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The Club publication 12/31/2018

12/31/2018

Nobel winner’s warning on trade
ANDREW MAYEDA

When Paul Romer sees the world’s two biggest economies locked in a trade war, his thoughts turn to robots.

Business leaders and investors worry that tariff barriers thrown up by the U.S. and China will block the global flow of goods and services. Romer, who won this year’s Nobel economics prize for his work on how technology drives growth, is more concerned about the flow of ideas. He sees the risk of a different kind of protectionism: one in which Washington and Beijing fight to control fields like artificial intelligence — claiming ownership of breakthroughs which could benefit all humanity, if only they were set free.
“If the knowledge already exists, it’s better for everybody to use it,” Romer said.

Underlying the trade conflict, from a U.S. perspective, is Chinese disregard for intellectual property. The Trump administration has accused China of pursuing its ambition to dominate the key technologies of the future by stealing American ideas.

But if that is what China is doing, Romer suggests, it’s merely following in American footsteps. Britain leveled similar accusations against the U.S. when it was emerging as an industrial power in the 19th century.

In his pioneering 1990 paper, Romer argued that technological advance isn’t something that arrives unexpectedly from outside an economy, like manna from heaven, to make faster growth possible. Instead, it has generated from inside the economy — and policy decisions can make it more or less likely.

The best environment for fostering useful discoveries, he said in his Nobel acceptance speech this month , is a society where they can easily be shared.

It is essentially an open-source view of the world — at odds with both America’s drive to protect the intellectual-property holdings of its corporations and China’s stated goal of primacy in cutting-edge sectors like robotics.

“Especially in these domains like artificial intelligence,” Romer said, the best approach may be to “allow more transparency about information. Perhaps even require it.”

The Nobel is a platform, and Romer is weighing how to use it to advance an open-source agenda. He favors free markets but says there’s an important role for government too: steering what he calls the “global innovation machine” toward shared problems that need solving, like lowering carbon emissions.

Mayeda writes for Bloomberg News.

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The Club PUBlication 12/24/2018

12/24/2018

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Rolando Otero - South Florida Sun l Sentinel

Rapper Mac Miller, whose real name was Malcolm McCormick, died in September from “mixed drug toxicity” that included fentanyl, cocaine and ethanol. He was 26.

Killer opioid fentanyl could become a weapon of mass destruction

As deaths linked to the opioid soar, security experts consider countermeasures.
By Anna Edney Bloomberg News

DECEMBER 17, 2018 — 6:10PM

It would take only 118 pounds of fentanyl to kill 25 million people.

That's how much of the powerful opioid painkiller Nebraska State Trooper Sam Mortensen found in April when he stopped a truck marked "U.S. Mail" swerving onto the shoulder along Interstate 80.

Rolling up the trailer door revealed an empty hold. But just below a refrigeration unit, behind a plastic panel secured with mismatched bolts, Mortensen found 42 brick-shaped packages, weighing 54 kilograms, full of fentanyl. The drug is so potent that even a small amount — the equivalent of a few grains of salt — can be lethal.

"Is that even believable? Can you even imagine?" President Donald Trump said in October when Mortensen was honored at the White House for making one of the largest fentanyl seizures in U.S. history. The truck's two drivers were arrested. "Trooper Mortensen, that was a job well done."

Fentanyl has emerged as the most dangerous of a group of drugs blamed for creating a U.S. public health crisis. U.S. deaths linked to fentanyl grew more than 50 percent to 29,406 last year, from 19,413 in 2016, according to the National Institute on Drug Abuse (NIDA). Relatively easy to manufacture, the drug is turning up more on the streets as dealers strive to meet still-enormous demand for opioids in the U.S.

Fentanyl is ever-evolving as suppliers try to avoid detection and still boost the potency of the drug using what are called analogues — essentially chemical cousins.

"There's never been a drug like fentanyl before," said Josh Bloom, senior director of chemical and pharmaceutical research at the American Council on Science and Health. "For street drugs, this absolutely destroys anything else in terms of lethality and danger."

