Good News for Greens

[from TNR.com:]

This is shaping up to be a week of decidedly good environmental news. First the EPA announced that it’s getting tough on mountaintop removal mining, and then, yesterday afternoon, the House passed an omnibus lands bill that creates the biggest expansion of the nation’s wilderness-preservation system since 1994. The bill, which has already passed the Senate and which Obama has promised to sign, sets aside 2.1 million acres of new wilderness in nine states.

--Rob Inglis (Flickr photo credit: erality)

Out tappin'...

Fiscal Food Poisoning

Pepto Bismol moment. When Chinese Premier Wen Jiabao thinks about his country's foreign-reserve holdings, indigestion sets in. You see, China holds upwards of $1.3 trillion in U.S. Treasury bonds, a sizable nestegg on the face of it. However, Wen sees a big problem ahead: the U.S. is about to flood the market with trillions in new debt to pay for takeovers, bailouts, buy-ins, and pump-ups--as well as to service and retire old debt. The Law of Supply and Demand suggests that China's dollar-denominated reserves are going to lose value. Indeed, they were losing value even as Wen addressed Friday's press conference marking the close of the National People’s Congress.

“We have lent a huge amount of money to the United States,” Wen reminded reporters. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.” Clearly, Wen derives little comfort from the motto "In God We Trust" splashed all over U.S. coinage and currency. He's a numbers man, and to him the U.S. budget looks like this:

Thanks to Jake at EconomicPic Data.

Year of the Ox

Light at the end of the tunnel? Things may be picking up for the Chinese six weeks into their new year, the Year of the Ox, which is historically a harbinger of prosperity. Minyanville's Prieur du Plessis points out that the Purchasing Managers' Index for China's manufacturers has strengthened over the past three months. In particular, the sub-index for new export orders jumped sharply in February. As the graph above shows, the PMI for new orders correlates closely with the Baltic Dry Index, which measures freight rates of iron ore and bulk goods. As goes the Baltic Dry Index, so goes the global economy.

Stock prices in China also reflect a renewed optimism, as the Shanghai Composite Index has risen 40% since the government announced a stimulus program in November. We should be cautious, however, about extrapolating expectations of economic growth in China to the Western economies. Eastern European nations are about to default on their sovereign debt, which will have a huge negative impact on the Eurozone banks investing heavily in that region. Meanwhile, back here in the good ol' U.S. of A., markets are reacting negatively to government stimulus plans. China, remember, is stimulating from a position of fiscal strength. The U.S. is not.

Déjà Dubya

Quick quiz. Relax. You know this one. Name a Republican, a D.C. outsider, elected President of the United States with less than 50% of the popular vote (love those third-party candidates). Within months of this man's inauguration, an attack took place on federal property here in America. The new President decided to punish the perpetrators by launching a war without a Congressional declaration--a war expected to last weeks, at most months.

Instead, the conflict dragged on for years. The U.S. had the advantage in military and economic might, but that seemed not to matter. As the stalemate continued, there was enormous collateral damage to civilian lives and property. And the losses of U.S. soldiers became almost too much to bear. The beleaguered President tightened security by curtailing civil liberties and wiretapping domestic communications. Those deemed enemies of the state were imprisoned without trial or due process.

The easy answer: George W. Bush. And if you missed that one (heck, you might have been too busy flipping condos to pay much attention to what Dubya was doing during his two terms), you get another chance because there is more than one correct answer. Abraham Lincoln also works. Whoa, you say. You mean that Mt. Rushmore dude who just turned 200 years old? The finski in my wallet? The Father--no, wait--The Uncle of Our Country?

Yup. Him. And while Lincoln to this day is revered by the majority of Americans, there are some who consider him unworthy of statuary prominence. Among Lincoln's detractors is Thomas DiLorenzo, author of The Real Lincoln (subtitle: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War). DiLorenzo argues that the American Civil War was not necessary to abolish slavery, nor was it originally intended to. It was fought, rather, for economic and political reasons.

