out to desperate people?

Once we go down this path, we see that the insistence on charging only $4 for the cases of water really just means that our hypothetical store owner is concentrating his $1,000 worth of charity on the particular Houstonians who happen to walk into his store and pull out their credit card to make a big purchase. What are the odds that these people are the ones in Houston most in need of his implicit $1,000 charitable donation that day?

Conclusion

As economists in the Austrian tradition stress more than others, market prices act as signals that allow humans to communicate valuable information with each other.

Just as it would stymie relief efforts if rescue workers couldn’t use cell phones or walkie talkies in a disaster area, by the same token government officials hamper humanity’s ability to recover from a crisis when they prohibit market prices from letting producers and consumers talk to each other.

Hurricane Harvey Looters Targeting Fuel Tanks As Google Searches For "How To Siphon Gas" Soar

Texas resident Joe Roan woke up to a rather unpleasant surprise yesterday morning as he discovered the remnants of a would-be thief attempting to steal gasoline from his Jeep Wrangler tank.  Unfortunately, as a local CBS affiliate pointed out last night, with refinery outages resulting in growing gasoline shortages, this is becoming a rather common occurrence for Texas residents.

Joe Roan didn’t witness the crime, but he found the evidence in his driveway.

“I came outside this morning and found this water hose was sticking out,” he said, holding the hose a thief left hanging out of his Jeep’s tank.

On the ground sat a gas tank.

“Instantly I knew someone was trying to steal my gas,” he said. “Maybe a car drove by when they were doing it and they ran? I don’t know.”

Roan said the thief didn’t even manage to get any fuel.

Meanwhile, Google searches for "how to siphon gas" have soared as criminals have been forced to hone their skills before taking to the streets.

Of course, the rampant onset of gasoline thieves is the result of fuel shortages which are often exacerbated by the pure panic of people trying to keep their tanks topped off. As we"ve reported several times in recent days, long lines at gas stations have become a common sight from the Texas shores up to Dallas.

Flooding from Harvey has caused a temporary gas shortage, creating long lines and price hikes at gas stations in Texas. pic.twitter.com/azLD5hZOZE

— ABC World News Now (@abcWNN) September 1, 2017

Watch live: Lines at gas pumps growing longer in North Texas --> https://t.co/oHTLanM0ec#Harvey pic.twitter.com/7XcZN1JGXO

— NBC DFW (@NBCDFW) August 31, 2017

Meanwhile, one seasoned energy trader warned this is "only just beginning" as the hangover from Hurricane Harvey flows downstream to retail gas prices...

As Bloomberg notes, Harvey impact currently includes:

• Colonial says it’ll commingle Rbob and conventional gasoline


• Explorer Pipeline planning to start lines Saturday, Sunday


• Logjam grows to 29 oil tankers as 11 ports remain closed


• Total Port Arthur is said facing extended shutdown on power loss


• Texas storm bucks N.Y. traders with wild gasoline expiry swings


• NHC issues final advisory on Harvey; losing tropical character

Which has left retail gas prices at the pump at their highest in 2 years...

And, judging by their usual lagged response to RBOB, they are set to go dramatically higher in the next few weeks...

All of which has resulted in the predictable onslaught of price gouging, with the Dallas News reporting sightings of gas prices ranging from $2.99 a gallon to $8....

There were multiple reports of gas stations charging anywhere from $2.99 to $8 for a gallon of regular gas.

At the 76 gas station in Garland, the fuel-price display unit outside showed $8 for a gallon. The station was swamped with calls from angry customers after a photo was posted on social media, according to Robert Fernandez, who works there.

There have been numerous complaints about high gas prices, according to Kayleigh Lovvorn, spokeswoman for the office of Texas Attorney General.

“When evaluating whether a business is engaging in price gouging in the sale of fuel, we look to see if they are charging excessive or exorbitant prices,” Lovvorn said in an emailed statement. “We recognize that certain market conditions, such as decreased production and closed refineries, might cause market fluctuations.”

The attorney general’s office is looking into 984 complaints filed between August 25 and Thursday afternoon. On Thursday alone, its Consumer Protection Division received more than 500 complaints, “many of which involve allegations of high fuel prices in Dallas, including amounts ranging from $6 to $8 dollars per gallon.”

