USA Follows the Same Downward Slide As GM

As GM goes…so goes America…

Uh oh…

Stocks rose yesterday; the Dow went up 50 points. The bear market rally is still on. Oil touched the $60 mark…a sure sign, say analysts, that the global economy is picking up. And the dollar fell further…to $1.36 per euro. Gold held steady, at $912 an ounce.

While most stocks advanced yesterday, General Motors backed up.

The experts say the company is going broke. “Chapter 11 looms,” says a Bloomberg report. Investors sold the stock down to $1.15 – a price GM hasn’t seen in more than 70 years. At that price you can buy the whole company for $700 million. Peanuts. Some fund managers earn that much in a single year.

Meanwhile, the USA follows the same downward slide as GM. Both are dogged by high debts, high costs and low management. The Financial Times reports:

“America’s Triple A rating at risk.”

Moody’s has issued a warning. Either the US cleans up its ledgers or it will be downgraded like a bad company. The US was first awarded a Triple-A credit rating in 1917. Not even a century later, it looks like it will lose it.

David Walker, star of Addison’s movie – I.O.U.S.A. – writes in the Financial Times that the US is headed for bankruptcy just like GM. It owes $11 trillion officially, with another $45 trillion in “off balance sheet” obligations. And, as we reported yesterday, this year it will lose another $1.8 trillion. That’s according to the Obama administration’s official count. Our own guess is that the loss will come to $2 trillion or more…and that trillion dollar losses will continue for years in to the future.

Even by the official estimates, the US government is spending $2 for every dollar it brings in. Even GM doesn’t operate that recklessly. GM loses money on every car it makes…but the loss is nowhere near 50% of sales.

What’s going on? How come the world’s biggest, most successful company…and its biggest, most successful country…are both skidding out of control?

The casual reader will be quick with an answer. They “made mistakes,” he will say. He will point to GM and say: “They should have come out with something like the Prius or Honda’s new Insight…which is already setting sales records in Japan. They’re just producing the wrong cars…and, oh yes, they pay their employees too much.”

As to the US, he will have roughly the same insight:

“They made a number of mistakes. They never should have kept interest rates so low for so long. And they should never have allowed the bankers to run wild the way they did. Now, the banking system is broke…and the government thought it was forced to step in with trillions of dollars. Of course, it made a mistake in how it supported the banks. It shouldn’t have given the bankers so much money so those b**tards could pay themselves such bonuses.”

But here at Markets and Money, we notice that mistakes always seem to come along when you need them.

Take California, for example. Governor Schwarzenegger says its deficit may rise to $21 billion. Analysts say the state will run out of money by July. Maybe it and GM will go broke together.

What mistake did California make? It increased expenses – counting on Bubble Epoque growth rates to continue. But instead of continuing to rise, property prices – which held the bubble aloft – collapsed.

Now comes word that housing prices are still going down. In fact, they went down faster than ever during the first quarter of this year – 14% year on year.

The biggest drops were not in California…but in Cape Coral/Ft. Myers, Florida, and Saginaw, Michigan. The Cape Coral area saw a staggering 59% collapse in house prices. Saginaw was not far behind; there, house prices fell 54%.

But wait, there’s good news too. Each month the losses diminished. Though prices are still going down, it appears that they are going down less fast each month.

David Rosenberg…chief economist at Merrill Lynch…is leaving the firm, and here are his parting words:

“Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks…

“The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks. To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged. But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

“While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.

“This is a bear market rally that may have run its course…

“So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors. We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007. Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.”

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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