Lincoln's vision of a strong central government transcending the rights of individual states (including the right to secede) is, depending on your viewpoint, either unconstitutional or post-constitutional. Either way, it appears at odds with the Jeffersonian ideal of a loose federation of relatively sovereign states. In DiLorenzo's words, it was "a blueprint for big government in America, with its income taxation, protectionism, central banking, internal revenue bureaucracy, military conscription, huge standing army, corporate welfare, and foreign policy meddling." It was a blueprint, moreover, advanced at gunpoint.

DiLorenzo has my ear for two reasons. One, we do have big government, about to get bigger, and it is killing us. Two, the Civil War was senseless and diabolically destructive and ought to have been avoided. The modern fascination for all things blue and gray has always escaped me--the monuments and museums, the re-enactments, the glory-glory-hallelujah! All of it. The Civil War was neanderthal in its prosecution (oops, sorry, all you cave guys), 19th-century weaponry welded to 17th-century tactics, static rows rather than mobile columns. It was a turkey shoot.

620,000 uniformed turkeys died on both sides. Tens of thousands more were horribly maimed. Both the Union and the Confederacy resorted to conscription to find more turkeys. In all, 8% of the white male population between the ages of 13 and 43, North and South combined, gave their lives. Census figures right here in Oxford County, Maine, show that it took decades to recover from the war and the economic decline that ensued.

They would still be shooting at each other if Lincoln had not adopted a different strategy: rape, pillage, and plunder. Generals Sheridan and Sherman--the "Phil and Bill" Show--were turned loose behind enemy lines to scorch the earth, victimizing noncombatants and essentially starving the Confederate Army. Had the Union lost and the President been apprehended, DiLorenzo surmises that Honest Abe would have been tried for war crimes. The punishment was the same then, Sadaam, as it is now.

Not everyone at the time thought that war was the answer. Published appeals for a peaceful resolution, however, were repressed by the Lincoln Administration. Newspapers editorializing against the war were prohibited from delivering through the U.S. mails. When private couriers were used instead, federal marshals were dispatched to confiscate the papers. Editors who persisted in criticizing the President were rounded up and detained in Lincoln's Gitmo, Fort Lafayette in New York Harbor. Printing presses (including those of the Bangor Democrat in Maine) were destroyed by feverish mobs while federal soldiers looked the other way. Lincoln even had one of his congressional critics, Clement Vallandigham of Ohio, tried by a military tribunal and deported. The Great Debater would allow no further debate.

To similar criticism, our 43rd President was blissfully indifferent and impervious. Bring it ON! Perhaps the Great Decider deserves a place among the Dakota Dudes.

Posturing, Not Problem-Solving

Evidence that Congress is part of the problem, rather than part of the solution, was on full display during Wednesday's hearing of the House Financial Services Committee. Invited to testify were the CEOs of eight of the nine mega-banks receiving a total of $125 billion in TARP money last October under the Treasury Department's Capital Purchase Program (CPP). Under intense scrutiny, the guest panelists submitted written testimony, then were subjected to a relentless grilling by irritated committee members.

I'll be frank, Barney. The proceedings were a disgrace. The lawmakers were not so much asking questions as blowing steam. Gathering and processing useful information is, um, way hard, requiring closed mouths and open minds. It is much more fun scoring clever sound-bites, first one to CNN or CNBC wins. Never mind the national interest; we gotta entertain the voters back home, make sure they have a target (other than us!) to whom they can vent their venom.

Congressmen who did actually read the written testimony (what? homework?) were reminded that most of these firms did not volunteer for the CPP. They were conscripted. In the words of Robert Kelly, CEO of The Bank of New York Mellon, "a key goal at the time was to have a range of institutions, including relatively healthy companies like [ours], participate in the Capital Purchase Program, removing any stigma that might be associated with accepting Treasury capital." The fear at the time was that a CPP beneficiary might be presumed by investors to be nearly bankrupt, thus inviting the kind of bank run that had brought down Lehman Brothers the month before. Treasury officials decided to hide the weak banks by mixing them into a larger flock of strong ones.

