Mish's Global Economic Trend Analysis

Morley the Robot Master Chef; Cognitive Cooking
LA to Gradually Hike Minimum Wage to $15 by 2020; Already Weak Growth Prospects Just Got Worse
CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders

Morley the Robot Master Chef; Cognitive Cooking

Posted: 20 May 2015 01:22 PM PDT

Want Lobster bisque? Morley, the robot master chef can cook that up for you in about 30 minutes.

Please consider Robot Master Chef Cooks 2,000 Recipes, Cleans Up, Does the Dishes.

A California company, Morley Robotics, has teamed with the UK's Shadow Robot Company, to develop a smartphone-controlled robot master chef capable of cooking world-class fare just as Chef Watson. The robot was unveiled at a recent event at Hanover Messe Robotic Technology Fair in Germany. The Robot Chef created a "lobster bisque" for the event in about 30 minutes.

The Morley Robot Master Chef, the product of over two decades of research and development, has two robotic hands, each containing 24 motors, 26 micro-controllers and 129 sensors. The arms have been designed and programmed to match the movements of a professional human chef. Owners will still have to lay out ingredients, but once that's done the robot will do the rest, including cleaning up and washing the dishes.

As Chef Ramsay has shown on his TV shows, many restaurants simply have terrible chefs. Soon, restaurant startups may be able to rent a Morley robot chef to train their human cooks in how to prepare palatable food. The world may become a better place if restaurant owners are able to get rid of temperamental "prima donna" chefs.

Morley Video

Want New Recipes?

If you want new recipes, just team up Morley with IBM's Watson, the computer that trounced everyone at the game of Jeopardy.

IndustryTap reports IBM's Watson Has A New Gig: World Class Chef

Earlier this year, IBM's Watson computer teamed with New York's Institute of Culinary Education. Watson and his handlers are now creating recipes that combine ingredients available to humans the world over in novel ways, raising eyebrows in the process. One of Watson's creations was the Austrian Chocolate Burrito.

The biggest knock against Watson was that (s)he wasn't creative and so this became a challenge for IBM engineers to overcome. The team set out teaching Watson about existing data on food, human proclivities and cooking techniques.

With thousands of ingredients to choose from and a "knowledge" of how ingredients are typically combined, Watson has gone off the beaten path and come up with mind-boggling recommendations for new dishes that are getting rave reviews.

Cognitive Cooking

Watson on the Road

To show the creative cooking power of Watson, IBM took the show on the road.

Cognitive Cooking - IBM Watson (Image Courtesy www.satelliteoffice.tv)

Chefs? Who needs em?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

LA to Gradually Hike Minimum Wage to $15 by 2020; Already Weak Growth Prospects Just Got Worse

Posted: 20 May 2015 10:58 AM PDT

In yet another triumph of stupidity over common sense, a triumph that is sure to cost jobs, slow growth, and encourage more robotic replacement of workers, Los Angeles' Minimum Wage on Track to go up to $15 by 2020

The Los Angeles City Council on Tuesday backed a plan to raise the city's minimum wage to $15 per hour, joining a trend sweeping cities across the country as elected leaders seek to boost stagnating pay for workers on the lowest rungs of the socio-economic ladder.

Lawmakers agreed to draft an ordinance raising the $9-an-hour base wage to $15 by 2020 for as many as 800,000 workers, making L.A. the largest city in the nation to adopt a major minimum-wage hike. Chicago, San Francisco and Seattle already have approved similar increases, and raising the federal minimum wage has moved to the forefront of the Democratic Party's agenda.

The first wage boost — to $10.50 per hour — to take effect in July 2016.

Some labor leaders have expressed dissatisfaction with the gradual timeline elected leaders set for raising base wages. But on Tuesday the harshest criticism of the law came from business groups, which warned lawmakers that the mandate would force employers to lay off workers or leave the city altogether.

"The very people [council members'] rhetoric claims to help with this action, it's going to hurt," said Ruben Gonzalez, the Los Angeles Area Chamber of Commerce's senior vice president for public policy and political affairs.

He predicted that many businesses would absorb their new labor costs by laying off employees, reducing work hours or moving out of the city entirely.

"It's simple math," Gonzalez said. "There is simply not enough room, enough margin in these businesses to absorb a 50-plus percent increase in labor costs over a short period of time."

Councilman Mitchell Englander, the council's only Republican, cast the lone opposing vote. In a statement, he said the council action could "make it impossible for entire industries to do business" in Los Angeles.

"The very last thing that we should be doing as a city is creating a competitive disadvantage for our businesses with those in neighboring cities," said Englander, who represents the northwest San Fernando Valley.

The council plan approved Tuesday would raise wages higher than the mayor's proposal, albeit more gradually. Businesses and nonprofit groups with 25 or fewer employees would have until 2021 — an extra year — to comply. Some nonprofits that train and rehabilitate disadvantaged workers, such as the homeless or former gang members, could also take advantage of the extension.

