"Substantial doubt," say auditors at Deloitte & Touche. They've been studying GMs figures. The numbers make them wonder whether the automaker can continue as a "going concern."
Here at The Daily Reckoning, we've got substantial doubt about a number of things.
As to GM, we share the auditors' concern. The world is full of car factories. Most of them can make cars better, faster, and cheaper than GM. Meanwhile, demand for autos is not growing as quickly as the global growth in auto-making capacity - especially in America. Not that we're trying to pass judgment. Let the Mr. Market do that!
But GM has friends in high places...ready to lean on the scales of Mr. Market's justice. The automaker has already borrowed $13.4 billion. It is asking for another $30 billion. But what kind of a dope would lend $30 billion to a company whose own auditors say they're worried that it might go out of business?
Then again, who would lend money to AIG four times in a row...after discovering each time that the company was in worse shape than before?
If you guessed anything but 'the US government,' you are not paying attention.
The rest of the world's lenders are idiots too - but of a different sort.
Allow us to simplify the world's credit markets circa 2009: the world's lenders are eager to make loans to the world's biggest debtor; they don't trust anyone else. The world's biggest debtor, meanwhile, lends to the people private lenders don't trust - the borrowers who can't pay the money back.
Meanwhile, sales are falling; profits are collapsing; dividends are disappearing; stock prices are plunging.
Yesterday, the Dow closed down 281 points. Oil held at $43. Gold rose $21. The correction in gold could be over. If that's the case, the yellow metal's price still has a ways to go...and you'll want to be part of this epic rise. Get in while the price is still relatively low. See here.
One out of every five mortgaged houses in America is now underwater. And a record 5.4 million Americans are either behind on their mortgage payments or in foreclosure.
House prices are still going down. You have to be a Lloyd Bridges to explore the U.S. housing market now.
This unprecedented drop in house prices has put millions of households underwater too. Martin Feldstein estimates that U.S. households have lost $12 trillion. It will take a decade of savings at a high rate to replace this money, he says.
The savings rate has soared...from below zero in 2006 to over 3% now. Rising savings will take $500 billion a year out of the consumer economy, Feldstein believes.
No wonder retailers are reporting weaker and weaker sales. In February, only Wal-Mart reported higher sales. Wal-Mart benefits from the 'trading down' effect. Now, when people spend money, they want cheaper alternatives...
Meanwhile, the cop who had the Wall Street beat when the biggest heist in history was going on...and who engineered the loans to AIG and GM...is now the chief of police. Tim Geithner said he was working night and day on Obama's rescue plan, "because we know how directly the future of our economy depends on it."
But as our old friend Marc Faber points out, neither Mr. Geithner, Mr. Bernanke, nor any of the men who rule us, seems to have any idea what they are talking about. As Chairman of the New York Fed, writes Faber, Mr. Geithner "did not seem to 'know,' in the period preceding the crisis, how the future of the economy depends on a sound financial system!"
Faber goes on to explain that not only did the key players fail to understand what was going on - when it was obvious to him, us and millions of others - they then misdiagnosed the problem and prescribed the wrong treatment. They thought it was a liquidity crisis; so they threw billions in cash at dying institutions.
At every step of the way, the feds have been clueless, hopeless, and defenseless. It was the feds who lent money at negative real interest rates for more than five years. It was the feds who pretended to "regulate" and "control" the marketplace...claiming to protect investors from fraud and malfeasance. It was the feds who licensed the banks...set banking standards...blessed derivatives because they "distributed risk more widely" (Greenspan)...urged people to buy adjustable rate mortgages (Greenspan again)...praised sub-prime lending because it encouraged home ownership...and even told consumers to "go out and buy an SUV" in order to give the economy a boost (Fed governor Robert McTeer).
The feds piled up the tinder...poured on the gasoline...and lit the match. And now, what do you know...they've all joined the fire department!
*** One small step for the Bank of England; one giant step towards bankruptcy.
"QE". It does not refer to the Queen of England...but the latest codeword in central banking - quantitative easing. The Bank of England said yesterday that it would buy government bonds itself. This is known to economists as "monetizing the debt." Because the bank takes in debt...and turns it into cash. Just like that.
The European Central Bank took a little step too. It cut rates - as did the Bank of England - by half a point. That brings the BoE down to 0.5% and the BCE to 1.5%.
