One Toke Over The Line

By Rob McCreary

While Bitcoin, Blockchain, Ether, Ripple and endless initial coin offerings dominate the imagination of retail investors, there is an equally appealing, and even more disruptive, agricultural product arriving soon from Amazon on your doorstep. Cannabis will generate EBITDA margins and cash conversion percentages that make online sports gambling paltry by comparison. My prediction is that 48 states will have legalized cannabis in some form by 2021, and the federal government will legalize it soon thereafter.

Right now, the cannabis industry is in its infancy. Nine states and Washington, DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults 21 years of age and older.  Medical marijuana is legal in another 29 states.

This Is A Cash Crop

Unfortunately, the cannabis industry has the same problem Pablo Escobar had with his drug money – it is illegal for national banks to accept cannabis deposits because marijuana is still classified as a Schedule One narcotic, along with heroin and cocaine. A small number of state banks and credit unions have accepted cannabis industry deposits after strict adherence to a checklist of “know thy customer” procedures that inhibit money laundering. However, until last week, they all feared Jeff Sessions who had vowed to prosecute state banks or credit unions that violated federal law. However, by a rare bipartisan vote, the House Appropriations Committee voted to add a rider to legislation funding the Department of Justice through 2019 that would shield providers who complied with state laws. Whether this becomes law soon is uncertain, but I bet tax revenues will prevail.

States Will Legalize For Tax Revenues

States will continue to legalize cannabis because most of them are broke and need another dependable and growing source of revenue. Eventually, you will see the Feds get in line because the Federal Reserve System abhors a cash economy as a matter of monetary control, and it is hard to pay state and federal taxes in cash. For example, Arcview Research predicts that legal cannabis sales will more than double from $9.0 billion today, to more than $21.0 billion by 2021.  If you assume taxable income is 20% of revenues, and the combined federal, state and local rate is 30%, this means $1.2 Billion in tax revenues. That’s a lot of cash to transport. It would probably take a fleet of Brinks and Loomis armored cars just to make each quarterly tax deposits not to mention the crooks who will try to steal the cash?

A Schedule One Narcotic Is Now Healthier Than Liquor

Also, it is now suggested by cannabis proponents that lifetime use of cannabis is healthier than alcohol.   Based on my own experiences from the 1970’s, pot has the half- life of plutonium and the numbing effect of an Easter Sunday sermon. The new and more powerful buds must induce a permanent state of being “stoned” which the Urban Dictionary defines: as a “ state of mind which occurs after smoking enough marijuana to the point where the user stares blankly into whatever catches his/her attention”. “I’m was so stoned I didn’t notice the movie was in French.”

In any event cannabis is here to stay simply because it will be regulated and taxed like liquor and cigarettes and its soporific effect on the electorate will be absolutely fine with every incumbent politician.

8.2 Million Users Did Jail Time Mostly For Mere Possession

This is an amazing reversal given that ACLU reported in 2010 that of the 8.2 million people arrested for marijuana over the prior decade, 82% were simply for possession. Remember in 1971 when Brewer and Shipley released their single “ One Toke Over The Line”? Spiro Agnew called them subversive and got the FTC to ban the song? Luckily, Lawrence Welk thought it was a gospel spiritual and One Toke maintained its top 10 momentum in the bible belt. This is all according to which summarized it as follows:

“One Toke Over The Line” became a Top 10 hit in 1971, and was largely responsible for introducing Brewer & Shipley to the masses.  While the record buying public was casting its vote of approval by buying the single, the (soon to be disgraced) Vice President of the United States, Spiro Agnew, labeled Brewer & Shipley as subversives, and then strong-armed the FCC to ban “One Toke” from the airwaves just as it was peaking on the charts.  Brewer & Shipley landed on Nixon’s Enemies List, a badge of honor they wear proudly to this day.  Even in the midst of all the fuss about the drug related lyrics, Lawrence Welk featured “One Toke Over The Line” on his show in 1971.  Check out this bizarre story and the hysterical “One Toke” video from the Welk show.  As Brewer & Shipley like to say, you couldn’t make this stuff up.”


