More to look out for in 2010

I promised some of you that I’d have an article up by the end of March. Sorry about the delay. Before I dig right into finance, let me take this opportunity to wish my friend MC a happy birthday and all the best to RL on his wedding next month. Special thanks to SE for bringing back smoked meat from Montreal. The stuff they sell in Toronto just isn’t the same.

Short term outlook

Now, back to business. The focus has shifted to Europe this year and more specifically, Greece. The term “PIIGS” (which stands for Portugal, Italy, Ireland Greece and Spain) probably sounds very familiar to you. I don’t doubt that Greece is in real trouble, but the Greek economy makes up less than 1% of the world economy and just about 2% of the Eurozone’s. On the other hand, Italy and Spain, which make up approximately 4% and 3% of the world economy and 13% and 9% of the Eurozone respectively, are getting a lot less coverage. Italy already has a public debt to GDP ratio of more than 100% and Spain’s unemployment rate is creeping up close to 20%.

In a nutshell, do not operate under the assumption that once the crisis in Greece is over, Europe will back on its feet again. Germany’s export oriented economy might benefit from a devalued Euro, but the overall fiscal health of the region will take time to rebuild as money that could be spent on consumption and investment is spent on debt repayment.

As for the U.S., there are more mortgage resets to come in 2010 and 2011. What this means is that the next wave of foreclosed homes might be on their way. According to Robert Kiyosaki, this will continue until 2012. The U.S. labour market is still weak; the official unemployment rate is below 10%, but if you factor in discouraged workers, the number is more in the range of 16% according to David Rosenberg. The latest rally in the stock market is the only positive sign for the U.S. economy. Stock markets do run ahead of the economy, but stock markets do often give off faulty signals. (i.e. it is safe to bet that all recoveries follow a rally, but not all rallies are followed by a recovery)

Heading east, the Chinese government is facing the dilemma of fighting asset bubbles and keeping the momentum of its economic growth. Will prices come crashing down? Nobody can know for sure. However , Jim Rogers did mention that he’d stay away from China for a while. China’s current GDP per capita (measured at PPP) is about 1/8 of that of the U.S. If the two countries are to be equal in terms of standard of living, China’s economy should grow eight times larger. If your time horizon is long, any time is a good time to invest in China.

Now, what to do?

Now is the time to protect yourself or better yet, profit from a falling or volatile market. The VIX (volatility index) is something to look into. As for April 9, 2010, the VIX closed at 16.14 vs. a 52 week low of 16.06. Theoretically, the VIX, as the name indicates, goes up when the market is more volatile and down when it is more stable. Because market crashes happen more quickly than the eventual recovery, the VIX has displayed a strong negative correlation to the S&P 500, its benchmark index. Use it to speculate if you believe that there’s chaos around the corner. Alternatively, you can use it as a hedge to protect your portfolio. No one knows if chaos is around the corner, but the upside of going long on the VIX certainly beats the downside risk.

The easiest way to gain exposure to the VIX is trade the iPath exchange traded note (ticker symbol VXX). If you don’t want to get this fancy, cash may not be such a bad “investment” in the short term. As always, determine how much of a loss you can absorb and sell the investment when you hit your threshold.

For next time

If you’re already thinking about the post-crisis era, this is a good time to do some window shopping. A good place to start is by looking at countries with healthy financial ratios. This is where I will focus my research for my next article.

Bye for now.

Your Checklist in 2010

A Bird’s Eye View of Financial Markets

From markets collapsing to last year’s strong performance, we have all experienced the prosperity and the devastation that financial markets can bring to us. What should we expect in 2010? No one can predict the future, but we can all improve our financial lives by focusing on key areas of development in 2010.

The U.S. filled financial markets with ample liquidity to keep it from collapsing. This created an opportunity for speculators to make carry trades. Speculators borrow U.S. dollars and buy assets like bonds, stocks, property and commodities. When U.S. speculators engage in carry trades, they:

1. Borrow U.S. dollars, convert it to foreign currency to buy foreign assets. This drives the U.S. dollar artificially low and foreign currencies and assets artificially high.

