Los Angeles City Mayor is a Failure

• Los Angeles has a $7.1 billion General City budget (this does not include the Airports, Harbor and Department of Water & Power budgets)

• Los Angeles is a full-service City government composed of elected and appointed offices, including commissions, departments, and agencies.

• Los Angeles City government has a workforce of about 37,000 employees that provide a variety of services ranging from crime control to tree trimming.

The above information was copied from a Los Angeles city web site that tries to inform the citizens about how the city government functions. Los Angeles Mayor Villaragosa says that the city will have shortfall of $24 million in its current budget. If the administration would just cut back its department budgets to those that existed just three years ago they would save more than $100 million. This will most likely mean that some jobs will have to be eliminated. That reduction is not nearly enough to reduce city services in any significant way.

The problem is that the mayor doesn’t want to impact his Teflon surface with any damaging decisions before next year’s election. The truth is Villaragosa has not successfully fulfilled any of his many promises.

Schools are ineffective, crime is a serious problem (especially gang activity), public transportation is poor in most parts of the city, traffic is impossible, the cost of living has driven out the middle class, business has been driven out of the city due to high taxes, and the list goes on and on.

Antonio Villaragosa’s smiling face is better than his predecessor’s continuously glum appearance. Jim Hahn never cracked a smile.

Evaluating Investment Funds

I almost never read stock and mutual fund reports and other information that those many companies send me. When I do, I rarely go past the third page of reports that have at least 50 pages. I like to look at the graphs that compare performance with other investments. Sometimes I find some interesting facts like Mario J. Gabelli earning $9 millon last year while his fund lost 20% of its value.

The most recent report I received is the Oppenheimer Strategic Income Fund Management Commentaries and Annual Report dated September 30, 2008. It totals 128 pages of information that would require an accountant’s knowledge to really understand. Oppenheimer’s auditor is the famous Deloitte & Touche LLP. That company attempts to reassure me by writing that the financial statements “represent fairly” the condition of the company “in conformity with accounting principles generally accepted” in the U.S.A.

I am not reassured as there is discussion of Swap Contracts, Credit Default Swap Contracts, and a variety of other swap contracts. This was supposed to be a conservative investment.

Bernard Madoff has been accused of cheating his clients out of billions of dollars. It’s an accusation that has yet to be proven. Although the accounting firm that reviewed his records is small there is no evidence that it was not qualified to audit the Madoff investment company. If Rene-Thierry Magon de la Villehuchet, the suicide victim and an esteemed financier who tapped his upper-crust European connections and invested both his client’s funds and his own money in Madoff’s company, could not recognize a scam how could us less trained individuals know that Madoff was running a ponzi scheme?

Who among us non-financial experts can read one of these reports and really understand the investment company? I rely upon magazine and newspaper articles, Morning Star, some financial newsletters and occasionally a broker. I will be spending more time learning to read and understand those annual reports and disclosures.

Ponzi Scheme

“In a Ponzi scheme, not all investors lose. The first investors gain much. Those who manage to get out in time retain their investments and some of their gains.”
TAMAR FRANKEL, a law professor at Boston University, on the Madoff scandal.

A ponzi scheme has also been called a pyramid scheme. In fact the first item I see when Googling the words ponzi scheme are “pyramid scheme.” The most prevalent that I am familiar with are the multi-level marketing businesses. Those entering at the top floor convince their friends to buy in to the sales plan. They buy “sales kits” that are filled with product. Those friends then sell their friends to buy in to the sales plan. This process goes on and on. Each person receives a commission for everyone in his network that sells participation. The problem is that there is very little selling of product outside of the group who keep buying into the sales plan. Eventually these schemes run out of friends. Those people at or near the bottom earn relatively little but those at the top of the pyramid have “earned” significant commissions.

It has been suggested that Bernard Madoff really did not hold investments that earned 10-12% per year. I personally do not believe that those kinds of earning are possible on a continuing basis. Mr. Madoff is accused of paying his clients that return from new money that was invested in his firm. The scheme worked well as long as redemptions were low and more investors were added to the list of clients. Declining stock values brought a wave of redemptions that his company was unable to fulfill. The SIPC and the Securities and Exchange Commission obviously did not monitor the Madoff investment company. This will likely cost the government significant money.

“There’s a sucker born every minute” is an expression that was attributed to P. T. Barnum. Whether he did use those words I do not know. ‘A fool and his money are soon parted ‘is an idiom from an unknown source that is probably the definition of someone that falls for a ponzi scheme.

No Innovation Means No American Manufacturing

It appears that the Detroit auto makers will be given some kind of loan to help them through their hard times. Considering the possible consequences if there is no aid, Congress has little choice. In the long run all three of those companies will have to change in very significant ways. If they do not, they will have to be allowed to die.