Rob McCrearyOne Toke Over The Line

Central Bankers Don’t Get Chopped

By Rob McCreary

The spring weather in Cleveland has been pretty awful and, while it is bad for your golf, tennis, biking and hiking, a cold and wet spring has been great for TV.  My wife has been hooked on “Chopped” for several years and I have to admit it is fun to learn something about cooking.  My favorite part is when the 4 chefs find out what is in their baskets. It is inconceivable to me that the contestants can take rattlesnake, fennel, watermelon and peanut butter and come up with anything remotely palatable.

Without A Pantry They’d All Be Chopped

It has taken me a few episodes to understand it is all about the pantry.  There is a stocked refrigerator with eggs, lettuce, nuts, butter, milk, cheese and a pantry complete with staples like flour and sugar, breads, vegetables, pastas, condiments etc.  There is also every conceivable cooking appliance under the sun from a blast chiller and an ice cream machine, to a vacuum sealer and a deep fryer.  It is really no miracle at all that the rattlesnake gets cooked just like chicken and put into a salad containing fennel and watermelon with a dressing using the peanut butter.  The multiplicity of options saves the show and allows chefs to compete on creativity and experience. But they do make mistakes, and often experimental recipes are not successful.

How much different the show would be if there was no pantry and the chefs could only use one appliance- say a blender. Can you think of anything palatable that could come from using the bass o’matic to blend rattlesnake, fennel and watermelon and peanut butter?

Serving Great Meals With Only A Blender

In many ways the Federal Reserve Bank and central banks all over the world are facing the same dilemma and, with the exception of Japan, have been using blenders to apply monetary policy. If you want to lower interest rates you use quantitative easing techniques like the discount rate to banks, buying bonds in the open market and simply printing money.  If you want to raise interest rates, you raise the discount rate, and stop printing money.  These iron chefs have pretty skillfully manufactured prosperity from the depths of the Big Recession using only a blender.

But today their baskets contain some pretty strange ingredients. They have inflationary trends in some commodities but deflationary trends in others. They have pockets of wage inflation, but overall a relatively flat wage picture. They have dramatically rising interest rates but a volatile stock market that is certainly afraid of rising rates and an inflationary environment. On top of that they have a debt based prosperity that is 3x the size of the natural economy whose survival is completely tied to low interest rates. There are massive under-fundings in the state pension system and rampant risk taking to cure those deficits.  The President is imposing tariffs and starting a trade war.  The dollar is strong and rising when the country’s trade deficit begs for a weak currency. Finally, the Fed has created a balance sheet that only Michael Milliken would underwrite.

This is a lot of ingredients when your only tool is a blender.

Japan Invented The Monetary and Fiscal Pantry

Japan waited 20 years to discover that it had to invent a pantry. The psychology of deflation is pernicious. Savers who are not paid any interest at all actually profit in “real” terms if their deposits (or their cash) stay at par and the costs of good and services decline 2 percent each year. You prosper in Japan by sitting on your wallet.

This is what happened in Japan starting in 1991. Just recently Abenomics, named for Shinzo Abe, has started using a whole new set of appliances. Governor Kuroda, the Governor of the Bank of Japan, has come up with some pretty interesting tools for combating deflation. First he is charging depositors to keep their money in the banking system. Second he is trying to move savers into the stock market by causing it to rise by buying it for the BOJ. It is estimated that the Bank of Japan may own as much as 75% of the Nikkei. Third he has instituted a dynamic pricing mechanism for interest rates that allows for quick and dramatic fine tuning. Fourth, he has committed to a 2% inflation target—NO KIDDING THIS TIME! Ben Bernanke writing for the Brookings Institute summarizes BOJ’s QQE strategy as follows:

“Under Governor Kuroda, the Bank has adopted a policy of so-called quantitative and qualitative easing (QQE), including purchases of exchange-traded funds and other private assets as well as of Japanese government bonds. As a result of QQE, the Bank of Japan’s balance sheet has grown to a size equivalent to about 88 percent of Japanese GDP by the end of 2016. For comparison, the analogous figures for the Federal Reserve and the European Central Bank are about 24 percent and 34 percent, respectively.”

Mr. Bernanke clearly admires Kuroda’s pantry and supports its importance in manufacturing inflation to soften the worldwide cost of borrowed money. Remember, like chefs who get chopped, not all central bank recipes succeed.  It would not surprise me at all to see The Federal Reserve System get rid of its solitary blender in favor of a pantry just like Japan. How else can the iron chefs of monetary policy make rattlesnake palatable to the unsuspecting public?