The strong ones signed on not because they needed the CPP, but out of patriotic duty. "We were not anticipating any injection of capital from the Treasury," Lloyd Blankfein, CEO of Goldman Sachs, testified. Indeed, Goldman had just raised over $10 billion in private capital--and could have raised more, as their common-stock offering was over-subscribed. A company like Goldman, acting in its own best interest, would have declined the CraPP and hunkered down for the inevitable industry shake-out. They would have emerged even more dominant than before. The word on the Street today is that Goldman, after Wednesday's circus on Capitol Hill, is more resolved than ever to give the government its money back, perhaps through a 40-million-share secondary offering.

The government needed Goldman more than Goldman needed the government. To show its appreciation, the Committee hauled in Blankfein and his Nifty Nine counterparts and scolded them over their compensation, practically guaranteeing that they will steer clear the next time they are needed.

Get Out the Alka-Seltzer

Uncle Sam is serving big portions, and investors may not have stomach enough. With $5.5 trillion of Treasury debt already out there, appetites may be sated. Still, the borrowing binge must continue, as new funds are needed for TARP, TALF, tofu, and whatever other menu options TurboTax Tim can cook up. “There is a lot of concern about who will be there at the end of the day to buy all this debt,” observes one bond trader, quoted at FT.com.

When supply begins to overwhelm demand, higher interest rates are needed to bring dealers back to the table. Since the end of December, the yield on ten-year notes has climbed from 2.08 to 2.95%--and the 30-year bond from 2.68 to 3.70%--in anticipation of the U.S. Treasury's quarterly auction of $67 billion in long-term securities this week. In normal times, a rise in rates from such a low level accompanies an acceleration in economic activity. Not so now, as the economy continues to hemorrhage jobs (almost 600,000 lost in January alone).

Beyond a certain point, rising rates are unwelcome, choking further growth. The tentative progress made recently in refinancing home mortgages would probably stall, paving the way for further erosion in housing prices. The Federal Reserve has signalled that it may step in as a buyer of last resort of U.S. bonds, but only if "such transactions would be particularly effective in improving conditions in private credit markets," according to a statement released last week. For now the Fed would prefer to direct its firepower at consumer loans and home mortgages.

As already pointed out, private banks, faced with the prospect of rolling over $2 trillion in debt over the next two years, will be competing with the U.S. Treasury for the support of bond investors. All of these refundings must be absorbed in order for the system to avoid collapse.

[update, 11:00 a.m.--]
The yield on the 10-year note has just gone through 3%.

Twenty Million Man March

China's Great Wall is visible from space. So, too, may be the stream of China's newly unemployed, all 20 million of them, returning to their homes in outlying provinces. With shrinking worldwide demand for Chinese manufactured goods, factories along the industrialized seaboard are cutting back. China's white-hot economic growth is cooling.

Government officials plan to do something about it. They know darn well that social stability depends on keeping young workers busy. Borrowing from the Western playbook, they are devising massive stimulus programs to keep and create jobs. Unlike their counterparts in the U.S. and Eurozone, they can actually afford those programs, having amassed a sizable trade surplus over the past two decades.

National stimulus spending in China will mean a redeployment of capital normally used to purchase U.S. Treasury bonds. This is bad news for the U.S., which needs to borrow to finance its own stimulus initiative. As bidders for American debt walk away, yields will inevitably rise. And rising interest rates will abort any economic recovery that might be forthcoming.

Also threatening to drive up interest rates are the borrowing needs of American and European banks. As the chart below illustrates, over $2 trillion in bank debt will mature by the end of 2010. That debt will have to be refinanced with new issuance, and in today's market that appears impossible. The risk of government takeovers of troubled banks is just too great. Private investors who last fall bought bank-issued hybrid bonds and preferred stock have gotten crushed. They will not make the same mistake twice.

