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Forbes 2017 Investment Guide: Bad Ideas Gone Good

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Sometimes the worst plans can make you richer. In this special Investment Guide we highlight strategies that may seem foolish at first, until you dig into them. Buy gold? Trade options? Take a reverse mortgage? All can provide big returns in the right circumstances. To help lead the way is the man behind pretty much every bad idea on HBO’s cult sitcom Silicon Valley – actor and comedian T.J. Miller, whose Erlich Bachman somehow always pulls through.

Written by Janet Novack, FORBES STAFF

Sleazy Image, Smart PlayReverse mortgages have a low-rent reputation. But they could play a bigger role in affluent Boomers’ retirement plans. If that happens, a 39-year-old neat freak will be a big winner. / By Lauren Gensler

Gold Is for Cranks? Not So Fast  / Bad inflation may never return. But if it does, you’ll wish you owned some metal and hogs. / By William Baldwin

Related: Tax Devils

Milking Your Stocks  / Trading options is a gambler’s bet, but for a math-minded investor, they can also provide a steady and relatively safe source of income.  /  By John Dobosz

Divide Your HomeForfeit part of your “best” long-term investment? It might make sense.By Samantha Sharf

Shrink Your SalaryNewt Gingrich, John Edwards and (it appears) Donald Trump did it. Maybe you should too.By Kelly Phillips Erb

Related: Keep The IRS At Bay

When Paper Beats Cash / Sacrificing salary for hard-to-value-options is crazy—unless you can do the math.By William Baldwin

Rowing Upstream for Alpha / As billions pour out of active management, stockpicking standout T. Rowe Price is hunkering down and quietly setting up a quant shop, just in case. / By Matt Schifrin

Related: 2 Great Alternatives To T. Rowe Price’s New Horizons Fund

Faceless Returns / Jack Bogle and a chorus of indexing champions say active investing is futile. BlackRock thinks Andrew Ang and his computer-driven ETFs are the strategy’s last great hope.By Nathan Vardi

Web Extra: The Irresistible Math Behind Private Equity Stocks / By Antoine Gara

 

Investment

Not So Fast: Can Elon Musk Really Open Tesla’s China Gigafactory This Year?

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Elon Musk rarely shies away from setting bold targets for Tesla, despite a mixed record for achieving them when promised. So it was in character when he announced the electric-car company’s first Chinese Gigafactory could be operational in about 11 months.

“We’re looking forward to hopefully having some initial production of the Model 3 towards the end of this year and achieving volume production next year,” Musk said at the Shanghai groundbreaking January 7.

He may be disappointed.

There’s no precedent for building a large, modern auto-assembly plant and starting its production in under a year, manufacturing experts say. In fact, even Tesla’s official goal of ramping up to 3,000 Model 3 electric sedans per week at some point in 2020 won’t be easy.  

“Unless he’s mastered some approach that I’m not aware of to do everything in a more effective and efficient way, that lead time to build is going to be really challenging,” said Laurie Harbour, CEO of manufacturing consultant Harbour Results Inc. in Southfield, Michigan. “It definitely seems completely optimistic.”

Musk’s motivation to rapidly localize Tesla’s operations in China is as simple as legendary criminal Willie Sutton’s apocryphal maxim about banks: That’s where the money is. China is the world’s largest electric-vehicle market, where sales of rechargeable vehicles likely reached about 1 million units in 2018. That’s why Tesla’s capacity target for its Shanghai Gigafactory when fully ramped up is 500,000 vehicles annually.

Tesla begins delivering Model 3s to China in March, but its China sales are restrained by a 40% import duty on foreign-built autos (China last month moved to cut that to 15%). Along with the Model 3, the Shanghai plant is also to eventually produce Model Y electric crossovers that can be sold to Chinese customers with no added tariff.

But first Tesla has to build that plant.

It typically takes at least two years to get a large new auto factory ready to churn out vehicles, according to Brian Jones, COO of Lexington, Kentucky-based Gray, an engineering firm that’s built nearly 450 auto and parts plants in North America over the past five decades for companies including Toyota, Volkswagen, General Motors, Mercedes-Benz, Nissan and Volvo.

“From the first shovel in the ground to the first vehicle rolling off an assembly line, the fastest we’ve ever seen is 24 months, which is typically a project you see from one of the more mature, experienced manufacturers,” Jones says. “That schedule can go all the way up to 36 months.”

That includes building the factory structure itself, as well as infrastructure in and around the site, including utilities, roads and exit ramps in place.

