As GM goes… so goes America…

Uh oh…

Stocks rose yesterday; the Dow went up 50 points. The bear market rally is still on. Oil touched the $60 mark… a sure sign, say analysts, that the global economy is picking up. And the dollar fell further… to $1.36 per euro. Gold held steady, at $912 an ounce.

While most stocks advanced yesterday, General Motors (NYSE:GM) backed up.

The experts say the company is going broke. “Chapter 11 looms,” says a Bloomberg report. Investors sold the stock down to $1.15 – a price GM hasn’t seen in more than 70 years. At that price you can buy the whole company for $700 million. Peanuts. Some fund managers earn that much in a single year.

Meanwhile, the USA follows the same downward slide as GM. Both are dogged by high debts, high costs and low management. The Financial Times reports:

“America’s Triple A rating at risk.”

Moody’s has issued a warning. Either the US cleans up its ledgers or it will be downgraded like a bad company. The US was first awarded a Triple-A credit rating in 1917. Not even a century later, it looks like it will lose it.

David Walker, star of Addison’s movie – IOUSA – writes in the Financial Times that the US is headed for bankruptcy just like GM. It owes $11 trillion officially, with another $45 trillion in “off balance sheet” obligations. And, as we reported yesterday, this year it will lose another $1.8 trillion. That’s according to the Obama administration’s official count. Our own guess is that the loss will come to $2 trillion or more… and that trillion dollar losses will continue for years in to the future.

Even by the official estimates, the US government is spending $2 for every dollar it brings in. Even GM doesn’t operate that recklessly. GM loses money on every car it makes… but the loss is nowhere near 50% of sales.

What’s going on? How come the world’s biggest, most successful company… and its biggest, most successful country… are both skidding out of control?

The casual reader will be quick with an answer. They “made mistakes,” he will say. He will point to GM and say: “They should have come out with something like the Prius or Honda’s new Insight… which is already setting sales records in Japan. They’re just producing the wrong cars… and, oh yes, they pay their employees too much.”

As to the US, he will have roughly the same insight:

“They made a number of mistakes. They never should have kept interest rates so low for so long. And they should never have allowed the bankers to run wild the way they did. Now, the banking system is broke… and the government thought it was forced to step in with trillions of dollars. Of course, it made a mistake in how it supported the banks. It shouldn’t have given the bankers so much money so those b**tards could pay themselves such bonuses.”

But here at the Daily Reckoning, we notice that mistakes always seem to come along when you need them.

Take California, for example. Governor Schwarzenegger says its deficit may rise to $21 billion. Analysts say the state will run out of money by July. Maybe it and GM will go broke together.

What mistake did California make? It increased expenses – counting on Bubble Epoque growth rates to continue. But instead of continuing to rise, property prices – which held the bubble aloft – collapsed.

Now comes word that housing prices are still going down. In fact, they went down faster than ever during the first quarter of this year – 14% year on year.

The biggest drops were not in California… but in Cape Coral/Ft. Myers, Florida, and Saginaw, Michigan. The Cape Coral area saw a staggering 59% collapse in house prices. Saginaw was not far behind; there, house prices fell 54%.

But wait, there’s good news too. Each month the losses diminished. Though prices are still going down, it appears that they are going down less fast each month.

More news…

Always on the hunt for a good small company investment opportunity, Tom Bulford was recently at the headquarters of a company that started out in 1871.

“It was a massive distribution site that was once a World War II airfield. There I saw huge piles of soya, maize, and rapeseed, being mixed into animal feed. I stood in a vast warehouse surrounded by mountains of tuna, pineapple chunks and sliced peaches. And in the background, I saw oil tankers load with fuel.

“The real conundrum about this company is that it is operating in markets that are competitive and are not really growing much faster than GDP. And yet it is achieving good growth through expanding its market share. Its three divisions distribute groceries and fuel oil from the factory or terminal to the customer, and supply of animal feeds to farmers.

