It's Time

It's Time To Look At The Future

The automakers are facing a huge challenge. They have to get back to profitability and I don’t think that the public realize how tough this is going to be.  There are a number of things that need to be changed that have nothing to do with cars.

                Legacy costs are the costs for former employees that no longer work for the company. These folks have insurance and retirement costs that are a real drag on the profitability of the companies. Something on the order of $1800 per car is set aside to pay these costs. These costs are contract language agreements made years ago when the “Big Three” were the masters of the automotive universe; they were making money hand over fist, and needed to keep the plants open to keep feeding the public’s appetite for new cars. They had the money and didn’t see anything in the future that would keep them from being able to make the payments. They also had actuary tables that told them that their employees would live “X” number of years and would cost the company “Y” number of dollars. What the automakers didn’t think about was that medical advances would allow people to live so much longer, new and expensive medical procedures allowed retirees to live much longer than the system planned. As they lived longer and addressed ever more expensive medical procedures, the costs to the automakers started to skyrocket.  The pension payments went on years longer than they originally planned. Also, as automation increased, the automakers had excess labor to either retire out, layoff, or retrain, all expensive. The expenses were so high that the automakers set up a program that paid workers to just sit on the bench and do nothing; it was cheaper than the alternatives.

 A number of things happened that changed the equation and cut in to profits. One was the rise of foreign automakers; they built relatively inexpensive, dependable autos and cut in to Detroit’s market share. The new cars had better technologies and were better built; they lasted longer, cutting the number of new cars purchased. Because there were more cars on the market, the automakers had capacity that had to be kept busy, so they dropped profit margins to move cars. Sales dropped, profits on cars that were sold were dropped, and income dropped, less money for the car companies spend. Less money to spend met less innovation and less money for stockholders. This led to lower stock prices, lower capitalization, and it was harder to borrow money. I know this is simplified, but these are examples of how many different factors came together in a perfect storm. Now the government is going to start telling the automakers how to run their business.

The government wants fuel efficient, safe cars built. The automakers have tried this in the past, but the costs led to prices that the public didn’t want to pay. The future may get to a point that the numbers work out for the consumer, we’ll see. The government needs to realize that they are temporary managers of the companies and they have never run a car company. Decisions in this industry take years from the decision being made, to the vehicle being in the marketplace. We’ll see how it all comes out.

GOOD LUCK

 

 

It's Time To be Honest

I’m totally with the public; I’m enraged at the bonuses that the AIG guys are getting from the government bailout. I part company with the majority though in that I don’t hold the employees at fault, and I don’t think we should take away the money. The company and their employees sat down and wrote agreements well before the government put their money in the pot. The agreements were signed in a competitive environment, and apparently the company thought this was what it needed to pay to keep assets in place.  Do I think that these agreements should have been signed? No, I think bonuses should be based on the company being profitable, and the employee being part of that profit. Everyone should have “skin” in the game.

Now that we are faced with the payment of these bonuses, they should be paid. The employees were offered the money in return for certain conditions being met, and the employees met the conditions. Pay the money.  Going forward, the rules should be changed to reflect the realities of the current situation, and if employees decide to stay or go, so be it.

This is just the tip of the iceberg in the takeover of businesses by the Government. Before the first Federal monies went in to AIG, they should have made done due diligence and gone through the books of the company and addressed issues that they didn’t feel was proper. If they wanted to change the rules of the game, then it should have been addressed before the money went in. There have been three infusions of capital to the company, and no one said anything until the checks were ready to be cut.  The Government should be no different than any other investor, they should hold management responsible for making a profit, and they should back the company in being competitive.

One of the answers that really bother me is Congress’ proposal to tax away all the bonus money with a tax, after the fact, of up to 100% of the bonus. Are we really comfortable letting the Government pick  and choose what income they want to tax, and at what rate, after we’ve earned the money? Also, would you like to have your pay numbers splashed across the Nation’s newspapers? I know I would not.

If we were to start punishing people by taking away their pay because of the fact that the company wasn’t being run properly, we should start with every level of Government. Did Federal regulators do a competent job of protecting the economy and the people? If not, then maybe we should dock their pay. Congress passed laws that enabled this to happen; maybe they need a pay adjustment. State Government has run California to the brink of Bankruptcy, are we doing anything to punish them for this? Have we ever punished them for not passing a budget on time? If I consistently didn’t complete my work on time, I’d be given direction to improve, and if it didn’t happen, I’d probably be out of work. It seems important that we all be held to the same standards and be treated fairly. That’s all I’m asking for these people.