2. They unload their foreign assets. They make a profit because the foreign assets appreciated in price as well as currency value. It’s a double win. Then they convert the foreign currency back into U.S. dollars to pay back their loan. The U.S. dollar has denominated, so they are actually paying their loan off with less money.

Of course, this is not sustainable and eventually, the carry trade will become a bubble and burst. When this happens, everything will return to their normal levels. Normal levels mean the U.S. dollar will “snap back up”, interest rate will also go up and asset prices (real estate, financial assets, and commodities, including gold) will fall. I cannot predict if this is going to happen. But this is what would happen if the carry trade bubble burst.

As a reference, the S&P 500’s historical P/E ratio is about 15. Last I checked, it’s currently about 25. The Canadian stock market is in a similar position. Here are a few ways to interpret this information:

1. The market is overvalued for above reasons. Things will return (closer to) normal levels.

2. A strong economic is on its way and the market has already (correctly) priced it in.

Some say that economic recoveries are preceded by a strong rally in the stock market. However, this does not mean that all stock market rallies are followed by a strong recovery. If a strong recovery does not materialize, the market is under pressure to take a fall or investors will have to be patient to keep valuations at current levels.

Just to keep markets at current levels, we have to rely on companies to report strong profits in a hostile environment. Unemployment is still lingering 10% in the U.S. and consumers are saving money instead of living beyond their means. It would be interesting to see if earnings can support the current market.

Public Finances

Public debt to GDP ratios across the large developed economies have reached their highest levels since World War II. According to Paul Krugman, the situation is not yet disastrous but a yellow flag should definitely be raised. He cited Belgium as an example where at 80%, there has not been a run on their debt yet. How does this affect us?

The U.S. and U.K. are on the verge of losing their pristine credit rating. Greece got downgraded and we all know enough about Dubai. A couple of states in the U.S. are having serious financial problems of their own. Governments will need to focus on getting their finances together; i.e. if the private sector cannot take over the baton to grow the economy, don’t count on governments to provide another stimulus package. The best they can (and will do) is to postpone or slow down the execution of their exit strategy.

Finally, some suggestions

Stock markets can, at best, maintain their current levels if not go through another correction. If you want to jump into equities, try to choose stocks that provide cash flow (look for dividend yield) and have a low Beta (correlation with the market). Don’t look for something that has great growth potential. Instead, look for something that is currently undervalued.

In Canada, the government announced that it would start to tax income trusts starting in 2011. The announcement was made in 2006. The performance of income trusts and the general stock market was strongly correlated before the announcement. After the announcement, income trusts have underperformed and some believe that income trusts are currently trade under their intrinsic value.

Interest rates have nowhere to go but up (when rates go up, bonds go down). The only question is when and to what magnitude. If you go long with bonds, you may find yourself disappointed. If you want to invest in fixed income, there are products that hold a mixture of long and short positions. If the money manager’s strategy is successful, these products should provide you with enhanced yields if all stay the same and some protection when rates go up.

I wish you all the best in 2010. While you’re busy making your financial plans, please don’t forget about the victims in Haiti. Please visit your local organizations and make a contribution. Donations can be made conveniently online.

Thank you.

While the private sector around the world is struggling to stay afloat, the public sector is not that much better off either. Fortunately for the public sector, they have the ability to take wealth from the general population via various venues and it can do it at its own discretion. Private enterprises simply go belly up.

How the government taxes you

Any action that the government takes to transfer wealth to itself from civilians is taxation. When you sales tax on your new computer, the government takes money from you. The government also takes a cut from each pay cheque that you worked so hard for. When the government needs more money, it can simply raise taxes.
Of course, raising taxes won’t make you very popular, especially if you’re trying to win the next election. Governments can print money. Printing money gives the government a bigger cut of the pie, thereby eating your purchasing power. The effect is the same as raising taxes, but it creates a lot less negative publicity for politicians.