Fentanyl is 50 times more potent than heroin, with which it is often mixed. In its strongest form, called carfentanil, it is used legally as an elephant tranquilizer. Law enforcement officers and first responders have been warned to handle fentanyl with extreme caution; some have fallen seriously ill after getting it on their skin or clothing.

The fatal potential of even glancing contact with fentanyl is a major reason why national security experts are becoming alarmed at the prospect of it being used to sow terror. The drug is "a significant threat to national security," Michael Morell, former CIA acting director under President Barack Obama, wrote last year. "It is a weapon of mass destruction."

The use of fentanyl as a weapon isn't new. In 2002, 50 armed rebels held more than 800 hostages in a crowded theater in Moscow, demanding the withdrawal of Russian forces from Chechnya. After a few days, Russian forces used a gas, reported by state news agency Interfax to be fentanyl, to incapacitate the attackers; more than 100 hostages were also killed.

As a tool of terror, the drug would work best in a closed space, said Daniel Gerstein, a senior policy researcher at Rand Corp., who served as acting undersecretary in the Department of Homeland Security's Science and Technology Directorate in the Obama administration. Open-air release likely wouldn't be as effective, as the drug could become too diluted, he said.

If ground-up fentanyl is placed on everyday objects, people could easily put their fingers in their mouths or rub their eyes and have a deadly reaction, said Bloom. "It doesn't take much more than a half-competent chemist to be able to manufacture it. And it's cheaper to manufacture than heroin."

Overdoses are hard to reverse
Containing a fentanyl attack would be difficult for police and emergency medical officials. Overdoses of the drug are hard to reverse with existing formulations of antidotes such as the Narcan nasal spray.

Narcan is carried by many police and paramedics, especially in areas hard-hit by the recent opioid epidemic. But people incapacitated by fentanyl frequently require several doses. Even some police and other emergency officials who have accidentally ingested or absorbed the drug have needed multiple blasts of Narcan to be brought back.

Last year, police officer Chris Green made a traffic stop in East Liverpool, Ohio, and ended up with fentanyl powder on his shirt. After another officer pointed it out, Green brushed it off with his hand. Soon, paramedics were rushing him to the hospital.

"He realizes something ain't right," said Police Chief John Lane. "He gets lightheaded."

Green survived after being given four doses of Narcan. Though skin contact with fentanyl isn't typically deadly, Green had used sanitizer on his hands, which hastened the absorption of the fentanyl. A video distributed to law enforcement in August by U.S. Customs and Border Protection warns against using hand sanitizer and says those who have touched fentanyl shouldn't touch their eyes, nose or mouth.

The U.S. Biomedical Advanced Research and Development Authority, known as Barda, is tasked with developing medical countermeasures. In September, it penned a potential $4.6 million contract with Opiant Pharmaceuticals Inc. to produce a reliable single-dose fentanyl antidote.

"Fentanyl-based drugs have been used in conflicts in other countries, so we know it's possible, and we need to be ready to save lives and protect Americans from potential health security threats," said Barda Director Rick Bright.

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The Club PUBlication 12/17/2018

12/17/2018

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President Barack Obama signed into law the Affordable Health Care for America Act during a ceremony at the White House in Washington, Tuesday, March 23, 2010.

28 Judge's ruling renews national debate
over health care law

Democrats vow to defend Affordable Care Act while Republicans could try for a new deal.

By Sheryl Gay Stolberg , Robert Pear and Abby Goodnough New York Times
BUSINESS - DECEMBER 15, 2018 — 7:54PM

Washington – The decision by a federal judge in Texas to strike down all of the Affordable Care Act has thrust the volatile debate over health care onto center stage in a newly divided capital, imperiling the insurance coverage of millions of Americans while delivering a possible policy opening to Democrats.

After campaigning vigorously on a pledge to protect patients with pre-existing medical conditions — a promise that helped return them to the House majority they had lost in 2010 — Democrats vowed to move swiftly to defend the law and to safeguard its protections.