GOOD LUCK

 

It's Time To See The Good

   

I know the economy is rough, I’m out of work myself, but I’m really getting tired of everything being gloom and doom. I realize bad news sells newspapers, and discussing bad news is a lot more fun than talking about the pluses out there. There is good news out there, retail sales are up, housing sales are up and other economic indicators are turning up. Of course, this is from a pretty low level, but up is good, no matter what. We need to recognize the good things, the biggest issue facing this economy is consumer confidence, and we need to acknowledge and celebrate the good, it’ll help make things better as we move on.

When people talk about the current economic conditions they always compare it to the Great Depression, but when the figures for most indicators come out, they are the worst since the early 80’s, when Reagan took over from Carter. If you ask most people, I don’t think they remember the early 80’s as being that bad. Yes there were problems, but we didn’t talk about the Great Depression during those times.

You have heard several times that the Obama Administration doesn’t want to waste a crisis. I think that there may be truth in that statement, I think that this Administration wants to use this crisis as a permission slip to make a whole raft of changes in how America moves forward. I’m not saying that making these changes is bad or good, as with most things, there will be good and bad coming down the pike. My issue with this approach is that the Administration has a number of balls in the air, and it looks to me, like Congress and the American people don’t have the attention span to give all of these different strategies the attention that they demand. The American people are starting to get confused at all the stuff going on, and I’m afraid that that they will just shut down and pull out of the discussion, and with uncertainty comes closing your wallet and not spending any money.

It seems to me that the Administration needs to focus all its attention on restarting the economy, which needs to be the discussion point every day, on every cable talk show. Be the speaker Democrat or Republican we need to be talking about getting the economy back on its feet. Healthcare is important, as are a number of other issues, but everyone knows that there will be huge battles between the parties over these issues because this is a bedrock belief of both parties. The battle will be long and hard, and the final outcome will be a compromise, the important thing is that the situation is addressed and improved. The way things are today isn’t working; healthcare is becoming a huge expense. We are living longer; we continue to roll up health costs for a longer period of time. As we age we use much more expensive procedures to extend our lives, all of this is costing business and government huge amounts of money. We need to address this, but let’s fix the economy first.

               

It's Time We Suck It Up and Move Forward

was reading Joel Stein’s Time Magazine essay on the housing crisis. I listened and watched CNBC’s  Rick Santelli  rant and my first instinct is to agree with these folks. Yeah, I think its right that we shouldn’t bail out people who bought houses that they could no way afford, or bought houses as an investment, or were too unaware to read the fine print on the contract and know what was going to happen.  Yes, if I have a good loan, and I’m not selling during this downturn, I’m probably not going to have major issues and should be all right. Of course who knows what the future holds and we’ll see what’s going to happen.

The problem that I see with this approach is that it only looks at the housing crisis as an isolated segment of the economy, but that’s not the way it really comes out. The economists that talk about the financial crisis that we’re in, say it won’t be better until the housing crisis is solved. We can say, O.K., let the housing prices go down, let the market reach its natural level, then everything will be better. The problem with that is that the house mortgages were packaged up in to bonds and other financial instruments that were then sold to investors. The investors have walked away from the market because they have no idea what the final value of market instruments will be. This fear pulled the stock market down to levels not seen in years. The drop in the market has frozen investments in businesses, and it has frozen the loan market, because the banks have no idea what their real values are, they’re holding on to all the capital they can as they try to stay above water, that means business loans , real estate loans, construction loans, and consumer loans are almost nonexistent. That means that people aren’t making or building things, and they don’t need employees.

What all of this means is that my 401K is dropping day by day; my job went away because my customers were afraid to buy products for their stores, because their customers have closed their pockets and are hunkered down waiting for the next shoe to drop. So even though my house loan isn’t in trouble I’m in the soup with everyone else.

Let’s be honest, the correction of the housing market will probably take three to five years, at least ,to correct, and when prices  are dropping by 40-60% , my biggest asset, my house will probably be upside down for quite some time. This will have major effect on my retirement and my family’s future.

Taking all this in to account, I’m behind putting a floor under the housing market, I’m for the government clarifying the financial markets and getting the financial institutions on a stable footing, or closed down. If we can get these things done, people will begin to believe in the markets and will believe that the future makes sense again. We’ll all probably have less money than we had last year, but we’ll get it all back together and we’ll start again, as we have coming out of each correction in the past. So, while it galls me to help the irresponsible, greedy, and downright stupid, I have to swallow hard and agree to get things cleaned up. Of course, we could have avoided the whole thing, but that’s the subject for future blogs.

GOOD LUCK