IMF – an international coalition to tax

What is interesting about this crisis is that even the IMF, an international organization, is also taking part in taking our money.
The IMF is a lender of last resort for countries that are going through a crisis. They successfully led South Korea to recovery from the Asian financial crisis for example. Given the scale of the current crisis, even the lender of last resort is feeling the pressure of not have enough money to lend out. The IMF needs to unwind its gold reserve.

The problem? IMF is one of the largest holders of gold in the world. Its holdings are large enough that they can put serious pressure on the price of gold when they sell. This places IMF in a tough position. To overcome this problem, the IMF and other important holders of gold, including the U.S., have agreed to limit the amount of gold that they can sell. I suspect that this is an important factor contributing to gold’s surpassing the $1,000 mark. Yes, governments and NGO’s are fixing the market for gold and are “taxing” us through higher gold prices.

Who is paying the “gold tax” to the IMF?

IMF will gain from its disposition of gold at the expense of the following group of people’s wallets. The first group is gold speculators. I cannot predict how much higher gold can go, but the coalition to keep gold price high cannot last forever. No nation is willing to surrender its monetary sovereignty to IMF for a very long time. When that day comes, the gold market will be competitive again. Like any bubble, the last person caught with the hot potato will be burnt.

Businesses that use gold as a raw material will suffer. Gold is an important raw material in the production of electronics. Electronic products are luxury items that people substitute away from in tough economic times. With costs rising and falling demand, business is going to be tough.

Similarly, jewellery stores face the same problems as electronics manufacturers. India’s jewellery sales are down by half this year and their Chinese counterparts are also feeling the same pinch. I can only hope that this gold tax will be used effectively to stimulate the economy for long term growth and not spent on useless infrastructure projects.

The Tobin tax

There have been suggestions to bring back the Tobin tax. The Tobin tax was introduced, but never implemented, when the US dollar was taken off the gold standard in the 70’s. The Tobin tax is a tax on transactions of currencies. The intended benefit is to make currency transactions more expensive and steer away speculators that cause market volatilities. However, making foreign currencies more expensive would also hamper international trade and cross border investments. In other words, it would hamper global economic growth.

Luckily, the Tobin tax is extremely difficult to implement because it would require the cooperation of many country. Still, it does reveal that the mentality of policy makers is to take money from the civilian (giving them a smaller share of the pie) and making the pie smaller (but hindering economic growth). For investors, this means that there are a lot more dollars out there chasing after fewer good investments. Be prepared to change your investment strategies more often.

It’s been busy the last couple of weeks. Things are back on track and here is my first entry in over a month.

Consider Oil:

We can guess where the economic recovery will take place, but no one can know for certain. However, when the economy recovers, no matter where it starts, oil will be in demand. Some encouraging facts:

• The average American consumes 25 barrels of oil per year. The average Chinese consumes 2. Yes, the new cars will be more gas efficient and so forth. Let’s just assume that Americans will only consume 20 barrels a year. If the Chinese were to catch up to America’s standard of living, they too, would consume 20 barrels of oil. China’s population is approximately four time that of the U.S. You do the math. The standard of living in Brazil, Indian and Russia are also on the rise and citizens in these countries will stress the supply of oil.

• While different sources studying the cost of oil production yield different results, it is fair to say that the cost is about $60 in low cost oil fields (the Middle East) and higher in oil sands (Canada). Peak oil theory suggests that we have already picked off the low hanging fruits. The cost of production will only climb up.

In a world where oil will be in high demand and production cost is high, you can invest in one of two ways. First, invest in a product that is long on oil. It could be something that tracks an index or simply goes long on oil futures. Another way is to invest in companies that supply oil discovery and drilling equipment and services. Their service will be needed to find that oil that’s scarce and hard to tap.

