China has used depressed commodities prices to stock up on long-term supplies of raw materials such as oil, copper, and iron.  And it’s used structural weakness in the U.S. financial system as justification for replacing the dollar as the world’s main reserve currency.

Now, the Red Dragon is looking to make headway on the highway by winning global market share in the automotive market while U.S. heavyweights spin out.

“We aren’t afraid of the financial crisis,” Zhou Fuquan, vice president of Geely Automobile Holdings Ltd. (PINK: GELYF), told Bloomberg News. “On the contrary, we hope it will penetrate even further as it has provided us with some opportunities.”

Geely is China’s biggest private automaker, but that isn’t exactly saying much. The company’s annual output is just 300,000 units, and its market share in China is a meager 3%. Still, Hangzhou- based Geely is determined to become a global player in the auto industry. It has ambitions to sell 2 million cars a year, including 1.3 million overseas – even though right now the company generates just 5% of its sales from abroad.

Of course, that’s why the financial crisis has been more of a financial opportunity for Geely. In March, Geely bought key assets from bankrupt Australian gearbox maker Drivetrain Systems International – the world’s second-largest maker of automatic transmissions.

“The economic downturn provides us with very good overseas acquisition opportunities,” Daniel Dai, vice president for international business at Geely, told China Daily. “We get the best technology with the best price.”

Geely has also set up a joint venture with Manganese Bronze Holdings PLC (MBH) to produce the TX4 London Taxi in Shanghai. MBH supplies taxis to Saudi Arabia, Turkey, and Spain as well, boosting Geely’s global presence.

For months, analysts have speculated that Geely will continue to its overseas expansion by launching a bid for Ford Motor Co.’s (NYSE: F) Volvo unit. Ford, which is the only “Big Three” auto company to not receive government aid, last December started looking to offload the Swedish car brand in an effort to pay off the debt it accrued when the company borrowed $23.5 billion in 2006.

Geely said on Sept. 9 that it might partner with a state-owned investment company to bid for Volvo. And earlier this week, the company announced that it would raise $334 million in funds from Goldman Sachs Group Inc. (NYSE: GS) through a convertible bond offering to “fund the capital expenditures of the group, potential acquisitions by the group and for general corporate purposes of the group.”

However, some analysts have pointed out that the Goldman capital falls well short of the roughly $2 billion Ford is asking for Volvo. They believe Geely instead will use the money to increase capacity and market the models it already has to buyers outside of its home market.

“The management is planning to expand its distribution channel to foreign countries,” Richard Li, research director at Celestial Asia Securities Holdings, told Forbes magazine. “This deal can provide this company enough funds so that the cash flow will be upgraded long term.”

And if nothing else, Goldman’s investment could be enough to instill investor confidence in the small Chinese carmaker.

Almost a year ago to the day Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) subsidiary MidAmerican Energy Holdings Co. agreed to pay roughly $230 million for a 9.89% stake in Chinese car and battery producer BYD Co. Ltd. Since then, BYD’s shares have jumped more than fivefold in that time.

“A big name investor certainly helps boost stock prices and brand recognition,” Li Lixi, a Northeast Securities Co. analyst in Shanghai, told Bloomberg. “Goldman’s investment in Geely may repeat the impact that [Warren] Buffett had on BYD.”

Geely’s Hong Kong shares yesterday (Wednesday) surged to their highest in more than nine years on the news of Goldman’s investment.

The Race to Build a Competitive Chinese Brand

Geely isn’t the only Chinese companies looking to use the financial crisis as an opportunity to broaden its global reach either. Other Chinese companies, including Beijing Automotive Industry Holdings Co. (BAIC), SAIC Motor Corp. Ltd., and Sichuan Tengzhong Heavy Industrial Machinery Co., are determined take the lead in what has become a race to be the first world-renowned Chinese automotive company.

“It takes decades to establish a recognized, renowned brand,” Jim Hossack, an industry analyst at researcher AutoPacific Inc., told Bloomberg. “China wants to do it much faster, perhaps within as little as five years.”

BAIC on Sept. 9 joined Koenigsegg Group in its bid for GM’s Saab division. Koenigsegg – backed by U.S. and Norwegian investors – in June agreed to buy Saab from GM, but struggled with financing the deal.