Rob McCrearyCentral Bankers Don’t Get Chopped

Take The Lump Sum?

By Rob McCreary

I have a friend who has been a teacher for more than 20 years in Cuyahoga County. She is counting on her pension to navigate post retirement living for her and her husband who has also recently retired. Given all I have read and learned about the national problem with pension underfundings I asked her if she could take a “lump sum” option. She is inclined to take the longer term payout because of the more generous gross payments and the possibility of cost of living increases. I also believe deferral allows her to continue favorable health coverage.  I have watched the sacrifices she has made to secure this pension, and I was concerned about her options. So I did a little bit of research.

An Independent View

Each year The Pew Charitable Trusts publish a state by state pension funding report card, the latest of which is for 2016. Here is their summary of the funding gap:

In 2016, the state pension funds in this study cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015, and the 15th annual increase in pension debt since 2000. Overall, state plans disclosed assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.”

Their report confirms many facts we already know, but there is one new analysis that looks at plan investment risk and volatility by calculating what rate of return is needed that year to match net outflows. Pew calculates the annual net inflows (employer and employee contributions) less plan outflows (retirement payments), and divides that number (usually negative) by actuarially valued plan assets. So if a state has net outflows of negative $3 Billion, and the retirement plan assets are $75 Billion, the plan investments would have to generate operating cash flow that year of $3.0 Billion (4%) to cover the deficit.

Liquidity May Be More Important

This “funding as you go” mindset is important because state plans may be overvaluing their plan assets  by assuming they are liquid and stable. By reaching for yield ever since the Big Recession, and abandoning low yield safe and liquid assets (30 Year Treasury Bonds) for higher risk, higher volatility asset classes like private equity and hedge funds ,many state funds have added risk of not being able to fund net outflows. Here are the annual operating deficits for 2016 for 25 states:

So this means that Ohio, for example, had to earn liquid returns in excess of 5 % in 2016 just to cover outflows for that year.

For my friend this has important implications. Her pension is not just underfunded, but its security may also be challenged by liquidity and volatility concerns. If the Fed wants to manage volatility and asset class liquidity it cannot raise interest rates and stop printing money. If it wants to return to “normalcy” (stop printing money), it may remove liquidity underpinning risky pension asset classes and cause their values to plummet. It is one thing for the US government to be insolvent, but to have that insolvency migrate to state retirement systems just as the boomers are retiring is unthinkable.

Ohio State Teachers Retirement System

My friend participates in the Ohio State teachers Retirement System (“STRS”). The recent report card from their outside consultant was not good:

Segal Consulting’s latest calculations show STRS Ohio’s funding period is 57.7 years and STRS Ohio’s funded ratio is 62.6%.”

According to Ohio Law STRS is not permitted to have a funding gap of more than 30 years. Their advisors have told them things need to change.  STERS recently suspended its cost of living adjustment for everyone in the system.  That gives them confidence that they are now only 30 years of funding behind. I would not have that kind of composure when their actual returns since 2007 have been 6.06% against an assumed return of 7.75%.

There is not any set of assumptions that can fully fund STRS other than changing benefits. STRS has already benefited from historic stock market returns.  Their own consultants, Callan Associates, have told them to prepare for a low return environment characterized by increasing volatility and challenged liquidity. Segal Consulting also told STERS it had to reduce benefits by $10 Billion just to get back to a 30 year funding gap! It is not clear in any publication I could find, how eliminating future cost of living assumptions will raise $10 Billion but that is the path they have chosen?

Don’t Trust The Politicians

If I had a choice of trusting Ohio politicians to fund my monthly STRS payment with a 38% funding gap and a 57 year investment hole, or taking a lesser lump sum payment and putting it in a ladder of investment grade securities, I would bet on cash in hand.

This may not end well for a group of Ohio teachers who have been underpaid and underappreciated throughout their careers and now find themselves dramatically underfunded in their retirement and completely reliant on the FED to continue providing liquidity for risky asset classes.


Rob McCrearyTake The Lump Sum?

What’s In Your Rip Van Winkle Wallet?