Remember that high oil prices do not automatically translate to high profits for oil companies. They’re facing an increasing marginal cost of production.

Areas to exercise caution:

Each economic boom is driven by a specific industry. You had your dot com boom in Silicon Valley in the US. Hong Kong had its real estate boom in the nineties. When one bubble bursts, the baton is passed on to the next industry. It’s much like fashion; one trend dies and another one is put in the spotlight. Eventually, those tight fitting jeans will be stylish again but that won’t happen until many fads come and go.

Given this, the financial industry, especially in the US, is one area you’d like to avoid.

• The basic business of a bank is to pay you a rate of r on your savings and charge r + x on loans. In the U.S., consumers are deleveraging, i.e. borrowing less and saving more.

• The quality of earnings is in question. Accounting rules require certain assets to be marked to market, but for illiquid assets, they may be marked to model. How accurate are these models? No one knows. Warren Buffett thinks the concept of mark-to-model is more like mark-to-myth.

• The financial industry has experienced years of deregulation which permitted innovative financial engineering to take place. The new era is tighter regulation. This means that banks will need to go back to the basic business of borrowing and lending and not package “funny” products that have done so well for them before the bust.

China , while full of potential in the long run, is one area to be careful with in the short run. China’s stimulus did not result in the desired effect of stimulating economic activity. Instead, it’s creating bubbles in the stock and real estate markets. The government doesn’t like what it’s seeing and has stated publicly that it will take measures to cool down the markets. If you have an investment horizon of less than five years, be careful when pumping money into the Dragon economy.

Other notes:

• Legendary investor Warren Buffett said that it’s about time the government stopped printing more money and be more disciplined with their spending. The U.S. government is spending 185% of what it takes in. The economy has gone through the worst part of the storm so there’s no reason to keep the printing press running.

• UBS is no longer the safe haven for tax evasion. Internal Revenue Service can (finally) access UBS’s client information.

• Li Ka Shing, Hong Kong’s wealthiest man, warns individual investors about the stock market’s current value.

Thank you for your comments Eric and I would like to apologize for taking so long with this article. For investment ideas, I must first establish a few things about my approach. First, I take the top-down approach. This means that I start with the high level looking at the big picture to narrow down of areas of possible interest whether it be in a sector region, industry or both. Secondly, I believe in value investing. From Ben Graham to Warren Buffett, this style has stood the test of time. Of course, this is not the only style that works, but it’s just the style that I prefer.

Talks of “Green shoots”

The general consensus is that the worst of the crisis is over and there are signs of “Green shoots” in our economic recovery. I agree that we are almost through with the worst of the crisis. By worst, I mean that the economy is no longer in free fall albeit the global economy is still contracting. U.S. unemployment is currently at 9.5% and experts see that it should top at 10.5%. We can almost put the wave of bankruptcies behind us. Prediction on when we’ll bottom ranges from the end of this year to Q2 of 2010.

I want to make it very clear that hitting the bottom should not be interpreted as the beginning of a rebound. The world is not riding through a business cycle but is amidst a paradigm shift. The economy will rebound again. The problem is timing. The economy collapsed before the next engine of growth was fully ready to be dispatched.

American consumers – an engine with too much mileage

American consumers make up roughly 20% of the world economy and this group is financially ill. Timothy Geithner, the U.S. Secretary of State, was loud and clear when he stated that the world should not rely on U.S. consumers to lead the recovery. We all need to take this statement very seriously. Aside from fiscal and monetary policies, the success of any government stimulus plan rests on the general public’s confidence and policymakers have every reason to want to drive up public confidence. If policymakers are saying “don’t look at us, go find someone else to lead the economy”, mark their words for it.