Tesla secured the 210-acre site in Shanghai’s Lingang area last year for about $140 million, and Musk said the cost of the initial phase to get the facility up to 250,000 units of annual capacity would be about $2 billion. (Analysts estimate that getting the plant to Tesla’s half-million-unit capacity goal may total $5 billion.) The local Shanghai government is helping expedite the project in terms of permits and supporting infrastructure, and Tesla says lessons learned from Model 3 production at its Fremont, California, plant mean it can accelerate Chinese Gigafactory construction.

Still, Musk’s comments were at odds with those he made in a July statement issued by the Shanghai Municipal Government about the plant’s timetable. Once permits and other preparations were set, “it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up to produce around 500,000 vehicles per year for Chinese customers,” he said.

By October 2018, however, he’d begun describing the accelerated timetable. “We’re driving to have Model 3 production for the China market or the Greater China market active certainly next year. It will be happening next year,” he told analysts during Tesla’s third-quarter results call.  

“Things work differently in China, so the North American experience (for building a new plant) may not translate exactly there,” said Kristin Dziczek, who studies industry, labor and economics as a vice president at the Center for Automotive Research in Ann Arbor, Michigan. Local government assistance will certainly help, “but this does seem really, really aggressive,” she said.

ELON MUSK VIA TWITTER

Reproducing the design and robots used for the Model 3 assembly line in California will speed things up, according to consultant Harbour.

Tesla also has to certify new suppliers in China, which is very time-consuming. Auto-assembly plants are “such a big system, and it’s such a gamble from launch of construction to starting to build (vehicles). Everything has to fall in line as planned in order for it to execute in that kind of timing. And to do it in 11 months, every star in the universe has to align for that to happen,” Harbour said.

Gray hasn’t built any of Tesla’s facilities nor has it built plants in China, but it is exploring consulting opportunities there, Jones said.

So could one of the top auto plant builders in the U.S. get a “greenfield” production site ready in under 12 months?

“We love a challenge, but that would be a stretch,” Jones said.

A Tesla logo is seen at the groundbreaking ceremony of Tesla Shanghai Gigafactory on January 7, 2019 in Shanghai, China.
A Tesla logo is seen at the groundbreaking ceremony of Tesla Shanghai Gigafactory on January 7, 2019 in Shanghai, China. VCG VIA GETTY IMAGES

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Economy

World Will Improve Where It Matters Most In 2019

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The world economy is set to enjoy a very good year. In that, it will be much like 2018 and 2017 and most probably like 2020 and 2021. Economic growth will be fairly strong in most of the countries where such expansion does the most good. While rich countries worry about objectively tiny setbacks, poor people are overall gaining more of the dignity that comes with adequate material comfort.

Consider extreme poverty. The World Bank draws the line between the wretched of the earth and everyone else at daily consumption of goods and services worth $1.90. The Our World in Data website at Oxford University estimates that 72 percent of the world’s population lived below that line in 1950. The World Bank’s preliminary estimate for 2018 is 8.6 percent, down from 10 percent in 2015.

Fewer very poor people means more are enjoying better lives. The proportion of the global population without access to electricity is declining by about 0.3 percentage points a year. The number of children not enrolled in school is shrinking by about 5 million annually. Almost every indicator of basic prosperity shows the same trend.

The good news is pretty much global. Even Africa, long the lagging continent, is starting to catch up. The proportion of African children that die before they turn five has declined from 21 percent in 1975 to 8 percent in 2015, the most recent year for which data is available. Better health comes from – and with – greater wealth. Real per person income in sub-Saharan Africa has increased by 40 percent in the last decade.

Not all the news is good. Due to war and civil conflict, primarily in Africa, the proportion of the world’s population that is undernourished has risen by 0.2 percentage points in the last two years. Still, at 11.9 percent, it is 2.2 percentage points lower than a decade ago.

The prediction of more global gains in 2019 is pretty solid. There are also good reasons to believe that 2029 will be fine. Economic growth in very poor countries is becoming a virtuous circle. More education and better health creates better workers, who support stronger institutions, which make larger and more effective investments, which produce the money needed to pay for even better schooling and health.

That pattern has held in country after country for at least two decades. Bad governments do slow progress, but it takes war or total state failure, as in Venezuela, to reverse the progress.

The almost unstoppable global retreat of misery and ignorance is arguably the best news ever in economic history. For political history, however, the trends are far less clear. The old belief that greater wealth would naturally bring more open societies looks flawed. The populace of many countries, both richer and poorer, seem pretty happy with autocratic and extreme nationalist governments.

China is the prime example. The oppressive and fairly corrupt Communist Party has presided over rapid and widespread increases in prosperity. Its cross-border ambitions, both civil and military, have expanded as well.