By Rob McCreary

I have always been intrigued with the idea of a portfolio of assets you can sleep on for twenty years. In fact, it is probably a pretty good way to think about how you should invest.

To refresh memories, recall that Rip Van Winkle was the creation of Washington Irving. He was a pre- American Revolution Dutch farmer who was both lazy and hen pecked. As the story goes, he meets a bearded man wearing antiquated Dutch clothing who is struggling with a keg of beer. Rip helps him carry the keg up a hill and finds himself among a cohort of bearded men playing nine-pins. Rip joins in the fun and then wakes up 20 years later and finds the colonies have become a nation.

If Rip were around today, and knowing that he was prone to long comas after a pint too many, he would be besieged by his brokers from TD Ameritrade or Goldman Sachs to put all of his money in front end load products of indefinite duration. Knowing Rip is a student of all markets and observing this chart that overlays the rise of the S&P 500 to M-2 (a recognized proxy for liquidity that includes cash, checking accounts and near cash like money markets) what would he do with $5 million if he had to pick no more than 5 investments:



A Condo In Aspen

His first million might go for exclusive real estate- a pied a terre in Paris, an apartment in NYC, a ski chalet in Aspen or a summer house on Nantucket. Unfortunately, these real estate ideas all cost more than a million bucks and would all require lots of debt and Rip knows he is going to default on that loan and lose his equity. He ends up looking at a condo in Myrtle Beach for $700,000 with $300,000 in a maintenance, repair, taxes and insurance fund to carry the property for 20 years.

A Bullet Proof Bond

A sure bet should be US Treasury Bonds. He can buy a 30-year bond that will yield 3.0% backed by the full faith and credit of The United States Government, but he is a little bit unnerved about the high amount of National debt ($21 Trillion) and the high and growing Debt to GDP. Japan’s balance sheet looks even worse so his only real choices are long term bonds issued by Germany and Switzerland. Germany with a low yield of 1.23% is preferable because the Swiss 30-year bond offers only 0.635%. In fact, the yield on the Swiss 10-year bond has been negative which offends a Dutchman like Rip who does not think you should ever pay someone an annual fee just to return principal.

An ETF For the Ages

Rip is hip and he understands that active managers are blood suckers. He is just about to choose SPY, a low fee ETF that mimics the S&P 500 but then he remembers the chart above that shows an alarming correlation between the slope of creation of liquidity and the amazing ascent of the S&P 500. He also worries the market as a whole might fall if central bank liquidity really goes towards repaying debts rather than supporting the stock market and all other asset classes. He also remembers the crash and the long slumber the Japanese Nikeii has endured since 1991 under similar conditions. Instead he gets really interested in algorithmic robo advisers like Betterment with the hope that artificial intelligence will replace human stock picking over his long slumber.

Private Equity

Rip is friends with a few people in the private equity business and he understands from his pals at Cambridge Associates that PE performance has been exceptional over the last 20 years. He likes the idea of owning a portfolio of operating businesses. He is a little leery of the high reliance on borrowed money and the nosebleed valuations. He is also a little concerned about a 20-year commitment at this point in the economic cycle and he is not sure about splitting 20% of the profits with the managers.


Rip does not understand Bitcoin or the Blockchain Technology but being a Dutchman, he remembers 1630 and speculation in tulip bulbs called tulip mania. He is intrigued about owning an alternative to fiat currencies, but Bitcoin is just a little too speculative.

Physical Assets

Commodities, gold, silver, diamonds, art, raw land, forests, wine, coal mines in West Virginia- these are all possibilities, especially getting a coal mine on the cheap. In fact, the idea of buying farmland in upstate New York instead of a condo in Myrtle Beach and burying gold and silver rather than buying German bonds is pretty appealing. He probably will not grow his $5.0 million, but he probably won’t lose it all either.


Rip’s Lament

Rip is embarrassed to tell his investment advisors he is buying land and burying gold. There are pages and pages of completely liquid and highly rated investment products festooning the pages of The Wall Street Journal and Barron’s. Many of these have small investment fees and expenses. There are also highly respected asset managers with eye popping investment performance over the last 10 years who charge high fees but are probably worth it.