SAIC group, the parent of China’s largest automaker, had also considered coming to Koenigsegg’s aid in the Saab bid. But ultimately it was BAIC that came through with the $420 billion in financing needed to close the deal.

“This is a great opportunity for us to partner up with a brand like Saab that we believe has a great future with a new business plan and new ownership,” Wang Dazong, general manager of Beijing Auto, said in a statement posted on its Web site.

Koenigsegg and BAIC will form a joint venture to market Saab cars in China, where the brand has little-to-no presence. BAIC will also gain valuable technology from the Swedish car company.

“Chinese manufacturers are hoping to buy up technology that will help them catch up to world standards on both the product and the development side more quickly than they would on their own,” Christoph Stuermer, automotive analyst at IHS Global Insight Inc., told the Financial Times.

However, not every Chinese endeavor has been greeted with success. Shanghai-based SAIC in 2004 paid $500 million for 49% of Ssangyong Motor Co. just to watch the South Korean carmaker go into receivership in February. And Sichuan Tengzhong Heavy Industrial Machinery’s attempted takeover of GM’s Hummer brand is still being stalled by China’s central government.

“It’s not in coordination with our nation’s industrial policy,” Vice Minister of Commerce Chen Jian said after sending back Sichuan’s application to acquire the Hummer brand for $100 million.

Still, Chinese auto companies won’t be satisfied until they race ahead of their Western counterparts.

“I’m fighting for what’s in overseas automakers’ rice bowls,” Geely founder Li Shufu told Bloomberg. “I want to build Geely into a global first-tier automaker.”

Source: Financial Crisis Gives Chinese Car Companies a Chance to Get Up to Speed

Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.

But that new hope is destined to be short-lived.

It’s true that – in terms of value delivered for the money invested – “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.

Financial Crisis Fallout Reshapes Sector

Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.

But regional differences are already emerging.

In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.

(Prior to the global financial crisis and accompanying recession – which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles – the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)

It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.

Granted, India’s auto market – around 2.5 million cars and light trucks a year – is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.

Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.

That’s why Asia will become the new Detroit – the future center of the automaking world.

Gone For Good?

In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.

For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.

General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM (NYSE:GRM) will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.

The United States’ One “Better Idea”

Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from “Cash for Clunkers,” and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market – as the most-effective manufacturer of the large automobiles that Americans continue to prefer – no matter what the government tells Ford to do.

Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.

Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious – particularly in the emerging economies of Asia – that upscale portion of the auto market should continue to be strong.

Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.

But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.

The New Leaders

For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano” car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.

Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.

Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.

The bottom line: Tata and its India-based competitors – Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) – as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.

By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.

Source: Why Asia Will Supplant Detroit as the Global Center of the Auto Industry

Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on “Four Questions about the Financial Crisis” this afternoon.

Hmmm…he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions…

CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing.”

The ‘signs’ he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles.

“A leveling out of economic activity is the first step toward recovery,” said Big Ben. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month.

However, it turns out that retail numbers pulled a fast one – and showed a drop in sales for last month.

Two months of gains has boosted hopes that March’s numbers would follow suit, building a rebound in consumer spending.

But, not so much. The Commerce Department showed that March’s retail sales were down for almost every type of store except necessities, such as food and drugs.

MarketWatch reports: “Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008.

“Economist David Rosenberg of (NYSE:BAC) Bank of America’s Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter.”

“The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.”

In other words…outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back…and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out…make do with last year’s summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer…just in case.

This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We’ll have to wait and see.

Now, we turn to Addison, with a report on what news has investors in a tizzy:

“The U.S. stock market dodged another bullet yesterday,” writes Addison in today’s issue of The 5 Min. Forecast. “Goldman Sachs (NYSE:GS) announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

“That’s $3.39 a share, more than twice as much as the market had anticipated.

“Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009.

“The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains.

“Curious how the markets work, though, isn’t it?

“In reality, Goldman benefited from a quirk in its new reporting schedule. ‘Its fourth quarter ended in November 2008,’ reports the Financial Times, ‘but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.’

“So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

“And since their stock is so ‘strong,’ Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

“Oh boy, ‘buyer beware,’ warns our short side specialist Dan Amoss. ‘The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.’

“‘Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.’”

