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Monday, June 01, 2009

The Era Of Gubmint Motors

I experience grave doubt about GM's future. Of course, there is nothing you or I can do about this, but my personal experience of semi-government monopolies is that they are not very responsive to market corrections and suffer in competition with truly private companies. Take the US Postal Service, for example. Their service has been getting worse for several decades in comparison to private delivery services, and only federal laws forcing a monopoly of some services keeps them going. (I'm grumpy this morning, because I just discovered that an insurance payment I sent priority with delivery confirmation has been lost. They could not get the thing 8 miles down the road without losing it. I never send any important payments plain mail any more - if I can't pay them online, I either pay for special delivery or take the payment to an office personally. That's how bad the US post now is. But this is a new low.)

In any case, this NY Times article about the 31 year old who is making a lot of the decisions will strike fear into the heart of individuals with some business experience:
It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

But now, according to those who joined him in the middle of his crash course about the automakers’ downward spiral, he has emerged as one of the most influential voices in what may become President Obama’s biggest experiment yet in federal economic intervention.
It's all being done on the basis of theorized social costs, rather than with a view to eventually creating a viable domestic auto company. Some optimists are saying that GM's bankruptcy won't have an effect. It surely will - a bunch of plants are about to be closed down. The longer term question is whether GM will ever be able to make lower-priced cars domestically in competition to companies like Toyota, and I doubt it.

In other news:
I experience even more doubt when reading BEA's April release on personal income and outlays. These reports are revised substantially, and I suspect this is one that will be revised substantially downward. I don't believe these numbers, although they are logical based on April's employment report. However the employment report household survey has a high degree of month-to-month variance and the establishment numbers are subject to a great deal of revision.

BEA claims that PCE dropped only -0.1%, but this does not square with the April retail numbers, nor with retail industry data. PCE is compounded of a lot more than retail sales, but at this time of the year retail sales make up a larger than normal share of PCE. Heating and cooling costs drop in the spring, for example.

There is no question that more money is accumulating in banks, and recent trends have not diverged. The H.8 report gives a snapshot by month and week of bank deposits, and transaction deposits are definitely growing disproportionately to seasonal flux, so I am not questioning that saving is growing. I am questioning the 1.1% increase in April income, which I do not believe. According to BEA, .7% of that is underlying (not due to the stimulus changes). The most I can figure would be about .3%, and that is really pushing it, even with increasing real estate sales in some locations.

I remain very worried about the six-month economic trajectory. In part, that is due to worries over increased fuel costs, which have the potential to completely outweigh any possible economic impact from 2009 stimulus spending by eroding real incomes.

In part, my worry is due to unfavorable very fundamental data such as rail. Take a gander at the April RailTime report (pdf).
As I stare at this graph, I feel a sort of generalized angst that does not remit with poultices of ISM, Beige Book, BEA personal income and construction value reports. I don't care what they say. Stuff is not moving when the demand for stuff should be picking up, and by now, inventory clearance should have proceeded along and drawn more traffic.

Unfortunately, May rail data continues to show a decline. The rolling four week comparison to YTD trends continues to drop. As of April 25th, cumulative US carload volume was down 18%, and cumulative intermodal volume was down 16.2%. As of May 23rd, cumulative US carload volume was down 19.3% and cumulative intermodal volume was down 16.8%. That may not look like much, but these are not seasonally adjusted figures. Further, these figures do correlate well with other observed trends, and clearly show the effect of increased real estate activity in the west. For the week of May 23rd, for example, carload volumes were down 28% in the east and only 16.4% in the west.

One of the reasons I watch freight and transport volume figures so closely is that the effect of currency value shifts can greatly distort the true economic picture. Most US economic reports are dollar-denominated, rather than volume denominated. However volume does matter; the relation of volume to jobs is real and generally quite inexorable.

I do have some mildly green-shootish stuff to report. If I didn't, I'd probably just have tossed down a fifth of vodka and gone back to bed. The first is Manufacturing ISM, which shows improved order and export order volume. Manufacturing and manufacturing employment is still contracting (consistent with Chicago PMI), but a potential turn seems a lot closer. There is a discrepancy between the rail data, Chicago PMI and Manufacturing ISM. I am waiting for NACM data to tip the balance.

Conceptually, the drop in the US dollar should be good for American manufacturers. Conversely, it will be negative for Eurozone exporters. There is considerable debate about this seesaw.

Of course all of this is potential, and with oil prices continuing to rise, I don't know whether we will even get to brief expansion before the next downward trajectory begins. At $70, I think any hope of an expansion is off, so if the price goes there and sticks for a few months, that's it. Game over internationally.

I am not sure whether a sustained price in the low $60 range will support an international turn. It might, or it might not.

Other green-shootish stuff: I have been watching India closely, and conditions there really are improving a bit. India's internal dynamics have been substantially improved by lower interest rates, although business interest rates are still a concern and probably need to be reduced further. I will be watching India's industrial production figures closely over the next couple of months. The other stat I have been watching closely in China and India are telecommunications, especially mobile phones. There was a marked rise in rural subscriptions in both countries over recent months. In part, this was due to stimulus, loan and targeted interest rate reductions in rural areas.

