Bailout Nation: Ford on the Federal Dole, Too
The idea that Washington has successfully rescued the auto industry is nothing but propaganda.
Finally, the South Side plant episode underscores the Orwellian propaganda that's come to substitute for truth in our Bailout Nation. The US auto industry is a disaster waiting to erupt once again in the not-too-distant future owing to the inexorable laws of supply and demand. For decades the US auto industry feasted on a diet of cheap consumer credit. This resulted in the sale of about 17 million vehicles annually between 1999 and 2007 -- a figure that was millions in excess of what the American public could actually afford or sustain. Consequently, the "park" in American garages and driveways is now swollen with nearly 250 million vehicles or more than one vehicle for every driving age person. So it will take years of sales at levels below the 14 million annual scrap rate to shrink the fleet down to an economically sustainable size.
At the same time, $100 billion of Federal bailouts has prevented any material shrinkage of North American production capacity -- to say nothing of 3 million existing vehicle imports plus potentially a further wave from China's burgeoning small car and electric/hybrid vehicle industry. In round numbers, the American car market faces upwards of 20 million units of visible supply and is still struggling to reach even 12 million of annual sales. Accordingly, price competition will be fierce and profits punk for a long time to come.
To be sure, GM just went through the Chapter 11 accounting car wash, meaning that it now has billions in hidden reserves to absorb cash operating costs -- at least for a few quarters. It's not that hard to make a billion per quarter when you can report essentially "expense-free" revenues.
Likewise, using taxpayer money, GM has recently acquired a sub-prime auto lender. So now it can resume stuffing the garages of lower-income households with new cars they can't afford, paving the way for a "twofer" when both loans default. And as long as the Fed's free short-term money lasts, fleet operators may continue to inventory more vehicles too, creating the illusion of sales gains. In fact, GM's YTD sales through July to actual retail customers are down 1% from last year -- which in turn reported the lowest sales rate since Beaver Cleaver got his driver's license back in the 1960s.
So the American auto industry is "back" alright -- back to the accounting games and sales gimmicks that led to its most recent near-death experience. And yet so thoroughly entrenched is the propaganda machine of present day crony capitalism that it will soon trot out our President to pronounce the auto bailout a success, and to suggest that the taxpayers who were fleeced two years ago will soon get their money back -- that is, they'll get repaid as soon as enough prospective GM shareholders can be fleeced for the $50 billion still owed to Uncle Sam.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.