GM, Ford and Chrysler Decline 20%

*** We're back in the U.S.A. Impressions? People are still driving big cars. The shopping malls are still open. There's no obvious sign of decline.

Driving up from Dulles Airport in Northern Virginia, there are the same office buildings - mostly companies that thrive on military contracts - and there are still traffic jams in the late afternoon on the Washington, D.C. beltway. The lumpenconsumer is still spending money (reports suggest that the English are cutting back on spending faster than Americans)...and he's still convinced that this is just a temporary setback, not a genuine turnaround. The boom is eternal, he believes.

Our guess is that the eternal boom has come to an end. At least, the credit boom thant began in '82 has come to an end. Credit has tightened. Real rates of interest will be going up. Fear will replace greed as the dominant emotion. And saving will replace spending as the trendy thing to do with your money.

It's still early in the cycle (these cycles last a generation)...but we will stick to our hypothesis until proven wrong...or until we go broke.

*** Even though we are still seeing SUVs on the road - gas prices be damned! - Americans simply aren't buying new trucks. In fact, Detroit's "Big 3" - GM, Ford and Chrysler - reported monthly declines of at least 20% since last year. Layoffs, plant shutdowns and major cutbacks have become the norm in the domestic auto industry.

With more and more Americans purchasing hybrids and more fuel-efficient vehicles, these plants need an overhaul to keep up with the technology of their competitors...and that's going to take some serious dough.

Now, taking a page out of Fannie and Freddie's book, the Big 3 are looking to the government for a $50 billion loan. Both presidential candidates are on board (a great way to buy some votes auto-dependent Midwestern states) and the Bush administration is "thinking about it." Experts are putting the chances of this package being passed by Congress at 75%, citing a perfect storm of circumstances: plunging auto sales, high gas prices and election year politics.

What the outcome of this bailout will be is up for grabs. Some think $50 billion won't do much to help this troubled industry, and others believe that this will help the companies get back on their feet, up to speed with the trends, helping them in the long-term.

What is abundantly clear from this situation is that the consequences of the country's EZ credit policies are rearing its ugly head. Steven Pearlstein, writing for the Washington Post :

"Can we be assured that, after the Big Three, no other industry will step forward and demand that the government rescue it from its own misjudgments? Unfortunately not. This is what happens when asset bubbles develop, countries live beyond their means - and then, inevitably, the bubble bursts and economic reality finally reasserts itself. Now the bill is coming due. The only thing left to be resolved is how it will be paid."

Bill Bonner
The Daily Reckoning Australia

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