Inland Empire Trying to Attract Foreigners

From Bloomberg

“Riverside County is the most aggressive in seeking overseas investors” among many California regions that are looking to create jobs, said Paul McIntosh, executive director of the group that represents the state’s 58 counties. A skilled labor force, abundant land, and proximity to ports in Los Angeles and Long Beach make it easier to forge trade deals, he said.

Now if they could only find a way to escape California's oppressive legislation. You don't notice it until you see what other STATES are doing:

In Texas, China’s Tianjin Pipe Group Corp. is spending $1 billion to build a production mill in the Corpus Christi area. Tianjin, which chose the site because it’s close to companies like Shell Oil Co. and Chevron Corp., will get property-tax abatements over 10 years from San Patricio County based on the number of jobs created and the land’s future value, said Leah Olivarri, a spokeswoman for its U.S. unit.

Canadian snack maker Saratoga Potato Chips LLC is investing $4.9 million on a U.S. headquarters in Fort Wayne, Indiana, that will employ as many as 175 people. In return, Indiana is offering as much as $1 million in performance-based tax credits.

Thanks for playing Riverside.

More Inflation / Deflation Debate

Article in the NY Times about the great inflation / deflation debate.

They call those Fed chairmen worried about deflation as doves and those concerned with inflation as hawks.

James Bullard, of the St. Louis Fed, looks like he went from a hawk to a dove:

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

These are pretty scary words as a Japanese-style deflationary spiral , or the lost-decade, as it is known in Japan has many different outcomes and not many of them are pleasant.

One is a persistently high unemployment, especially for younger people who must accept lower wages as the older workforce does not retire. There is a decline in the lifetime employed and an increased use of temporary labor and the acceptance of dead end jobs.

At the end of the article is mentioned my long time Fed hero Richard Fisher, of the Dallas Federal Reserve bank. He is a hawk.

I can always depend on Mr. Fisher to put it all in perspective. Here is his latest speech on the state of the economy.

Mr. Fisher believes that all the policy changes and a lingering uncertainty are responsible for the lack of action on the part of businesses.

The bottom line is this: In whatever realm and whatever form, excessive uncertainty is the enemy of economic growth. As Ben Bernanke wrote in 1980, the “resolution of uncertainty” can lead to “[a business] investment boom.” It follows, then, that if and as regulators and legislators provide more clarity, a major roadblock to economic growth will be removed.

It was recently reported that nonfarm, nonfinancial firms in the U.S. have over $1.8 trillion worth of liquid assets sitting on their books. Excess bank reserves being parked in the 12 Federal Reserve Banks exceed $1 trillion. If and as the incidence of
“random refereeing” and uncertainty is assuaged, then we might well have the opportunity for robust growth in employment and capital expenditure expansion as firms and banks put that excess cash to use. That’s the good news.

I would agree. People save money as a buffer against uncertainty and most people put off investments until they know which way the wind is blowing. In economics we have the concept of long term vs. short term. People only live in the short term, the day to day, the marginal occurrences that make up your lives.

People plan for the long term, what their overall goals are and what it is they are working towards. People never reach the long term, it is like the end of a rainbow. It is the equilibrium point where supply and demand are in balance and the whole economics profession makes sense. Economic fundamentals work in the long run we can tell you what the overall state of affairs is going to look like, but we cannot tell you exactly how we are going to get there.

We don't know if there is inflation or deflation going on in the short run. We know that if unemployment remains high and the economy is in a type of liquidity trap, then we should have deflation in the long term. We also know that if the Fed continues to expand its balance sheet, there will be inflation, greater debt, crowding out of private funds and higher taxes in the long run.

How can we plan for the short run when we can't even agree on what the long term equilibrium point is supposed to look like?

Shippers Unintended Consequences?

Interesting article in the NY Times

The cost of shipping something from Hong Kong to Los Angeles is at an all time high ($2,624), as the above chart shows. Last year the price was at an all time low ($871). The current price is even higher than during the boom times so what gives?

The price is the determined by supply and demand and price changes are determined by changes in supply and demand. Over the past year, shippers have reduced significantly the number of ships sailing and have slowed the speed at which the ships move, making them less efficient. This has the effect of greatly reducing the supply of space.

In addition, demand has gone up over the previous year as retailers order and sell more goods.

The effect has been a double shift with the overall result being higher prices. Not only that, but the indirect cost of wasted time, missed shipments etc greatly adds to the cost which is not reflected in the price but can be measured in the increased use of air freight, as people substitute out of ocean and into air.