...which is still pretty cheap compared to what Best Buy is charging for water.

Amazon Hosts Robotics Competition To Figure Out How To Replace 230,000 Warehouse Workers

There is little doubt that Amazon operates some of the most technologically advanced warehouses in the world.  As of the end of 2016, the Seattle Times noted that the company "employed" roughly 45,000 robots spread across 20 fulfillment centers around the country. 

As can be seen in the video below, the KIVA robots, a company which Amazon bought for $775 million in 2012, move product bins around the company"s massive warehouses with relative ease.  The bins are delivered by the KIVA robots on a just in time basis to human "pickers" who grab whatever products are needed and finish the packing process before boxes are shipped off to customers.

But while they"ve seemingly mastered the art of moving bins around a warehouse floor with, for all essential purposes, miniature robotic forklifts, a solution to automating the simple task of picking individual items out of those bins has remained elusive.  And, with 1,000"s of very expensive, sickly and generally needy humans currently fulfilling that task, you can bet Amazon is eagerly pursuing that solution with some level of urgency.

In fact, just this weekend, Amazon will be hosting a robotics competition with 16 teams from around the world who will get a chance to show off their robotic "picking" technology for the chance to win a share of $250,000 in prize money.  Per Bloomberg:

Sixteen teams of robotics researchers are traveling to Japan this week to help Amazon.com Inc. solve its warehouse problem. The company has a fleet of robots that drive around its facilities gathering items for orders. But it needs humans for the last step — picking up items of various shapes, then packing the right ones into the correct boxes for shipping. It’s a classic example of an activity that’s simple, almost mindless, for humans, but still unattainable for robots. Starting Thursday, the company is running the Amazon Robotics Challenge, the third annual contest for robots that push those limits.

Both academic and commercial roboticists have been putting a lot of energy into solving what’s sometimes referred to as the “picking” challenge, and Amazon is trying to direct that energy towards its specific needs. In one part of the contest, teams fill a shelf with a random assortment of items that Amazon provides — a champagne glass, a roll of duct tape, scissors, a children’s book entitled “Robots, Robots Everywhere” — and their robots pull out specific items, packing them into boxes that represent pretend Amazon orders. In another, robots confront a jumble of items, and pack them onto shelves that resemble those in Amazon warehouses, remembering where each one went. There’s about $250,000 of prize money at stake, including $80,000 for the top prize.

Of course, for a company that spent $775 million on KIVA, $250,000 in prize money is just a drop in the bucket if it helps them to identify a grad student who could potentially solve their "picking" problem.

Startups privately grumble that Amazon is using the contest to outsource development on the cheap. In a market where Google paid a single engineer $120 million to help develop automated vehicles, $250,000 for any usable information on automated warehouse robots basically rounds down to zero. Laboring -- even indirectly -- below the market rate for one of the world’s most valuable companies, they say, is insane.

Startups like Right Hand Robotics and Universal Logic claim that their systems are far more sophisticated than what has come out of Amazon’s challenge so far. Yaro Tenzer, a co-founder of Right Hand Robotics, is in Japan for RoboCup 2017, the conference where Amazon"s contest takes place. He says he may recruit participants, but sees little reason to show off his company"s techniques publicly. "The value for us is staying ahead of everyone else," he said.

So why do it? Some participants in Amazon"s contest, who are mostly grad students and academics, are looking for jobs. And while there have been complaints about Amazon’s stinginess, the rewards this year are about three times as high as past prizes. Ashley Robinson, a spokeswoman for Amazon, says the company raised the prize levels because the contest is harder than it used to be.

Just another 230,000 people who are about to suffer the very real world consequences of Bernie"s "Fight for $15."

GM Reports Record "Channel Stuffing": Dealer Auto Inventory Highest Since June 2007

As we await all US carmakers to report June auto sales, we remind readers that when we discussed last month"s disappointing monthly car sales report, which badly missed expectations showing the fifth consecutive month of declining auto sales - the first time this has happened since July 2009 -  with domestic light vehicle auto sales printing at an annualized 12.59, the lowest sales number going back more than three years - we noted what may be the biggest concern for the auto industry: inventory days continued to trend higher as OEMs push product on to dealer lots even though sale-through to end customers has seemingly stalled.

