Business Insight Zone

Some historical perspective: things could be much worse.

The shortest honest answer: I don’t know . . . and neither does anybody else.

Ah, but of course I have a longer answer. Generally, I’m prone to think that the aces of Wall Street (and Sand Hill Road, etc.) have a better view than I do of these things. Holding this view is my stab at humility. But these days that view, ehh, continues to erode.

For today, here are two tidbits that convince me we have a good long way to go before we’re out of the woods.

First, from the New York Times:

Car Sales at 10-Year Low
By BILL VLASIC

Sales of new cars and trucks plunged to their lowest level in more than a decade in June, as high gas prices and a weak economy kept American consumers away from dealer showrooms.

With the drop last month of more than 18 percent, automakers now expect to sell well below 15 million new vehicles this year, far fewer than the norm this decade of more than 16 million vehicles a year.

Detroit automakers were hit hard. Ford Motor was down 28 percent in June, General Motors was off 18 percent, and Chrysler dropped 36 percent.

Despite its sharp decline, G.M’s results were better than expected, which industry analysts attributed to a sales blitz with offers of zero-interest, long-term financing deals. The cut-rate loans helped G.M. retain its historic position as the top-selling United States automaker over Toyota, whose sales fell 21 percent. . . .

A few simple notes about this.

1. If Toyota’s off 21 percent, you know the market is bad. (As the story reports, though, Honda is sitting pretty, at least relatively: its sales grew one percent in June.)
2. Chrysler dropped 36 percent. THIRTY-SIX parts out of a hundred, that is. Wow — and here I thought (and Bob Nardelli agreed) that private ownership might improve their fortunes. Maybe eventually this will prove true — but obviously it didn’t in June.
3. I don’t fault Vlasic for phrasing it this way, but GM’s results aren’t better than expected if it took fat zero-interest deals to goose them that high. Zero-interest financing, as David Gaffen of the Wall Street Journal rightly notes, “is the same as giving away money.” If you have to give away money to improve your results . . . you’re not really improving your results. Detroit’s reliance on the zero-interest gimmick is just one of the ways that it has papered over the awful fundamentals of its business during this decade.
4. Regarding the figure of 16 million cars per year, I’ll hand the floor over to Dave Livingston: “One of our favorite quotes suggests that the Industry can’t survive at 14 million cars for two years. Check out the chart — they did just fine for three decades between 13 - 14 mil !!! What misplaced fantasy of lease-financing, discount subsidies, and over-production of ancient models nobody really wanted made them think it was graven on stone?” Just so.

Second, here’s Gaffen again from the Wall Street Journal MarketBeat blog:

Write-Downs, Right Down to the Ground
Posted by David Gaffen

While the strain in the credit markets still falls short of the explosive environment of mid-March, the current malaise is in a sense, more depressing, as it can be attributed directly to broader U.S. economic problems.

[Gaffen talks about the decaying conditions in counterparty risk.]

Why the despair? Part of it has to do with the slow, steady wave of rising mortgage delinquencies, and the erosion of the value of assets backed by those mortgages. In addition, the loss by bond insurers MBIA Inc. and Ambac Financial Group Inc. of their key triple-A credit ratings has forced banks and brokerages to revalue the assets those firms backed. [. . .]

“Our expectation was that write-downs would be done by the second quarter but it looks like it’s going to be another quarter or two,” says Mr. Mikelic.

This particular technical problem — a bad environment from the perspective of credit-default swaps — comes on top of much simpler writedowns by Citigroup and . . . well, geez, a heck of a lot of writedowns.

This reminds us of at least a couple of things:

1. The current trouble in the financial markets reflects the fact that no one has had good visibility into the nature of the deals surrounding the real-estate bubble of the early 2000s. In many cases, we just don’t know how bad the damage is going to be until the responsible parties are able to tote it up . . .
2. . . . and in some cases, even those very parties can’t predict accurately how bad the damage is going to be in another six or twelve or eighteen months. And this applies doubly to analysts watching from the outside — thus Mr. Mikelic’s quote.

So, what ties these two industries — automobiles and finance — together?

• They’re both still in trouble.
• Their troubles are inextricably linked to the credit problems stemming from the meltdown of real-estate markets.
• The problems are structural, not superficial.
• It’s gonna be a while before they get fixed.

In my opinion.

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Related posts:

• “Fear of the unknown” creates all kinds of nightmares for the financial sector.
• Merrill’s NEW message: “If you thought our earlier writedown was bad…”
• What does the future hold for the Detroit car makers?

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(Photo from the Library of Congress.)

Category: Economics