Mervyn King, head of England's central bank, said he was going to quantitative easing because, in effect, nothing else had worked. They were already lending money to English banks below the consumer price inflation level...which is to say, at negative real interest rates. But the banks weren't cooperating. They took the money...but there it sat. They didn't lend it out.
That is why it is obviously NOT a liquidity crisis. The problem isn't that the banks don't have enough cash...or access to cash...it's that they don't know what anything is worth. They can't make a loan, because they can't be sure of getting the money back.
We've already laid this out for you, dear reader. We're going to do it again, in case you weren't paying attention: this is not a liquidity crisis...and not a recession either. It's a depression. In a depression, the economy needs to adjust to a NEW REALITY...whatever it may be.
Martin Feldstein, mentioned above, provides more figures. In the new reality of 2009, there's about half a trillion less in consumer spending...because consumers are saving money, rather than spending it. And you can take out another $250 billion just from the crack-up in the housing industry. No building...no construction jobs...no financing jobs...no selling jobs...no furnishings...etc. etc.
That's $750 billion less each year to support American's retail...and indirectly, wholesale...providers.
The Obama administration is trying to make up for this private spending with public spending. But his plan, as bold as it is, will only put back about $300 billion each year. That leaves a $450 billion shortfall...which could easily remain for the next 10 years.
This is the new reality that every business, investor and household in the country must live with. Revenues will go down. Sales will go down. Profits...earnings...dividends...you know where this leads.
Well....
Actually, none of knows where it leads...exactly. From today's perspective, it appears to lead to a Japan-like slump...a long period of adjustment to the new reality...delayed, worsened and stretched out by the efforts of our leaders.
But then...there's that QE.
We can't read tomorrow's headlines...but we can read the names on tomorrow's tombstones - they're our own. What has to happen will happen. The United States is now engaged in the most massive spree of Madoff financing the world has ever seen. It needs to borrow more and more just to pay for previous borrowing.
At some point in the not-too-distant future...this system must crack- up. Normally, Madoff would go broke and go to jail. But what would happen if he had a printing press in his basement...and the legal write to print up as many $100 bills as he wanted?
Would the story have ended differently? Would he have the integrity to avoid full-scale quantitative easing? As to that...as to so many things...we have 'substantial doubt.'
Here at The Daily Reckoning, we've got substantial doubt about a number of things.
As to GM, we share the auditors' concern. The world is full of car factories. Most of them can make cars better, faster, and cheaper than GM. Meanwhile, demand for autos is not growing as quickly as the global growth in auto-making capacity - especially in America. Not that we're trying to pass judgment. Let the Mr. Market do that!
But GM has friends in high places...ready to lean on the scales of Mr. Market's justice. The automaker has already borrowed $13.4 billion. It is asking for another $30 billion. But what kind of a dope would lend $30 billion to a company whose own auditors say they're worried that it might go out of business?
Then again, who would lend money to AIG four times in a row...after discovering each time that the company was in worse shape than before?
If you guessed anything but 'the US government,' you are not paying attention.
The rest of the world's lenders are idiots too - but of a different sort.
Allow us to simplify the world's credit markets circa 2009: the world's lenders are eager to make loans to the world's biggest debtor; they don't trust anyone else. The world's biggest debtor, meanwhile, lends to the people private lenders don't trust - the borrowers who can't pay the money back.
Meanwhile, sales are falling; profits are collapsing; dividends are disappearing; stock prices are plunging.
Yesterday, the Dow closed down 281 points. Oil held at $43. Gold rose $21. The correction in gold could be over. If that's the case, the yellow metal's price still has a ways to go...and you'll want to be part of this epic rise. Get in while the price is still relatively low. See here.
One out of every five mortgaged houses in America is now underwater. And a record 5.4 million Americans are either behind on their mortgage payments or in foreclosure.
House prices are still going down. You have to be a Lloyd Bridges to explore the U.S. housing market now.
This unprecedented drop in house prices has put millions of households underwater too. Martin Feldstein estimates that U.S. households have lost $12 trillion. It will take a decade of savings at a high rate to replace this money, he says.
The savings rate has soared...from below zero in 2006 to over 3% now. Rising savings will take $500 billion a year out of the consumer economy, Feldstein believes.