And back to Kate, reporting from a blustery Baltimore:

“I hear that the government’s turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years,” writes our good buddy Chuck Butler in today’s issue of The Daily Pfennig. “And we all know what happens when consumers get money in their hands: they spend it!”

Very true…but will the American consumer have anywhere left to spend their tax return?

A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat.

The report, done by New York-based real estate research firm Reis, shows that “In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.”

The report goes on to show that “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

Are we still surprised at the disappointing March retail figures?

Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999.

Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31.

But as Addison pointed out, above, Goldman did benefit from a ‘quirk’ in their new reporting schedule.

“Leave it to the clever boys at Goldman Sachs to turn dross into gold,” says our friend Barry Ritholtz in a post on his blog, The Big Picture today.

“The bulk of their profits had come from AIG transfer payments – the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. ‘For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.’”

Wondering how this is possible? Well…that’s where the beneficial ‘quirk’ comes into play…

From the NYT:

“Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

“The orphan month featured – surprise – lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

“Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?”

“Truly astounding,” writes Barry, “the word Chutzpah simply does not do it justice.”

Source: U.S. Retail Figures Pull a Fast One

On Tuesday, President Obama signed the $787 billion bailout plan. In a Churchilian moment, he admitted that the end of the war on depression was not at hand, and more sacrifices would have to be made, but “today does mark the beginning of the end.”

At least, he has the whole world behind him. America’s mayors, for example have enlisted en masse. Heeding a call from the White House, they came up with 18,750 projects that are “shovel ready,” meaning, they can begin digging holes within hours after the cash hits their bank accounts. Las Vegas, for example, said it could use $2 million to put in more neon signs. Shreveport, Louisiana, said that if had $6 million, it would put in three new aquatic centers with slides.

Whee! These are the worst of times for many… but they are best of times for some. There is a bull market in claptrap; politicians haven’t had it so good since the New Deal.

In France, the Sarkozy government recently announced a plan to bailout the nation’s auto industry. The government will lend 9 billion euros to Renault, PSA (Peugeot) and their related finance companies. In return, the state hopes to collect interest and requires that the companies continue to employ French voters. Slovakian autoworkers don’t vote in French elections; they can go to Hell. In England, Gordon Brown announced yet another bank bailout this week – 37 billion pounds, he says, will provide a ‘rock of stability’ for the system. Traditionally, gold provides solidity to a banking system. But Gordon Brown, when he was Chancellor of the Exchequer, sold off tons of British gold at barely a quarter of today’s price.

When the going was good, people believed things that weren’t true. Now, they still believe things aren’t true – but in the opposite direction. Where they once believed they could get richer, eternally, by squandering money they hadn’t earned, now, they look to the government to do it.

Depressions are so rare that there is no statistically reliable evidence about them. They are like women who rotate their husbands’ tires while preparing their dinners; they are so infrequently encountered that there is no point in making generalizations or trying to form them up into a baseball team. Each one is sui generis.

Hardly anyone is still alive who remembers the depression of the ‘30s or what the feds’ bailouts wrought. Here at the Daily Reckoning, we have already given our version of the story. A depression is not a pause, we recall explaining, it a time when debt is squeezed out of a saturated economy. Bailouts, handouts, and government stimuli actually retard the process.

But ours is a minority view. Only that great economist Fidel Castro seems to agree with us. The geniuses can’t help, he says; structural change is needed:

“Even if Kant, Plato and Aristotle were resurrected together with the late brilliant economist John Kenneth Galbraight [sic], they would neither be capable of solving the more frequent and deeper antagonistic contradictions of the system.”

But the burden of proof is on us. Which is too bad; Fidel is retired and we have no proof of anything. All we can do is marvel, and guffaw, at things so absurd they take our breath away.

In the bubble era people spent too much money they didn’t have on too many things they really didn’t need. Then came the credit crunch. Now, they hallucinate that if they spend even more money they don’t have, on things they hardly even want, they will get what they really need – jobs, growth and inflation. Even respected economists say they believe in miracles. Resources have been made “idle” by the depression, they claim, like strong backs in an unemployment line. Government spending is just putting them to work. By this reasoning, things that were too expensive even in the boom years miraculously become cheap at any price. And things that weren’t worth spending money on in the fat years become miraculously indispensable in the lean ones. It is like a man who didn’t care for caviar when he had a good job; now that he is unemployed, he must have it every night. They are only taking up ‘idle resources’ that would otherwise go to waste, explain the miracle workers. In their minds, an umbrella is useless unless it is actually raining.