Of note, we highlighted GM, one of the few OEMs to actually disclose dealer inventories in monthly sales releases, which reported that May inventories increased to 101 days (963,448 vehicles) from 100 days at the end of April and just 71 days (681,402 vehicles) in April 2016. Indicatively, analysts say an overall inventory level of 60 to 70 days is healthy. 100 is not. GM management was eager to deflect attention from this troubling statistic, and said that soaring inventories are normal and, somehow, "reflect strong sales", as per the press release: "As planned, GM’s inventories reflect strong sales, lower car production and strategic, launch-related growth in truck and crossover stocks."

Or maybe not, because as Automotive News reporter Nick Bunkley pointed out something troubling: with 935,758 unsold GM units collecting dust in dealer lots at the end of June, this was the highest inventory number in 9.5 years,  the highest since November 2007, one month before the recession began.

Fast forward to today when GM reported its June results which again disappointed, and were down 4.7%, more than the expected 3.4% decline (although one wouldn"t know it by looking at the stock which was up as much as 3%). GM sales were dragged by most brands: Chevy -6.4%, GMC -3.6%, Buick +16.4%, Cadillac -11.8%. But that"s not what caught our attention: a bigger problem is what GM revealed in its deliveries report which disclosed a whopping 980,454 units in dealer inventory at the end of June, up nearly 17k from the past month, and representing 105 days of supply, up from an already red-flag raising 101 in May. As Buntkley notes, "GM"s inventory has officially hit a 10-year high. 980,454 units in stock (a 105-day supply) as of June 30, the most since June 2007."

???? GM"s inventory has officially hit a 10-year high. 980,454 units in stock (a 105-day supply) as of June 30, the most since June 2007.

— Nick Bunkley (@nickbunkley) July 3, 2017

In short: GM "channel stuffing" just hit a new all time high for the restructured company, with the number of GM vehicles parked at dealer lots and patiently waiting for a buyer rising to the highest since the summer before recession officially began, when GM was still pre-bankruptcy GM, with far greater (if ultimately superfluous and in need of restructuring) production.

Carmageddon: After Abysmal April Sales, Auto Workers Prepare For "Extended" Summer Shutdowns

Auto OEMs typically shut down plants once a year during the summer to retool for model changeovers and whatever general maintenance is required.  But this year summer shutdowns will be about much more than just retooling plants.  With inventory soaring on dealer lots, auto OEMs will likely have no choice but to extend their typically summer shut down schedule and it will take a "yuge" toll on the 1,000s of auto workers that are considered "short term" employees and not eligible for unemployment benefits...the folks who pretty much single-handedly voted Trump into the White House.

As we noted yesterday (see "Auto Bloodbath: Every OEM Misses April Sales Estimates As Inventories Continue To Soar"), after an abysmal March print and growing speculation on wall street that auto sales are looking less like a "plateau" (Ford"s label not ours) and more like a debt-fueled bubble on the verge of an epic collapse, auto investors were looking toward April auto sales for signs of hope.  Unfortunately, the "hope" trade failed to materialize as every single, major auto OEM missed their April sales estimates in fairly spectacular fashion. 

The total auto SAAR came in at 16.8mm for April, compared to hopes of 17.1mm, and the YoY change in unit sales was the worst since 2011.

Meanwhile, inventory days continued to soar to multi-year highs with GM leading the pack on "channel stuffing" with over 935,000 unsold cars sitting on dealer lots.

All of which has automotive analysts now predicting that the "typical" summer shutdown cycle in 2017 will be anything but typical and could include 3-4 shutdowns for plants producing some of the worst performing models.  Per Bloomberg:

“We’re not seeing the same picture as the president,” said Michelle
Krebs, a senior analyst with Cox Automotive. “We are not seeing any new plants being built in the United States or increases in production. The fact is we have passed the sales peak and we’re now seeing decreases in production.”

Even if that happens, weeks of production suspension seem almost certain to be on tap for the industry, said Mark Wakefield, managing director and head of the automotive practice at AlixPartners. He said automakers have aggressive plans for temporarily shuttering assemblies that make slow-selling sedans and small models.

“For certain plants, we’ll see three or four summer shutdowns for the tougher-selling products,” Wakefield said. Right now, automakers “are a little less worried about inventories because they know they’ll be taking the plants down more.”

