Blood on the Street
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Editor’s note: The Dow is having its worst June since the Great Depression.
The index is on the brink of a bear market, says Bloomberg. More subprime-related writedowns and stubbornly high crude oil prices are giving Mr Market a serious case of the jitters.
The US economic model is in decline, says Dan Denning. US companies are lumbering giants who just can’t compete as the world changes. They can’t make money making things. They can’t make money lending money. This is a big problem…
Dow Jones Has Worst June Since Great Depression, American Model in Decline
Dan Denning
The Dow Jones Industrials Index has had its worst June since the Great Depression. The index is down 9.4% this month, although that is not as bad as June 1930, when it fell 18%.
The Dow is only 30 major companies. But in two important ways it shows that the U.S. model for prosperity over the last 50 years is in big trouble. While this certainly affects Australia, it is not entirely bad news.
The first blow to the U.S. model is the decline of General Motors (NYSE: GM), a company that is, in many ways, the epitome of the large, vertically integrated, post-World War Two major U.S. corporation. GM has made more money in recent years as a finance company than a car company. That’s because it’s hard to make money making cars when labour is so much cheaper overseas… and when you are selling massive cars at just the time petrol is getting more expensive.
It’s hard to believe that it’s impossible for GM to make money. Toyota makes money making cars and wages in Japan are higher than wages in Mexico or China. But GM has many legacy costs and is itself a house – divided, half-ageing industrial manufacturer and half modern finance company. Both are endangered species. That’s why the stock fell to a 54-year low yesterday.
The other blow to the American model is seen in the 6% decline in Citigroup (NYSE: C) shares. Rome didn’t fall in a day either. But Citigroup is now at a ten-year low, facing billions more in losses, and literally looking to recapitalize its business (and transfer ownership and future earnings) to Sovereign Wealth Funds from the Middle East.
To review: big American firms can’t make money making things. Big American firms can’t make money lending money. Those are two formidable challenges for the rest of the year. In fact, they are two big challenges, full stop. Industrial economy: splat. Financial economy: splat. What’s left?
Of course there are some U.S. firms that can and will compete in the global economy. But what we’re pointing out again is how competitive the world has become. Nobody ever got rich consuming more than producing. For investors, this means broadening your horizons to the many stocks listed all over the globe that are not correlated to the U.S. story… and that are making things.
Fortunately, Aussies have a lot to choose from. The downside is that a global slowdown hurts everyone. The upside is that the growth in industrial production in the developing world is a perfect fit for Aussie resource producers.
The risks? As one reader put in an e-mail this morning, maybe we aren’t just facing Peak Oil or Peak Food or Peak Water, but Peak Man. That is, is it really possible that there are more people on this planet than its resources can support?
Our answer to that is no. But it’s a long answer, so you’ll have to wait for the rest of until Monday. As bad as the markets are, we suspect the sun will still come up tomorrow. Here’s hoping…
Dan Denning
The Daily Reckoning Australia
Source: Dow Jones Has Worst June Since Great Depression, American Model in Decline
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Tags: credit crisis, Dan Denning, Global Inflation, Global Recession, stagflation, subprime crisis, Us Inflation Rate, US recessionAbout the Author
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.