Big Three: Too Late to Recover
MSNBC reported General Motors Corp. President and Chief Operating Officer Fritz Henderson saying today that bankruptcy isn’t a viable option because it would further erode consumer confidence in the automaker and “we want them to be confident in their ability to buy our cars and trucks.”
This man does not seem to be in touch with the sentiment of the general public who at this time seem quite prepared to take a big bath rather than continue bailing out failed corporations. Realizing at least a few of their previous faux pas the heads of the big three are once again preparing to appear before congress to request an ever growing sum of bail out money. Henderson conceded that flying to Washington previously in separate corporate jets was “a problem” for lawmakers, and also acknowledged that their plan at the time was not clear. This time the three auto leaders plan to travel the 520 miles to Washington in fuel efficient hybrid cars. Their collective satori may have come too late however as Americans, hopefully including lawmakers, begin to question the wisdom of the meme, “too big to fail.”
Automaker’s demands call to mind the antics of evangelist Oral Roberts who once threatened that “God will take me home” unless the public donated $8 million over the next two months. Well time has moved on and the automakers are demanding more than Oral ever did, much more. Chrysler needs $7 billion ’till year end “just to keep running.” GM is asking for $4 billion “now” as the first installment on a $12 billion loan. These demands are just the beginning, there are additional reqests for multi billion dollar lines of credit sealed with the threat “or we will have to close our doors and shutter our windows.” The obvious problem with bailing them out at all is that once we begin, when do we end? We need to ask about the opportunity cost of a bail out: what else could we do with $34 billion inflatable dollars?
Are the automakers really “too big to fail?” Besides, even if I cannot buy a GM, or a Ford in the future, there will still likely be the Hondas, Toyotas, and Hyundais. In a global market the lions share will go to the producer with the best balance of value and quality, the big three have realized this “too late to recover.”
So How Weird Can it Get
The market is way down, the bailout is in process, how much stranger can things get?
In some quarters paranoia mode is fully under way from the upscale family murder/suicide in California to the 90 year old woman who shot herself because her house was being foreclosed. Some are predicting dire outcomes for various dates including October 7th. I thought I’d post this prediction before the markets open so here it is…
Urbansurival.com, a site I came across on Reddit.com, predicts…
“there’s some resistance tomorrow at 9,376, then 8,983, and then switching to the 15-minute chart a pause around 8,049, and then the daily has a close range between 8,700 and 6,900 – with a center around 7,700 to 7,400 but that could be +/- 200 points. All depending on how much the dollar is holding its own while the Euro is having issues/confidence issues.”
Hmmm
My best advice is stay invested, if you have thoughts of hurting yourself or others call 911, ride out the correction, it’s a business cycle stupid!
The President Who Cried “Wolf.”
“Every member of Congress and every American should keep in mind – a vote for this bill is a vote to prevent economic damage to you and your community,” Bush said.
hmmm
Fogel on Universal Healthcare
82 year old Nobel Prize winning University of Chicago economist Robert Fogel spoke recently at the annual Lindau meeting for Nobel Laureates. Fogel won the Nobel prize along with Douglass North in 1993 for the application of statistical methods to economic history, often with controversial results. At the Lindau meeting he said that the rising spending on healthcare in developing nations reflects the rising income of consumers along with a strong appetite for heathcare. He argued that “As people get richer they want to spend a larger share of their income on health.”
This comment drew an almost unanimous expression of sarcastic derision from readers of the Wall Street Journal, most of whom, evidently failed to understand that independently of the current American healthcare system, rising wealth, whether individual or national, correlates with greater healthcare spending. Fogel also said that governments should not interfere to decrease demand for healthcare in an effort to lower costs but should move to some form of universal healthcare for essential services with extra user costs for additional services such as shorter wating times, private hospital rooms, and expensive elective surgeries. Now, am I daft or can these comments be constructively applied to the USA?
Temp Rule on Short Selling
The Securities and Exchange Comission has announced a temporary rule on short selling of investment bank stocks as well as the stock of Fannie Mae and Freddie Mac. The rule will require brokers to actually pre-borrow the shares before shorting a stock. Currently many short sellers could short a single stock based on the same shares; the new rule will require a broker to cover shorts, share for share by removing shares from the market once a stock has been shorted. The SEC will consider extending this rule to the broader market. To me this is kind of a “duh,” or, self evident principle that should have led to reform years ago.