On the defensive, Republicans campaigning this fall promised that they too backed the health law’s protections for people with pre-existing medical conditions. But the Texas ruling illustrated the fruits — and possible perils — of their long-running campaign, stepped up in the Trump era, to remake the judiciary through the confirmation of dozens of conservative judges, including two appointees to the Supreme Court.

The ruling, if it stands, would not only do away with coverage protections for people with pre-existing health conditions but also strike down the guarantee of coverage for what the law deems “essential health benefits.” These include emergency services, maternity and newborn care, mental health and substance abuse treatment, prescription drugs and pediatric care.

But it is so sweeping that many legal analysts believe it is likely to be overturned. The Supreme Court, in a 5-4 decision, has already upheld the Affordable Care Act’s legality. The political reaction to the Texas decision, though, is not likely to diminish anytime soon.
“This is a five-alarm fire,” said Sen. Chris Murphy, D-Conn. “Republicans just blew up our health care system.”

Republicans were by and large muted in their response, but incoming House Minority Leader Kevin McCarthy of California appealed to Democrats to come to negotiate a successor to what he called “an unconstitutional law.”

“President Trump has made clear he wants a solution, and I am committed to working with my colleagues on both sides of the aisle to make sure America’s health care system works for all Americans,” he said in a statement Saturday.

The Democrats’ first step will be in the courts; aides to current House Minority Leader Nancy Pelosi of California said Saturday that House Democrats would move quickly to notify the Trump administration that they intend to intervene in the case. A vote on a resolution to do so is expected in the earliest days of the new Congress.

Democrats also intend to convene hearings to spotlight the sweeping impact of the Texas ruling — and lay the groundwork for their case to reclaim the White House in 2020. If upheld on appeal, the decision could deprive an estimated 17 million Americans of their health insurance — including millions who gained coverage through the law’s expansion of Medicaid. Still others could see premiums skyrocket as price protections for pre-existing conditions lapse.

In his ruling Friday, Judge Reed O’Connor of the U.S. District Court in Fort Worth struck down the law on the grounds that its mandate requiring people to buy health insurance is unconstitutional and the rest of the law cannot stand without it.

The immediate practical effect of the ruling was not clear. While the judge declared that the whole law was invalid, as Texas and 19 other states had asserted, he did not issue an injunction to stop federal officials from enforcing it, and the effects of the judgment could be delayed pending appeals.

The decision came a day before open enrollment was to end for coverage under the health law for the coming year. Sign-ups were already expected to dip after successive blows to the law by Congress and the Trump administration. But the passage of statewide referendums in November and the election of Democratic governors could also mean coverage expansions in the coming year under the health law’s Medicaid expansion.

In an e-mail to millions of Americans on Saturday, the Trump administration tried to allay concerns caused by the court decision.

“The marketplaces are still open for business, and we will continue with open enrollment,” said the message from the federal Centers for Medicare and Medicaid Services. “There will be no impact to enrollees’ current coverage or their coverage in a 2019 plan.”

But President Donald Trump was in a celebratory mood, tweeting, “Wow, but not surprisingly, Obamacare was just ruled UNCONSTITUTIONAL by a highly respected judge in Texas. Great news for America!”

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The Club PUBlication

12/10/2018

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For carmakers, auto shows are no longer can’t-miss

Manufacturers find they can get better publicity by staging their own events.

By STEPHEN WILLIAMS • New York Times

DMITRY KOSTYUKOV • New York Times The BMW stand at the Paris Motor Show. What used to be obligatory attendance at big-time shows, to attract thousands of media types in one place at one time, is now past.

PARIS – At the Paris Motor Show in October, the first international extravaganza of the new-car season, the press had to scramble to find the special among the predictable.

he excitement among the media scrum — short-lived as it was — flowed from a stand introducing the VinFast, a generic-looking SUV that was to be the first car built in Vietnam (the company had a sedan, as well). Miss Vietnam, in glamorous attire, was there, along with dancers in traditional clothing holding long sticks.

At the next stand over, with music blaring, a modest group of fans sized up Ferrari’s blood-red 488 Pista: 710 horsepower, base price $350,000.