Widespread defaults, both by corporations and by sovereign nations, are in our future. The collapsing debt will create a vortex too powerful for meaningful government intervention.

Maturing Bank Securities in 2009/10 (USD)

Source: UBS

The New Marathon Man

Rafael Nadal

2009 Australian Open Champion

Pacino Unavailable, Cuomo Takes Over

Need a lawyer? Andrew Cuomo (above) can fill the bill, although right at the moment he is busy protecting the People of the State of New York. Cuomo is outraged that Merrill Lynch, in its dying days as a stand-alone company, funneled billions in year-end bonuses to executives. The hand-outs cannot reasonably be linked to employee performance, as Merrill lost money hand over fist in 2008. It is likely that Merrill's white knight, Bank of America, would have reduced or even denied the bonuses had they been considered after the two firms merged officially on January 1.

Cuomo, as the state's attorney general, believes that he has standing because taxpayers' money was used to grease the merger. He also raises a second, more troubling issue: that material financial information may have been withheld from Bank of America shareholders when they met on December 5 to approve the merger. They voted with knowledge neither of the coming bonuses nor of Merrill's stupendous fourth-quarter loss. Such a lack of disclosure would be a violation of New York securities laws.

President Barack Obama calls the bonuses "shameful," and Senate Banking Committee Chairman Christopher Dodd (D-CT) promises his own investigation. But they have themselves to blame as well, having pushed all along for a federal bailout of the banking industry. This is what happens when you let foxes into the hen-house. Bank of America alone has benefitted from $45 billion in cash infusions and another $118 billion in loan guarantees. Now it looks like some of that dough will be spent in litigation. And if the Treasury officials who masterminded the BofA-Merrill merger are somehow implicated in the cover-up of pertinent financial information, who knows what the eventual price tag for taxpayers will be?

It Ain't Over Yet

She's back, with a cautious outlook for 2009. Meredith Whitney, analyst for Oppenheimer & Co., was dead on a year ago when she found several of Wall Street's biggest investment banks to be technically insolvent. Since she first sounded the alarm, Citigroup has been broken apart, Lehman Bros. has gone bankrupt, and Merrill Lynch would have gone bankrupt had it not been taken over by Bank of America. Now it is Bank of America that gets to go bankrupt, taking with it the tens of billions of bailout bucks. [TARP now stands for Taxpayers Are Rightfully Pissed.]

[update, February 18, 2009--]
She's gone...to start her own firm.

Take the Money and Run

Still want to release the rest of that TARP money? Maybe not, when you see what it is being used for. Last night word got out that Merrill Lynch dispensed year-end bonuses to employees a month earlier than usual--and just days before Bank of America closed on its ill-advised acquisition of the venerable investment banking firm. Sneaky? You bet.

For one thing, who at Merrill Lynch deserved a bonus of any kind? After all, this is a company that has recorded cumulative losses since July 1, 2007, of $39 billion, with a "B." In its last quarter as an independent company, Merrill went out with a $15 billion loss. Coincidentally (or not), $15 billion is the amount handed out in bonuses at Merrill during 2008. $25 million of it went for a ritzy apartment in the New York City building pictured above.

You see, last May Merrill announced the hiring of a dude named Peter Kraus, straight from Goldman Sachs, as an executive vice-president. Two weeks after he reported for work, the feds pushed Merrill and Bank of America into a shotgun wedding, ostensibly to save Merrill, which was loaded with gazillions of dollars worth of bad debt. In the new corporate structure, Kraus was the odd man out, and he was let go in October with a nifty parachute. In December his wife paid $37 million for the new Park Avenue address (for a tour, go here).