Rip is just concerned the conditions under which long term investments are made must be relatively stable and predictable. For a Rip Van Winkle portfolio to work you need constancy. That word would not describe Black Monday or the Tech Bubble or the credit induced real estate mania of the BIG Recession in 2008. Nor would it characterize its liquidity induced recovery. Shovel ready led to QE1 and, even though things were improving, to QE 2 and then QE3 and now a Trump tax cut. The bad actors in all of this are the Congress and the devil children from The Federal Reserve Bank.

They have good company. According to the International Monetary Fund Central Banks all over the world have manufactured more than $200 Trillion of debt and many central banks are taking unconventional approaches to managing their economies. For example, the Bank of Japan is openly buying ETFs to boost the Japanese stock market as part of Abenomics and the Swiss central bank is running a sovereign wealth fund. What happens when they run out of money?

Rob McCrearyWhat’s In Your Rip Van Winkle Wallet?

A Double Whammy For LBOs

By Rob McCreary

Since the end of last year, the three-month London interbank offered rate, known as LIBOR, has increased to 2.32% from 1.69%. LIBOR measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, including almost all LBO financing.  Throughout most of my career, 3 month LIBOR has been falling from almost 10% in 1989 to less than 1% in 2015.  Since then, it has inched forward, but recently has accelerated.  We typically borrow for our businesses at LIBOR + 350.  In 2015 that meant 3.8 %.  Today it is 5.8%.

Six Times Leverage Is Common

A majority of the buyout financing is variable rate debt priced off LIBOR.  Since the debt has been cheap, there is also a continuation of the trend by private equity firms to use more and more debt in the capital structures. Here is a chart from The Wall Street Journal Daily Shot on April 2 showing the rising amount of debt in the LBO capital structure.   Notice that more than 50% of the deals have greater than 6x leverage:

Trump Tax Reform May Hurt The Model

It is still uncertain whether Trump corporate rate cuts will compensate for the rising interest expense.  Also, for the first time in my career, the new tax law imposes limitations on the deductibility of interest in highly leveraged capital structures. That provision limits interest deductibility to no more than 30% of EBITDA. If you run a financial model on a $50 million EBITDA business that has 6x leverage ($300 million debt) at a blended rate of 8% that would mean $24.0 million of annual interest expense against a 30% annual deductibility limit of $15.0 million. $9.0 million of interest would not be deductible and taxable income for the LBO company would increase by $9.0 million. Even though corporate rates are now lower (21% vs 34%) it won’t take long before the net cash to pay principal will be worse than before tax reform.

This is mostly because, the deductibility of LBO interest will fall again in 2021 when the 30% limitation is applied to EBIT (a much smaller number) not EBITDA.  There is also a risk of large disallowances for cyclical companies whose earnings fall dramatically.

Valuations May Fall

The bottom line for leveraged buyouts is less taxpayer subsidy, less cash flow, and, maybe, a corresponding decrease in valuations? For the entire period I have been involved in leveraged buyouts since 1999 ,100% of the interest expense has been deductible. Leverage has been encouraged and rewarded.

Rising interest rates and limits on deductibility of interest are major changes in our business model and it comes just as interest rates are rising for the first time since 1982. A recent study by Goldman Sachs confirms my concern. They have demonstrated that shares of 50 public companies whose floating rate bonds account for more than 5% of their total debt have lost 5% of their market value through March of 2018 compared to an overall index decline of 1%. This report is confirmed by The Wall Street Journal Daily Shot which shows this trend for Kraft and General Mills (high amount of variable rate debt)compared to the SPX and Black & Decker.


If the variable rate is a major valuation concern for  public companies with small exposure, what does it portend for private equity firms with 10x the variable debt exposure?  The public markets are signaling that variable rate debt is now an enduring valuation issue.  When interest on LBO debt may be a non-deductible as well you may see the first valuation “double whammy” in a long time.  The debt magic may be done.

Rob McCrearyA Double Whammy For LBOs

New Variables For The Debt Debate

By Rob McCreary

I have written several blogs over the last six months about the national debt and how it may challenge many assumptions about the American economy as well as the American way of life. I am writing again because those challenges just became more imminent.

