Who Makes the Best Cars?

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“I’m never going to buy another American car,” said an American colleague yesterday. “The quality just isn’t there…”

On the other hand, we have a French friend who swears his Corvette is the most trouble-free car he’s ever owned.

Who makes the best cars? We don’t know. But we don’t have to know…we’re happy to let Mr. Market decide.

But Nancy Pelosi wants to trump Mr. Market. She wants to decide which automakers survive and which don’t. Letting the automakers go bankrupt is “obviously, out of the question,” says Nancy Pelosi.

Out of the question? Maybe. Obviously? Not at all.

Here at The Daily Reckoning, we know that Mr. Market is a hanging judge. When he thinks someone has done wrong, he strings them up. Right now, he’s got GM and Chrysler on the gallows. But Nancy Pelosi is right; Congress is bound to come to the rescue.

We’ll get back to that in a minute. First, a look at yesterday’s news:

Is the market set for the long-awaited Obama Bounce? Yesterday, it wasn’t clear. The Dow lost 215 points. Gold finished down almost $4. Oil was down too – to $43.

We’ll just have to wait.

Meanwhile, auto execs were back in Washington. They seem to have lost their case with Mr. Market on the bench. Now, they’re appealing to Congress.

But the U.S. Congress is more like a lynch mob than a judge. It doesn’t think or carefully weigh the evidence. And it is certainly not blind. Instead, it reacts…like a mob…instinctively, and foolishly.

The unions don’t want to see GM or Chrysler go under. They’ve been feeding at that trough for a long time; they don’t want to stop now. The shareholders don’t want to see them go down either. They’ve got money at stake. Nor does management…nor do any of the subcontractors, dealers, or service industries related to automobiles…or the hundreds of thousands of people they employ.

They’re all “stakeholders,” they say. And they’re prepared to reward members of Congress who help them protect their ‘stakes’ and punish those who don’t.

Of course, all say they believe in free enterprise…and in market economies. But all will tell you that there are special circumstances in this case. Everyone always has plenty of reasons why the rules of a free society shouldn’t apply to them…at least not just now.

So, the fix will probably be in, dear reader. The Detroit Dinosaurs will be kept alive. At least for now.

But how? These hogs have big appetites. Who’s going to feed them? With what?

Ah, there, dear reader…there’s always a catch…a fly in the ointment…crack in the bell…. Hit the bell hard enough…and it falls apart.

There are only so many resources in the world – only so many workers…only so many tons of steel and only so many barrels of oil. In a real, free-market economy, ordinary people decide how these will be used. They vote with their money. They buy a beer, for example…and send a signal to the whole world. “Beer is what we want!” So, the hop growers get hopping…the beer truckers get trucking… and the brewers get brewing. The ‘hidden hand’ directs resources to where they are needed. People get what they want.

And then, along comes the U.S. Congress…in its all its majesty. We don’t care what Mr. Market says, it declares, ‘It is cars from Detroit that the people shall have.’ And then, the money that would have gone into making beer is diverted to the auto industry. Resources follow the money. The steel delivery trucks head for the auto plants, not to the brewers. The oil that might have been used by a distillery is instead siphoned off to fire up an auto plant. The capital that might have been used to build more breweries in Anaheim is instead used to prop up old assembly plants in Detroit. And then, the consumer pays more for his beer – because the brewers didn’t increase production – and more for his cars too…Detroit knows the game is rigged in its favor; why bother to cut costs?

Of course, subsidizing the domestic auto industry is just what economists have been cautioning other countries NOT to do for decades. Typically, a woebegone country in Africa or Latin America wants its own airline and its own auto industry. Its citizens could perfectly well buy their sedans on the open market…and count on the commercial airline industry to move them through the sky. But where’s the prestige in that? Where are the sweetheart contracts…the bribes…the payola…the baksheesh?

A report out earlier this week criticized the Treasury Department for not having adequate controls on its $700 billion giveaway program. The money may be wasted…but at least it should be wasted according to proper procedure, said the critics.

And so the great fight against nature continues. The Bubble Epoque is over. Bailouts…bribes…boondoggles – welcome to free enterprise a la USA, circa 2008.

*** As we mentioned yesterday, today is a special day…it’s what our buddy and trusted currency counselor, Chuck Butler refers to as Jobs Jamboree Friday! Yee-haw!

Early this morning, Chuck wrote this to his readers:

“The ‘experts’ have forecast a -335K drop in jobs for November… But, your old Pfennig writer believes that this forecast is low. I think it will be closer to -375K. The reason I say that is the employment piece of the ISM report that printed the other day and the employment index of that report showed some real serious rot on the labor vine. I read a report last night, where an economist was attempting to show how the report should read -750K. As bad as -375K is, I don’t think the Bureau of Labor Statistics (BLS) would have anything to do with printing a -750K report!”

Turns out, the Labor Department’s monthly jobs report was much worse than feared. In November, the United States shed 533,000 jobs…the biggest monthly job loss since December 1974.