But sometimes capital needs to take a break and hang on coat-rack. Every banker, householder and investor needs a reserve against mistakes. Now, more than ever. Until the crisis is over… and a new economy takes shape… any investment of labour or capital is likely be another mistake.

In normal times, residents of Chula Vista, CA, turned up their noses at spending a half a million on a public park for dogs. But now that the hard times are here, a place where dogs can run off the leash seems a fitting a use for money the town doesn’t have. In the best of times, Lincoln Nebraska was in no position to spend $3 million on an “environmentally friendly clubhouse for a municipal golf course.” But cometh the worst of times, and the golfers suddenly deserve not just a clubhouse, but one that is pals with nature.

Things we used to take for absurd we now take for granted. But it is just one of the wonders of the human race that it is capable of believing anything. The sunny years have passed. Now, there are storm clouds on every horizon. And instead of protecting its precious “idle” reserves… the government turns them into dog runs.

Source: Ready for the Shovels

Oil slipped slightly – down to $39. And gold lost $21. While some may see the drop in the gold price as disheartening, we see it as an opportunity to grab some more of the precious metal while the price is relatively low.

The Banque de France says the country’s GDP is falling. It’s expected to walk backwards by about 1% this year.

The Sarkozy government announced a $12 billion program to support France’s auto industry. “We’ll give you money,” he said, “but you’ve got to promise not to cut salaries or close down.”

Nissan, 40% owned by Renault, announced it was cutting 20,000 jobs worldwide – 9% of its workforce.

Japan is facing an “unimaginable” contraction, its central bank’s chief economist warned yesterday. Orders are drying up…production is falling off…and consumers can’t seem to find anything they want to buy. Industrial production in Japan fell a record 9.6% in December. The country is looking at an annual GDP decline of 1.7%.

Growth is collapsing throughout all of Asia. Singapore, for example, went from healthy 5.3% growth last year to minus 2.4% this year. India and China are still projecting decent rates of growth – though significantly below their highs. We’ll see how long that growth continues…

And poor Latvia. Its economy is not just walking backward…it’s running. Today’s Financial Times tells us that output is falling there too at a depression rate of more than 10% per year.

But the big news yesterday was the sell-off in the bond market.

“All eyes on sudden spike in US Treasury yields,” says the headline in the Financial Times.

The yield on the U.S. 10-year note rose above 3% for the first time in three months. The two-year note, meanwhile, moved above 1% yield. What does it mean?

We are bearish on U.S. government paper – in all its forms. And here’s why. The latest estimate from Goldman Sachs puts US government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They’re switching to short term paper – bills and notes, which are less vulnerable to inflation and currency declines. And they’re pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40%…a huge drop.

Either one of two things will happen. If the government funds its deficits honestly – by borrowing from willing lenders – this huge extra demand for credit will force up yields…thereby lowering bond prices. Or, if the government resorts to “monetizing the debt” – that is, funding its debt with printing press money – investors will flee bonds, in fear of higher inflation.

Either way, it will be bad news for bond prices.

Remember, we are only in the Boondoggle Stage of the crisis. Using the collapsing economy as an excuse to waste money, the pols are having the time of their lives. Does your community need a bridge? A new drainage system? A shooting range for blind people? A study of the mating habits of fire ants (how do they get together without getting burnt?) Even in the best of times, politicians have trouble saying ‘no.’ Now, ‘yes’ is the answer to every request.

What strange madness is this? Why would anyone think the economy will be made better off by squandering money now on projects that were deemed unworthy or unaffordable only a few months ago? The country got into trouble because people squandered too much money; now they think they will get out of trouble by letting the government squander money. But we’ll have to wonder about that later. Now, we’re just trying to keep up with the torrent of boondoggles, bailouts and bunkum.

Let’s see, Bloomberg reports that about $3 trillion has been spent fighting the downturn in the last two years by the United States of America. We pass over the issue of whether this has done any good, and stick to our figures… Another $5.7 trillion has been pledged. Plus, this latest Obama Bailout will cost about a trillion more.

