Andy Kessler

WSJ: General Electric’s Long Unwinding

https://www.wsj.com/articles/general-electrics-long-unwinding-1529862757

I had only one question after seeing General Electric tossed from the Dow Jones Industrial Average: What took so long? Yes, GE used to be revered by Wall Street. Investors would explain to each other that GE was 1% of the U.S. economy. As the company went, so did the U.S. But its stock peaked in 2000, and GE has been a failing industrial giant ever since. This underlying reality was hard to see through the smokescreen of its finance business, GE Capital.

I remember when HarperCollins, which had published a book of mine, announced it would be publishing a book by former GE CEO Jack Welch and his wife. I immediately called my publisher and complained in mock horror, “I thought I was your hedge fund guy.” He didn’t get it. I explained that he should forget about turbines and locomotives. GE was basically a giant hedge fund—a bet on its finance unit, which contributed half of GE’s profits.

Jack Welch played Wall Street like a fiddle with his decadeslong record of consistent earnings. His CFO, Dennis Dammerman, even told Fortune magazine in 1997, “We have a lot of diverse businesses, and when you put them all together they produce consistent, reliable earnings growth.” Wall Street believed it. A colleague once told me that Mr. Welch would get up in front of Wall Street analysts and toy with them. He’d joke, “Well, you guys are saying that ‘we might not meet our earnings estimates this quarter because of this or that.’ Wait, why are you writing that down? I’m telling you what you are saying, only write down what I am saying, which is that we deliver consistent earnings growth.”

Dammerman further admitted, “We’re going to take these large gains and offset them with discretionary decisions, with restructurings.” I’ve seen it. I invested in technology companies only to see GE Capital come in and write big checks. It’s an old corporate accounting trick—some called it a honey pot, others a cookie jar. When the investments went public, GE could time the sale of stock for when it needed to book additional profits to make up for a shortfall elsewhere. Jeffrey Immelt took over as CEO at the end of 2001 and kept the Welch legacy going, growing assets at GE Capital to more than $500 billion for a globally expanding business of loans, leasing, factoring, equity finance and insurance.

Mr. Welch had a famous leadership lesson—be No. 1 or No. 2 in any business, or get out. Sadly, as a hedge fund, it was dead last. During the 2008-09 financial crisis, its honey pot was destroyed. GE even took $3 billion from Warren Buffett to meet short-term obligations. Mr. Immelt and GE have been unwinding this hedge fund ever since.

WSJ: The Art of the Brushoff

 https://www.wsj.com/articles/the-art-of-the-brushoff-1529258628

While watching the Washington Capitals hoist the Stanley Cup, I had to chuckle. I was reminded of an old boss. When I first started at his small brokerage firm, I was told that if he didn’t like someone in a meeting, he would pick up the person’s business card and pick his teeth with it. The meeting would end soon thereafter. A lot of people don’t want to say no, nor do they know how to. It’s an art.

Some people have brushoffs down pat. A decade ago, I heard activist Ward Connerly explain Bill Clinton’s premeditated move. Headed to the White House in 1997, Mr. Connerly learned that Mr. Clinton’s signal that he didn’t like someone—so his staff shouldn’t bother—was to compliment his tie. Mr. Connerly was amused until Mr. Clinton approached him to tell him how much he liked his tie.

I’ve been brushed and hushed. In the mid-1990s, after much hassle, my colleagues and I landed a meeting with Jeff Berg, who ran one of Hollywood’s top talent agencies. We were in his lavish office pitching him on getting his clients to invest in our fund. Technology was disrupting music, television and movies, and we were the perfect hedge. I thought the meeting was going pretty well until his secretary walked in saying John F. Kennedy Jr. was on the line. Mr. Berg gave us the eyebrow lift and took the call. As we were ushered out, we heard him yelling, “Yes, I know everything in this town.” Great theater—no deal.

Maybe a year later, I was on a panel at an investment conference with Mike Milken. We had a great discussion about finding value, which ended with him saying he was extremely interested in our fund. Could we please send him materials and follow up? I’m still waiting for his call back. Countless others have used this tactic.

Earlier in my career, I was in Houston pitching chip stocks to a famous but rather elderly money manager. About 20 minutes into the meeting, he fell fast asleep. I didn’t know what to do. Naturally, I kept talking. He eventually woke up, thanked me for visiting, and quickly showed me out.

At a conference in downtown Manhattan, I met the founder of the famous though usually pointless series of talks—it rhymes with “zed”—and we had a great discussion. We continued the chat on the sidewalk as we were heading to the same Midtown restaurant for an event. A limousine pulled up. The driver jumped out and opened the door. The founder got in, alone, leaving me stranded—and with a clear message.

WSJ: The Canard About Falling Incomes

 https://www.wsj.com/articles/the-canard-about-falling-incomes-1528054223

As election season approaches, chants about the hollowed-out middle class predictably grow louder. Wages have been flat for decades, we’re told. “In 1973, the inflation-adjusted median income of men working full time was $54,030. In 2016, it was $51,640,” the New York Times breathlessly reported last year. Sounds awful. Except it’s nonsense. Cast a leery eye on anyone who uses 1973 as a base—it was a high-water mark before a deep recession. But the real red flag—what makes this argument totally bogus—is the phrase “inflation-adjusted.”

The odoriferous offender is the manufacturer of inflation data, the Bureau of Labor Statistics. After the creation of Social Security in 1935, Congress would occasionally bestow vote-winning gifts on retirees in the form of benefit increases. In 1975 Congress switched to automatic cost-of-living adjustments based on a consumer-price index, or changes for “a market basket of consumer goods and services.” That’s food, rent, electricity, T-Mobile,Netflix .

Forget for a moment that some of that didn’t exist in 1975. As consumer items got more feature-rich and complex, the BLS simply couldn’t note the absolute price of, say, a microwave oven. So the bureau came up with the indulgently named hedonic quality adjustment, defined as “decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes.”

It’s a better measurement but still inaccurate. Here’s a thought experiment: Think about your car’s automatic emergency braking, sometimes known as precrash or collision avoidance. It has been an increasingly popular option in recent years. By 2022, it will be standard on most cars. Some silicon sensors and a few pieces of code—today it costs maybe $50 to produce. But what’s it worth?

Let’s do a little hedonic decomposing of our own. Before these sensors, you would have had to hire a person to ride shotgun and constantly watch for potential collisions and slam on the brakes for you. In 2016 the AAA Foundation for Traffic Safety estimated the average driver spends almost 300 hours a year in the car, logging more than 10,000 miles. Paying someone even $10 an hour to stare into traffic means that over five years, collision avoidance is worth nearly $15,000. Double if you want someone to look out the back window, too.

Does this show up anywhere in the consumer-price index? Of course not. Of course not. One of the most lifesaving features has dropped in cost by three orders of magnitude in less than a decade. To the BLS, it’s practically nonexistent.