Such is the state of the auto show in 2018: A start-up from Vietnam grabs the media glory, and — Ferrari notwithstanding — companies like Ford and Fiat, Volvo and Volkswagen don’t even bother to show up.

“Motor shows are dead.” That was the bold declaration made by Herbert Diess, Volkswagen’s global chairman, this past summer during a visit to the annual Goodwood Festival of Speed in Britain. The events are “a product of the 1960s, and they are not as relevant anymore,” he told Motoring.com, an Australian magazine. “They’re not delivering what we want, and they’re not delivering what car buyers want.”

Perhaps Diess was taken by the joyous contrast at Goodwood, which showcases cars in a bucolic outdoor setting and offers visitors ride-and-drives, concerts and Champagne along with the latest models.

It’s certainly a far cry from the traditional circuit in cavernous convention centers, including the 2018 Los Angeles Auto Show, which wraps up this weekend. But even before the formal press days began earlier in the show’s run, some key unveilings — new cars from Mazda, Mini, Honda, Jeep and Porsche, among others — were either shown to the press off-site or given a sneak peek online.

And in an attention-getting twist, Volvo elected to rent a stand and not display a single vehicle. As Marten Levenstam, a Volvo executive, explained to reporters: “Now is the time to really do different things in a different way. This is just one example of that.” Instead of cars, Volvo and its partner company Luminar displayed advances in LiDar technology, which uses lasers to aid autonomous vehicles in detecting objects in their surroundings.

In Detroit, officials have moved the traditional show, which has been held each January since forever, to June in 2020, hoping to attract potential buyers to an outdoor event where they can drive as well as gawk at cars.

Furthermore, the roster of no-shows so far announced for Detroit this coming January, before the switch, is already formidable: Volvo, BMW, Audi and Mercedes-Benz, among others, have already confirmed that they won’t attend. Of course, many no-show companies send scouts to assess the competition.

What used to be obligatory attendance at big-time shows, to attract thousands of media types in one place, is now past.

“If we don’t have a proper unveil for a show, we won’t go,” said Mark Dahnke, a spokesman for Audi.

He likes to mention the adoption of a “launch cadence,” and Audi’s conviction that bringing journalists to a one-off event, to spend a day or two with the car, is the more effective road to press attention. To that end, Audi recently invited 1,200 auto writers to San Francisco for the introduction of the E-tron, an electric SUV.

“If you do have a big reveal, the media doesn’t have enough time to digest properly what you’re doing,” Dahnke said, referring to auto-show introductions. Reporters “are covering 10 or 15 different brands in a day, and it causes you not to be able to cover a larger topic that might be more complex.”

For some manufacturers, the return isn’t worth the investment. A major presence at a show, with a display and newsconference — plus lighting, music, catering and the other accouterments — can cost a half-million dollars or much more.

Often the funds are funneled elsewhere. Pointed messages and high-resolution artwork and clips are targeted to consumers though Facebook, YouTube and Instagram.

“All the manufacturers are handing out photos, spec sheets, interviews in advance of a lot of these shows,” said Steve Keyes, communications director for Centigrade in Detroit, which handles publicity for Alfa Romeo, Genesis and other brands. “If I’m a journalist, I’ve got all the information I need before a show — well, going to one is sort of a moot point.”
Despite the declaration of Diess at VW, one exception to the trend of abandoning the auto show, at least in the United States, is Volkswagen.

“Because of the large attendances, auto shows sell cars,” said Greg Lucia, a marketing spokesman for Volkswagen. “We look at auto shows as a fundamental way to get our product in front of consumers who are in the purchase funnel.”

Mark Gillies, a spokesman for VW of America, added: “For us as a small brand in the U.S., shows bring in large numbers of media. We can get the kind of exposure that’s difficult for a 2 percent player, the way a General Motors or Toyota can do outside of an auto show venue.”

Diess’ damning opinion grates on many other decision makers in the automotive industry, who say the major shows — which usually open in the fall in Paris or Frankfurt and extend into the spring in Geneva and New York — are the defining ingredient to entice customers into showrooms.