“These businesses are hardly new, but perhaps this is the attraction. Established industries that are perceived to offer limited growth and which are already quite a crowded playing field do not tend to attract new entrants. The battle is fought by those that are already in the game and the secret of success is efficiency combined with good customer service… ”

And now, back to our line of thought…

*** David Rosenberg, Chief Economist at Merrill Lynch is leaving the firm. His parting words:

“Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks… The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks. To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged. But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

“While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.

“This is a bear market rally that may have run its course. So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors. We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007. Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.”

*** When a company goes broke, analysts always say: ‘it made mistakes.’ But people always make mistakes. One invests too little. Another invests too much. One innovates too little. One innovates too much. Over time, all companies go broke.

Countries make mistakes too. Reliably. One empire declines so another can rise. In modern history, one western country has replaced another, as the world’s dominant power, about every century. Spain until the Armada sank, France until the battle of Waterloo, England until 1914, and then America until…?

The mistakes made by America are the same mistakes that empires always make. “Imperial overstretch,” it is called. Spain reached for England… and drowned in the North Sea. France stretched to Moscow… and froze in the snow. England’s elastic stretched all over the world – to colonial outposts in Singapore, Australia, and Rhodesia. But by the time she was challenged by the Huns in WWI, her economy had already been surpassed not only by Germany but by America too.

Now, it is the US that wears the purple. It has its fingers in every pie, its ships in every port, and its red ink running over everywhere. Even at the very peak of its authority – in the ‘90s – it was already relying on the savings of poor people in Asia in order to continue its big spending ways. And now, confronted with the challenge of a worldwide financial meltdown… the obvious consequence of too much spending and too much borrowing for too many years… what does it do?

Does it cut back? Does it bring the troops home and the deficit down? NO! It spends and borrows even more! In other words, it makes a grand, fatal mistake. Now, an amount equal to its total receipts must be borrowed just to keep the federal government going. Even taking 100% of domestic savings only brings in less than half of the amount needed to finance its deficit. So, the rest – an amount equivalent to the entire US military budget – must be borrowed from kind strangers, business competitors and potential rivals for power.

Sooner or later, the foreigners will not be so easy with their money. Instead of buying US Treasury debt, they will sell it. Instead of supporting America’s imperial ambitious, they will undermine them.

Source: A Seven-Decade Low for GM

In fact, water shortages are erupting around the world, from San Diego to Riyadh.

Hundreds of farm workers and locals from all parts of California took to the streets last Thursday as part of a four-day march to protest federal cutbacks in water supplies.

“This is ground zero,” Mario Santoyo, an adviser to the California Latino Water Coalition, told the New York Times. “There’s a human tragedy going on here, and we need water.”

The state of California projected in March that, because of a drought in the state’s Central Valley, as many as 23,700 full-time workers would lose their jobs, and farmers would lose up to $477 million in revenue, The Times reported.

California Governor Arnold Schwarzenegger has declared the drought a state of emergency and – not for the first time – threatened statewide water rationing.

Yet, the scene in California is just a small glimpse of the kind of dissatisfaction and unrest that many experts believe will become frequent occurrences if the world’s evolving thirst isn’t quenched.

Today, 2.8 billion people, or 44% of the world’s population, live in areas of high water stress, according to the Organization for Economic Co-operation and Development. This will rise to almost four billion by 2030 based on present trends. The livelihoods of one in three people on the planet will be threatened by water scarcity within 15 years.

And the situation is showing signs of spiraling out of control as populations around the world continue to grow.

The world’s population has more than doubled in the past 50 years, soaring to about 6.5 billion from 3 billion (The combined population of China and India is about 2.5 billion). In that time the use of water has tripled, according a recent article in The Economist. Analysts anticipate that the world’s population will increase by about 2 billion by 2025 and 3 billion by 2050.

And it’s not just the volume of people that has analysts worried. It’s where those people will be living and what they’ll be eating. The vast majority of masses joining the world’s population in the coming decades will be city-dwellers, who consume more water than their rural counterparts.

That’s largely because urban populations, particularly populations with higher standards of living – such as those blossoming in developing countries like China and India – consume more meat, and therefore more water.