Hmmm…a trillion here…a trillion there…pretty soon you’re talking about real money.

“US Taxpayers Risk $9.7 Trillion on Bailout Programs,” Bloomberg figures, or about two-thirds the entire national GDP.

Hmmm….that’s about as much as the total burden of household mortgages. In other words, instead of all these boondoggles, bailouts and bunkum, Congress could have just paid off everyone’s mortgage.

*** Inflation is now only a problem because there isn’t any. In the United States, the consumer price index crested at nearly 6% last year. Now, it appears to be headed down to zero…and perhaps below. That is what the feds are desperate to avoid. When consumer prices fall, consumers become obsessively frugal. They know that if they just wait, they’ll be able to get what they want at a lower price. And then, why not wait a little longer…and get the item even cheaper still? This “propensity to save,” as economists call it, becomes self-reinforcing. As consumers stop spending, lower demand causes prices to fall further…which incites consumers to dilly dally even more…which causes prices to sink again.

That is the Japanese-style ‘deflationary cycle’ that gives Ben Bernanke a nightmare.

But we explained yesterday, there’s not much he can do about it – at least nothing honest. Rupert Murdoch says the financial crisis has caused $50 trillion in wealth to vanish. The feds have put back only $3 trillion (arguably) so far. Just looking at the numbers, it doesn’t seem as though prices will be rising anytime soon. For every dollar the feds put into the system, $17 disappears.

What’s a fellow to do? The only way out, as near as we can see, is the road taken by Gideon Gono. “Monetizing the debt”…“quantitative easing”…“printing press money” – it will no doubt go by a number of different euphemisms and code words. It’s what happens when the Fed buys U.S. Treasury debt directly. For this purpose, it simply creates a ledger transaction…effectively adding to the money supply.

But even printing money does not automatically and immediately cause consumer price inflation. According to classical economic theory, the shelves must be cleared and the excess capacity must be re-absorbed before prices will rise. That could take a very long time. But we’re not sure it works like that. If money were suddenly dropped from helicopters, as Ben Bernanke once pledged to do, merchants probably wouldn’t wait for their inventory to disappear before raising prices. They’d be concerned that there were giving away something that was valuable in exchange for something that was not.

When this kind of inflation happens – perhaps worthy of the adjectival modifier ‘hyper’ – it can happen very suddenly, and very violently. That is why we suggest selling U.S. paper now…even if it turns out to be very early.

*** Drought…fires… plagues…

The poor Australians are battling blazes all over Victoria province. The total cost is climbing up towards 200 dead…and half a billion Australian dollars worth of property damage.

There’s a terrible drought in China too…the worst in 50 years. Peking has put up 10 million euros to help the peasants.

Chris Mayer sends this note:

“China is in the midst of its worst drought since 1951. Beijing has gone 100 days without rain. Nearly one-fifth of China’s wheat harvest is at risk and over 1.8 million head of livestock are short of water. Over 3.7 million people face water shortages, as do nearly 23 million acres of farmland. Rivers and lakes are drying up and farmers are drilling deeper than ever to reach falling water tables.

“As is the way with these things, it couldn’t happen at a worse time. The economy is clearly slumping along with the rest of the world. Unemployment is on the rise. And now food prices may also climb. Not a good combination for a country that already has a fair amount of unrest bubbling just below the surface.

“Water mismanagement has long been a problem in China. Wasteful irrigation is one problem. So is pollution and mass urbanization to the cities, particularly in the more industrialized – but water-parched – areas in the north.

“The government knows this and has swung into action with a number of emergency measures, including financial aid for farmers. One of these measures also increases the subsidies to pay for irrigation projects.

“Over the next several years, I think irrigation equipment is going to play an ever-larger role in helping reduce water use. Water problems will get only worse before they get better. The companies that make the tools and have the expertise to solve those problems will be very valuable. And so will their shares.”

*** And from Argentina comes bad news. Not only is the country parched, the drought seems to be centered on your editor’s farm.

“It’s dry…very dry…” says the farm manager. “We got almost no rain this season. The reservoirs are empty. There’s no way to keep the cattle. There’s nothing for them to eat. We just have sell as many of them as we can.”

