Monday, June 1, 2009

GM finally dies - Does the United States have similar symptoms?

Monday night having a night cap in beautiful Metro Detroit. I am not predicting the end of the United States, but there are certain parallels I see in the current direction of the US and GM (now Government Motors) in its years prior to implosion...

First, I live in metro Detroit (and strangely for people who haven't been to the suburbs of D-town it's a great place with great people), so it is hard for most of my friends and family to understand why I have been so negative on the Detroit autos for years. Unlike the mass media, I don't think the product they produce was the main problem at the end. I told people these companies would eventually go bankrupt / or something along those lines for several reasons. Why? Well for the following reasons and after each point I follow with a parallel to the United States.

1. Because GM had massive pension / post retirement liabilities which made it almost impossible to stay in the black and service those obligations (US parallel = social security / health care, etc.)

2. Many of the workers (not all) had an entitlement mentality. The union brought a mentality where these people really thought they were entitled to be overpaid not based on merit, just because. Now this attitude will be shattered as these people realize a non-UAW protected job, if you can find one, may pay one-third for the same work and you will be expected to produce. I heard stories about how when a new young guy would start at a big 3 plant and be working too fast, the older workers would say, "Slow down, son - we do it at this pace". Getting paid the same no matter if you achieve or not will never succeed. (US parallel = this type of subsidization of under performance and lack of effort seems to be in line with the current administration's mindset - which in my opinion itself is the biggest cancer for our country of any - if people think they should do the least to get the most (social programs, government subsidies, etc.) because they "just deserve it" how can you have long-term success in a company or a country? Also, by supporting failure you destroy successful people's drive to achieve.)

3. GM made poor investments to build its businesses and had a tremendous waste in spending that was supposed to build the company and this built its huge debt obligations. (US parallel = the government has "invested" in not letting failure be an option for many financial institutions (call that a huge off balance sheet contingent liability of the US), created a wasteful stimulus plan (for the most part), and plan to continue to create deficits that just like GM's deficits will have to be paid at some time. And like GM these investments will be shown to be near-sighted and the benefits will fade as quickly as they started. I think the government is providing tax payer money in some very inefficient ways.

4. The suppliers to GM didn't trust them and wouldn't invest in them. I went into a supplier plant once and one side was automated with brand new equipment and the other side looked old and had 100 people working in it. I asked the owner what that was all about. He said the automated side is devoted to Toyota and the old side was for GM. I again asked him why and he said because GM might pull all of his programs the next day to save a nickel and if he made the investments he would be S.O.L. He said Toyota would not treat him like that as long as he was a responsible supplier. (US parallel = Some of our suppliers of capital, namely China, is beginning to lack some trust at our country's fiscal responsibility. If China and other countries do stop or slow the treasury buying, I can't see how the US will finance the debt other than to seriously monetize / inflate / devalue the dollar, etc. in the nearer term)

There are 4 symptoms I see that caused GM's demise that the US is showing signs of... So, what does this mean to a trader. To me, it indicates positions in precious metals, select commodities and short treasuries are appropriate.

1 comment:

  1. Spot on. Probably can start shorting financials again in a month or two.


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