U.S. consumers are changing their habits. The savings rate in the U.S. has not been positive for a long time. They are spending less and will very likely keep this habit after the crisis is over. For almost a quarter of a century, money has been growing faster than the economy by approximately 6% a year. With U.S. debt expected to reach 100% of GDP during Obama’s presidency, Americans have no choice but to continue to be thrifty for many years to come; this is the age of deleveraging. One columnist pointed out that this unwinding will continue until the year 2018.

China, the next engine?

With American consumers pulling the plug, the world is looking to China to lead the recovery. China has the world’s largest population and their GDP per capita is roughly 7% vs. the U.S. China’s standard of living will catch up to the U.S. The world economy has a lot of potential. If you’re a value investor, the next couple of years should be a good time to go shopping. However, there is a timing issue in the short run counting on China to lead us out of this mess.

While growth in China is strong, it is not invincible. For every 1% drop in spending by American consumers, Chinese consumers need to raise their spending by 5% just to keep world GDP from declining. In tough times, the mentality is to save as much as possible in anticipation of rainy days ahead. On top of that, the Chinese have a high propensity to save even in good times. Unless you can convince 1.3 billion Chinese people to go out there and spend 5% more, talks of China leading us out of this is more of a hope.

Here’s something that you should know about the Chinese economy; it is not fully market driven yet, the expected growth rate is 8% and the government is willing to use its reserves that it has accumulated from years of trade surplus to reach its target. Simply put, some of the growth from the world’s economic superstar is artificial. Many entrepreneurs have shut down their factories and shed many jobs in the process (and you expect Chinese consumers to go out on a shopping frenzy?) On top of this, China is imposing stricter environmental regulations, putting further pressure on the manufacturing sector. China has its own share of problems that it needs to deal with. This super engine is still under development.

The road to recovery

We can still expect the recovery to begin in China, but just don’t expect it to be explosive as it has been in the last decade. China cannot convert its export driven economy to a consumer driven economy overnight. Luckily for China, the government has ample foreign reserves (almost US$2 trillion) and they actually need to spend money on infrastructure. Also, with commodities on the cheap, one can hope that Chinese consumers will be more willing to open their wallets gradually. One concern is that global trade is breaking down, meaning that what happens in one country has less impact on others. Can we interpret a recovery in China as a recovery as a global recovery? I have my doubts.

So what does this mean to your portfolio? I will discuss it in part two.

I have been asked as to why it’s taking me so long with this article. Recently, I’ve been bogged down by some personal stuff. One of the suggestions that I got is to post weekly updates on key world events with some short commentary while I write the big articles. I think that’s a great suggestion. Please check back weekly for updates.

Thanks for your support!!

P.S. Thanks to Michael Jackson for everything he’s brought to this world. Rest in peace Michael.

The “B” word along with “GM” and “Chrysler” often appear in the same newspaper articles. Bankruptcy is failure. Bankruptcy is bad news. For now, let us define bankruptcy as a situation where an entity is in default with their debt obligations. When you see the “B” word again, just think of it as news that’s neither good nor bad. Think of it as just a piece of information.

Chapter 11

When you read about bankruptcy in the United States, you will probably see the term “Chapter 11” somewhere in the article. What exactly is Chapter 11? When an entity files for Chapter 11, it is actually under protection from its creditors and a complex restructuring process begins. The restructuring process attempts to fix the entity so that it will resurrect in a new form and “go back to business as usual”. It will involve creditors to forgive the entity’s debt, often exchanging for equity positions. It is not surprising that creditors that become shareholders reclaim a measly 20 cents on the dollar on the investments.

In the meantime, the entity could re-negotiate some other contracts that are outstanding. Chrysler was in constant talks with the Union to adjust their hourly wages to more competitive levels for example.

Bankruptcy proceedings can be a messy business as there are many parties of interest involved. The creditors will want a bigger share of the company. Workers will want to keep their wages and benefits. The Bankruptcy Court decides on what is fair or not. Otherwise, the process will never end.