Payrolls Shrink Again!
Payrolls shrank again in June for the sixth consecutive month, this time, by about another 62000 jobs. Couple that with the market now entering official “Bear” territory and looks like we’re in for some real dog days this summer. Is it all doom and gloom? That depends on who’s talking. In the short term it most certainly is though the Fed is expected to be more bullish about prospects going into the new year (not to mention a new presidency).
In a recent Duke University survey of CFO’s the highest priority worries were 1) consumer demand; 2) cost of labor; 3) cost of fuel; 4) interest rates; 5) cost of health care. Interestingly, European and Asian business leaders were much more optimistic.
Do We Need More Rate Cuts?
A CNN Money article states that Federal funds futures on the Chicago Board of Trade show that investors are betting 100% on the likelihood of a half point rate cut on March 18th and, 88% on a three quarter point rate cut. They then, on the basis of the growing opinion among some economists that we don’t, ask “do we really need another rate cut?”
“The problems the markets are facing are not due to interest rates being too high. It’s a lack of confidence,” said Barry Ritholtz, the CEO and director of equity research for Fusion IQ. Ritholtz and others argue that the rate cuts are only worsening the pain through devaluation of the dollar and amped up demand for commodities such as gold and oil. If additional rate cuts are not going to increase either consumer confidence or trust among lenders, do we really need one?
Top Ten Most Expensive Medical Conditions
The top 10 most expensive medical conditions in US as determined by the Agency for Healthcare Research and Quality
| Condition | Cost ($ billion) |
| Heart conditions | 76 |
| Trauma disorders | 72 |
| Cancer | 70 |
| Mental disorders including depression | 56 |
| Asthma and chronic obstructive pulmonary disease | 54 |
| Hypertension | 42 |
| Diabetes | 34 |
| Osteoarthritis and other joint diseases | 34 |
| Back problems | 32 |
| Normal childbirth | 32 |
Boston Globe: The Black Box Economy
Stephen Mihm, an assistant professor of American history at the University of Georgia has a feature article in the current issue of the Boston Globe called “The Black Box Economy.” Focusing on the shadowy world of ever more sophisticated derivatives, he speculates on the doomsday potential of these instruments that are valued at over ten times the world’s total GDP and that are often based on no underlying asset at all. Some hope is held out by way of the FASB.
The Stimulus Package that America Needs
What do current proposals for an economic stimulus package propose? I’ve heard estimates of $600 – $800 for average American families. This “windfall,” in theory, will revitalize our consumer-based economy by filling malls with customers who are eager to spend, spend, spend. Perhaps the hope is that this “priming of the pump,” will once again get the streams of cash flow, flowing, and keep them flowing. This kind of stimulus measure however, clearly cannot keep consumers spending for long and it is reasonable to question how many will start spending at all. $800.00 after all, at least makes a dent in whatever astronomical figure the average American has for an outstanding credit card balance.
To really really get the economy going, how about not only a larger windfall to families, but an incentive for actually spending the money on new consumer goods. What if the government say, offered a matching tax credit to consumers of $1.00 for every $1.00 spent on soft goods and perhaps double that amount for durable goods? Wouldn’t that be sweet?
My gosh, why stop even there, why not actually pay people to go shopping? Can you imagine the amount of consumer spending that could be stimulated if the government would just pay us all to shop! They of course could not keep this up forever, maybe just for a year or two until we get over the hump and the bear goes back into hibernation.
Seriously though, what about something really radical like ending the drain on the economy by ending the war that has so far created over $40,000 in debt for every American family? What about some real leadership from our elected leaders to help transform this nation into a nation of savers instead of spenders, a nation of thoughtful investors rather than reckless consumers, and a nation of well-rounded, productive people rather than amusement junkies? A one-shot, injection of liquidity may have psychological value but it won’t change the fundamentals, a long term plan and real leadership is needed for that.
Angry Bear phrased it well, “we must think further than just giving the junkie one more–maybe his last–shot in the arm. In short, merely priming the consumer for one more run at the punch bowl is a bit short-sighted.”
