PrefBlog

UPS is attempting to catch up in the drone wars:

UPS, despite its decades of delivery experience, is a latecomer to the drone delivery game. Drone startup Flirtey demonstrated a ship-to-shore drone delivery of medical supplies off the coast of New Jersey earlier this summer, and drone delivery company Zipline declared its intent to delivery needed blood to rural populations in Washington State’s San Juan islands.

And it’s not just startups that are already doing delivery. Amazon’s drone program is perhaps the most famous, but Europe’s own DHL delivery giant experimented with drones in difficult mountain terrain. Chinese online retailer JD.com is also exploring drone delivery in marshy and channel-crossed provinces, where flying drones can fly easily over the car-impassible waterways. That UPS is experimenting with drone technology is more a testament to the technology’s broad appeal than any particular innovation by the company itself.

On a related note, Tyler Cowen of Bloomberg claims that technology favours suburbia:

Self-driving vehicles are also likely to help the suburbs most. One of the worst things about the suburbs is the commute to the city or to other parts of the suburbs. But what if you could read, text or watch TV – safely — during that commuting time? What if you could tackle your day’s work just as you do on a train or plane? Commuting would seem a lot less painful. As driverless vehicles evolve to accommodate work and leisure uses of the automobile space, pleasure will replace commuting stress.

What about drones? They too would seem to favor remote areas where it is harder to access useful goods and services. Drones may do more for exurbs and rural areas than for the suburbs, but it seems cities will gain least. Walking or biking to nearby shops is a potential substitute for drone delivery. Rolling sidewalk drones might find it harder to negotiate crowded cities, and cities with a dense network of tall buildings may be less friendly to flying drones. Population density may increase the risk of a drone falling on someone.

Jared Dillian writes in Forbes about the message we’re sending to the Chinese:

Shockwaves reverberated through Canada last week as the government announced that negotiations would commence on an extradition treaty between Canada and China.
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Make no mistake about it–from Canada’s perspective, this has everything to do with money laundering–and the torrid housing market. In fact, supporters of the extradition treaty directly cite the inability of middle class Canadian families to buy homes that have become prohibitively expensive, due to foreign capital pouring into the country.
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But Canada should really reflect on whether they want a reversal of those capital flows. History has not been kind to countries that have slammed the door shut on foreign investment. And money always goes to where it is treated best. So if Canada becomes hostile to Chinese money, it will find somewhere else to go. And I’m sure lots of countries would be happy to take it.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, unchanged from September 14.

Here’s a US story we probably won’t see in Canada!

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 — with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit.

Eggs and beef have have grown especially inexpensive, and it isn’t only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 — a little more than the price of a pint of beer.
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[Analyst at Wolfe Research Scott] Mushkin, who researches local markets, recently found that prices of a typical basket of grocery items in Houston, had fallen almost 5 percent over the past year.

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Mark Gilbert of Bloomberg writes about his experience playing a game published by the Fed:

The San Francisco branch of the Federal Reserve has a game on its website that lets you play at being Chair of the Federal Reserve. After tinkering with it, I’ve come to some conclusions: Modeling the economy is a mug’s game, short-term interest rates are a poor tool for steering the economy, and I should never be given the job of running a central bank.

The website sets out the objectives:

Your job is to set monetary policy to achieve full employment and low price inflation. Your term will last four years (16 quarters). Keep unemployment close to its natural rate of 5 percent. Keep inflation near the Fed’s 2 percent inflation target. Pay attention to the headlines for information about the economy.

Here’s how I did:

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Today’s big news is the FOMC policy rate decision:

The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
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Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Projections for the future course of rates eased slightly but remained skewed upwards:

The central bank’s so-called “dot plot”, which it uses to signal its outlook for the path of interest rates, showed that officials expected one quarter-point rate increase this year. Three policy makers projected that keeping rates unchanged this year would be most appropriate. Officials scaled back expectations for hikes in 2017 and over the longer run.

Policy makers see two rate hikes next year, down from their June median projection of three.

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It’s interesting to see more argument that technology, not globalization, is the bug-bear of the middle class:

In the realm of international trade, it is a truism seemingly as consistent as gravity: Jobs and investment flow from north to south, while manufactured goods travel the other way around. Factories in the United States and Canada shutter as work shifts to Mexico and Central America, where human hands do it more cheaply.

So the established order of trade was by all appearances turned upside down on Tuesday, as General Motors agreed to cease manufacturing an automobile engine at a factory in Mexico while moving jobs to a plant in Canada.
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In an era of increasingly sophisticated manufacturing that relies more on computers and robotics than low-wage hands, centers of innovation like Canada and the United States will exert a greater pull than before.
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Given that state-of-the-art products fetch a higher price, it is presumably worth paying a premium to the limited numbers of humans involved in their creation — and especially since this buys proximity to the minds that dream up lucrative new visions. The Canadian plant getting the jobs sits near Waterloo, the birthplace of the BlackBerry, which is something like Canada’s Silicon Valley.
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Above all, the deal underscores the potency of markets in shaping what happens in commercial life, a force far more powerful than demagogues making dubious promises about tearing up trade deals.

CalPERS, the giant pension fund that doesn’t do credit analysis, is the subject of some sharp commentary by Megan McArdle:

For example, Calpers, which uses a 7.5 percent discount rate, has a funding level of about 75 percent. It is currently contemplating lowering that discount rate all the way to 6.5 percent, but only over two decades.

It’s hard to believe that 20 years was chosen for mathematical reasons. After all, the wave of boomer retirements, which will be the greatest stressor our national retirement systems have ever seen, should be well over by 2035. Rather, one suspects it was chosen because Calpers doesn’t dare change it faster. Changing it faster would mean big increases in current contributions.