“About 68 percent of those who come to our show are in the market for making a car decision,” said Mark Schienberg, who was visiting Paris in October. “That’s where the investment really takes off.” Schienberg is president of the Greater New York Automobile Dealers Association, which organizes the New York International Auto Show each spring.
“The issue for manufacturers is that they only have 20 minutes to do a press conference,” he said. “They want more time. We get it. But we stress to them, do something at the show, because you can’t fit 6,800 journalists in whatever outside venue they’re doing.”

While reports of the auto show’s death may be exaggerated, the portents are ominous.

In Paris, acres of show floor were occupied by motorcycles and lots of Suzuki cars and trucks, a budget line that has largely abandoned the United States market. (It still sells motorcycles here.) And some of the companies that did go to Paris tried to leverage the situation by negotiating for a lower stand rental. That didn’t work, said Jean-Claude Girot, the event’s chief.

“I am not receptive to that,” Girot said. “We are a commercial operation, and we must have profits.”

He did allow that changing the generic formula is a must. “We have to reinvent — be more inventive, but no less interesting,” he said. “Smaller booths, perhaps. We have to fight to be better, to show better things to the visitors and press, and to keep the passion.”

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The Club PUBlication 12/03/2018

12/3/2018

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Lee Schafer

It’s not hard to find reasons to fret about the state of the economy.

The housing market is slowing down. Light

Investor angst is up, even as the economy keeps rising
One "vulnerability" the Fed identified that got attention was excessive debt by businesses and consumers.

DECEMBER 1, 2018 — 2:34PM

Federal Reserve Chairman Jerome Powell, shown in September, assessed the U.S. financial system on Wednesday.

vehicle sales seem to have peaked last year, as highlighted by news that General Motors plans to off workers and idle North American plants.

News from the bond market seems worrisome, too, as investors have demanded a higher premium of late to buy a corporate bond that carries some risk rather than buy a Treasury note instead.

Then there are the dire headlines about ballooning big-company debt. A “$9 trillion corporate debt bomb is bubbling,” according to CNBC, making it a “time to worry,” as the New York Times put it.

Actually, it might be time to calm down.

The average economic up cycle since the end of World War II lasted only about five years, and this economic expansion has been chugging along now since summer 2009. It’s certainly looking likely that an economy that has recently grown at a rate of around 3.5 percent will slow down next year.

And while popping asset bubbles and reworking the debt of overleveraged companies and households can be painful, there’s not much reason to think those are the kind of economic troubles we are likely in for.

Some concern in the market last week followed the Federal Reserve’s first-ever financial-stability report, released along with a speech from Fed Chairman Jerome Powell. One “vulnerability” the Fed identified was excessive debt by businesses and consumers.

Yet Powell, in his talk in New York, sure didn’t sound alarmed. You would expect a lot of debt this late in an economic expansion, he said, and total debt hasn’t reached the peak levels seen in the late 1980s and late 1990s. He likened the Fed’s new report to an annual medical checkup for baby boomers like him, with his doctor saying he needs to pay attention to some things but overall he’s a healthy guy.

Some of the angst over debt seems to center around all the money borrowed by just one company, AT&T. Just a summary of its debt runs to more than three pages of tiny type with a whopping total of more than $183 billion at the bottom.

Apologies if this sounds unsophisticated, but a big debt load is only a problem if the borrower doesn’t have the money coming in to make the payments. In just the last quarter, AT&T had nearly $16 billion of cash earnings.

It’s a similar story for some Minnesota companies that seem to have taken on a lot of debt, like Golden Valley-based General Mills. It needed to finance acquisitions, and so it had about $15.6 billion in debt as of the end of its last quarter, which was 2½ times as much as it had in shareholder equity.

Depending on who is making the call, that much debt relative to equity likely means General Mills fits the definition of a highly leveraged company. But to add a little perspective, its cash earnings in its last full year came to about $3.3 billion.