So far, the cattle business has not been a big winner for us.

“When the grass is too dry and too short,” the farm manager explained, “the cattle pick up a lot of dirt and sand when they eat. The sand wears down their teeth, so even if they had good grass, they wouldn’t be able to put on much weight. And since they can’t find much to eat and can’t eat it very well, they don’t have the energy to go very far looking for better grass. It’s a vicious circle. But that’s what we’ve got up here…a difficult place to raise cattle.”

Meanwhile, here in Europe, there’s water everywhere. Fields are flooded in England. In France, it’s been raining for days.

Source: Bad News for Bond Prices

Speaking at a Sunday news conference and on”Meet the Press,” Obama didn’t specify projects beyond roads, bridges and”other traditional infrastructure.” Nor could he give a price tag. But just his mention of the infrastructure projects was enough to kick start the markets Monday.

On”Meet the Press,” Obama said his transition team and advisers are”busy working, crunching the numbers, looking at the macroeconomic data to make a determination as to what the size and the scope of the economic recovery plan needs to be. But it is going to be substantial,” Bloomberg reported.

Obama also referred to his meeting with U.S. governors last week, saying that many job-producing state projects are”shovel ready.”

The auto industry, Obama said, had made”repeated, strategic mistakes,” but allowing it to go under would only add to our 12-month-running recession and the millions of jobs it’s taken from the U.S. economy.

Obama also said that his economic team is coming up with solutions to the housing crisis.

If there’s a common thread between his opinions on what to do with each troubled industry, it’s that Obama is trying to create a broad economic package that both creates jobs and fills in the holes where the U.S. economy had been falling short – as opposed to writing a check to taxpayers and hoping it adds to the gross domestic product (GDP).

While he expects to deliver change, it might take another year for it to show, statistically speaking, the Chicago Tribune reported.

“I am absolutely confident that if we take the right steps over the coming months, that not only can we get the economy back on track, but we can emerge leaner, meaner and ultimately more competitive and more prosperous,” Obama said at his news conference, The New York Times reported.

Source: Obama’s Talk of Infrastructure Investment Moves Monday Markets

“The definition of stupidity is doing the same thing over and over again and expecting different results,” said Albert Einstein.

The best thing that could happen to the auto industry is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible.

So, why in the world is management siding with the unions in their appeal to Congress?

Because under bankruptcy protection, management becomes accountable to the court, many of their perks and benefits would be curtailed, and they could, heaven forbid, even lose their jobs.

The auto industry, its unions and allies are therefore quick to point out that they, too, are “too big to fail” (have we heard that before?), that the American economy would not recover from the job losses and the economic impact of failures that would have far-reaching implications.

The Center for Automotive Research (CAR) has just released a comprehensive study on the impact of a 100% failure of the Big Three in the U.S.:

• In the first year, the U.S. economy would lose 3 million jobs (about nine additional jobs for each auto worker that is laid off). It would lose another 2.5 million in year two and 1.8 million in year three.
• U.S. personal income would decline by over $150 billion in the first year and another $250 billion in the next two years.
• Our government would also lose $60 billion in 2009 and almost another $100 billion in the next two years.
• We would lose a piece of Americana (those of you who are nostalgic for the good ol’ days might enjoy the following video clip: http://www.youtube.com/watch?v=KGZvQoPxhNs)

I agree – it poses a very grim scenario.

In fact, Senate Bill Sec. 402 seeks to “(C) preserve and promote the jobs of 355,000 workers in the United States directly employed by the auto industry and an additional 4,500,000 workers in the United States employed in related industries; and (D) safeguards the ability of the domestic automobile industry to provide retirement health care benefits for 1,000,000 retirees and their spouses and dependents.”

Obviously, the $25 billion approved by Congress on September 24, 2008 is already falling short. It is clearly not enough to deal with a problem of that scale and, the car makers lament, needs to be doubled immediately. But in case you wonder, the industry and its unions do reserve the right to come back for more…

So let’s review some of CAR’s assertions in light of what we know:

Auto sales are forecast to decline from 16.1 million in 2007 to 14.9 million in 2008. 2009 can be expected to be much worse. Spending on capital goods such as cars and trucks will be affected long-term as a result of excessive consumer debt, tighter credit terms, higher unemployment, and a serious recession (or depression).