To get products in on time, they need to spend a lot more. Cost Plus, for instance, has used air freight for some time-sensitive items, and that costs about 10 times what sea freight does, said Jeff Turner, who oversees supply chain and store operations. And for sea cargo, even though contracts with freight companies exempt Cost Plus from summer surcharges, known as peak-season surcharges, the retailer is paying them.

“We have agreements that literally say we don’t have peak-season surcharges for our business, but we’re treading completely new ground. Our carriers are coming to us and saying, ‘If you want to get on the vessels, we need to figure out how you guys pay peak-season surcharges,’ ” Mr. Turner said.

Mona Williams, vice president for buying at the Container Store, said the company was telling manufacturers to book space well in advance, and that it was moving delivery dates earlier.

And for items that simply must arrive, well, there are ways to do it. “Sometimes you can offer to pay a steamship company a larger amount of money, and they might take somebody else’s container and not put it on,” said Jeffrey Siegel, the chief executive of Lifetime Brands, but “in most cases, you just have to wait.”

So the only way to get your goods on time is to pay more and essentially bribe somebody to do their job? I mean, with shippers being monopolists and all, customer service never part of their business plan, but still you would think that such practices would be illegal, to say nothing of being immoral.

These shippers basically have the US economy in a chokehold since they are restricting trade.

Higher prices will force shippers to increase their capacity to increase profits. This takes time for the market to react and these spikes in price occur because of short term dislocations. Companies hedge their risk of these short term dislocations by long term contracts, but if these long term contracts are not being honored, how can any business be conducted?

Business is based on trust and where trust is lacking, there is always the power of the law to make sure contracts are being filled.

The amount if ill-will for these shippers is almost palpable.

Sales to Inventory Ratio

The inventory to sales ratio is maintained by the Census, of all agencies. It measures the inventory of goods from retailers and manufacturers, as well as the sales of goods from these same people.

The ratio should always be greater than one, since you can't really sell something that doesn't exist yet. The closer to one the ratio gets, the leaner the supply chain is. The higher the ratio, the more slack that exists in the system.

The ratio looks like this:

What a mess. I wonder what happens if we break it up by quarter?

Hmm, looks like there is some strong seasonality there, especially in the first quarter when retailers have a bunch of unsold Christmas goods. Q1 2009 when things went downhill, with a bunch of unsold goods just sitting on shelves

Q1 2010 was much milder, since retailers ordered far less goods.

Now what happens if we just look at sales, which is much more volatile than inventory? Sales are demand for goods, inventory is supply of goods, demand is always fickle and changing whereas there is a whole chain of events that lead up to supply, so it is far less responsive.

Here is sales. Things to notice, from 1992 to about 2001 things were steadily increasing. From 2001 until about 2004 things were pretty static, not much happening and then from 2004 to 2008, sales increased like crazy. So we have dot com bubble in the 1990’s, then 2001 recession and a muddling until 2004 when the housing boom took off and then a huge crash when the housing boom ended.
Now it seems that sales are beginning to increase, like they always do in the second quarter, then will probably be flat in the third quarter and then a slight rise or flat in the fourth quarter before going down again in Q1 2011. So where we are now in 2010 is where we were in 2006 in terms of sales.

What I cannot understand is why sales continued to increase in 2008 when we were officially in a recession? I think it may have to do with fuel prices, since they are included in retail sales, or maybe it just hadn’t hit home yet that we were screwed and people didn’t switch to saving mode, but by Q1 2009, it all came to a head.

Fun stuff.

AMB Earnings Transscript

Here is a link to the AMB transcript from Seeking Alpha.

I thought this was interesting.

Customers are reluctant to commit the space any earlier than absolutely necessary and their real estate procurement strategy can be best described as just in time leasing designed to keep their space use perilously close to their bare minimum requirements.

The only way customers have been able to handle their recovering consumption is to switch to unconventional inventory management and transportation strategies. For example, in order to manage to leaner inventory levels, customers are now placing orders in smaller quantities. This is evidenced by an increased frequency of orders and deliveries which is neither efficient nor sustainable.

A second strategy has been the increased use of air cargo to replenish out-of-stock items. And as the ocean carriers are employing slow steaming to save on fuel costs more of our customers inventory is spending time on ships, delaying the need for warehouse space. Ironically, this too has led to increased use of the more expensive air freight product to meet service levels.

The bottom line of all of this is that less inventory is being carried in warehouses right now and more is in the transportation network which means that the rebuilding of inventories is lagging the recovering consumption. We view these substitute transportation strategies as stop-gap measures as they are added expense will eventually become cost prohibitive.

You can think of warehouses as oil in an engine. It lubricates and protects, serves as a buffer between supply and demand. This oil costs money, but it is necessary to keep the engine running.

