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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • A Radical Proposal For A Possible Compromise: Abolish The Debt Ceiling

    We start with the proposition that, in human affairs, parties often dig in their heels and then are faced with the unpalatable alternatives of giving in and "losing" or continuing the fight and "doubling down." The problem with some conflicts is that, as more and more pain has been caused by the conflict, it becomes progressively less acceptable to concede defeat. The reason is that defeat tends to make the pain suffered meaningless and the product of a failed strategy rather than worthwhile in connection with the achievement of some objective.

    In the context of our current situation, as the pain of the shut down of the government increases, it will tend to be harder for the Republicans to swallow defeat and pass a clean resolution allowing the government to function. They will be perceived as having created pain and indifference for no reason at all. Similarly, it will be hard for the President and the Democrats to back down because, if they do, there will be a perception that they could have done it at the outset and avoided the unnecessary disruption we have all suffered. From the perspective of the President there is the added concern that backing down to "extortion" by the Republicans will set a very bad precedent and will virtually guarantee that the tactic will be repeated at least once a year in the future.

    So, how can both sides win? The Tea Party defines victory in terms of delay or revision of Obamacare. The President defines victory in almost exactly opposite terms.

    One solution is to give something valuable to both sides. Suppose the President were to make some concessions on Obamacare - perhaps, dropping or delaying the tax on medical devices, perhaps several other delays or revisions that would do not harm to the essence of the program. He obviously would view this kind of concession in exchange for legislation keeping the government open as a defeat. So what else could he be given that would allow him to claim victory.

    One concession that the Republicans could make is to not only increase the debt ceiling but to abolish it altogether. The debt ceiling is not an inevitable part of our economic structure. It is obviously possible to control the deficit without a debt ceiling. In fact, the debt ceiling as really not been successful in restraining spending or deficits. In addition, its abolition would not necessarily mean it could not be enacted in the future. The important aspect of its abolition would be that, in the future, the onus of enactment would be upon those who wanted a debt ceiling.

    The President could claim an important victory in the national interest because a threat to the economy would be removed. He could also claim that this deal was a "one off" situation and in no way a precedent for the future. On the other hand, the Tea Party Congressional delegation could tell their constituents that they just made the deal of the millennium. They could point out that no sane person would actually take action leading to a Treasury default. Since the creation of a default would be action they would never actually take, the concessions wrung from the President in exchange for abolishing a weapon that they would never actually use have been bought for nothing.

    In a real sense, both sides could claim victory and argue that, by "hanging tough", they obtained important concessions and benefits. Of course, there would be naysayers but a good deal is one that does not allow either side to "crow" and is neither side's fondest dream.

    It is interesting to think about the reaction of financial markets to such a deal; I think it would be explosively positive.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 04 12:00 AM | Link | 51 Comments
  • A Distant Mirror: William Jennings Bryan And The Tea Party

    I watched Inherit The Wind a couple of nights ago and I have been reading up on William Jennings Bryan. The Scopes Trial occurred just as radios became widely deployed and may have been the first "mass media" trial in the world. The movie led me to reflect upon William Jennings Bryan, his political trajectory from radical Democrat to religious fundamentalist and his stalwart supporters. His constituency and policy positions have some eerie similarities to the modern Tea Party although there are important differences as well.

    When you look at Presidential election maps Bryan carried almost exactly the states considered to be "Red" states today - the South, the Great Plains states and the northern Rocky Mountain states. He ran well in rural areas and was popular with religious fundamentalists. He emerged like a lightning bolt in 1896 with his "Cross of Gold" speech and got the Democratic nomination at age 36. He got huge majorities in the South and Plains states but actually lost ground in comparison with previous Democrat candidates in New York and New England. He gave stump speeches all over and developed a strong following. He also ran in 1900 and 1908 and was Wilson's Secretary of State until 1915 resigning because he was more adamant in resisting involvement in WWI than the President.

    He was generally viewed as a "liberal" or even a radical. He condemned the large banks and railroads, generally supported reform (direct election of Senators and women's suffrage) and was very liberal on monetary policy (supporting the free coinage of silver - then viewed as a radical notion). Rural America felt that it was exploited by the combination of railroad monopolies, high tariffs, and the gold standard - all of which tended to make life difficult for farmers. Bryan proposed measures which would help farmers do better.

    He is now remembered as a fundamentalist for his role in the Scopes trial and, less distinctly, for opposing a motion at the 1924 Democratic convention which would have condemned the KKK. This is unfair because he played a vitally important role in American politics for thirty years and probably was a factor leading the Republicans to adopt progressivism in order to compete in elections.

    Bryan is sometimes described as the first "celebrity politician" in America (Mark Twain is often described as the first "celebrity"); after losing in a couple of Presidential campaigns, Bryan pretty much went into the "William Jennings Bryan Business" and gave speeches for a generous fee and finally, near the end of his life, was involved in Florida land promotion. I am sure that - had it been around at the time - Bryan would have played some kind of role in Amway.