If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly. This is basic economics so far.

Now comes our choice: On the one hand, we have some highly productive global manufacturers that produce fuel-efficient vehicles the U.S. consumer wants and can afford to buy. On the other hand, we have three inefficient companies that produce unattractive gas guzzlers and are plagued with high legacy costs and liabilities (Big Three workers make $73/hr, Toyota’s $48, the average manufacturing worker makes $32). Why should U.S. taxpayers subsidize these losers? Is it so that they can continue to compete unsuccessfully with productive manufacturers and avoid any dramatic (and much-needed) changes in their way of doing business?

In light of the fact that throwing good money after bad almost never works out, I think the U.S. taxpayers should not bail out GM, Ford, and Chrysler. A common-sense alternative would be to save our tax dollars and allow the most efficient manufacturers to gain market share and hire more workers. Ultimately the U.S. market will post sales of 12 to 15 million cars annually. If it takes one, two, or three million fewer workers to produce the cars U.S. consumers can afford to buy, so be it.

A farmer with one modern wheat combine can do the job of a thousand 18th century farm hands. That is a lot of unemployed farm workers, yet nobody demands to return to those good old days. Productivity and efficiency do result in job losses and dislocation, but eventually progress creates new jobs and additional wealth.

Whether a Honda, GM, Toyota, Ford, Hyundai, or VW, currently each and every car still requires one engine and four wheels. Each manufacturer uses basically the same domestic and overseas suppliers, and each has dealers selling its cars (most dealers represent a broad spectrum of brands and will sell whatever car the market wants). The argument that GM closing its doors would result in the loss of 2 million jobs or more is ludicrous as the competitors that pick up the slack will hire workers and buy more from their suppliers. While that may not be good for Detroit, it may be good for the Carolinas or Tennessee.

Simply, business shifting from certain players in the industry to others is called competition. Capitalism and competition are the forces that have made the U.S. the most successful economy for many decades. Granted, it is a harsh reality, but it works, and so far no other system has come even close to creating as much wealth for most of its agents.

Anyone who follows our flagship newsletter, The Casey Report, knows our stance: we hope, most likely in vain, that the new administration will finally come to the realization that no entity is too big to fail. Besides, bankruptcy reorganizations have a much greater chance of success with larger corporations, as they usually have lots of assets to dispose of — assets that can be sold cheaply to new enterprises, which are then able to build businesses on a much sounder basis. In the process, there is innovation and progress.

The choice is clear: Either the Obama administration can continue on the path of nationalizing entire segments of our economy (so far banking, insurance, auto – next, health, airlines…) and run them into the ground. Or it can let poorly managed companies fail, thereby making it easy for successful businesses and new entrepreneurs to buy the assets of these organizations. Step back and let the markets work their magic instead of blaming the market for ills that were created by special interests and poorly designed regulations.

Source: Should the Big Three Be Allowed to Fail?

Gold surged on Monday, helped by higher oil prices, a lower dollar and investor concern about inflationary pressures given the large amounts of money being pumped into the global economy.

Autocatalyst material platinum jumped more than 6 percent to $840 an ounce, while palladium gained more than 11 percent to $178 on growing optimism about a rescue for the auto industry in the United States.

Spot gold rose nearly 3 percent to $776.70 an ounce and was up at $773.90/775.90 at 1030 GMT from $754.60 in New York late on Friday, when it fell to $740.40, the lowest since November 20 in a commodities-wide sell-off.

To some, talk of inflation is premature given the world is currently grappling with the prospect of deflation, but forward looking investors are adding to their holdings of the precious metal to preserve the value of their portfolios.

“We will see some deflation, but that will be short lived and the inflationary impact of substantial fiscal stimulus … will inevitably lead to inflation,” said John Meyer, analyst at investment bank Fairfax.

“Gold will be an important commodity in the protection of value,” he said. Fairfax expects gold to average $900 an ounce next year compared with a previous forecast at $550. Central banks have pumped cash into the world’s financial system and slashed interest rates in an attempt to ease the credit crunch and boost confidence.

Chinese and European leaders are due to plot their next steps on Monday to move the world economy back from a precipice, while stimulus measures presented, planned or pending injected optimism into stock markets.