After that, yearly wage increases would be pegged to the consumer price index — a key provision of the law that backers say addresses past failures to adjust the minimum wage for inflation. Opponents said automatic pay increases based on inflation would be a further hit to businesses.

Simple Math

I side with Gonzalez on the "simple math" and Englander on competitive disadvantages.

This move is 100% guaranteed to cost jobs. Proponents of such measures inevitably say things like "studies show that hikes in minimum wages don't hurt employment."

Such studies only look at the "seen". Population trends and productivity have kept growth intact. Employment rose in spite of hikes in minimum wages, not because of those hikes.

The obvious fact is many struggling businesses will go under. That effect will be seen, but perhaps small. What we won't see is how many stores, businesses, and franchises will not open because of labor costs.

And it's hard now to estimate the push on businesses to further automate, but wage and benefit hikes pressure businesses in that direction.

Experiment Guaranteed to Fail

Councilman Paul Koretz said "This is an experiment. If anyone tells you they know exactly how this is going to go … they're not being honest with you."

Well, I don't pretend to know "exactly" how this is going to go. But I do know the consequences will be slower growth, fewer stores, and higher unemployment than there otherwise would be.

San Francisco Chronicles

San Francisco recently hiked the minimum wage to $15. In immediate response, Borderlands Books announced it would close.

A second bookstore owner, Brian Hibbs, owner and operator of Comix Experience, an iconic comic-book and graphic-novel shop on San Francisco's Divisadero Street and supporter of the wage hike had second thoughts once he saw the math.

Hibbs calculated that the $15-an-hour minimum wage will require a staggering $80,000 in extra revenue annually. The amusing thing is Hibbs describes himself "progressive capitalist".

"We're for a living wage, for a minimum wage, in principle. But I think any law that doesn't look at whether people can pay may not be the best way to go," says Hibbs.

For icing on the hypocrite's cake, Hibbs asks "Why can't two consenting people make arrangements for less than x dollars per hour?"

Progressive Capitalism?

I wrote about Hibbs in Capitalism for Me, Socialism for Thee; Progressive Capitalism?

There is no such thing as "progressive capitalism". The idea is as ridiculous as being a Jewish Christian Atheist.

In response to Capitalism for Me, Socialism for Thee, several readers said businesses can just raise prices.

For books that have a set price, it's not that easy. But even in cases where stores can raise prices, what about the decline in traffic?

Already Weak Growth Prospects Just Got Worse

Fast food dining and retail shopping is not price inelastic. The cost of fast food is already prohibitive. So hiking prices is 100% guaranteed to cost some traffic.

The bigger unseen is store expansion. Rising labor costs will have every business cutting expansion plans over what they would have done in the absence of these wage hikes.

Economic common sense is all it takes to realize that already weak growth prospects just got a lot worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders

Posted: 19 May 2015 11:07 PM PDT

I was back on CNBC with Rick Santelli on Tuesday May 19. The topic once again was municipal bonds with a spotlight on Chicago. Here are a pair of videos.

Live Santelli Exchange

CNBC's Rick Santelli discusses Chicago's credit downgrade and municipal bond crisis, with Mike Shedlock, Sitka Pacific Capital Management.

Link if video does not play: Santelli Exchange: Illinois' unfunded pension liabilities

What's next for Chicago's debt crisis?

In an extended segment, CNBC's Rick Santelli discusses Chicago's municipal bond crisis with Mike Shedlock, Sitka Pacific Capital Management.

Link if video does not play: What's next for Chicago's debt crisis

The slides in the videos are courtesy of the Illinois Policy Institute. Santelli drew an amusing schematic of the 2011 tax hike showing where the money went. Here is the original chart.

John Cullerton: "Tax increase helped state pay bills and debt." October 28, 2014.

In the second segment, I mentioned Mike Madigan, Speaker of the Illinois House. I know full well Madigan is Speaker, but the words "House Speaker" did not come out of my mouth. I was thinking of mentioning John Cullerton, "Senate President", and those were the words that came out of my mouth.

In Illinois, Madigan and Cullerton are the two guys that control every bit of legislation.

Beware, the Tax Man Has Eyes on You

In case you missed it, please consider my May 4, article Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering.

Nuveen estimates that property taxes in Chicago will need to rise by 50% to bail out Chicago pensions. I believe the required tax hike would be much higher.

When Nuveen came up with the 50% property tax hike, it did not include tax hikes to bail out other Illinois pension plans. Nor did it address the $9 billion budget deficit for the state. Nor did it consider the possibility (I believe likelihood) of negative stock market returns for years to come.

For further discussion please see my April 23, article Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Egan-Jones Chimes In

On Monday, I gave Sean Egan of the rating agency Egan-Jones a ring. I asked him how he would rate Chicago General Obligation bonds. Egan replied "deep in junk territory".

Here is a table I put together of various rating agencies, incorporating Sean Egan's response.