    Anyhow, what I find interesting is that the same parts of the country that loved Bryan are now the core of the Republican party and the base of the Tea Party. In each case, I think that there is a distaste for the big cities, the big financial institutions, intellectuals, smarty pants economists, and immigrants. Religious fundamentalism also seems to be a common thread as is "legislating morality" (Bryan derived a lot of support from the Prohibition movement). Bryan was also - at least at times - somewhat of an isolationist and it is increasingly clear that the Tea Party leans in that direction.

    But there are striking differences. Bryan was the poster child for a "easy" money policy; he would have loved QE and would argue for more of it. Farmers wanted a weak dollar so that they could sell their product overseas. They wanted low interest rates and inflation so that they could pay back the banks. And they hated the gold standard. In this sense, the Tea Party seems to be diametrically opposed to the early Bryan supporters.

    I also feel that Bryan was a supporter of aggressive governmental action to rein in the big banks and railroads. While the Tea Party doesn't seem to like the big banks, they do not seem to like the idea of using the government to rein them in either.

    Bryan managed to channel "prairie radicalism" and resentment into a coherent political movement and nearly became President. He was to a degree the "father" of the modern liberal Democratic party with its interest in regulation of business and expansive fiscal and monetary policy.

    There is a great deal of resentment - especially in rural America - among people who feel they have been "left behind" in the modern economy. A lot of this is channeled into hostility toward big banks and suspicion of the government. In many cases, I think that people in the very parts of the country most dependent of federal assistance are advocating cutbacks that may be self-defeating.

    If modern populist urges expressed in the Tea Party are to produce constructive outcomes for the country, they will have to be channeled into the advocacy of coherent policy proposals built around a core of ideas widely acceptable in the entire country. Bryan got off to a start on this and turned out to be a very influential figure. It is unfortunate and unfair that he is now thought of largely in connection with the Scopes Trial. Modern conservative leaders should be putting together coherent proposals on tax reform, health insurance, foreign policy, and immigration rather than simply undermining Obama. The politics of resentment are powerful but fickle. Bryan held on to his loyal constituency for 30 years because he offered proposals which would provide hope and a better future for people who felt they had been abused by the system; the Tea Party will have a short duration unless it can do the same.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 18 8:18 PM | Link | 4 Comments
  • Variation In Electric Rates Should Create Upside For Tesla And Solar City

    In articles about electric vehicles and distributed solar power, I often see references to "national average" electric rates. These articles often ignore the tremendous variation in electric rates around the United States and may therefore lead to a misunderstanding of the prospects of companies like Tesla and Solar City which are sensitive to electricity prices.

    The variation in electric rates is much greater than the variation in other energy prices in the United States. This is because electricity is generally generated on a local or regional basis and there is enormous variation in the sources of electric generation, the expense associated with distribution and the efficiency of the local electric utilities. As a general matter the most expensive electricity is in those areas which rely on petroleum as a fuel source for power plants; the least expensive is in areas which can rely on large scale hyrdoelectric facilities. I have put together a comparison based on data from the Bureau of Labor Statistics, the EIA and utility websites. In each case, the data is for average kilowatt hour rates for residential customers.

     Rate per KWH (in cents)
    National Average13.7
    Los Angeles SMSA20.3
    Washington State8.8
    San Francisco SMSA22.8
    Miami SMSA11.5
    New York SMSA20.8
    Puerto Rico29.0
    Philadelphia SMSA15.9

    Solar City should be able to do well displacing retail electricity in Southern California and might do even better in Hawaii and Puerto Rico. Tesla should consider focusing on places like Seattle and Miami where electricity is relatively cheap. I generally use a rough metric of 8 kwh = one gallon of gasoline and on that basis, in Seattle, a Tesla probably covers as much ground on 75 cents worth of electricity as a conventional car covers on $4 worth of gasoline. On the other hand, I generally use a metric of 15 kwh = one gallon of gasoline for hybrid cars. On that basis, it actually costs more to buy the electricity to move a Tesla 100 miles than it costs to buy the gasoline to move a hybrid 100 miles in Hawaii and the numbers come out almost even in San Francisco!

    A recent Barrons article indicates that it costs Solar City 15 cents a kilowatt-hour to generate electricity. That is certainly more expensive than the national average but it is also a lot cheaper than retail rates in LA, New York City, San Francisco, Puerto Rico and Hawaii. Islands generally have high electric rates (and often have outage problems) because they cannot interconnect with neighboring utilities and generally must rely on petroleum products (diesel or residual oil) as generating fuels. This may suggest a global strategy for Solar City as well.

    Sep 02 11:10 PM | Link | 1 Comment
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