Surely you recall that the TARP legislation passed by Congress in October placed restrictions on beneficiary firms, including "a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the [Treasury] Secretary holds an equity or debt position in the financial institution" ("senior executive officer" defined as among the "top 5"). Kraus gets off because his pay package was negotiated before the TARP enactment. Moreover, it was Bank of America, not Merrill, that got TARP money, and technically Kraus was never an employee of Bank of America. So he walks.

Still, Merrill Lynch, for all intents and purposes, came under federal receivership on that fateful September day when Lehman Bros. went bankrupt. What appeared at the time to be a private-sector take-out was in reality choreographed and eventually bankrolled by the Treasury Secretary, Henry Paulson, formerly Chairman and CEO at Kraus's old firm, Goldman Sachs. Merrill's CEO, it must not be forgotten, was John Thain, formerly President and CFO at...um...Goldman. (Is there an echo in here?)

Thain made a bid for a $10 million-dollar bonus of his own, but Merrill's compensation committee, meeting three days after B of A shareholders approved the merger on December 5, would have none of it. Thain was able, however, to take care of some buddies, persuading the committee to accelerate employee bonuses adding up to between $3 and $4 billion. That mission accomplished, Thain then notified B of A executives of Merrill's Q4 loss.

Not at all amused, Bank of America announced Thain's resignation this afternoon. Meanwhile, New York Attorney General Andrew Cuomo is investigating the lame-duck bonus awards, and B of A CEO Ken Lewis must contend with shareholder suits questioning his acquiescence to the Merrill deal. Behold your tax dollars at work.

Good Money After Bad

In case you thought Congress knew what it was doing when it passed the Emergency Economic Stabilization Act last October, refer to the graphic above, which charts Bank of America's stock price over the past six months. Does that look like a company that has been fixed?

As you can see, the first hiccup came in mid-September, when Bank of America agreed to rescue Merrill Lynch. Traders bid the stock down because Bank of America was over-paying for Merrill's troubled assets. Relief came a week later when Congress (ta-dah!) first started talking about a bailout bill for the banks. Then the stock tanked again when the House initially voted the bailout down--one of those rare instances when lawmakers actually listened to their constituents. The Senate, listening instead to their cronies on Wall Street, revived the bill. The end result was the Troubled Asset Relief Program (TARP), whereby the U.S. Treasury would spend up to $700 billion buying up those nasty Merrill assets, among others.

Treasury officials soon realized that this was a program built to fail. If they started pricing distressed assets, banks across the land would have to mark down balance sheets, inviting the mother of all bank runs. So TARP morphed into something else, a program to inject liquidity directly into the banks through purchases of equity. That way, mark-to-myth accounting could be prolonged a while longer.

Bank of America got $25 billion from TARP, essentially buying shareholders' approval of the Merrill takeover at a December 5 meeting. (In the interest of price discovery, I had hoped that B of A shareholders would nix the deal, but of course company executives control shareholders as securely as they do Congressmen and -women.) After the shareholders' vote, management let on that Merrill's portfolio was even more toxic than originally thought. The hand went out for more TARP money.

Early today they got it. In addition to a $20 billion cash infusion, the U.S. Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans," according to a joint statement by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. It is becoming increasingly clear that the Merrill deal was orchestrated by government officials as a gun-to-head proposition for Bank of America, which should be running, not walking, away from the acquisition. "They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal," says Cassandra Toroian at Bell Rock Capital.

Now they are going under. Hours after the latest TARP announce- ment, Bank of America released its earnings statement for the fourth quarter. Ug-LEE. Instead of an expected profit, B of A reported a 48-cents-per-share loss, with billions in charge-offs for uncollectable debts and coming layoffs of 35,000 employees. Revenues lagged the consensus estimate by 25%, a miss so bad that one wonders if anybody knows anything in the financial sector these days. Or else the ones who know aren't telling. In its last earnings report as an independent entity, Merrill Lynch announced its own loss of $15 billion. All yours, Ken Lewis.