To refresh the facts this is a picture of our national debt:

This is a chart that shows the change in interest rates for the 10 year Treasury from 2016 to today:


The latest report from the US Treasury for the fiscal year ended 2017 suggests that the primary deficit ( not including interest on US debt as an expense) will shrink through 2021. Thereafter it will accelerate with the US Treasury concluding that the “debt-to-GDP ratio after 2026 indicates the current fiscal policy is unsustainable.”

From my point of view this prediction just got worse in light of two new variables that were not considered when the 2017 Annual Report was created:

  1. Tax reform makes revenue significantly less in 2018 and beyond so the primary deficit will be worse and the prediction of declines until 2021 is probably off the table?
  2. Interest rates on re-fundings of US Debt are rising and are likely to increase throughout 2018.
  3. So, the primary debt (before interest) will be worse than predicted and the total annual deficit (including interest payments) will be dramatically worse.

The Annual Report says that interest payments account for 6% of the $4.5 Trillion of costs or $270 Billion annually. There is no footnote suggesting the interest rate assumption but $270 Billion is about 1.3% of the $21 Trillion. This is an amazingly low cost of funding compared to the average interest rate on the 10-year treasury has been 6.23% since January of 1962.

Trump politics have made things worse. The prospect of Democrats controlling both houses of Congress and legislating more of a welfare state should scare anyone who can multiply.

Rob McCrearyNew Variables For The Debt Debate

Financial Literacy And Capitalism

By Rob McCreary

I am surprised  so few of the millennial generation are preparing for retirement by participating in tax deferred retirement plans. My generation was introduced to the miracle of compounding returns when the retirement system was revamped in 1976. Over 40 years later $1000 invested per year compounding at 8% tax deferred is now worth $349,726.  My employers all encouraged participation in tax deferred retirement plans by offering employer matches. Sometimes that match was 1:1 up to 3%.  Even more amazing has been the introduction of the Roth IRA. You don’t get the same tax benefits when you contribute, but when you take withdrawals they are taxed at capital gains rates. Most of my peers bought into the retirement system and saved.

Millennials Are Not Using The Tax Deferral

This is not true for the millennial group who are about the same age as I was when I began contributing to my 401k and IRA plans. According to Maurie Backman, writing for The Motley Fool on March 9, 2018.  

Very few the millennials are investing anything in a retirement plan:

“ Apparently, younger workers aren’t getting the memo. In fact, 66% of millennials have no money saved for their golden years, according to new data from the National Institute on Retirement Security.  But here’s the kicker: It’s estimated that two-thirds of millennials work for a company that sponsors a retirement plan, yet only about half that many younger employees opt to participate. All told, only 5% of millennials are saving appropriately for retirement, which means the bulk of younger workers risk coming up short once their careers draw to a close.”

This Correlates To Low Financial Literacy

Interestingly, this low participation also correlates with a pretty disturbing analysis by The Wall Street Journal in their Daily Shot at financial literacy among high school students. This chart shows that only 5 states mandate education on financial matters for high school students and under 10% of the high school population has any education about financial matters. Maybe this explains how the millennials missed the miracle of compounding tax deferred returns:


There is also an implicit threat to the whole capitalistic system. If you don’t begin with some sort of financial literacy at an early age you also do not begin to understand how the capitalist system diverges from socialist and central economies. When you are invested in the capitalist system you have an incentive to promote it by protecting its fundamental principles. I fear that the central authority is crowding out an informed and financially literate population.

Student loans are a great example. The government intervened in what had been a longstanding local bank product. The result has been a disaster because students without an ability to pay have been underwritten and encouraged to pursue an education that is increasingly irrelevant to job creation. In the private system the money would not have been chasing marginal customers.




Rob McCrearyFinancial Literacy And Capitalism

Who Is Going To Do The Work?

By Rob McCreary

A lightning rod in the political world is immigration but less so in the business world.  In the lower middle market every one of our portfolio companies is looking for qualified workers who can pass a drug test, and perform entry level work.  I am not sure why Americans do not want these jobs? They come with benefits and hourly pay that is substantially greater than minimum wage. Maybe unemployment compensation, or food stamps, or workers compensation, or any other safety net work replacement is crowding out the number of citizens who really want a 40-hour work week? What happened to the dignity of work?