That is worrying for many reasons. One of them is that war is probably the only force destructive enough to stop the upward march of global economic good news. The great question, for both 2019 and 2029, is whether progress will threaten prosperity by leading to the use of the world’s ever-larger supply of ever more deadly arms. -Reuters

-Edward Hadas

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Investment

The 2019 stock market reversal: how it happened

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 Few people would have disagreed at the beginning of the year that the nine-year-long bull market was reaching its end phase. That didn’t diminish the shock when it actually happened. Here is Breakingviews’ imagined account of how the good times came to an end in 2019.


Day 1 – The market opens on an unremarkable Monday. A mid-sized maker of car fan belts files for Chapter 11, blaming European tariffs levied in response to U.S. trade barriers. Three hours later, Facebook announces a data breach, which it attributes to alt-right Generation Z whiz-kids with possible links to Russia. Investors, jittery over the impact of trade war and tech-sector weakness, start to sell. The S&P 500 Index slumps 4 percent, financial and internet stocks bearing the brunt.

Day 2 – Tech stocks fall further and faster. That afternoon, President Donald Trump takes to Twitter to call Federal Reserve Chairman Jerome Powell an “ENEMY OF THE PEOPLE” for his reluctance to cut rates. Later at an event, Powell emphasizes that the Fed is not on a pre-set course, but stocks only slide further. Trump muses on replacing the Fed chief with wrestling promoter Vince McMahon. Despite confusion over whether such a thing is possible, the S&P slides 4 percent.

Day 3 – Two ratings agencies say they are downgrading a basket of BBB-rated bonds to junk status, expressing concern that a slowing economy will push up defaults. Spreads on high-yield bonds widen dramatically. Market-makers stop trading some exchange-traded funds exposed to corporate debt, and collateralized loan obligations, which buy and repackage junk-rated loans, start offloading assets. The S&P slips 3 percent.

Day 4 – Trump announces the formation of “Team America,” a group of U.S. plutocrats who pledge to invest their personal wealth in the U.S. stock market, including the chief executive of one of Wall Street’s biggest lenders and Treasury Secretary Steven Mnuchin. Within hours, Tesla chief Elon Musk, who had been named as one of the group, tweets that he is looking forward to taking America private “at 420.” Stocks dive a further 5 percent.

Day 5 – Warren Buffett, whose name did not appear on the Team America line-up, tells a CNBC interviewer that he sees no buying opportunities at current levels, and is minded to use his $100 billion cash pile buying back shares instead. Retail investors take fright. Stocks slump 3 percent. Facebook’s valuation has now fallen from $390 billion at the start of the year to just $200 billion.

Day 6 – Over the weekend, Chinese President Xi Jinping expresses concern that, as the holder of $1.2 trillion of U.S. debt, China’s feelings have been hurt by U.S. volatility. Starbucks branches immediately attract protests in second-tier Chinese cities, and rumors proliferate that the People’s Bank of China is preparing to sell Treasuries. Yields on 10-year debt hit 4 percent. The S&P has now fallen 20 percent in a week.

Day 7 – Talks over the acquisition of a large media company fall apart. The buyer blames uncertain markets, but reports emerge that the company’s bankers got cold feet, and withdrew a letter they had provided declaring themselves “highly confident” of arranging financing. Shares in dozens of putative takeover targets fall as much as 30 percent. Trump tells Fox News that Securities and Exchange Commission Chairman Jay Clayton could be doing more to help.

Day 8 – An open letter from Wall Street bank chief executives appears in the financial press, arguing that post-crisis banking reforms have made the meltdown worse. They argue that proprietary trading, which could have enabled banks to buy up stocks on their own account, would have stemmed losses, and call for a reconsideration of Basel 3 and Dodd-Frank Act rules. Financial stocks rise, but the S&P still ends the day down 2 percent.

Day 9 – Mnuchin announces he is standing down from the Treasury, but pledges his full support for the president. Trump says he will pick a replacement quickly, and declines to shut down reports that he is considering rapper Kanye West for the role. Stories emerge that the original selloff may have been triggered by hedge funds who had set up algorithms to trade automatically based on Trump’s tweets. Markets are flat.

Fed expected to hike interest rates, defying Trump

Day 10 – Facebook says Buffett is investing $10 billion as a vote of confidence, taking voting shares and generously priced warrants. The slide in stocks has stopped, as abruptly as it began. The market closes up slightly but has lost almost a quarter in two weeks. Congress begins to discuss curbs on algorithm-based trading. After markets close, the White House announces its new pick for the Treasury: first daughter Ivanka Trump. -Reuters

-John Foley and Neil Unmack


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