Chapter 7

There is no need to write much about Chapter 7, though it is a term that is less heard of. This is when an entity’s assets are liquidated and paid out to its stakeholders according to the pecking order; you know, secured debt holders get first dip, then the unsecured debt holders, and then the shareholders. Each level would get something only if the level above has something left for them. For this reason, shareholders can be fairly sure that there is nothing left for them. After the liquidation process is complete, the entity is forever gone.

Bankruptcy and the Detroit Big Three

Chrysler has filed for bankruptcy, GM is not far away, and Ford says it has enough cash to burn for just another year. I think bankruptcy is actually helping Detroit to take the fast lane in getting out of its darkest days.

Chrysler and GM are or will soon be under Chapter 11 protection. This means that stakeholders believe they will benefit by turning the company around instead of dumping everything at fire sale price before they lost everything. Think of the Chapter 11 process as a student who is failing his classes in school, but the teachers believe that she still has the potential and imposes disciplinary actions on her. Chapter 7 is equivalent to expelling the student because she is hopeless.

Chapter 11 will definitely help Detroit migrate to the next automotive era, but this does not mean that they will shine like the stars that they once were. Detroit failed to realize that they had entered an era of innovative competition, especially in the arena of fuel efficiency. Toyota got a head start in Hybrid technology, and the Germans dominate in diesel. Unless they catch up very quickly, they will be making products that don’t stand out and will survive because they managed to cut costs from restructuring efforts. As discussed in my last article, innovation will drive the next winner and this company in Los Angeles has a very promising technology. The U.S. auto industry might shine again if L.A. meets Detroit in a productive way. They also need to establish a bigger presence in China where the auto industry is experiencing explosive growth.

Was it right to bailout the Big Three? What about the Banks?

In response to K’s comments, I agree with you that the laissez-faire approach would’ve saved the taxpayers a lot of money. If we are looking at the issue purely from a financial point of view, it is not hard to tell that the government is subsidizing Detroit and not investing in it. And yes, if the Big Three are out, the parts suppliers will go out of business and cause even more unemployment. The decision to bail them out is based a political decision, not a financial one.

If I were part of the think tank, I would not recommend bailing out the Big Three. If the patient is gravely ill and surgery is inevitable, operate on the patient. Why prescribe her with a few months of pain killers and then perform surgery that would have to be done anyway?

The financial industry is a different story. Ben Bernanke is counting on his quantitative easing plan to revive the economy and needs the banks around to do the work for him. Let’s say that all but one bank stayed afloat. The Fed could push the rates as low as they like, but it doesn’t mean that the only bank would follow suit because there is no competition. This happened in Canada when the banks refused to follow the Bank of Canada’s lead after the latter had cut its rate. The more banks there are, the stronger the Fed’s army.

These zombie banks still have value in them as vehicles to help circulate money in the economy. Once the economy stabilizes, the Fed can make the switch to a laissez-faire approach and let the market decide who can stay. By bailing out the banks (at least temporarily), the U.S. government is acting like a market player because they are pursuing their self interest of maximizing GDP and hence, their tax revenues.

In the end, you still can’t beat market forces.

Henry Ford would probably sigh and shake his head if he saw what was happening to the American auto industry.  The industry is not just about jobs but has long been a symbol of American prosperity.  It has served well in the past as an indicator of economic health in the pre-financial tsunami era.  With the Obama administration granting GM and Chrysler 60 and 30 days respectively to restructure, it would appear that much of what we know about the industry can only exist in our memories and museums. 

Car sales is a direct function of oil price

My friend PH explained to me why all levels of the industry, from salespeople that work on commission to management in Detroit, love to sell big cars.  Gas guzzling SUVs have a higher profit margin than the practical Chevrolet Cobalt, which is on GM’s line-up because they need to satisfy fuel efficiency and environmental regulations.  SUVs enjoyed a few years of popularity when Detroit thought they have proven the world wrong by thinking that Americans wanted small cars.  Detroit was right – for a while, until the price of oil kept rising and rising with almost no friction.  New buyers didn’t want SUVs and existing owners were eager to get rid of theirs.    