I cannot understand why President Trump wants to keep young immigrants who are not likely terrorists out of our country? I also cannot support the Democrat’s idea of supporting only immigration policies that lead to Democrats being elected. These political positions on both sides virtually ensure that robots will replace people, and entry level jobs will disappear. Making immigration a political issue rather than a business and lifestyle issue is a huge mistake. Here is a census of our window company work force:

These immigrants are not stealing American jobs. Portland, Maine has a 2% unemployment rate. The truth is Americans do not want to work as hard as the Somalis, Serbs and Croats who came from nothing and are thrilled to be working 40 hours a week with benefits. Many of our employees commute 2 hours a day for the privilege of working in our Portland, Maine window factory.

Another endorsement for immigration comes from a consultant we are using who specializes in manufacturing processes for window industry, and has been involved in hundreds of different manufacturing situations. He thinks our factory in Portland, Maine is one of the most productive and well managed in the country. We have our own comparison with a similar window operation in Ohio where the opioid epidemic is real problem. We simply cannot recruit a sustainable workforce, even though there is a strong supply of skilled automotive workers.

If we permit immigration to exist as a transcendent political issue we will have missed the chance to sustain America’s greatness through the marvel of our business world. The resulting diversity and ambitions of immigrants will be necessary to compete in an international business order that will reward innovation and a trained work force.





Rob McCrearyWho Is Going To Do The Work?

Do Millennials Play Golf?

By Rob McCreary

My only first-hand experience with Martians was “My Favorite Martian” which was a TV sitcom that aired from 1963-1966. Uncle Martin had special powers like the ability to disappear and levitate objects. While not quite as talented as Barbara Eden in “I Dream of Jeannie”, he was nonetheless my closest encounter with a Martian up to the dawn of the millennial age.

Don’t get me wrong. I love Millennials. They are quirky, funny, and tribal. To call them weird would minimize their importance to the price of Bitcoin, and our society’s hope for an unconventional future.

Take Out Was Pretty Challenging 

My first interaction with Millennials was a highly recommended sandwich shop in Damariscotta, Maine. My wife and I entered the shop and dutifully moved under a sign that said “Place Your Order Here”. We’ve been around long enough to know that you order under the sign, then you pay at the cashier and they bring the sandwich to your table, or package it for takeout. But that was not the business model at Fernald’s Country Store. We were the only people in line, but noted a beehive of activity among the sandwich makers, the cashier, the table servers and a few floaters who never seemed to be doing anything but circulating from the kitchen to the table space, but never with any sandwiches, or drinks: no sign of any table clearing either.

We are old and have no patience, so after about three minutes of just standing there I joked to one of the floaters, “Do we have to stand here and text our order to you?” She responded in all seriousness that “It would be a lot faster if you just made your order online.”  We were kidding, but she was serious. It then occurred to me that the sign might be just some memorabilia from the lost century that went with all the posters on the walls. Luckily, the cashier who was obviously the owner, was also old enough to know about My Favorite Martian, and she understood we actually wanted a face to face experience. Our order was taken. The money was paid. Millennials are from Mars.

Half Caffeinated Coffee Was Worse

Thinking this was an isolated incident, I found my next millennial experience even stranger. I was at a coffee house in Tremont called “The Loop”. Tremont is a trendy downtown Cleveland neighborhood and a gathering place for the Millennial Nation. I ordered a small, “half-caf” dark roast and the millennial coffee barista looked at me like “I” was from Mars. I said “You know, half decaf and half hi-test!” She blinked once, and then again and asked with doe like sincerity, “What is hi-test?”  I was stunned, but recovered quickly and explained that hi-test means fully caffeinated, just like premium gasoline. She was enthralled, but let me know that she has never pumped gasoline so she really did not know what I was talking about.

Business As Usual Was Unusual

The coffee incident was nothing compared to the seating area. There were hundreds of vinyl records on display and a turn table, I was just about to search for the lava lamp and Jefferson Airplane’s “Surrealistic Pillow” when I heard what sounded like a cross between Leonard Cohen and Boy George waft from the speakers (might have been my old Harman Kardons). Like an Alice in Wonderland cartoon, things got “curiouser and curiouser!”.  As I scanned the room full of millennial patrons, there were tats everywhere and, even though there was business being conducted, it looked like the people at the tables were texting each other rather than talking face to face.