Bankers use a shorthand to talk about corporate indebtedness, a simple calculation of total debt divided by the cash earnings, usually defined as earnings before interest, taxes, depreciation and amortization. It’s the money left over after cash expenses that should be available to pay back any loans.

In the case of General Mills, that ratio is about 4.8. That’s not exactly a low number as such things go, and would be worrisome for a company in a highly cyclical business with unpredictable cash flow. In a recession, however, no one seems to stop eating Cheerios. In the worst year of the Great Recession of the last decade, General Mills managed to increase its operating profits.

Other big Minnesota companies that carry debt are even less leveraged than General Mills. Hormel Foods has made acquisitions in the recent past, but its outstanding debt makes up just a sliver of its total capital.

Target Corp. and Ecolab each have about half of their total capital made up of debt, but for both the total debt to annual cash earnings ratio shows they easily have the income to handle what they owe. Even frugal consumer households can be more heavily indebted than these companies are.

“Odd” is the word Bryce Doty used for what he’s seeing in the markets lately, including hand-wringing over excessive debt. A senior vice president and fixed income portfolio manager for Minneapolis-based Sit Investment Associates, Doty has seen signs of strong economic performance he thought he would never live to see, like having more job openings than workers to fill them.

“The signs for the economy are green, green, green,” he said. “Just so many different record things happening.”

Yet in the markets he pays attention to, he said, “It’s red, red, red.”

The housing market slowdown? That’s true, he said, but housing prices had been appreciating more than 5 percent a year, and the recent slowdown in price increases just means that the market is healthy but maybe not booming.

Corporate bonds have declined in relative value compared with Treasury bonds, too, and that’s usually a bad sign for the credit markets. Yet Doty said he doesn’t expect an increase in companies defaulting on what they owe.

"The bond market is giving all the same signals as though we’re going into a downturn in the credit cycle. It looks identical to that,” he said. “But it’s a false signal.”

Doty said he’s often skeptical of economic news that’s based on a survey, like for consumer confidence. Survey results are subjective, and if consumers feel slightly less great in November than they did in October that leads to a bad news headline.

But never mind the reported numbers, consumers are buying, as in 2018 consumers have been about as confident as they have been in 18 years. If in next month’s survey most consumers have suddenly turned gloomy, well, that would be news.

“My predictions are good for 10 minutes, you know,” Doty added. “Better get that article out.”

__________________________________________________________________________________________________________________________
Lee Schafer joined the Star Tribune as columnist in 2012 after 15 years in business, including leading his own consulting practice and serving on corporate boards of directors. He's twice been named the best in business columnist by the Society of American Business Editors and Writers, most recently for his work in 2017.

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The Club publication 12/31/2018

The Club PUBlication 12/24/2018

Killer opioid fentanyl could become a weapon of mass destruction As deaths linked to the opioid soar, security experts consider countermeasures. By Anna Edney Bloomberg News DECEMBER 17, 2018 — 6:10PM

The Club PUBlication 12/17/2018

28 Judge's ruling renews national debate over health care law Democrats vow to defend Affordable Care Act while Republicans could try for a new deal. By Sheryl Gay Stolberg , Robert Pear and Abby Goodnough New York TimesBUSINESS - DECEMBER 15, 2018 — 7:54PM

The Club PUBlication

​For carmakers, auto shows are no longer can’t-miss Manufacturers find they can get better publicity by staging their own events. By STEPHEN WILLIAMS • New York Times

The Club PUBlication 12/03/2018

Archives

Killer opioid fentanyl could become a weapon of mass destruction

As deaths linked to the opioid soar, security experts consider countermeasures.
By Anna Edney Bloomberg News

DECEMBER 17, 2018 — 6:10PM

28 Judge's ruling renews national debate
over health care law

Democrats vow to defend Affordable Care Act while Republicans could try for a new deal.

By Sheryl Gay Stolberg , Robert Pear and Abby Goodnough New York Times
BUSINESS - DECEMBER 15, 2018 — 7:54PM

For carmakers, auto shows are no longer can’t-miss

Manufacturers find they can get better publicity by staging their own events.

By STEPHEN WILLIAMS • New York Times