In a speech Tuesday in London, Fed Chairman Ben Bernanke called for “a comprehensive plan to stabilize the financial system and restore normal flows of credit." Specifically, he talked about creating a so-called bad bank to "purchase assets from financial institutions in exchange for cash and equity." Funny, I thought that was what TARP was supposed to be doing. Look again at the graph up top and see how well that's working.

[update, 1:00 p.m.--]
Despite Uncle Sam's helping hand, BAC is down another 15% in today's trading to $7 a share. With the dividend all but gone, there is no longer any reason to own the common stock. Taking down bank equity these days is like wading into the Gulf of Maine on New Year's Day. Think shrinkage.

TED Spread Back Below 1.00

The TED Spread hit a five-month low today, falling to 98 basis points. The TED Spread is a measure of the premium that banks pay to borrow money from each other compared to the yield on the 3-month U.S. Treasury Bill. The so-called London interbank offer rate (LIBOR) is currently at 1.09 percent. Subtract from LIBOR the yield on 3-month T-bills (an absurdly low 0.11 percent because of the recent flight to safety by bond investors), and you get the TED.

The TED averaged 12 basis points during the year leading up to the onset of the credit crisis in August 2007. So this economic health indicator still has a way to go before we can entertain thoughts of a meaningful recovery. But at least we are headed in the right direction.

Lies, Damn Lies, and Government Statistics

The U.S. Bureau of Labor Statistics tried to put the best possible face on Friday's employment data, noting in its monthly press release that the U.S. economy lost "only" 524,000 jobs in December. Thus, if you squint at the graph above, you might jump to the conclusion that we have turned a corner. After all, 524K is less than November's 584K. Happy days are here again!

Two things about these numbers. First, the number for November is an upward revision of the figure announced one month ago, which was 533K. Expect December's number to be revised higher as well. Second, the headline numbers from month to month are "seasonally adjusted," which is bureaucrats' lingo for "messed with." To get the actual number for December, you have to scroll down to the bottom of the report and click on Table B-1. Then look at the figures in the top row that are NOT seasonally adjusted. Whoops, the job loss was more like 954K.

So that corner that you thought you saw--fuhgeddaboudit. Later on Friday Mainers were treated to more bad news when NewPage Corp., owner of the coated-paper mill in Rumford, announced plans to take 150,000 tons of downtime in 2009's first quarter. The company's press release was not specific as to which mills--or how many employees--would be affected. But there can be little doubt that NewPage will be impacting the job figures from BLS for January and beyond.

Global Constipation

See those idle containers? Stacked dockside in Shanghai, they are a sign that worldwide demand for Chinese goods has slackened. This means that fewer euros and U.S. dollars are finding their way to China, which makes it harder for the Chinese to keep buying foreign debt. They may no longer want so much foreign debt. After all, they have a domestic stimulus package of their own to bankroll, to the tune of about $600 billion.

President-elect Barack Obama hopes to trump that with $800 billion worth of stimulus here in the U.S. Since the U.S. Treasury does not have $800 billion, it will have to borrow it somewhere. Normally our Chinese buddies would be good for that, but they are already stuffed with $1 trillion of American debt. If the Chinese are backing away, why are the prices of U.S. Treasury bonds surging? Who is doing the buying?

Let us hazard a guess here. Could it be that American banks--you know, the ones that have taken down all that TARP money--are lending it back to the federal government? If that is the case, taxpayers would be borrowing from themselves, with the banks getting a handling fee. These are the same banks that would have failed (and may yet still) without taxpayer assistance. Sounds pretty incestuous to me.

Uncle Sam is not the only borrower out there. Governments around the world are expected to issue $3 trillion in debt in 2009 to stimulate slowing economies--three times more than in 2008. Yesterday the German government tried to auction off €6 billion in 10-year bonds, but could get rid of only 87 percent. The Bundesbank had to eat the rest. If the same thing starts happening at Treasury auctions, prepare for the mother of all meltdowns.

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.