Rating Agency	Date	Rating	Level	Outlook
S&P	5/14/2015	A-	3 Levels Above Junk	Negative
Kroll	5/11/2015	A-	3 Levels Above Junk	Stable
Fitch	5/15/2015	BBB+	3 Levels Above Junk	Negative
Moody's	5/12/2015	Ba1	Junk	Negative
Egan-Jones	5/18/2015		"Deep Into Junk"	Negative

S&P Blames Moody's

Here's an amusing take on passing the buck courtesy of Pensions & Investments on the Debt Downgrades.

Chicago's problem now is that it faces "short-term interference," S&P said. "That said, we recognize that the city has a diverse tax base and a management team that has good policies in place. These are an important foundation for any city that needs to address the challenges that this city is facing."

Lois Scott, the city's chief financial officer, said in a statement: "The city of Chicago's financial crisis is real, urgent, and has been decades in the making. The downgrade by Moody's of the city's credit — a decision they say was driven by the Illinois Supreme Court's reversal of the state pension reform bill — has substantially magnified the city's challenges and will add real costs to Chicago's taxpayers. In fact, S&P noted Friday that its own downgrade is driven by the short-term pressures on the city's fiscal position that were created by Moody's actions earlier this week. However, unlike Moody's, S&P recognizes the city's efforts to not only address its legacy liabilities, but that it has the right tools in place to address the challenges it faces."

Rate Shop Whores

For a discussion of how the SEC is to blame for the current environment of Fantsayland bond ratings please see Rate Shopping Whores and Chicago's Bond Rating.

In that link I explain in detail how it is that one rating agency has Chicago "deep in junk" while others have Chicago rated "A-".

99% Haircut

The Bond Buyer reports San Bernardino Chapter 9 Plan Gives Bondholders Worst Cut of All.

San Bernardino, Calif. is now planning to give bondholders significantly worse treatment than they have received in any municipal bankruptcy to date, Moody's Investors Service said in a comment piece Monday.

The bankruptcy plan of adjustment city officials presented to the city council on Thursday "proposes to eliminate 99% of the principal value of its pension obligation bonds, while committing to pay 100% of its unfunded pension liability," Moody's credit analysts wrote.

"The implication of the ruling is that the use of POB proceeds to fund pensions is irrelevant to how the bonds are to be treated in bankruptcy, and therefore retirees are under no obligation to share losses with bondholders," according to Moody's.

"The ruling and the plan of adjustment are credit negative for San Bernardino's POB investors." Moody's wrote in the comment. San Bernardino proposed in its adjustment plan to only provide pension obligation bondholders with a 1% recovery.

In Stockton, POB holders received a roughly 41% recovery, while bondholder recovers in Vallejo were roughly 60%. Vallejo did not have POBs.

"By leaving pensions untouched, however, the city's financial operations will remain strained by rising pension costs," Moody's wrote about San Bernardino. "Under the city's projections, pension costs will nearly double over 10 years to nearly 19% of expenditures."

Bondholders and Taxpayers Screwed

San Bernardino city officials made a purposeful decision to screw bondholders and taxpayers.

"By leaving pensions untouched, however, the city's financial operations will remain strained by rising pension costs. Under the city's projections, pension costs will nearly double over 10 years to nearly 19% of expenditures," says Moody's.

Moody's dramatically understates the problem because it did not factor in the likelihood of negative returns on stocks and bonds.

Conflict of Interest

Federal bankruptcy courts ruled four times that cities can cut pensions. So far, cuts have been token. In the case of San Bernardino, nonexistent.

Why?

The answer is "conflict of interest". City officials wanted to preserve their own ill-gotten and undeserved pensions. On that basis, U.S. Bankruptcy Judge Meredith Jury may have made a very bad ruling.

Message to Bondholders

The decisions in Detroit, Stockton, San Bernardino, and Vallejo send a clear message to bondholders:

Don't buy or hold municipal bonds in any municipality plagued by pension woes because you will be screwed if you do.

That is why I agree with a Chicago Tribune editorial by Henry J. Feinberg, says Pass a Bankruptcy Law, Give Taxpayers a Chance.

Pending Illinois legislation, Bill 298 will allow Illinois municipalities to go bankrupt, a badly needed measure. Feinberg's editorial seeks to amend House Bill 298 so people who hold Illinois bonds have a "secured first lien," the fancy words needed in the law to make sure bondholders are first in line to get their money back.

My concern is not for bondholders, rather it's for the taxpayers. In the great financial crisis bailing out the banks at taxpayer risk was precisely the wrong thing to do.

In this case, taxpayers are punished once again. They will have to pony up for inevitably higher borrowing costs. And the sorry situation is that none of the cities really solved any long-term problems.

In bankruptcy, the city could have at least done something to protect taxpayers down the road. Instead, corrupt and greedy city officials protected their own interests.

When the stock market takes another dive, and it will, San Bernardino pensions will again be deeply underfunded.

Another Crisis Coming

Since no long-term issues have been solved anywhere, expect another pension crisis down the road in a number of already bankrupt California cities.

Meanwhile, I repeat my warning: Don't buy or hold municipal bonds in any municipality plagued by pension woes because you will be screwed if you do.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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