The patrons were also checking us out because we were wearing sport coats, penny loafers and at least one of the guys was taking photos of a building site out of his briefcase. I think the Millennials thought we were probably going to take phone pictures of our photos and text them to each other, but I secretly know they were thinking we were a sub species and wanted to demand “Earthlings Take Us To Your Leader”.

I wish I had more experiences with Millennials. I want to learn about Tatoos, their interesting hair styles, their music (I think it was music), and their fascination with Bitcoin and cryptocurrencies. Most of all, however, I want to find out whether Millennials play golf.

Rob McCrearyDo Millennials Play Golf?

We used to call it Winter

By Rob McCreary

January of every year is wonderful for the prediction industry. Almost everyone who made a prediction in the prior year is taking credit for the few things they got right and, conveniently forgetting or minimizing what they missed. There are only a few groups who actually score themselves like Barron’s and certain columnists in The Economist. The rest of us rely on failing memory and a complete lack of accountability.

Almost all of the January savants are quick to point out the macro trends and tailwinds that will influence the shape of 2018 like Tax Reform, the price of oil, reversals of Quantitative Easing in the US and Europe, the weak dollar, the travails of cryptocurrencies, capital spending, deficit spending, Fed interest rate increases and the VIX.  However, based on my experience in the first 20 days of 2018 in Cleveland, Ohio Betsy Kling had more impact on our local economy than Warren Buffet, Jamie Dimon and Jim Cramer.

Our Chief Meteorologist

Betsy Kling is our favorite weather personality and she has a following that can challenge Justin Bieber, Taylor Swift and Oprah Winfrey all rolled into one. Her resume is pretty modest. She graduated from Bowling Green State University and received her Certification in Broadcast Meteorology from Mississippi State University. She has been a Meteorologist for 20 years and the Chief Meteorologist at WKYC-TV for 14 years. Like the oracle from Delphi she divines millibars and winds aloft from Doppler radar and atmospheric sensors to predict weather, and most recently, end of days.

I watched her single-handedly shut down most of greater Cleveland for about 36 hours with her prediction of a cataclysm of sleet and ice on Friday, January 12, followed by several feet of snow and freezing temperatures on Saturday, followed by more freezing and more snow on Sunday, and again Monday. As far as I know, the only event that took place was the Browns “0-16 parade” – suggesting losing is inexorable. Except for the temperature, Betsy pooched this prediction in a big way (no ice/ little snow) and probably cost greater Cleveland businesses more money on Martin Luther King weekend, than Lebron has made in his career. The other thing about her job and most of the expert prediction business, is nobody seems to care. Just think where we would be in private equity if we were as consistently wrong about big predictions as Chief Meteorologists.

They Use To Just Call It Winter

When I was a kid they called this winter and we dealt with it. I can’t ever remember anything being cancelled. Gross Domestic Product (GDP) marched forward without interruption from the weather. Weather is now entertainment. It takes on tsunami proportions and is usually accompanied with a name or acronym that makes it memorable. It is frequently blamed for quarterly earnings shortfalls.

I have learned that The Weather Channel now has a materiality standard (population or geography) for naming not just hurricanes but also winter storms. Any storm on the East Coast, especially one that touches New York City is automatically a super storm. There is no worry or mention about the middle of the country. These are Red states in the fly over zone, devoid of economic impact and deserving of all the bad weather they get because their citizens are too stupid to live in New York or California. This is certainly supported by The Weather Channel’s naming criteria:

“The Weather Channel’s winter storm naming system is based on how many people or how much real estate is affected by the worst part of a storm. A localized but extremely impactful winter storm could affect 1,000,000 people, but since it doesn’t reach a 2,000,000-population requirement, it wouldn’t receive a name.”

Bad News For The Fly Over Zone

This is bad news for Buffalo, Bismarck, and Butte where a 90-year-old who dies shoveling eight feet of snow is remembered as having died of natural causes, but his counterpart in New York is remembered as having been ravaged, and ultimately slain, by Killer storm Kyle that shut down the entire East Coast and left millions without power.

All I know for sure is I want this job, I get the power to interrupt life based on Doppler radar predictions, and I am almost always wrong and no one cares. They call me an expert and I am more popular than free cell phones.

Rob McCrearyWe used to call it Winter