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HomeGM: General Motors, Government Motors, or Going, Going, Gone Motors?
Posted by Larry Doyle on June 3rd, 2009 6:00 PM |
What will the future hold for GM? I believe there are three potential scenarios, with likely overlap in the short run but less overlap over the long haul. Let’s see if the real GM is behind:
Door #1: A Revitalized and Profitable General Motors
Behind this door, for GM to be a viable entity they need to address the deeply embedded culture and values within the organization. In order to effect change, the people of GM need to understand dramatically different expectations, define and live a new value structure, and execute.
Why do losing teams in professional sports change general managers and coaches? Culture. GM has a culture that allowed a failed financial framework to gain a foothold and ultimately crush the organization.
Without new management at the senior level and throughout the organization, how does the new culture – predicated on total discipline – get established?
Some may argue that Chrysler came out of bankruptcy with no cost to the taxpayer. That is a fair point. Time will tell, though, if the same can happen with GM.
In my opinion, Chrysler benefitted from the growth of the shadow banking system in the mid 1980s which increased leverage throughout the economy. Currently our economy and culture are headed in an opposite direction, that is, consumers and corporations are delevering and will likely continue to delever going forward. As such, I do not envision vehicle sales rebounding as strongly as GM needs to prosper.
Sense on Cents handicaps a vibrant General Motors as a longshot.
Door #2: A Bureaucratic “Government Motors”
Behind this door, I see an entity burdened by red tape, sluggish proceedings, and social agendas. Why?
Any organization is ultimately a reflection of the people and its ability to attract dynamic, entrepreneurial, intelligent leaders at all levels. With all due respect to those currently working at GM, I have a hard time believing this organiztion will be able to attract sufficient numbers of these leaders going forward. Why?
Leaders of that ilk do not tend to enjoy and thrive within an environment burdened by systems, processes, and hurdles inhibiting its success. With government ownership, those hurdles just got much higher.
What are the hurdles?
– How will success be measured? Will it be bottom line profitability? Market share? New vehicles? Social goals, such as environmentally efficient vehicles?
– Is it better to survive than thrive? Organizations in the private sector take prudent risks to drive growth. Will GM be risk averse in an attempt to maintain stability rather than pushing ahead in the spirit of venture capitalists?
Sense on Cents handicaps a bureaucratic Government Motors as a better than even money bet over the next 5 years.
Door #3: A “Going, Going, Gone Motors”
Behind this door, I see an entity that will ultimately utilize the $60 billion (and potentially more) government injection of equity capital as nothing more than an interim bridge loan.
Is the new GM on the other side of the bridge? No. Behind this door, GM will have been flushed down the river and out to sea unable to compete in the Brave New World.
The equity injection of government funds will actually be utilized as more of a stopgap to prevent the immediate dissolution of the company.
Robert Reich addresses this likelihood at Wall Street Pit.
Reich flies in the face of his Democratic Party leaders in asserting that the true motive of the government takeover of GM is ultimately:
The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise.
Reich views the GM situation from a macro standpoint and in the context of a shift in our economy and the world to new technologies. GM is not well positioned currently to adapt and thrive in that environment. Over and above that, GM will be downsizing and not in a position to invest the necessary human and financial capital to lead the company and the industry.
Although Reich’s assessment is not exactly a rosy picture, I give him credit for voicing his opinion and looking beyond the immediate landscape. While Reich sits in the comforts of academia, where are the political leaders who are willing to take these risks in making these statements. As Reich asserts:
US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.
So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.
So once again the American public is forced to deal with a correction based
upon the lapse of time. What do we know about time?
“Can you teach me about tomorrow
and all the pain and sorrow running free?
Cause tomorrow’s just another day
and I don’t believe in time
Time, why you punish me?”– Hootie & the Blowfish
LD
GM: A Question of Trust
Posted by Larry Doyle on June 2nd, 2009 8:00 AM |
“Trust me.”
Have you ever walked away from a discussion with a person–be it a boss, a business associate, a prospective partner–in which you wondered why they felt the need to make that statement?