“People are starting to see that this is not necessarily a plateau,” Wakefield said. “It’s a meaningful reduction, and they’re starting to make plans around that.”

Of course, as J.D. Power recently pointed out, growing inventories on dealer lots come despite OEM"s spending $16.4 billion on incentives through April, or roughly $3,800 per car, up 13% vs. last year.

“While industry retail sales pace remains high, it is being powered by elevated levels of incentive spending which pose a serious threat to the long-term health of the industry. The total value of incentives used to sell new vehicles has increased by $1.9 billion through the first four months of the year.”

Total incentive spending in the marketplace stands at $16.4 billion through April, up 13% from last year. On a per unit basis, spending for the average new vehicle through April was $3,814, up $460 from a year ago.  On trucks and SUVs, spending was $3,740, up $578, while on cars, spending was $3,938, up $308.

Despite record incentive levels, average days to turn continues to rise. Nearly 30% of vehicles sold in 2017 sat on dealer lots for over 90 days, up from 27% last year. “With flat retail demand and inventory at record levels, manufacturers will continue to face a difficult choice between maintaining elevated incentives or making production cuts,” Borrego said.

On the bright side, for Trump anyway, at least the auto jobs aren"t going to Mexico.

Auto Bloodbath: Every OEM Misses April Sales Estimates As Inventories Continue To Soar

After an abysmal March print and growing speculation on wall street that auto sales are looking less like a "plateau" (Ford"s label not ours) and more like a debt-fueled bubble on the verge of an epic collapse, auto investors were looking toward April auto sales for signs of hope.  Unfortunately, the "hope" trade failed to materialize as every single, major auto OEM missed their April sales estimates in fairly spectacular fashion. 

Here"s a summary of the April carnage:

SAAR:

According to GM estimates, April SAAR came in at 17.0mm units, down 2.9% YoY, which was well below the JD Power estimate released last week of 17.3 mm.

Inventory Days:

Meanwhile, inventory days are still trending higher as OEMs continue to push product on to dealer lots even though sale through to end customers has seemingly stalled. 

GM, one of the few OEMs to actually disclose dealer inventories in monthly sales releases, reported that April inventories increased to 100 days (935,758 vehicles) from 98 days at the end of March and just 71 days (681,402 vehicles) in April 2016.  But please don"t worry because GM would like for you to know that their soaring inventories are normal and "reflect strong sales"...no really, here"s the quote from their press release:

"As planned, GM’s inventories reflect strong sales, lower car production and strategic, launch-related growth in truck and crossover stocks."

Incentive Spending:

Meanwhile, GM"s incentive spending also soared YoY to 11.7% of their average transaction price (ATP) versus 10.3% last year. And Ford also announced on their sales call that average incentive spending was up about $300 YoY.

And, as one industry observer notes, the combination of rising inventory levels, higher incentive spending and pending model changeovers in coming months could imply that the auto industry could unravel in fairly short order.

to a very specific point in time. If new car retail numbers miss by the degree that I"m concerned about; it"s going to cause a huge day

— Daniel Ruiz (@DRuizG80) April 29, 2017

with even larger incentives. This will all be happening during the 60 day period that I pointed out relating to unsold used car inventory.

— Daniel Ruiz (@DRuizG80) April 29, 2017

rid of prior model year new cars. I believe that new car incentives will put massive pressure on used car values in that time period.

— Daniel Ruiz (@DRuizG80) April 29, 2017

OEM Commentary:

Of course, despite the abysmal numbers, OEMS still tried to paint a rosy picture for their industry. 

• GM: “When you look at the broader economy, including a strong job market, rising wages, low inflation and low interest rates, and couple them to low fuel prices and strong consumer confidence, you have everything you need for auto sales to weather headwinds and remain at or near historic highs."


• Ford:  "We"re maintaining our industry guidance for the year of 17.7 million vehicles. To put things into perspective, it"s important to note that we"ve seen a plateauing industry, basically last year and this year, and when you have that kind of an industry, you"re going to have variations, both up and down, month-to-month."

But while OEM mgmt teams remain optimistic, it seems that investors are getting slightly concerned as both the OEMs...

...and suppliers all tanked on today"s sales figures.