“These are horrendous numbers… This is an economy that is in absolute free-fall right now. Confidence has collapsed,” said Nigel Gault, chief U.S. economist at Global Insight.

Also in the jobs report was data that showed that the unemployment rate went up from 6.5% to 6.7% in October. MarketWatch points out that although this rate is (marginally) lower than the forecasted 6.8%, it is the highest unemployment rate since 1993.

*** The holiday season is going to be rough on many Americans…and in turn, retailers. In fact, Americans are turning away from what usually powers the economy out of a recession: credit cards. The Washington Post reports:

“According to an analysis by Citi Investment Research, the constriction in lending that began earlier this year points to at least a 5 percent decline in consumer spending on goods during the heart of the holiday season. A Consumer Reports survey showed more than half of shoppers intend to rely less on credit this Christmas. One retailer, Circuit City, has already blamed the meltdown in credit for sending it into bankruptcy protection last month.

“‘If you’re a retailer right now, you see the contraction in consumer debt as a problem,’ said Jerry Welch, former chief executive of FAO Schwarz and now head of prepaid card service nFinanse. ‘There’s no way you can be a retailer and look out and see people being maxed out on their credit cards and think it’s good for you.”

Over here at The DR headquarters, we have an interesting way to provide your family with the comfortable holiday season they have become accustomed to…with a $1500 “One-Time Divided” check.

*** The South Africans we meet – black, white, or somewhere in between – are always nice, smart and hardworking. And the society they have created is dynamic, complex, and flourishing.

On the other hand, it is a society that is troubled…and, possibly, doomed.

At least, that is our impression. Crime is an ever-present problem…and a constant subject of discussion. When we arrived, a radio talk show was discussing a recent case in which robbers interrupted church services – at gunpoint – and relieved parishioners of their valuables.

No one thanked these desperadoes for what they had done – even though they made it easier for the churchgoers to get into heaven. Instead, they were roundly condemned…in recurring laments about how crime-infested South Africa has become.

The evidence of crime is everywhere. High walls and razor wire protect suburban houses. Security guards stand vigil at office parks. And along the roadsides, there are people – walking, sitting, sleeping, bicycling…all vaguely menacing, at least to someone from North America or Europe.

Is it anymore dangerous than Baltimore or Las Vegas? We don’t know. But to a foreigner, it seems more dangerous.

And it seems like a culture evolving – quickly. From the domination of the Boer’s and the English, South Africa has become multi-racial…and multi-cultural. All the races and cultures seem to get along fairly well. But how long can it last, we wonder? How long before the plague of democracy catches up to them, and the numerically superior black Africans realize they can vote themselves money and privileges?

Keep reading for today’s essay…

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Clearly, Mrs. Pelosi and the ‘Ben and Hank Show’ have quietly laid “Mr. Market’ to rest. RIP.

    But, I walk away from reading this article thinking that the thesis is: if I don’t like the idea of all my future tax payments going into a slush fund for the former wizards of wall street, in perpetuity. Then my option is to move to South Africa….

    “The evidence of crime is everywhere.” Of course, the biggest CRIME is the “rescue/bailout” plan. And all I hear is “when the economy picks up next year….”

    But it won’t. They can cook the books of Corporat Amerika, AGAIN, and make the economic numbers sound passable. SHEER LUNACY.

    Reply
  2. I hear ya ralph – at least the South Africans have the decency to tell you when they’re robbing you!

    Reply
  3. I feel tempted yet again to post some views for the day.

    1. The outcome of the US car maker bailout talks will in my view have NO medium term impact on the number of cars sold in the US or elsewhere. The same things will happen regardless of whether its called Conservatorship (under a Car Czar) or a Chapter 11. I think they do make good cars Bill – the only problem is that they can’t do it profitably.

    2. Of more importance to the market are the current predicaments of firms like GMAC and XL Capital. For some interesting reading on some key CDS borrowers in the Aussie market see http://www.imf.com.au/pdf/CDO_11.pdf . It makes frightening reading.

    3. The Chinese have been (very predictably) window dressing the real nature of their predicament. The snippet of trade data that has been released should have floored the Australian and Asian markets today (Thursday) but it didn’t. The Chinese data probably understates the true situation but by how much I don’t know.

    4. Yeah. Governments will probably dump some gold to pay debts. What choice have they got? It will probably send yet more juniors to the wall. At least my remaining holds are a few years from production. Anything can happen here!

    5. Expect California and other states (in the US and Australia) to follow programs similar to what the first Kennett Government did in Victoria during the 1990’s. They don’t have a choice – and what they realise in asset sales will be disappointing. The word I have received(reliably or not ) in NSW is for drastic program expenditure cuts – combined with increased capital works expenditure. Obama has also said as much between the lines, but where will the money for US capital expenditure come from??? Either thin air or a printing press me thinks.

    Coffee Addict
    December 11, 2008
    Reply

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