No wonder retailers are reporting weaker and weaker sales. In February, only Wal-Mart reported higher sales. Wal-Mart benefits from the 'trading down' effect. Now, when people spend money, they want cheaper alternatives...
Meanwhile, the cop who had the Wall Street beat when the biggest heist in history was going on...and who engineered the loans to AIG and GM...is now the chief of police. Tim Geithner said he was working night and day on Obama's rescue plan, "because we know how directly the future of our economy depends on it."
But as our old friend Marc Faber points out, neither Mr. Geithner, Mr. Bernanke, nor any of the men who rule us, seems to have any idea what they are talking about. As Chairman of the New York Fed, writes Faber, Mr. Geithner "did not seem to 'know,' in the period preceding the crisis, how the future of the economy depends on a sound financial system!"
Faber goes on to explain that not only did the key players fail to understand what was going on - when it was obvious to him, us and millions of others - they then misdiagnosed the problem and prescribed the wrong treatment. They thought it was a liquidity crisis; so they threw billions in cash at dying institutions.
At every step of the way, the feds have been clueless, hopeless, and defenseless. It was the feds who lent money at negative real interest rates for more than five years. It was the feds who pretended to "regulate" and "control" the marketplace...claiming to protect investors from fraud and malfeasance. It was the feds who licensed the banks...set banking standards...blessed derivatives because they "distributed risk more widely" (Greenspan)...urged people to buy adjustable rate mortgages (Greenspan again)...praised sub-prime lending because it encouraged home ownership...and even told consumers to "go out and buy an SUV" in order to give the economy a boost (Fed governor Robert McTeer).
The feds piled up the tinder...poured on the gasoline...and lit the match. And now, what do you know...they've all joined the fire department!
*** One small step for the Bank of England; one giant step towards bankruptcy.
"QE". It does not refer to the Queen of England...but the latest codeword in central banking - quantitative easing. The Bank of England said yesterday that it would buy government bonds itself. This is known to economists as "monetizing the debt." Because the bank takes in debt...and turns it into cash. Just like that.
The European Central Bank took a little step too. It cut rates - as did the Bank of England - by half a point. That brings the BoE down to 0.5% and the BCE to 1.5%.
Mervyn King, head of England's central bank, said he was going to quantitative easing because, in effect, nothing else had worked. They were already lending money to English banks below the consumer price inflation level...which is to say, at negative real interest rates. But the banks weren't cooperating. They took the money...but there it sat. They didn't lend it out.
That is why it is obviously NOT a liquidity crisis. The problem isn't that the banks don't have enough cash...or access to cash...it's that they don't know what anything is worth. They can't make a loan, because they can't be sure of getting the money back.
We've already laid this out for you, dear reader. We're going to do it again, in case you weren't paying attention: this is not a liquidity crisis...and not a recession either. It's a depression. In a depression, the economy needs to adjust to a NEW REALITY...whatever it may be.
Martin Feldstein, mentioned above, provides more figures. In the new reality of 2009, there's about half a trillion less in consumer spending...because consumers are saving money, rather than spending it. And you can take out another $250 billion just from the crack-up in the housing industry. No building...no construction jobs...no financing jobs...no selling jobs...no furnishings...etc. etc.
That's $750 billion less each year to support American's retail...and indirectly, wholesale...providers.
The Obama administration is trying to make up for this private spending with public spending. But his plan, as bold as it is, will only put back about $300 billion each year. That leaves a $450 billion shortfall...which could easily remain for the next 10 years.
This is the new reality that every business, investor and household in the country must live with. Revenues will go down. Sales will go down. Profits...earnings...dividends...you know where this leads.
Well....
Actually, none of knows where it leads...exactly. From today's perspective, it appears to lead to a Japan-like slump...a long period of adjustment to the new reality...delayed, worsened and stretched out by the efforts of our leaders.
But then...there's that QE.
We can't read tomorrow's headlines...but we can read the names on tomorrow's tombstones - they're our own. What has to happen will happen. The United States is now engaged in the most massive spree of Madoff financing the world has ever seen. It needs to borrow more and more just to pay for previous borrowing.
At some point in the not-too-distant future...this system must crack- up. Normally, Madoff would go broke and go to jail. But what would happen if he had a printing press in his basement...and the legal write to print up as many $100 bills as he wanted?