The engine in this case is the US economy. When the engine slowed down suddenly and screeched to a near halt you didn't need as much oil to keep things moving and a lot of the oil was drained to cut costs.

When it gets going again, you will need that oil to act as a buffer, otherwise there will not be products on the shelves when you need them, retailers will lose money from lost sales, consumers will lose since they will end up paying more for goods (since there are fewer goods) and manufacturers will lose since they produce and sell fewer goods (since everyone is ordering and purchasing less). Costs and inefficiencies to the system increase and everyone as a whole loses.

Air freight is a short term solution. It is more flexible and elastic (responsive to changes in supply & demand) than is ocean freight. It is also way, way more expensive and heavy bulk goods are poorly suited for air freight.

At LAX air freight has been up 28% in April, and has double digit growth since November 2009. In Ontario, things are not all that great. Air freight is up 10% over the previous year. This is because there is so much extra capacity at LAX that there really is no need to go to Ontario. Plus LAX is closer to the end destination those goods are headed for.

The IE warehouses are for ocean cargo, bulky items that need to be shipped via long haul truck. For air freight, you don't need the highway system. If you are shipping something to Chicago, you can just fly it to Chicago rather than unload it from a boat, ship it to Ontario for long haul to Chicago.

Good to see the rules of economics at play. I talked about air freight recovering before ocean freight like 9 months ago I think. In the short run, the volatility and randomness seem to dominate, but it the long run supply and demand will play out in predictable ways.

Christmas in July

Retailers economic worry could hurt So. Cal industrial market.

From the AP:

Retailers are having second thoughts about orders they placed earlier this year, when the economic recovery looked stronger and Americans were more willing to
spend money.

Now they worry they could end up stuck with too many toys and sweaters come the holidays and have to cut prices.

Stores are fretting that even small increases in their holiday stocks may be too ambitious. Some are waiting to see how spending turns out in the back- to-school season before trimming their holiday orders, but others aren't wasting any time.

...

Most stores have until August to do any tweaking on their holiday orders, though the largest chains, which have more power over suppliers, can cancel some orders later.

...

With unemployment stuck near 10 percent and the stock market having wiped out its gains from earlier this year, Americans are skittish about spending as the second half of the year begins.
Retail sales fell 0.5 percent in June compared with the previous year, the government reported this week. Clothing chains had to slash prices on summer tops and shorts even more than they planned to entice customers.

Now, stores worry that merchandise will pile up, leading to rampant price-cutting.

"It still feels like a fragile economy," said Brendan Hoffman, CEO of Lord & Taylor, which has plans in place in case sales slow down. Hoffman said that if business weakens, the department store will turn to more aggressive promotions.

Stores are still smarting from the huge discounts that made Christmas 2008 a disaster. They desperately want to avoid a repeat and have been cautiously increasing how much they put on store shelves.

Just when it seemed like things were getting better.

The scariest thing I have seen on the internet today

An article in Rolling Stone about economic bubbles and Goldman Sachs. It seems plausible and Rolling Stone may be one of the more reputable news sources these days.

If the statements in the article are true, I think the vampire squid analogy may be too nice. A more apt reference would be the Sacculina carcini:

A female sacculina begins life as a tiny free-floating slug in the sea, drifting around until she encounters a crab. When that fateful day arrives, she finds a chink in the crab’s armor (usually an elbow or leg joint) and thrusts a kind of hollow dagger into its body. After that, she (how to put this?) "injects" herself into the crab, sluicing through the dagger and leaving behind a husk. Once inside, the jellylike sacculina starts to take over. She grows "roots" that extend to every part of the crab’s body – wrapping around its eyestalks and deep into its legs and arms. The female feeds and grows until eventually she pops out of the top of the crab, and from this knobby protrusion, she will steer the Good Ship Unlucky Crab for the rest of their co-mingled life. Packed full of parasite, the crab will forgo its own needs to serve those of its master. It won’t molt, grow reproductive organs, or attempt to reproduce. It won’t even regrow appendages, as healthy crabs can. Rather than waste the nutrients on itself, a host crab will hobble along and continue to look for food with which to feed its parasite master.

You can kinda think of the US economy as the crab, and Goldman Sachs as the profit-maximizing slug intent on feeding only itself. I was really angry after reading that article, I will slowly work my way to acceptance (the fifth and final stage of grief) later today.

I always wondered about the 2008 oil price bubble, it hurt the trucking industry very severely and came out of nowhere and just disappeared.

The Rolling Stone article is worth the read, if nothing else it will make you appreciate the long-term effects of short term payouts.