Chinese Auto Dealers Hit Panic Button As Tax Hike Triggers "Inventory Early Warning"

With the US automakers facing an "inventory bubble," hope for any momentum rested squarely in the shoulders of China... until today. China Automobile Dealers Association just unleashed their "Inventory Early Warning Alert" for January 2017, citing sales-tax increase on small-engine cars and Chinese New Year holiday.

As we detailed previously, J.D.Power analyst Thomas King warned, 2016 ended with an inventory "bubble" that will require less production or more incentives to clear.

With near record high inventories of 3.9 million vehicles...

U.S. auto inventory finished 2016 at about 66 days supply, up from 60
days a year earlier. Inventory would last 2.23 months at the November
sales pace, according to the latest available data from the Census
Bureau. The stock-to-sales ratio in 2016 is extremely elevated compared
to historical norms...

And now China Auto Dealers issue a Vehicle Inventory Alert - the index soared most on record by 18.6 percentage points to 61.5%. (A reading above 50% indicates low market demand and high inventories)

The market demand index, average daily sales index, business conditions index chain decreased, of which the market demand index and the average daily sales index chain fell sharply, which is due to the December market overdraft.

The total market demand index was 23.0%, a decline of 51.6 percentage points, a substantial decline in market demand index.

Worse still, China Auto Dealers Association warns that further inventory pressure is expected in February due to holidays and fewer working days.

WATCH: Students ARRESTED for Passing Out Copies of the Constitution

The list of things someone can go to jail for is now growing as several college students were arrested for passing out pocket-sized copies of the U.S. Constitution and signing students up for membership in their conservative student organization. The incident occurred at Kellogg Community College in Battle Creek, Michigan and involved members of the Young Americans for Liberty who were arrested September 20^th, 2015 and charged with trespassing. Brandon Withers and Michelle Gregoire were arrested and spent nearly 7 hours in jail for their unapproved distribution of the U.S. Constitution and for allegedly attempting to recruit others to their club.

The ‘offenses’ resulted in demands the students remove themselves from campus property. The students refused to leave and were arrested by campus police and charged with trespassing.

According to The Washington Times, Scottsdale, AZ based, “Alliance Defending Freedom, a nonprofit legal organization that “advocates for the right of people to freely live out their faith,” filed a lawsuit on their behalf Wednesday in the U.S. District Court for the Western District of Michigan.” Senior ADF counsel Casey Mattox issued a statement wherein ADF claims their clients’ constitutional rights supersede any unlawful school rules denying them such freedoms.

Kellogg Community College had established several rules regarding the exercise of free speech and has established a free speech zone. Additionally, the distribution of materials, according to the college, must be approved first by the department known as Student Life. In other words, the exercise of students’ first amendment rights according to the U.S. Constitution is regulated by the public school’s Student Life department. And the school defines free speech as “solicitation”, another activity which must be pre-approved.

Here’s their definition from the KCC website, “Solicitation is defined as activities or events, normally in short duration, as the carrying or displaying of signs or placards, leafleting, campaigning, marches, rallies, parades, demonstrations, protests, assemblies, speeches, circulation of petitions, and/or any public demonstration on the grounds.” Yep. There it is. “Speeches” is defined as “solicitation” and not free speech. Also at issue is the need to have a permit to express one’s free speech at an assigned table, where participants cannot even “call out to” passersby.

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ADF is representing the students in the case, Young Americans for Liberty at Kellogg Community College v. Kellogg Community College. 

“The policy is unconstitutional…because it grants college officials too much discretion to restrict the content and viewpoint of student speech if it does not ‘support the mission of Kellogg Community College’ (KCC) or the mission of a recognized college entity or activity,” reads the ADF’s statement. ADF Legal Counsel Travis Barham said, “All public colleges—which are supposed to be the ‘marketplace of ideas’—have the duty to protect and promote the First Amendment’s guarantee of free speech.” Barham added, “Ignoring this duty, KCC arrested these club supporters for exercising this freedom, and, ironically, for handing out copies of the very document—the Constitution—that protects what they were doing.”

ADF says, “The lawsuit seeks to have the school’s “speech permit” and “speech zone” policies ruled a violation of First and Fourteenth Amendment rights. “Compensatory and nominal damages” are also sought over Ms. Gregoire’s arrest.” Here’s what ADF says took place on the day the students were arrested;

On Sept. 20 of last year, KCC students Brandon Withers and Michelle Gregoire, along with three other YAL supporters were on a large, open walkway in front of the Binda Performing Arts Center on KCC’s campus talking with students about the club and handing out pocket-sized copies of the U.S. Constitution. Withers, Gregoire, and the other supporters were not blocking access to buildings or pedestrian traffic and were not interfering with any KCC activities or other planned events on campus.