According to The Economist’s article, it takes about 1,000 liters (264 gallons) of water to produce one kilogram (2.2lbs) of wheat. But it takes as much as 15,000 liters (3,963 gallons) to produce a kilo of beef.  The meatier diets of Americans and Europeans requires about 5,000 liters (1,321 gallons) of water a day versus the 2,000 liters (528 gallons) of water needed to sustain the vegetarian diets of Africa and Asia.

The world will need as much as 60% more water just for agriculture for the 2 billion people expected to join the urbanite ranks over the next decade and a half, according to the Food and Agriculture Organization.
And it’s not just developing countries that need to worry. A report by the World Wildlife Federation, entitled “Rich Countries, Poor Water,” pointed out that water crises are increasingly affecting many wealthy nations, due to climate change, drought and water resource “mismanagement.”

“In Europe, countries on the Atlantic are suffering recurring droughts,” the report notes, “While water-intensive tourism and irrigated agriculture are endangering water resources in the Mediterranean.”

The Murray-Darling basin, an area of southeast Australia as large as France and Spain combined, recorded its lowest level of inflows in 117 years during the first three months of 2009.  Farmers have been restricted to as little as 16% of their annual water allocation. Authorities warn that water supplies for the two million Australians who live in the basin cannot be guaranteed beyond next year.

United Nations Secretary-General Ban Ki-Moon has warned that “time is running out,” as estimates suggest that almost a third of the world’s population will be living in regions facing severe water scarcity by 2025.

Money Down the Drain

The United States and other countries around the world are already being forced to confront their water supply shortages. And they’re having to do it with cash.

California will receive $260 million in federal economic stimulus funds to fix dams, restore fisheries and habitat and help the state cope with drought conditions, Interior Secretary Ken Salazar said last week. In addition to that, the state is likely to qualify for much of the $135 million in federal grants set aside for water reuse and recycling projects.

“I think a new reality is forming here … that water is scarce and we are going to have to change the way we use water,” Frank Royer, general manager of the Camrosa Water District in Camarillo, told the Ventura County Star.

Saudi Arabia – a desert country that is swimming in oil but desperately lacking fresh water – is putting $800 million into a new public company that will invest in overseas agricultural products, the Financial Times reported.

The reason: The Saudi government is discontinuing domestic wheat production to conserve its water resources. The country has been producing about 2.5 million tons of wheat each year since it began its wheat program in the late 1970s.

China is another country hoping it can spend its way out of a water dilemma.

About 15.3 million hectares, or 13%, of Chinese farmland are lost to droughts every year, according to a recent article in BusinessWeek. Roughly 300 million people living in rural areas still don’t have access to drinking water. And of China’s 600 cities 400 are facing water shortages.

That’s because, on top of water scarcity, China has horrible pollution, which has rendered much of the nation’s fresh water undrinkable.

More than 200,000 people in Yancheng, Jiangsu were recently cut off from clean water for three days when a chemical factory dumped carbolic acid into a river, BusinessWeek reported. A similar incident occurred in November 2005 when a chemical plant in Jilin spilled massive amounts of toxic benzene into the Yangtze and Songhua rivers.

About 1 billion tons of untreated sewage is dumped into the Yangtze River each year. And half of China’s population – 600 million to 700 million people – drinks water contaminated by human and animal waste.

As of September 2008, China had poured $7.46 billion into 2,712 water treatment projects, according to the nation’s Ministry of Environmental Protection. Beijing also has launched a multibillion-dollar effort to transport water from southern regions. But that project has been delayed because of environmental concerns and resistance from the estimated 300,000 farmers who would have to be relocated to accommodate water pumping and cleaning stations as well a canal., BusinessWeek reported.

The Asia Society argues that water – not oil – will evolve into the key regional security in the 21st century, and Asia in particular is desperately lacking.

“This is a fundamental resource that we need to survive,” Suzanne DiMaggio, director of the Asia Society’s Social Issues Program told TIME magazine. “The emerging picture is very worrisome.”

Source: Developed and Emerging Nations Forced to Ante Up to Stem a Worldwide Water Shortage