$500,000 for a green card

So U.S. Citizenship and Immigration Services has requested that Southern California Logistics Airport stop advertising trying to raise money from foreigners because they believes:

"Essentially, Victorville RC (Regional Center) is actively promoting what appears to be defunct projects as viable development projects on its public Internet Web site and providing a downloadable brochure that clearly claims that these projects are viable," according to the eight-page letter dated May 4.

You can see the full article here.

I had no idea they give you a green card if you "invest" 500,000 into the US.

I am assuming that the U.S. Citizenship and Immigration Services has to sign off on these deals because seems like a law that allows people in the US to rip-off rich naive foreign investors.

For 1/2 a million bucks maybe that is why they call it a green-card.

Looks Like The WSJ sees what I see

And that is growth in the IE.

Full Story:

For the first time in years, John Rojas has a warehouse brimming with boxes.

The president of Cargo Cats Inc. said his warehousing business saw a spike in activity recently, and that his main warehousing unit is now operating at about 90 percent of capacity.

“We’re going at 100 miles per hour right now,” Rojas said, standing beside ceiling-high, towering stacks of boxes in his Mira Loma, Calif. warehouse.

Warehouses in the Inland Empire, which receives goods from the two largest ports in the country, reported a similar increase. To deal with the heavier load, many warehouses have taken on new employees.

Temporary hiring agencies, such as York Employment Services and CitiStaff Solutions Inc., do a lot of the hiring for warehouses in the district, and say they have been finding more work for more people.

...

Mark Doss, owner of Mark Doss Trucking who was eating at the Ontario West Travel Center on Monday, said, “In ‘08 and ‘09, you could actually find a place to park. Now, you can’t.”

He said it’s been difficult to find a parking spot at gas stations, food joints and other places around the Inland Empire warehouses since the Spring. From January through April it was “dead, dead” on the highway 10, he said. But since then, he has noticed about a 30 percent increase in traffic coming into the warehouses.

The Inland Empire is a growth market, and looks like these "green shoots" are starting to take hold. We have seen it in increased activity in Inland Empire, mostly in the East but also starting in the West.

When I heard someone say that recovery was going to happen in the Inland Empire first, I was a little skeptical, since things were going down so fast it was hard to think of them going back up.

But the East has shown the quickest turnaround, mainly because it is more responsive to prices (more elastic is how economists would describe it). The less elastic markets, such as Central Los Angeles & especially Vernon, have not fared as well.

Nothing like a soured commercial loan and mounting debt to motivate landlords to reduce prices.

Clerical Workers Strike At POLA

I have not heard too much about this in the news until today, but evidently clerical workers at the Port of Los Angeles have been striking since their contract expired July 1st.

Here is the story.

Striking clerical workers at the nation's busiest port complex expanded their walkout to a fifth terminal Friday, temporarily shutting down loading and unloading operations when dockworkers at the facility refused to cross the
picket line.

The disruption ended after an arbitrator ruled the clerks' union had bargained in bad faith and ordered the longshoremen back to work, said Stephen Berry, who represents 14 shipping companies at the ports of Los Angeles and Long Beach negotiating new contracts with the union.

...

The strike, which began when the clerks' contract expired July 1, appears to have
caused no significant disruptions in shipping. The clerical workers process paperwork for the shipment of cargo, but managers at the struck terminals have been handling the workload, Berry said.

The shippers want to use new computer programs giving customers access to shipping schedules, a move that the union has said would endanger jobs. The union is seeking contract provisions against outsourcing.

Zimbabwe Money Washing

Found this article pretty interesting.

Basically, with an inflation rate of a billion percent, the US dollar is the de facto currency of Zimbabwe and many other countries that cannot maintain stable price controls. The reason for this is that citizens trust the value of the US currency rather than the rapidly inflating currency of their own country.

The effect is that money stays in circulation for really, really long periods of time. And we are talking about physical currency here, I am not sure if people accept checks for US dollars in Zimbabwe.

The effect is that the money supply for these dollars is fairly stable, so prices remain constant in US dollars, but the money is really, really stinky. People hide it in their shoes and other places, and it will exchange hands until it falls apart.

So the article talks about people washing money to get rid of some of the funk. Since US dollars are made out of cotton, this can be done the same way you would a pair of jeans, at the laundromat.

One interesting side effect is basically to prove the reverse of Greshems law, that good money will drive out the bad money; people will part with the stinky dollars and keep the good ones for themselves.

I love how an economic principal that started in the 15th century to explain currency debasement still has relevance today.

Since the US imports more than it exports, it has to exchange US dollars for goods. These dollars (physical or otherwise) are held in foreign reserves.

I read somewhere that there are more dollars outside of the US than inside, but I have not been able to see any official government information that would prove this true or false.