You know how the story unfolds.  Consumers switch to fuel efficient cars where the Japanese and more recently, the Koreans, dominate.  Toyota dethrones GM as the world’s number one car maker.  Oh, don’t forget, with the financial tsunami, there is a behavioural change that keeps executives in Detroit up every night; more and more people are taking the bus to work.   

The end of the U.S. auto industry or the beginning of a new era of leadership?

While I’m not a big fan of American cars, I would say that the U.S. has all of the ingredients that it needs to become a leader in the next auto age.  Some dinosaurs became extinct, but others evolved into crocodiles and alligators that are alive and well today.  Whether the Big Three can turn into crocodiles will depend on many variables such as consumer attitude towards cars, the pace of economic recovery and government policies.  Some things we can be certain of though.  We can be sure that the supply of oil is finite, and environmental regulations will only become stricter.   As we sober about economic woes, let us not forget about the hole in the ozone layer.

If we want the luxury of relying on a personal vehicle wherever we go like we did for the most part of the 20^th century, we need to power up our cars cheaply and in a manner that won’t stink up the environment.   Electric cars have the potential to address both of these questions.

Tesla Motors

Based in California, Tesla Motors designs and builds high performance electric cars.  If you still believe electric cars can only hold enough charge to take you to and from the grocery store at a maximum speed of 40km/h, it’s time you’re in for a little surprise.  Tesla Motors is already working on the prototype of their second product; the Type S.  Requiring only 45 minutes to recharge, the Type S can travel up to 500 km on a single charge and accelerate from 0-100km/h in 5.6 seconds.  Running on electricity presents significant savings to your wallet and to the environment (we already have the technology in place to dispose of batteries safely).  I suggest you visit their website at http://www.teslamotors.com  to learn more about this company and their products.  By the way, if you live in a house, you can consider buying a solar panel powered charger to power up your car.  The solar power charger gives you enough power to 80km/h a day, giving many commuters the opportunity to literally drive for free.

Obstacles to the path to the new era

While the future of electric cars is promising and exciting, there are obstacles that will slow us down to a new future or simply prevent us from getting there.  If you frequently drive long distance between towns, you will probably dismiss the idea of an electric car because you wouldn’t want to be left stranded in the middle of the road.  The good news is that it only takes five minutes to swap batteries.  This is about how much time you would spend pumping gas in your car.  The problem is that we have plenty of gas stations and we don’t have any battery swap stations unless companies (maybe even governments?) are willing to invest capital to develop such infrastructure.  The U.S. has tried for a very long time to cure its addiction to oil and the Obama administration has committed to spending on infrastructure.   Obama had said explicitly that he would invest in infrastructure to both stimulate the U.S. economy and make the U.S. less reliant on foreign oil.  The big question is whether the new infrastructure will be in favour of electricity or some other alternative energy like hydrogen or bio fuels.

The car starts at almost US$50,000.  The price tag can scare many people away, but I believe the price will go down if this technology becomes popular.  In the meantime, there is a lot of excess capacity in auto production.   GM’s plan to close their plants for nine weeks this summer is evidence that this excess capacity exists.  If at least one of GM or Chrysler ends up filing for Chapter 11, many things can happen.  Tesla could sweep up plants for bargain prices and greatly expand its economies of scale.  The lucrative contracts that auto workers of the past had enjoyed (and these contracts are a main culprit that brought down the Big Three) will be a thing in the past.  What if Tesla concentrated on design and innovation and outsourced the production of vehicles to Chrysler or GM that will finally have a reasonably priced labour force?  Anything is possible.  If the U.S. wants to reclaim its title as the leader in the auto industry, this is the time to do it and the first step is to migrate America's auto capital from Detroit to Los Angeles.