KCC administrators and campus security eventually approached them and said that they were violating the Solicitation Policy because they had not obtained prior permission from KCC, and that they were not allowed to conduct expressive activity in this location on campus.

One of the administrators told the supporters that “engaging [students] in conversation on their way to educational places” is a violation of the Solicitation Policy because it is an “obstruction to their education” to ask them questions like, “Do you like freedom and liberty?,” adding that he was concerned that the students from “rural farm areas…might not feel like they have the choice to ignore the question.”

The officials instructed Withers, Gregoire, and the others that they must immediately stop engaging in their speech activities and leave campus. When Gregoire and two of the other club supporters politely informed KCC’s chief of public safety that they were going to continue exercising their First Amendment freedoms by talking with students and handing out copies of the Constitution, he arrested them and charged them with trespass.

“Today’s college students will be tomorrow’s legislators, judges, commissioners, and voters,” said ADF Senior Counsel Casey Mattox. “That’s why it’s so important that public universities model the First Amendment values they are supposed to be teaching to students, and why it should disturb everyone that KCC and many other colleges are communicating to a generation that the Constitution doesn’t matter.”

Attorney Jeshua T. Lauka of the Grand Rapids law firm David & Wierenga, P.C. is serving as local counsel in the case, filed in the U.S. District Court for the Western District of Michigan.

Members of the YAL club at Kellogg say that the school’s solicitation policy plays favorites with other groups on campus, often allowing liberal-leaning groups to “solicit” (which actually means to speak out in public according to KCC’s own definition) without having to obtain prior permission. So, the group decided to give to the students what they already possess, their constitutional rights, and call into question KCC’s questionable treatment of students’ first amendment rights.

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We applaud the YAL for their ability to challenge so-called authorities and exercise their God-given unalienable rights which KCC feels compelled to control. Even if KCC were a private college, they would not have any right to tell anyone they could not speak their minds in public. But since KCC is a public college, and every space on the campus is public space, the school has very little legal grounds to tell anyone they cannot distribute literature, hold rallies, engage in speeches, or sign-up anyone to any club at any time.

The school also has no rights to impose its apparently socialist agenda upon the student body to the detriment of their rights to life, liberty and the pursuit of happiness.

This case will be an easy win for ADF and hopefully will establish a precedent for free thinkers everywhere on every campus who’d like to speak their minds without interference from an institution which endeavors to silence and control them and their access to being able to think for themselves.

Discouragingly enough, this incident is hardly an isolated one. Just last October, according to Campus Reform, an activist was forced to leave another campus, Middlesex County College, because he did not get prior approval to practice free speech.

Then, in November, students at Grand Valley State University in Allendale, Michigan were threatened with arrest by police who told them that they immediately needed to stop handing out the pocket constitutions because it violated the school’s policy.

Also, the Free Thought Project reported on an eerily similar case last year out of Glen Ellyn, IL. In that infuriating video, two students at the College of DuPage, a public university, were on campus exercising their First Amendment rights by passing out pocket Constitutions and fliers that read “America is a free speech zone,” when approached by a police officer and threatened with arrest.

Caught On Tape: How The Robots Are Taking Over Amazon

Over the past few years, as Amazon"s distribution network has grown at a near-exponential pace, so has its workforce. As the chart below shows, starting in 2010 and continuing through the third quarter, Amazon has seen a staggering increase in its mostly part-time employment: from 28,300 to over 306,000.

However, always seeking ways to cut a few basis points from its razor thin retail margins, Jeff Bezos has discovered that many, if not all, of these part-time laborers, minimum wage as they may be, are expendable, and the company is actively growing its robotic "workforce" in preparation for the moment when most of those 300,000+ workers become fully redundant.