In regard to trust, I feel much more comfortable when others assert, “you can trust him” rather than an individual asserting, “trust me.” Why? Very simply, trust is a virtue. As such, it is not given like a cheap bauble. Trust is earned. The foundation of our capitalist system is trust. When a basic trust is violated, regulators are compelled to act to rectify that violation.
Let’s enter the Brave New World of the Uncle Sam economy and address the credibility of this virtue known as trust.
CNBC recently aired a fabulous roundtable discussion, “The Future of Capitalism,” which touched on many of the economic issues currently debated. In the midst of the discussion, Mohamed El-Erian of Pimco strongly asserted that capitalism is ultimately a system based upon trust. Without trust, investors will not willingly commit capital to drive future economic growth.
As with any virtue, trust is not a one way street. While trust is earned, it needs to be rewarded so as to promote even greater trust. In so doing, the model of trust is displayed as the shining beacon for personal and professional relationships, whether between two people or amongst three hundred million.
Let’s get more specific. Investors who committed capital to General Motors in the form of equity took the greatest risk. In so doing, they positioned themselves to reap the greatest reward were the company to prosper. The company entered bankruptcy; the shareholders got wiped out. That is the way capitalism works. Or does it?
Investors who committed capital to General Motors in the form of senior debt took lesser risk. In so doing, they positioned themselves to receive a lower fixed return knowing if the company failed they would be first in line. They made this investment based upon trust in longstanding rules of bankruptcy proceedings. These investors include large institutions and thousands of individuals. Their trust was violated in the GM bankruptcy proceedings. They were not first in line. Junior creditors, specifically the UAW, received substantially better treatment. What happened? Uncle Sam rationalized this “violation of trust” as being in the common good of our country. Regrettably, this violation received no real debate in our court system and limited debate within our general media.
Uncle Sam, in the persons of Barack Obama and Tim Geithner, have put forth that the automotive situation is a special case; standard bankruptcy proceedings will continue to be practiced elsewhere. I would counter that we have a responsibility to future generations of investors to challenge Obama and team on this point. The future of capitalism itself rests on this debate.
The true costs of this violation will be borne by future iterations of unionized companies that can not easily access the capital markets. I personally would only commit capital to such an entity at a much higher rate of return knowing full well the risks I am taking are now greater given the precedent set via the Chrysler and GM bankruptcies.
Analysts, government officials, and others will continue to rationalize this violation of trust. In my opinion, this rationalization is akin to “the ends justifying the means.” That is a dangerous weapon.
This “question of trust” will certainly be an ongoing theme as we venture further into the Brave New World of the Uncle Sam economy. In the process of making investment decisions, we now need to more aggressively question just how much we trust our counterparties, especially Uncle Sam.
Please share your insights and thoughts so we can collectively be more diligent in navigating the economic landscape.
LD
The Future of America is Now
Posted by Larry Doyle on June 1st, 2009 3:29 PM |
Last week I wrote The Future of America to highlight a treatise put forth by Clinton administration Secretary of Labor Robert Reich. In that post, Reich put forth – and I totally concur – that our future economy will be known as the Technology Revolution. In order to participate and prosper in that revolution, one needs to be increasingly well educated.
Reich wastes no time in writing further on this topic and I am pleased to access his work at the highly regarded financial site, Wall Street Pit. Reich writes, The Future of Manufacturing, GM, and American Workers (Part II). In this piece, Reich reiterates the critically important need for education beyond the secondary level. I concur. Reich touches on the shortcomings and failures within the educational experience for lower-middle income and poorer families. He asserts:
America’s biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. Our universities are the envy of the world, and no other nation surpasses us in providing intellectual and creative experience within entire regions specializing in one or another kind of symbolic analytic work (LA for music and film, Silicon Valley for software and the Internet, greater Boston for bio-med engineering, and so on).
But we’re in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can’t get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy — in hotels, hospitals, restaurant chains, and big-box retailers — earning low wages with little or no benefits. Unions could help raise their wages by giving them more bargaining leverage. A higher minimum wage and larger Earned Income Tax Credit could help as well.
Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we’re doing now. At the least, every young person should have access to a year or two beyond high school, in order to gain a certificate attesting to their expertise in a particular area of technical competence. Technicians who install, upgrade, and service automated and computerized machinery — office technicians, auto technicians, computer technicians, environmental technicians — will be in ever-greater demand.
I totally agree with Reich’s assessment of our situation, but I think he otherwise falls woefully short in his analysis. Reich points toward the effects and outcomes of the educational output for the lower-middle income and poorer groups in our social construct. However, Reich immediately points toward the necessity for public intervention and public obligation in providing access to education beyond the secondary level.
I strongly believe the ultimate success – or the continued failure – for those involved in the education for our lower middle-income and poor has to start at home and with the family structure. Reich regrettably does not take this issue on and plays to his strong liberal base in the process.
I have attempted to highlight the horrendous urban graduation rates (50%) and excessively high rates of single parent families (currently 40% nationwide, with rates as high as 70% within the African American population) in my post from last Fall, Give a Man a Fish, Feed Him for a Day. I have also attempted to highlight a program supported by both private and public funding that addresses the academic, community, and family structure needed to promote success for lower income people. On the heels of Secretary of Education Arne Duncan visiting the inner city of Detroit to take the pulse of “the worst school system in the country” (a graduation rate of 25%!!!), I wrote Arne Duncan Visits Detroit; He Should Visit Domus.
I am in total agreement with Reich’s assessment of our global economy entering into a Technological Revolution. I am in total agreement with him on the need to focus on education. I think he falls woefully short in his analysis of the glaring holes in our urban settings, and the costs these holes are incurring on our social fabric and nation as a whole. Regrettably, not unlike the Obama administration remaining beholden to the UAW in the ongoing developments within the automotive industry, Reich is also beholden to the strong, liberal base within the teachers’ unions. As such, he lacks the courage to prescribe the necessary medication to address our national urban education plight. Our nation deserves better.
LD
Inflation, Deflation, or Stagflation?
Posted by Larry Doyle on June 1st, 2009 11:06 AM |
I am an eternal optimist and, as such, I never want to see people’s spirits waver. I encourage people not to allow the current economy to “deflate” their hopes for better days. By the same token, I am a pragmatist and caution people not to view the recent bounce in our equity markets as reason for an overly “inflated” sense of optimism. In this same spirit, though, we need sufficient optimism along with practical analysis to avoid the perils of “stagflation.” Let me expound.
The debate between analysts touting prospects for inflation versus deflation is ongoing. Those concerned with deflation highlight increasing levels of unemployment pressuring wages, falling asset valuations, and slack consumer demand. Those concerned with inflation point toward the unprecedented levels of liquidity injected into our system via all of the government programs. The inflation hawks maintain the economy merely needs a small spark and inflation will spread in an uncontrollable arson-like fashion.
I actually believe there is a very real chance we get developments from both camps leading to the scourge known as stagflation. How may this play out?
Many respected analysts are promoting the concept of a new “normal” economy. This scenario entails an economy operating with enormous government deficits, an elevated level of unemployment, and little to no shadow banking system (securitization of loans and other assets).
In this new “normal” economy, GDP may only eke out small positive growth given these heightened pressures. Pimco’s Mohamed El-Erian writes of A New Normal:
This reflects a growing realization that some of the recent abrupt changes to markets, households, institutions, and government policies are unlikely to be reversed in the next few years. Global growth will be subdued for a while and unemployment high; a heavy hand of government will be evident in several sectors; the core of the global system will be less cohesive and, with the magnet of the Anglo-Saxon model in retreat, finance will no longer be accorded a preeminent role in post-industrial economies. Moreover, the balance of risk will tilt over time toward higher sovereign risk, growing inflationary expectations and stagflation.
Even as we come out of this recession, our economy will run increased risks of slipping into another recession given the lack of cushion provided by a strong consumer, the burdens of heavy government debts, and inability to easily access credit.
El-Erian adds:
For the next 3–5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. (As one of our speakers put it, we have transitioned from a world where the private sector provided public goods to one where the public sector provides private goods.) It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and U.S., where many short-term policy imperatives materially conflict with medium-term ones.