IMMINENT BAILOUT

Adding to investor worries about inflation was oil , which leapt 6 percent to above $43 a barrel.

Gold often rises in line with oil, which can trigger inflation, while a weaker U.S. currency makes metals priced in dollars cheaper for holders of other currencies.

“The dollar and oil are doing their bit for gold, but we are seeing a lot of investor interest in gold,” a trader said.

The U.S. Senate will reconvene later on Monday as negotiators seek to draft legislation to provide the three largest automakers with $15 billion in short-term loans.

Expectations that the plan could be agreed were bolstered after U.S. President-elect Barack Obama said the auto industry could not be allowed to collapse.

The news boosted platinum and palladium, used to make auto catalysts that cut carbon emissions.

Palladium was at $178/185 an ounce from $159.50 on Friday and platinum at $839/859 from $788.

“Having sustained substantial price corrections between July-October, platinum is currently benefiting from a good degree of bargain hunting buying, mainly from those with longer-term outlooks,” TheBullionDesk.com said in a note.

“However, with more negative auto data expected and commodities generally under pressure the short-term view is still a little negative.”

Spot silver rose nearly 5 percent to $9.91 and was at $9.84/9.82 from $9.45 on Friday.

Pratima Desai , Peter Blackburn
LONDON, Dec 8

As ECB President Jean-Claude Trichet announced the largest cut in the Eurozone’s 10-year history, he said that the region is bracing for negative growth next year.

“Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels today, Bloomberg reported.

The ECB estimates average annual real gross domestic product (GDP) growth to be between 0.8% and 1.2% in 2008, between -1.0% and 0.0% in 2009 and between 0.5% and 1.5% in 2010.

The ECB’s rate reduction followed two other huge central bank cuts in Europe.

The Bank of England cut its rate by one percentage point to 2%, its lowest level since 1951. That cut followed its 1.5 percentage point cut to 3% less than a month ago. Sweden’s central bank also slashed a record 1.75 percentage points from its primary interest rate.

Meanwhile, France unveiled its own economic stimulus plan today – a $32.9 billion (26 billion euro) injection that will target infrastructure, support local authorities and help its own ailing auto industry. The goal is to increase its GDP by 0.6% next year and push its deficit to 3.9% of the GDP, Reuters reported.

Wrapping everything together, are the Eurozone’s latest economic statistics, also released today, that said that GDP shrank 0.2% in the second quarter, investment dropped 0.6% and household spending remained flat.

Holger Schmeiding, chief European economist at Bank of America in London, said Europe is facing a “very serious recession.”

“Despite a major monetary stimulus and some help from lower oil prices and a looser fiscal policy, we do not expect the economy to recover before late 2009,” Schmeiding told Bloomberg.

Outside the Eurozone, four other countries recently slashed their primary lending rate earlier this week.

• New Zealand reduced its interest rate by 1.5 percentage points to 5.0%, a five-year low.
• Indonesia made its first interest rate cut since December 2007, reducing its key interest rate by one-quarter of a percentage point to 9.25%, Reuters reported.
• The Bank of Thailand cut its main interest rate one percentage point to 2.75%, its biggest reduction in eight years and its first cut in 16 months.
• Australia also cut its lending rate by a full percentage point to 4.25%, a six-year low.

Source: Record Rate Cuts and Economic Props Light up Europe

The Dow Jones Industrial Average (.DJI) and the Nasdaq (.IXIC) are skirting 5-year lows.

To date, the 10-year return of the S&P is -16%. If that performance holds until the end of the year, this could be the first 10-year period in which the market has lost money. Your broker’s marketing materials may require some significant edits.

In other news…

Jobless claims surged to a 16-year high, while leading economic indicators erased gains from September. Wall Street has keyed off a stream of seemingly endless negative information. And primetime Senate hearings for the auto industry haven’t helped.

The CEOs of General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler failed to impress Capital Hill during their testimony. Executives were unable to gain the support they needed to get federal bailouts. All three companies could face bankruptcy without help.

Meanwhile, GMAC – the finance arm spin-off from General Motors – was looking for money, as well. GMAC is looking to become a bank holding company to qualify for federal bailout dollars.

Companies mentioned in this article: GM and F.

Source: S&P’s Back To The Future: 1997