We ended the week with the markets substantially down. The market has been desperately trying to find an equilibrium, and failing. Every time investors are lured back by low prices and boost the market a bit, more bad news hits. Below is a five day chart, showing "the audacity of hope" which lasted right up until the votes were counted. Then it was discovered that the party was over, the punch bowl was empty, and everyone had to go home.
We continue to be mired in a very low price level. The only "positive" here is that European and Asian markets are doing even worse. Personally, the past 30 days have taught me how a mouse feels when it's "playing" with a cat.
Obama has said some very positive things - frankly, I'm tentatively impressed. When pressed for his choice for a treasury secretary, he responded "I want to move with all deliberate haste but I want to emphasize deliberate as well as haste." There are rumors flying fast and furious about who he is considering for Treasury, but I expect Obama will pick his own man without regard to the rumors. He has had several economists briefing him, and to my eyes all are suitably centrist and fiscally conservative - meaning, they're of the school that thinks that deficits matter, a seemingly subtle point that has somehow escaped the Republican party for a generation. I am cautiously hopeful that Obama will follow an economic path comparable to Clinton's; while I was not in agreement with many of Clinton's spending priorities, he balanced the budget and respected the autonomy of the Fed to keep inflation low.
In the House, Pelosi is said to be considering a stimulus on the order of $150B, but this time more focused on infrastructure repair and job creation rather than simply handing out checks. I think this is an excellent choice, we have neglected our infrastructure in this country for 20 years. On Thursday she sat down with Senate leader Reid, the presidents of Chrysler, Ford, GM, and Cerberus, and the head of the UAW. You have to believe this was a bargaining session, it really is quite an unlikely group of people to have over for drinks. GM announced today that they had burned up nearly $8B in the last three months, and there was some question if they had enough cash to last the rest of the year. They almost certainly do not have enough cash to last until next summer. Bankruptcy is not considered an option for them, as it is believed that the insecurity about auto warranties being covered will immediately result in their sales cutting in half, and then putting them into a death spiral. Chrysler is privately owned and therefore does not release financial information, but it's generally believed that they are weeks away from exactly such an implosion.
A report produced recently by the Center for Automotive Research projects the impact of all three U.S. auto companies ceasing operations in the U.S. Alternatively, it projects the fallout from a 50% reduction in the industry that might be brought about by the elimination of one or two companies. Their findings include:
• Should all of the Detroit Three's U.S. operations cease in 2009, the first-year total employment impact would be a loss of nearly 3 million jobs in the U.S. economy—including 239,341 direct job losses at the three auto companies; 973,969 secondary jobs at auto supply companies; and more than 1.7 million jobs at other employers from the reduced spending by those jobless workers. The employment picture would recover somewhat in 2010 and 2011, due to increased U.S. production by foreign-based automakers and dislocated workers finding new jobs.
• Even if just one or two of the auto companies goes down, the first-year losses would still be nearly 2.5 million jobs in the U.S. in the first year before coming back somewhat in the second and third years. That's because the domino effect of one major automaker going under would push several financially fragile auto suppliers into insolvency, which would interrupt production at the remaining car companies.
CAR Chairman David Cole, one of the authors of the study, says legislators and members of the public who doubt the U.S. auto industry is worth saving "should realize the costs of it failing are far greater than the $25 billion in loans the industry is seeking."
Obama said "I want to see a stimulus package sooner rather than later. If it does not get done in the lame-duck session, it will be the first thing I get done as president of the United States." He also called on Bush to join Congress in seeking aid for the ailing U.S. auto industry, which was seeking some $50 billion in emergency loans.
European and Asian banks continue to drop interest rates, and I continue to see this as strictly symbolic: the issue is not the cost of money, it's the banks insecurity about their ability to measure risk, and the lack of AAA customers to loan to. Fantastic stupidities continue to occur - earlier this week Volkswagen stock shot up over 300%, briefly making Volkswagen the highest priced company in the world. It turned out that a whole bunch of hedge funds had noticed that alone of the world's automakers, Volkswagen stock had not gone done much, so they sold a whole huge mess of the stock short. Selling stock short means you "borrow" some stock from someone else and sell it. You agree that within a certain period of time you'll buy shares to replace the ones you borrowed. If the stock meanwhile goes down in price, you do real well. If you sell shares you don't own without borrowing them, this is called a "naked short." About a day and a half into this, some German news commentator noted that Volkswagen was 74% owned by Porsche and 20% owned by Lower Saxony, the German state in which Volkswagen mostly resides. Only about 5% of all the shares in Volkswagen are available to be publicly traded. The hedge funds shorted all of it, which, when they heard of the share ownership, left then scrambling to buy shares to cover their shorts (isn't that a great phrase?) like a group of seven year olds playing musical chairs at a birthday party. Porsche eventually magnanimously agreed to temporarily sell a couple percent of their shares, at a huge profit, to help out the hedge funds. Next time you happen to meet a Master of the Universe, be sure to ask how they managed to sell more shares in Volkswagen than were available to be traded, and how this should make you feel all warm and fuzzy about their market omniscience.
China has just begun to have serious layoffs - about 130,000 last month. This is perceived to be far more serious in China than here. The deal in China is that the government makes jobs happen to move people from the impoverished farmland into the more prosperous cities, and in return the people let the old geezers continue to be in control. The Chinese central government deeply and rightfully fears breaking their half of the deal. However, with the entire rest of the world going into consumer shock, it seems obvious that the layoffs have only just gotten started. It's an open question how China will choose to deal with this very politically threatening situation. We live in interesting times.