Would the story have ended differently? Would he have the integrity to avoid full-scale quantitative easing? As to that...as to so many things...we have 'substantial doubt.'
"Europe's Crisis...worse than the US," writes Henry Blodget. You've got to hand it to us cunning Americans. We have started a fight in a crowded bar; now, we slip out the back door.
For the last 20 months, the brawl has been going on. In the United States, stock prices have been knocked down to half what they used to be...but just look at the other guys! Iceland - that hedge fund in the North Atlantic - has broken almost every bone in its frigid body. China faces an unemployment line 100 million people long. The United Kingdom has more debt than the United States...and it depends far more on the financial industry.
The question on the table today is this: who will get the biggest black eye in this slugfest?
The naked facts: Eastern Europe borrowed about $1.7 trillion, mostly from Western European banks. It's scheduled to make $400 billion in payments this year alone. Rolling over debt was a cinch two years ago; now it is like rolling over a beached whale. Sixty percent of Polish mortgages are in Swiss francs. The Poles borrowed in euros and Swiss francs to take advantage of lower rates. Now, they earn zlotys, pay back Swiss francs, and weep.
"Along came the synchronized global recession and large Polish current- account trade deficits, which were three times those of the US in terms of GDP," explains John Mauldin. "The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe."
Bankers are just lemmings disguised as human beings; everybody knows that. Austrian bankers search out the high cliffs. The collapse of CreditAnstalt in May of 1931 took the banking sector over the edge, leading to the Great Depression. This time, Austrian banks have lent the equivalent of 70% of their nation's GDP to Eastern Europe. If as little as 10% of it goes bad, the whole Austrian financial system will be broke...and could bring down all of Europe with it. In the '31, the economies of France, Britain and the US were contracting at the rate of about 6% per year. In the last quarter of '08, the US economy shrank at nearly 7% - and CreditAnstalt hasn't even happened yet.
But at the stroke of a pen, the Americans can nationalize their banks and save their financial system. In Europe, it can't be done. Big banks, little countries, says Mauldin. Proportionately, such a bailout would cost $14 trillion in the United States, he estimates. So when nine Eastern European countries got together and asked for help, Angela Merkel gave the same response that Gerald Ford gave New York City when it asked for a bailout in 1975: Drop dead.
Pity the poor Pole. He dragged around the Bolsheviks' chains for nearly half a century. Then, when he finally broke free, the capitalists bamboozled him. Does he deserve it? Nope, he just has the bad luck to owe money in a currency he cannot fiddle.
"The crisis strengthens the relative position of the United States," writes Spengler in the Asia Times, "and exposes the far graver weaknesses of all prospective competitors. It makes the debt of the American government the world's most desirable asset. America may deserve to decline, but as Clint Eastwood said in another context, "deserves got nothing to do with it".
The punks must feel lucky, as Eastwood would say. In the bubble years...the rest of the world mocked them as fat spendthrifts, while offering them more dessert - on credit. The more Americans spent...the more dollars piled up overseas...the more dollars foreigners lent back to the United States...so the more dollars Americans had to spend! Now that Americans don't spend, the foreigners' factories go silent, their banks wobble...and their top stocks fall. Now they buy U.S. Treasury bonds at even lower yields! This past two weeks, the dollar index rose to a 3-year high - and the 10-year T-Note traded below 3% yield - even as Obama announced a $1.7 trillion deficit.
Of all the cashflows in the world, says Spengler, lending to the world's longest-lasting government, presiding over its largest economy, has got to be the most reliable. He reminds us that lending to the United States in the '80s was a good investment. Then, the U.S. government cut the top marginal tax rate from 70% to 40% and generated enough growth to pay the interest and boost asset values.
But now, asset values are clearly going down while the top marginal rate is going up. Lending in the '80s was lending at high yields at the beginning of a major expansion to the strongest balance sheet on the planet. Now the situation is reversed; lenders earn the lowest yields in history...from the world's biggest debtor...at the beginning of a depression.
This bubble in U.S. public debt will end as badly as the last one in private debt. But for now, the worse things get, the better they are for the people who made them bad. Not only can the Americans save their banking system...they can save their leveraged households and wipe out their debts too. The United States financed its spending fest with others' money. Now, it finances its trip to rehab the same way - with other peoples' money.