As the Seattle Times reports, Amazon now has some 45,000 robots across 20 fulfillment centers. That’s a bigger headcount than the armed forces of the Netherlands. It’s also a 50% increase from last year’s holiday season, when the company had 30,000 robots working alongside 230,000 humans. For now, the growth rate is keeping pace with that of human additions: from Q4 of 2015 through Q3 of 2016, Amazon reported a 46%, 12-month increase on average in staffers. However, as the pace of carbon-based employment eventually plateaus, that of new robot recruits will only continue to rise.

As the Times notes, the surge in Amazon’s robots showcases the company’s love for automation. In 2012 the company bought Kiva Systems, a Boston-area robotics firm that invented the flat, toaster-like warehouse robots that now populate Amazon’s warehouses. There are also other kinds of automata, such as arms that carry pallets.

For now, the 300K+ workers are mostly safe as much of the stowing and picking of items, which require fine motor skills and discernment, is done by human brains and hands. That is changing, however, as robots become increasingly more sophisticated.

“We’ve changed, again, the automation, the size, the scale many times, and we continue to learn and grow there,” Amazon Chief Financial Officer Brian Olsavsky said of the robots in a conference call last April. The executive said he couldn’t point to any “general trends” in the adoption of robotics, because some fulfillment centers are clearly “fully outfitted” in robots and “some don’t for economic reasons — maybe the volume’s not perfect for robot volume.” However, as minimum wages continue creeping higher, the "economic reasons" to boost robotic volumes will dominate, and most if not all fulfillment centers will become "fully outfitted."

Of course, warehouse automation is just a part of Amazon"s grand vision of maximizing logistical and supply-chain efficiencies, as well as eventually doing away with bothersome paychecks for employees. Several weeks ago, Amazon announced that it had made its first automated drone delivery in the UK. More recently, the company obtained a patent for an "airborne fulfillment center utilizing unmanned aerial vehicles for item delivery", i.e., a giant flying drone mothership zeppelin warehouse. 

By now, it is becoming clear that Bezos will not stop until Amazon is one giant, automated, and fully self-contained system, along the lines of the following video showcasing how early-generation Kiva robots have already displaced thousands of human workers.  Within a few years, expect all of Amazon"s warehouses to look virtually the same.

 

More Bad News For NYC Real Estate As Luxury Co-Op Contracts Collapse 25%

Luxury real estate broker Olshan Realty, Inc. has some bad news for New York"s hedge fund managers looking to dump their luxury $5 million, 1,500 square foot palaces as the market for luxury New York City real estate just might be on the verge of collapse.  Accroding to a year end report published by Olshan, contracts for luxury co-ops (defined as those with an asking price above $4mm) collapsed 25% in 2016 while the average number of days that apartments sat on the market surged 31% and discounts to original listing price also jumped a point to 6%.

The decline reflects classic price resistance. There was a 2% increase in the average asking price, but a 30% increase in the average days on the market—318 days. You read that right—it took more than two months longer to sell a luxury property in 2016 than in 2015. The average price drop from listing to contract signing was 6%, an increase from 5% in 2015. There was also a 5% decline in contracts signed at $10 million and above.

The steepest fall from grace was in co-ops: 25% fewer contracts at $4 million and above from 2015, signaling a continuing market shift in the luxury market to new condos that offer freedom of ownership, new infrastructure, robust amenities, and some hip architecture—particularly seen Downtown.

Of course, this news should come as little surprise to our readers as we"ve frequently written about the unintended consequences of the massive overbuild of luxury apartment inventory over the past several years in Manhattan. 

In fact, a few weeks ago we warned New York City apartment owners to take note of the latest 3Q16 "Elliman Report" that showed the number of apartment closings had plunged 18.6% YoY while apartments sat on the market an average of 8.2% longer.  Inventory also spiked with new development inventory up a massive 27.2%.   

"The number of re-sales has fallen year over year in each of the last four quarters at an increasing rate.  Listing inventory reflected significant differences in the rate of growth between re-sale and new development.  Re-sale inventory expanded 8.2% to 5,290 while new development inventory surged 27.2% to 973 respectively from the same period a year ago."

Meanwhile, the re-sale market looked even more bleak, on a standalone basis, as the number of closings collapsed over 20% YoY while days on the market increased 7.5%

The lesson seems to be that the marginal New York City buyer has been priced out of the market while sellers have not yet accepted that the bubble has burst deciding instead to maintain listing prices while letting their apartments sit on the market longer amid growing inventory levels...that should work out well...