Strange Times

If anyone doubts that we live in strange times, they only have to take a quick look around. The government owns a majority share of GM and a significant portion of Chrysler. Not to mention AIG and other financial firms. All the major banks are in hock to the Fed. Friday evenings bring a bank failure more often than not, and the FDIC recently shut one down mid-week, contrary to its policy of closing banks at 5 p.m. on the last business day of the week so to have time re-open on time on the next business day.

Chrysler, with the help of foreign governments, seems poised to emerge from bankruptcy and either sink or swim. The proof will come when they actually convince people to buy their cars. And we aren’t there yet. If the deal with Fiat closes (and that’s not a done deal yet), we’ll see whether a combination of two ailing companies can emerge significantly stronger than the sum of their present weakness.

GM has the same problems as Chrysler, but, since they’re an international company in a way that Chrysler isn’t, everything gets complicated.

What happens with GM China or GM Europe or GM South America? Listening to one news report after another today, I don’t really know. In fact, I don’t really understand which part of the multinational company is being restructured and where the other entities come in. If they do at all.

That uncertainty and confusion will likely make consumers even less confident about buying a GM product. In many ways, the burden of their complexity is their biggest liability.

Still, I have an eternal optimism that comes from somewhere I don’t know. Perhaps it’s faith, but I don’t see GM or Chrysler as religious issues.

Maybe it’s a fundamental faith in the financial system and its ability to heal itself.

Maybe I’m just naive or stupid, but I don’t think so.

I think it originates in the cynically jaded optimism that informs the rest of my life.

My best guess is that Chrysler and GM each have a 50/50 chance of surviving long enough to turn their respective companies around and that the failure of either one could easily pull the other down with it. And the undertow could become strong enough to suck Ford out to sea, as well.

Domestic auto sales hold the key to any turnaround: they must rebound to about 12 millions units annually. If not, any (and possibly all) of the Big 3 could end up liquidated.

Consumer confidence will have to increase to a level that people are willing to take on the significant personal debt incurred when buying a new car. As long as job security continues to be so widely tenuous, car sales will drop or remain stagnant at best. So as long as unemployment continues to rise, car sales will continue to slump.

The auto industry is inextricably tied to thousands of companies in this country and to many more around the world. As companies fail, their former employees will not be buying cars. Employees that fear their company might fail won’t be either. They will hoard cash, instead, and not buy anything that isn’t an immediate necessity. Many, if they have to buy a car, will buy a used one, a purchase that does the industry no good.

If President Obama’s administration succeeds in salvaging the parts of Chrysler and GM that are worth keeping and the companies survive, he will be a hero. If it fails, he will be reviled as arrogant and incompetent. It’s the biggest gamble Mr. Obama has entered into in his entire political life. The outcome will either confirm him as a saint or condemn him as a naïve meddler.

If he fails, many will forget or just plain not understand the enormity of the crisis that we are living through, and the blame game will go into overdrive.

I don’t have answers. I only have hope, and that’s a rare commodity these days.

Thanks to swift and decisive action by our president, we’ve averted what could have easily spiraled into a depression equal to or even worse than the 30’s. Catching companies in mid-air as they implode is no small feat.

I hope that the US government will get out of the car and financial services business as soon as possible. The idea of the Treasury owning big chunks GM and AIG, among others, gives me pause. I just don’t much like it. It is contrary to everything I believe is best practice.

When best practices fail, we have to turn to the next best thing. And that’s where we are now: the unfortunate owners of some highly risky companies.

Although it may take years to rebuild the financial system, reconstruction is going full speed ahead. Recovery will follow the reconstruction by a year or two.

Still, I don’t think the market will go to 13,000 anytime soon. I’m expecting 9,000 by year-end, and maybe 10,000 in a year and half. It was highly over-valued at 13,000 but is about as under-valued with it sitting at 8,700.

As I said, these are strange times. I am old enough to remember when gas went from about $0.33/gallon to over a dollar in what seemed like one night back in the 70’s. The effect was crippling and led to inflation and unemployment on just about every front. The car that had cost $10 to fill up suddenly took $30. The crushing effect of the sudden spike spared almost no one from financial hardship.

Times were bad, but today I’m more insulated from the vagaries of the economy than most people. Because of my job, I know the gory details of my company’s financial position, and I’m not concerned at this point. And I can still afford gas (what little we use), rent, food and any number of things I don’t really need. They’re great to have, but I don’t really need a bunch of them.

Granted, I would be surprised to see a raise this year, but I can live with having paychecks that don’t bounce and show up on time. Too many people don’t have that luxury: being able to sleep at night, knowing they’ll have a job for the foreseeable future.

In the midst of all the fear and uncertainty and hopelessness, I still have faith, the evidence of things not seen.