Lenders can absolutely, positively be confident they will get their money back - with interest, on the appointed day. But it is money whose value the debtor determines for himself.
If only the Poles could do the same!
For the last 20 months, the brawl has been going on. In the United States, stock prices have been knocked down to half what they used to be...but just look at the other guys! Iceland - that hedge fund in the North Atlantic - has broken almost every bone in its frigid body. China faces an unemployment line 100 million people long. The United Kingdom has more debt than the United States...and it depends far more on the financial industry.
The question on the table today is this: who will get the biggest black eye in this slugfest?
The naked facts: Eastern Europe borrowed about $1.7 trillion, mostly from Western European banks. It's scheduled to make $400 billion in payments this year alone. Rolling over debt was a cinch two years ago; now it is like rolling over a beached whale. Sixty percent of Polish mortgages are in Swiss francs. The Poles borrowed in euros and Swiss francs to take advantage of lower rates. Now, they earn zlotys, pay back Swiss francs, and weep.
"Along came the synchronized global recession and large Polish current- account trade deficits, which were three times those of the US in terms of GDP," explains John Mauldin. "The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe."
Bankers are just lemmings disguised as human beings; everybody knows that. Austrian bankers search out the high cliffs. The collapse of CreditAnstalt in May of 1931 took the banking sector over the edge, leading to the Great Depression. This time, Austrian banks have lent the equivalent of 70% of their nation's GDP to Eastern Europe. If as little as 10% of it goes bad, the whole Austrian financial system will be broke...and could bring down all of Europe with it. In the '31, the economies of France, Britain and the US were contracting at the rate of about 6% per year. In the last quarter of '08, the US economy shrank at nearly 7% - and CreditAnstalt hasn't even happened yet.
But at the stroke of a pen, the Americans can nationalize their banks and save their financial system. In Europe, it can't be done. Big banks, little countries, says Mauldin. Proportionately, such a bailout would cost $14 trillion in the United States, he estimates. So when nine Eastern European countries got together and asked for help, Angela Merkel gave the same response that Gerald Ford gave New York City when it asked for a bailout in 1975: Drop dead.
Pity the poor Pole. He dragged around the Bolsheviks' chains for nearly half a century. Then, when he finally broke free, the capitalists bamboozled him. Does he deserve it? Nope, he just has the bad luck to owe money in a currency he cannot fiddle.
"The crisis strengthens the relative position of the United States," writes Spengler in the Asia Times, "and exposes the far graver weaknesses of all prospective competitors. It makes the debt of the American government the world's most desirable asset. America may deserve to decline, but as Clint Eastwood said in another context, "deserves got nothing to do with it".
The punks must feel lucky, as Eastwood would say. In the bubble years...the rest of the world mocked them as fat spendthrifts, while offering them more dessert - on credit. The more Americans spent...the more dollars piled up overseas...the more dollars foreigners lent back to the United States...so the more dollars Americans had to spend! Now that Americans don't spend, the foreigners' factories go silent, their banks wobble...and their top stocks fall. Now they buy U.S. Treasury bonds at even lower yields! This past two weeks, the dollar index rose to a 3-year high - and the 10-year T-Note traded below 3% yield - even as Obama announced a $1.7 trillion deficit.
Of all the cashflows in the world, says Spengler, lending to the world's longest-lasting government, presiding over its largest economy, has got to be the most reliable. He reminds us that lending to the United States in the '80s was a good investment. Then, the U.S. government cut the top marginal tax rate from 70% to 40% and generated enough growth to pay the interest and boost asset values.
But now, asset values are clearly going down while the top marginal rate is going up. Lending in the '80s was lending at high yields at the beginning of a major expansion to the strongest balance sheet on the planet. Now the situation is reversed; lenders earn the lowest yields in history...from the world's biggest debtor...at the beginning of a depression.
This bubble in U.S. public debt will end as badly as the last one in private debt. But for now, the worse things get, the better they are for the people who made them bad. Not only can the Americans save their banking system...they can save their leveraged households and wipe out their debts too. The United States financed its spending fest with others' money. Now, it finances its trip to rehab the same way - with other peoples' money.
Lenders can absolutely, positively be confident they will get their money back - with interest, on the appointed day. But it is money whose value the debtor determines for himself.
If only the Poles could do the same!
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