India's most recent figures show a slowdown in subscriptions, which may indicate a diminishing effect of those policies. Indian retail trends still seem somewhat negative, and this is of concern because positive Indian business trends seem mostly due to enhanced internal demand. Both China and India succeeded in boosting internal consumption in some areas (including cars) by dropping consumer interest rates. There is always a shelf effect when interest rates are moved this way - an initial bulge of sales arrives as a new cohort can afford products. Sustaining demand after that point depends on broader economic conditions.

Australia is picking up, but they are doing so at the cost of rapidly increasing household debt obligations. In a couple of years, they will need a much stronger global economy to support what they are doing internally. Otherwise, as UK and US economists now concede, the cost to internal growth may outweigh the benefits.

The longer term question is whether GM will ever be able to make lower-priced cars domestically in competition to companies like Toyota, and I doubt it.I don't.

Obama has created Amtrak Motors and your tax money will be used to make sure the company exists. No subsequent POTUS will ever dismantle it.

The cars will be shit, much like Amtrak's service. The government will provide dirt-cheap financing to those who really can't afford cars - again on your dime. They'll also quadruple gas taxes to make sure those who just bought the new cars can't afford to drive them. Which is good for the environment.
The only real solution to GM's problems was to allow GM to default on all of their retired employee obligations. That was what was and is ultimately killing GM. Remove the medical and pension costs and GM could lower their prices by about 3,000~4,000 dollars per car. This is very harsh, but it is the only way GM can regain its competitive advantage. This is what most of the airlines had to do in the middle of the 1990s and they emerged out of their respective reorganizations as healthy entities.

If this sort of chapter 11 had occurred, GM would have presented the federal government with their pension funds (not much) and they retires would have all gotten a much reduced payout. Again this is what happened with the airlines. Of course the GM payment recipients would not like it (with good reason), and as they are union members, and part of the democratic parties base, the solution was simply unacceptable. I think that is the "social cost" this chap was referring to.

The solution chosen seems to be dictated by these political considerations. Both GM and Chrysler have been effectively turned over to the unions, at the cost of bondholders. What is most likely is now the government will prop up GM and Chrysler to keep them going, while the unions will keep a steady flow of funds going to the pockets of the political class that feeds them. Interestingly these government supported companies will be competing with private companies such as Ford. Not good.

The solution is easy, don't buy any car from either of these companies; let them rot on the vine. It is hard on the employees, but there is really no other solution if one wants to keep the country from turning into a socialist utopia. Not fair to the folks that put 20 or 30 years in as workers, but then again the fire bombing of Hamburg was not all that nice either, yet apparently it had to be done. In any case it is becoming apparent that a war is going to have to be fought against government supported companies if the US is ever to return to a normal economy and not become a pale imitation of 1950s England
Whats the import tarif going to be on foreign competitors?

Mr. Sensitive, I would like to see the kind of angst directed toward government motors that used to be directed at jap cars in the south.

I think those collapsable batons would be good for smashing windows and mirrors off of socialist motor vehicles.

I'll start next model year to give everyone the benefit of the doubt.
I am more qualified to run GM than Brian Deese.And that is an amazing thing to be able to say honestly.OMFG.
Tom - I feel your fright. I really do.
Mr. Sensitive - considering the history of US farm subsidies (which are always generous in election years), I think Charles may be right.

I can't help but think the government will try to keep GM staggering along no matter how much it costs.

Read the NY Times article again. The decisions on autos are being made on the basis of social costs NOW rather than any projection of future success.

YT - Defacing government property is a federal crime. I'd be careful.
The government is projecting 16 million plus new car sales by 2012.
This could be accomplished by a GSE auto loan facility similar to Fannie with a new government agency part of the transportation dept that would act like the current FHA, I guess it would be the FAC, Federal auto credit agency!
It will be all about credit availability supporting cheap lease rates, low monthly payments for just about anybody and payed for by the taxpayers either today or coming generations.
Mr. Sensitive is right on about what happened to the airlines. I know because the PBGC now sends me my much reduced pension check. And I don't have the medical plan (Medicare supplement) my old company still ostensibly provides retirees because I can get the same plan for less money from an insurance company. The airlines unions were fair game because they did not have nearly as much clout with Congress as the UAW did. Also, each airline went down at different times so the numbers weren't so big.

However, the airlines are not really better off today even though they reduced their employee costs. The reason is that they are very dependent on fuel prices and a healthy economy to make even a small profit. There may be a way to operate an airline that provides safe, reliable service and make a consistent profit, but no one has figured it out yet.

Think how much more difficult it will be for GM to make money since it has not really reduced all those legacy costs(Retirement & medical). It'll just become another entitlement program unless.......we can elect some people to Congress who understand free markets.
Jimmy - hard to find those politicians who really understand free markets. Republicans don't appear much better.

I may be soured by my local batch (Isakson in particular is demonstrating he hasn't got a clue about free markets), but it appears that the actual subsegment of politicians who are willing to take a longer view of the economy are a small minority in both parties.
Some thoughts on the Deese appointment, with a baseball analogy and a Gilbert & Sullivan song, here.
Don't get me started: I once ordered from ebay with priority mail. I didn't get the item so after waiting more than 1 week I complained to the seller and I ended up calling my post office about my missing priority mail (on line status said at the post office but I didn't get any notice). They couldn't find it over the phone. Next day they delivered it to my house. How weird is that?
Danny - hey, semi-government monopolies at work. There is some law forcing companies to use their first class mail service instead of private couriers, or the post office would be in even more trouble.
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