TED Spread Narrows, But Not Enough

We are making progress, but this spread needs to shrink another 100 basis points to return to where it was before credit markets started to tank in August 2007. With three-month Treasuries yielding close to zero, this remains an elusive target.

Sales of USED Cars Are No Better

With new-car sales dropping dramatically, we are left to wonder if value-conscious consumers are migrating in greater numbers to the used-car market instead. Not so, according to the chart above, which shows that the supply of used cars is outstripping demand. Wholesale used-vehicle prices fell by over 11% just in the two-month period from September 1 to October 31, as unit sales plunged by 16.5% in September and another 19.7% in October (source: Manheim Consulting).

The number of used cars sold annually in the U.S. far exceeds the number of new cars. In 2007 41.4 million used vehicles (passenger cars and light trucks) were sold, triple the number of new vehicles (13.7 million). So weakness in the used-car market is a good indicator of how the average American consumer is struggling. It is expected that in 2008 1.6 million repossessed vehicles will be added to the inventory of used cars for sale.

Defaults on auto loans will likely increase in 2009, as declining used-car prices make it more difficult for distressed borrowers to extricate themselves. For them, the most economic course of action comes to suspending payments and sparring with the repo man.

GM V-P Lutz: "Market Collapse"

U.S. Auto Sales, 1995-2008

Thanks to Alan Greenspan's easy money, American consumers glutted themselves on automobiles over a ten-year period. By 2006 there were 1.2 registered vehicles in the U.S. for every licensed driver. Think about that for a minute. If every licensed driver got in a car and hit the road at the same moment, that would still leave over 40 million cars sitting idle in garages and driveways. Going way out on a limb here, I will suggest that we need no new cars right now. Those parked cars represent at least a three-year supply.

That is not even counting unregistered new and pre-owned inventory on dealer lots, which are plumb full. In fact, finding a place to store new vehicles is getting to be a problem. "We are seeing cargo buildup at ports of entry on both coasts as well as at other inventory points such as factories and rail yards and dealerships," said Christopher Connor of Wallenius Wilhelmsen Logistics. Pretty soon unsold cars will be floating at sea on drifting container ships, alongside the ones with excess crude oil and the barges hauling solid waste to nowhere in particular.

As we exit 2008, we are selling cars in the U.S. at an annualized rate of 10.5 million. Most estimates for 2009 fall in the range of 11-12 million units. Robert Lutz, former product guru at Chrysler and now Vice-President for Global Product Development at General Motors, said in a Fox interview earlier this week that at these run rates, there is "no viability for the domestics, no viability for the Japanese, no viability for the Germans." The $15 billion now being offered by congressional Democrats to the Big Three is merely a "short-term liquidity measure" that "gets us to the next Administration." His characterization of 16.5 to 18 million units as "normal" may be a bit disingenuous. If that is what he thinks is necessary for Detroit's survival, get ready for some bankruptcies.

[update, December 12:]
GM announced today that it will reduce Q1 (2009) production at its North American plants by 250,000 units. The announcement came just ten days after it had projected Q1 volume of 600,000 units, which, if we do the math together, means a revised expectation of 350,000. A year ago GM was producing over 1 million units per quarter and losing money doing it. GM's 8.375 percent bonds due in July 2033 are now trading at 15 cents on the dollar, effectively yielding 57.6 percent--which tells you what bond traders think of GM's long-term prospects.

[update, December 22:]
Toyota announced today that it will lose money for the first time ever in its fiscal year ending March 31. Sales for the year are expected to decline 18% to 7.54 million units worldwide (2.17 million units in the U.S.). Last week Honda said it expected its U.S. car sales for the year to fall 14 per cent to 1.59m units. "When the American car market shrinks to 11m vehicles," points out Koji Endo, industry analyst at Credit Suisse, "no one is going to make money.”

[update, January 15, 2009:]
GM today cut its estimate for 2009 U.S. industrywide auto sales to 10.5 million units, which, if accurate, would be a "disaster," according to consultant John Casesa. “It’s a level of demand that is far below Detroit’s break-even point.” GM needs to submit a viability plan to the U.S. Treasury by March 31--or else give back the $13.4 billion in emergency loans released, not by Congress, but by the Bush Administration.

Wait, Don't Tell Me: A Vegetarian Stir-Fry?

Copyright 2008 The Financial Times

Wrong answer. Renminbi literally means "people's currency." Until July 2005 the renminbi, issued by the People's Bank of China, was worth about 12 cents American. This was a favorable exchange rate for the Chinese, who have been exporting like crazy to the rest of the world and have amassed a trade surplus with the U.S. that now exceeds a quarter of a trillion dollars annually, not exactly lunch money.

Since 2005 the renminbi has been allowed to float (slowly) against the dollar and has appreciated over 20% in three years (see graph). As far as the Bush Administration is concerned, that trend is our friend because it prices American-made goods more competitively. Chinese authorities, on the other hand, are not wild about it, and this week they seem to be signalling that they have had enough. On Monday the renminbi dropped out of a narrow trading band and fell by 0.73 per cent.

So most Americans are thinking, "Who cares? I don't like stir-fry anyway." They should care. Dubya cares. He's got his Treasury Secretary, Henry Paulson, over in Beijing right now trying to sweet-talk the Chinese into sticking with the "reform process." Truth be told, China is experiencing an economic slowdown just like everyone else, and displaced workers are rioting in the south. Government officials would like to keep the lid on, and a weakening currency is one way to do it.

If speculators (remember them?) smell blood in the water, things could quickly get out of control. A rapid devaluation of the renminbi is in no country's best interests. Among the domino consequences would be devaluations of other Asian currencies as well as protectionist measures in the West. To defend its currency, China would have to start dumping U.S. Treasuries, driving up interest rates and exacerbating our own recession. And if we can no longer borrow from the Chinese, how are we gonna pay for all these bailouts at home?

Let's face it, the Chinese are now calling the shots. They are choking on U.S. debt and do not want the U.S. trying to inflate its way out of the current credit crisis. Zhou Xiaochuan, the Governor of the People's Bank of China, lectured Paulson earlier today. “Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” Zhou said. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.” Translation: Don't expect us to clean up your mess. No sooner were the words out of his mouth than Zhou hopped on a plane to Washington, D.C., for a Group of Thirty (G-30) meeting, at which incoming Treasury Secretary Timothy Geithner will surely hear the same message.

My fellow Americans, get ready for a lower standard of living in the coming years.