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Wednesday, December 10, 2008

Make ‘em squirm

Too big to fail, too fat to live. The automobile sector employs hundreds of thousands of people, and that's just the ones getting paid for not working. They can't get let 'em go under. Conversely, they're totally corrupted. They've spent hundreds of millions of dollars to avoid having to make more fuel efficient cars. They show up to beg for billions in private jets. There's something utterly wrong with the way they think. They think the problem is we're not buying enough cars and not that they're making too many. It's arrogance on a grand scale.

The Bush administration is prepared to give them the bare minimum of what they require to survive. GM has estimated they need 9 billion to get to March. Chrysler says they need 4 billion. Ford says they can get by but they'd really love some money anyway. So they're going to give them 15 billion. This is probably correct – if they gave them the 34 billion they asked for, it wouldn't force much change. By giving them as little as possible, it makes them address the model, not just the cash requirements. It also makes them come back and beg. They should have to report on their progress, on their cost improvements, on how they're going to address a 10 million car run rate instead of the artificial 16 million rate they're geared to.

Really, though, the auto industry suffers from massive overcapacity. They produce better cars than they did. And those cars last longer. This is a great example of the structural problems created by the credit bubble. As financing was so readily available, perfectly good cars were retired because it was so easy to just get another one. The used fleet is enormous and quite young and able. We don't need all the cars they produce and without the easy credit we can't possibly consume them. If they start the credit flowing there again, it will just continue to create unnecessary overcapacity there. This harkens back to the Depression – their business is geared towards a much higher volume than the economy requires due to shamefully lax credit conditions for so many years.

I'm trying to buy a car now. It's an interesting exercise. The car dealers are really suffering. They're still long a lot of 08s and the 09s are not moving either. I was offered an 09 for 1k under invoice price last week. The dealer is already freaking out that he's not going to be able to sell his 09s… and its still 2008. What about the dealers? Does that 15 billion dollar package do anything for them? Probably not. With auto sales down 40% there's probably more inventory than ever and with people hunkered down, the used market is the place they'll turn for bargains. New cars are in trouble till the existing fleet gets older and retired. At least, that's what should happen. Maybe they'll come up with some manipulative stimulus package to get people to keep buying new crap they don't need. That seems to be the overarching intention of the government intervention so far.

The auto executives will be back in 3 months and they ought to be. It'll be Obama's problem and we're probably better served having Obama deal with it versus having the current administration float them for any longer than they have to. These companies need to rationalize their business models, not just feed money into their bloated manufacturing lines and pension funds.

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