Monday, August 03, 2009
During this evening's "Kudlow Report," former American Airlines CEO and all-around hard-nosed business pundit Robert Crandall quoted an arresting factoid: Since the year 2000 a net 30,000,000 new cars have been sold into the American market ("net," I believe, being net of cars that have been retired), but we have only added 15,000,000 new drivers. Crandall's conclusion is that the market is saturated, which does not follow ineluctably from those facts (assuming they are true -- I did not verify them), but seems likely nonetheless.
The question, of course, is whether this fact of the market fundamentally dooms the weakest companies. You know, the ones that you and I own involuntarily.
I have obtained permission from Nobel laureate Thomas Schelling to copy a chapter of one of his books and send it to friends. I plan to send you a copy.
The chapter on the childhood game "Musical Chairs" discusses (among the 50 other things it discusses) the phenomenon to which you are referring.
I had lunch with former Secretary to the President Phil Brady, in 2004. He is/was President of the National Association of Auto Dealers and joked that a talk by a cabinet officer said that he was either there to discuss "cars or houses." The point is that low interest rates got us out of the 2001 recession, but the prolonged stimulus in these markets had the predictable effect of depressing those markets for some period to come.
Durable goods are called that for a reason. And production in any given year tends to bump (thus 'musical chairs') in the following years.
In short, the recession/depression has two causes: loss of confidence in the markets, which has caused a liquidity trap (rampant fear); and the natural outgrowth of over-production for a few years.
I am a bit unsure of any more than what I have said here. I would like to figure it out though.
For years the Detroit Three were run to mazimize revenue, not profit per car. That's what happens when you're burdened with huge legacy retiree costs, and have to sell some cars at a loss or flat to meet fleet mileage rules.
In the end all real estate is local. Some states like California and Florida are overly responsible for the debacle. Dollars on thier overvalued house sales didn't just disappear. They went into pockets.
"Since the year 2000 a net 30,000,000 new cars have been sold into the American market ("net," I believe, being net of cars that have been retired), but we have only added 15,000,000 new drivers."
Thus the Cash for Clunkers program.
A friend of mine got a new Lexus $4500 off trading in a 10 yr old Lexus with a broken A/C. The new one projects to a whopping 4 mpg better than the clunker.
I can hardly wait to see how many big luxury cars and trucks Americans purchase under this program.
Tell me if I've got this wrong:
People who have old (and presumably paid-for) autos are being enticed to purchase trendy NEW autos, thus acquiring new debt...all at a point in time when inflation sits just around the corner ready to eat into their (remaining) disposable income.
So, either we are grossly DISCOUNTING goods that a smart buyer would have been ready to buy anyway.
We are encouraging people to get car loans, more expensive insurance and more expensive maintenance on something they really didn't need.
Hmmmm...I think I'll just wait around for a year or so and start attending the repo auctions....it's going to be a bidder's market!!!
PS....Despite it being (IMHO) a bad idea...it is a simple one. Lo and Behold, even that cannot be competently administered by government bureaucrats without delays, breakdown, paperwork and cost over-runs.
So far I'm 0-for-everything. My mortgage is one I can afford, I have no college debt remaining and I already drive high mileage cars. I save for my kids tuition. I also save for the unexpected disaster. It turns out I get no money in any of these give-aways. I even make too much to have received money in the first stimulus, way back in 2008. Angry? You betcha.
"The question, of course, is whether this fact of the market fundamentally dooms the weakest companies. You know, the ones that you and I own involuntarily."
Only in a reasonable level playing field.
The US Government's active involvement in the management of the big two will ensure they do not fail.