Every Friday the Los Angeles Daily News has a section entitled DRIVE. It is all about new and unusual vehicles. This past Friday’s edition reviewed the new Ford Flex. The car reminded the reviewer of an old panel truck. The difference is that it looks somewhat like an old station wagon. For those too young to remember, a station wagon is really an SUV on a car chassis. The result is that station wagons provide the ride of a car along with the space of an SUV.

I have owned two station wagons. The last was a 1983 Chevrolet Malibu. The Flex’s V6 engine and the space for five reminded me of the Malibu. What really caught my eye was the gas mileage. The Flex offers 16 city and 22 highway miles per gallon. That was the mileage I obtained on that Chevrolet. This lack of innovation is the reason that the Detroit auto makers now sell less than 50% of total car sales in America. How many billions of dollars will the United States government spend on this incompetent industry? Perhaps the lack of innovation is the real reason American manufacturing has been in decline for the past 30 years.

Keeping Jobs In America

As I walk through the stores this holiday season there is one consistent fact. Most of the merchandise was made in another country (not the United States). Even clothing sold in high end stores was manufactured in another country. My Dell desktop computer was made in China and my Dell laptop was made in Malaysia. Tech service on those computers is provided in Bangalore, India.

Does patriotism trump our pocket books? There is an article on the Los Angeles Times November 29 front page about the new Kia plant being built in West Point, Georgia. The paper quotes one lady there that buying American, “is still a big deal. But you can only be patriotic until you can’t afford it anymore.”

Manufacturing continues to decline in the United States. This contention is supported by the fact that union membership has fallen by 50% in the past 40 years. In September 2001 the Commissioner of Bureau of Labor Statistics, Katharine G. Abraham presented a paper with the dismal fact that “Manufacturing employment fell by 141,000 in August” of 2001. Manufacturing has continued its decline to the present.

America’s largest corporations have continued to thrive and grow larger during the past 20 years as manufacturing employment has declined. This situation is the result of the export of American manufacturing and jobs to lower cost nations. With a new Democratic Party administration in the White House and strong Democrat presence in Congress this circumstance could change. The problem is the lobbyists employed by big business.

Congress may not be able to resist the temptations of the lobbyists but can always pass laws that induce employment in the United States. That can be accomplished through tax incentives. Lobbyists and corporations love incentives. Now the public must demand that Congress do its job.

Wind Turbine Manufacturing

No economically successful nation exists without a manufacturing base. While the financial markets do create jobs and are part of our economic engine they could not survive without manufacturing, mining, and agriculture. Most governments do encourage the development of every kind of endeavor.

However, the United States is a capitalist nation that stringently follows the philosophy of free enterprise. As a result we object to government aid to any private enterprise. Most Americans believe in Darwin’s theory when it’s applied to business. That belief translates to most of us questioning the use of government funds to bail out the financial industry, auto manufacturers, or any other business. Does this mean the end of the Big Three auto makers? If the Republican Party controlled both houses of Congress the answer would be yes. The Democratic Party is likely to be emendable to a bail out.

Barack Obama has pointed out that the United States could employ thousands of people building a Green economy. Look for Wind Turbine companies on the internet and you will find there are about 20 of them in the United States. Only one name is familiar to most of us, General Electric. Two others that caught my eye are Suzlon Energy Limited and Urban Green Energy. The likely disappearance of the Big Three auto companies and our need to reduce oil imports should make this manufacturing opportunity a high priority in the new administration.

Make The U.S. Auto Industry Competitive

Darwin’s survival law applies to business too!

Without a plan to make the U.S. auto industry competitive, no amount of money will make the Big Three profitable. Reuters reported that General Motors Chief Executive Rick Wagoner said “bankruptcies would have a devastating impact on the domestic economy, many times larger than the aid automakers seek.” Perhaps he is correct in the short term but the management of all three Detroit auto makers have no vision for the future. Everything they have introduced in their vehicles has been reactive to foreign competition.

They have built low quality gas guzzling cars and trucks that are everywhere. Approximately 50% of the cars sold are still built by the American owned manufacturers. A review of Consumers Reports indicates that the quality of their vehicles lags far behind the imports. This is especially true when Detroit’s vehicles are compared to Honda, Nissan, and Toyota. Those three Japanese manufacturers have made major inroads in U.S. sales despite their higher prices because their vehicles are economical to operate, have higher quality and provide longer life.

I know this from personal experience. I drive every car I have owned until the cost to repair it is very high. No Big Three car I have ever owned lasted more than 100,000 miles. I sold a Ford Fairmont (to a Ford lover) at 54,000 miles when it was literally falling apart. All six of the Japanese imports have lasted at least 135,000 miles. Currently our family still owns a 1990 Honda Accord with about 200,000 on the odometer and it still travels 60 miles a day.

The Big Three need to consider bankruptcy re-organization that includes new management. The U.S. government is not in the business of investment in private enterprise.