As our global economy transitions to this new “normal,” I believe the likelihood of stagflation is quite high. For those who recall the perils of our economy in the early 1980s, stagflation is not a pretty picture. How does one manage investments and personal finances in an environment of stagflation?
Let’s deal with the component parts. Given sluggish growth, limited credit, and lessened opportunities, it is of paramount importance to cut expenses and minimize debt as much as possible. Servicing debt will be an ongoing challenge and increasingly problematic. Be proactive at this point in time in adjusting your finances to this reality.
Where will the inflation come from and how does one address it? In my opinion, the inflation “train” will arrive sooner than we think. Some of the savviest investors, including Financial Pacific Advisors’ Bob Rodriguez and noted Black Swan author Nassim Nicholas Taleb, are already positioning themselves for it. (The WSJ reports, Black Swan Fund Makes a Big Bet on Inflation).
How can people protect themselves from the inflation monster? Increase exposure to the following:
– precious metals and commodities
– critical infrastructure (power plants, agriculture, water, transportation)
– necessary life items (drugs, medicines, food)
– stronger and more fiscally prudent foreign markets
Decrease exposure if not get outright short
– longer maturity (5yr and and longer) Treasury bonds
This stagflation story will have many chapters and I will be writing extensively on it. Please share your thoughts, opinions, and recollections of the early 80s economy so we can all move forward most effectively in navigating the economic landscape.
LD
“Reflections and Outrage” by Robert Rodriguez: Strongly Recommended Reading
Posted by Larry Doyle on June 1st, 2009 5:00 AM |
Bob Rodriguez, Partner and Chief Executive Officer of First Pacific Advisors, delivered the keynote address the end of last week at the Morningstar Investment Management Conference.
Mr. Rodriguez is a 35 year veteran in the financial industry and a Morningstar Manager of the Year three times. In my humble opinion, there are none better in the industry today. As I referenced on NQR’s Sense on Cents with Larry Doyle last evening, I totally concur and feel strongly about Mr. Rodriguez’s powerful pearls of wisdom. I beseech you to read this address, save it, read it again, and share it with your colleagues!
Allow me to comment and highlight Mr. Rodriguez’s major focal points. Mr. Rodriguez addresses every major issue in our financial world today. He layers those issues on top of the potential social impact our country faces. Mr. Rodriguez is not bashful in highlighting that our day of reckoning is upon us. I have read this piece three different times. I am more impressed and in greater agreement with his assertions after each reading.
Rodriguez addresses the following:
1. the need for personal and professional discipline and integrity
2. he recounts an experience in which he was solicited to “pay to play” by his biggest account . . . he passed and never regretted it
3. he castigates the financial industry for its performance over the last few years (be mindful he delivered this speech to an audience of financial managers!!)
4. he talks about how and why he has made a major shift into energy stocks within his fund!!
5. the changing nature of the markets and the global economies.
6. he rails on Alan Greenspan
7. Rodriguez offers, “my trust has been severely shaken in the Federal Reserve, the Treasury, the Congress, and the Executive Branch of government…”
8. “the regulatory agencies and federal government were complicit in laying the groundwork that allowed many of these credit excesses to develop prior to this economic crisis.”
9. he addresses the horrendous business practices being promoted by GMAC.
10. the positive economic impact of the Stimulus will be offset by ongoing reduction in consumer spending.
11. “we have to be careful about what is meant by sacrifice . . . a democratic government is the only one in which those who vote for a tax can escape the obligation to pay for it.”
12. Rodriguez’s outlook on the market:
— we are currently experiencing a bear market rally
— corporate earnings will disappoint
— the stock market overall will be price constrained for TEN YEARS
— “I view the Treasury market as being in a bubble territory with foolish leaders at the helm.”
— the bulk of the economy’s credit problems are still to come as charge-offs on trillions of dollars in loans remain to be recognized.
Reflections and Outrage
by Mr. Robert Rodriguez
Partner and Chief Executive Officer First Pacific Advisors
MUST READ!!
LD
