I do live in the Detroit suburbs and have a business which is at least partly dependent (as are all businesses in Michigan, Ohio, Indiana, etc.) on the health of the domestic auto companies.

I have been following the “auto bailout” debate on my favorite conservative web sites, as well as television and radio, with some consternation, maybe even alarm. I believe that here is a lot more to this issue than has been previously discussed. I have sensed somewhat of a herd mentality to much of the opinion I have read, as well as a big dose of schadenfreude, feelings of “coastal” and “corridor” superiority, and head-in-the-sand reasoning as to the ultimate conclusion to which the proposed “do nothing” approach will lead.

First, but not necessarily most important, I want to get across the amount of permanent and irreducible devastation that doing nothing but wishing the U.S. automakers a good bankruptcy would visit upon a huge swath of this country. If metropolitan New York City (of which I am a native), a “company town” to the financial and media industries, were faced with the total and simultaneous collapse and bankruptcies of ALL the major financial and media corporations that were the base of their regional income, I think that many of the pundits, and even economists, who now blithely recommend this solution as if it were castor oil to child with a belly ache, would be looking for a different solution. The people of Michigan have already been in deep economic difficulties for the last 4 or 5 years which put them it in a deep recession. That is the starting point for the imminent destruction of much of its economic base. That someone might eventually pick up the assets of these corporations, and, jettisoning their liabilities to their long-time employees, begin anew with less onerous obligations, does not mitigate the immediate and lasting devastation visited upon these people, their families and the cities, towns, states and institutions they created. That is the human side, the quickly brushed aside reality that I have most often sensed was totally ignored.

As to the business and economic arguments put forward, there is also a lot not considered. First of all, yes, of course, the leadership of the U.S. makers has not been as good as it should have been. But neither has it been as negligent as it has been recently portrayed. In the last 10 years, G,M., Ford and Chrysler have been making very great efforts to pare down their cost of doing business, already laying off, buying out and losing through attrition literally hundreds of thousands of both salaried and union workers, closing plants, increasing efficiency, speeding design-to-market time, cutting development costs, cutting marketing expenses, and, amazingly enough, with union cooperation, changing onerous work rules, substantially lowering wage and benefits to new hires, and greatly increasing manufacturing quality control. Their newest products are equal to, or within tiny fractions of, the best quality, dollar-for-dollar, of any cars made by anyone, anywhere. And, they are about to introduce a whole slew of much more fuel-efficient, hybrid, and plug-in electric vehicles after many years of development. In the areas where they still need to make the most progress – long-time worker wages and benefits plus retiree pension and medical care, they have made very significant inroads in the newest “pattern” contacts negotiated with the UAW and set to take effect in 2010. When these changes occur, and going forward into what they hope will be a better future, the US makers will, except for an irreducible fraction of retiree costs, be at parity with the Japanese transplants. And, lastly, as to the often-heard complaint that they were only making “gas-guzzling SUV’s,” well, they wouldn’t have made them if their market research and subsequent real sales didn’t show that the American people, voting with their pocketbooks, wanted them and bought them in droves. In places like NYC, where almost no one owns any car at all, it was easy for opinion makers to ridicule the automakers and the American “rubes” foolish enough to buy their mammoth (too big to double park at Zabar’s) machines as foolish and wasteful, if not downright dangerous.

You might want to check out what were nearly the very first vehicles that the very smart people at Toyota and Nissan rushed to design immediately after they built their first assembly plants here – that’s right, very large pickup trucks and SUV’s; they couldn’t wait to get into the market. Their CAFE standards met by merely re-warming their bread and butter vehicles from fuel-deprived Japan and Europe, they jumped at the chance to share in the larger profits provided by the much-maligned SUV in a country where fuel was much less expensive. They were correct, if somewhat short sighted, as were GM, Ford and Chrysler. But for a fortuitous series of circumstances, including the timing of a media- and speculator- driven oil bubble derived from the every-third-decade repeat of irrational fears of the impending end to natural resources plus environmental extremist politicking, the existing base of small fuel efficient vehicles necessitated by their home circumstances, government funding for much of their worker liabilities, and a general atmosphere of bad feelings toward the US makers because of their less than glories efforts in the 70′s and 80′s and the high wages of their “unskilled” workers, the Japanese auto makers might well have suffered their own crises. As it is, with credit being so hard to come by, even they, with their current advantages, are doing comparatively very poorly in the US market.

As you may surmise from the above, I may not be smart enough to know exactly what would be the best remedy for our and our auto industry’s current woes, but I do think that the current atmosphere created by those who are nearly cheering for the industry’s bankruptcy, without very much thought as to its ultimate consequences, is not a good one. In this case, we are not facing a simple textbook example of the market in its creative destruction phase. The market has been bent by non-economic forces outside of itself, some temporary and some permanent, and a large measure of previous malevolent government intervention. I think that much more consideration should be given to a federal loan for the US automakers, as long as the terms and the plans of the automakers are transparent and made with an eye to economic recovery, rather than just resistance to change or political pandering.

But enough on the public schools industry.

GM stock is around 3 bucks. At that rate, capitalization for GM is under 2 billion. ( The WSJ reported that over the last ten years, GM has lost a half trillion in value)

How come the vaunted UAW doesn’t buy GM?

What does that tell me?

By the way, Honda builds cars in Ohio, and in Ontario. All non union plants.

GM and Ford have plants in ‘Right To Work’ southern states, they are UAW.

Just as the Big Three can not say no to the UAW, we can not say no to the teachers unions.

I wish the Japanese government would open schools in the US to save us. We are seeing our industrial economy die. We have built a pubic education system on the same platform, with the same results. Only instead of crappy cars, we get crappy citizens and voters.

So, how does this work?

Regarding the both the stock market and real estate market, few people ask the question “What is a reasonable way to measure value for that stock or that property?” The lack of the simplest numeric analysis astonishes me.

Here’s the secret: A stock should sell for a multiple of its earnings and a property should sell for a multiple of the rent it commands.

When a stock or property has no earning power, then the question is asset value less liabiliies, just like a firesale or bankruptcy.

In the case of the Detroit automakers, their abilty to make a profit is questionable, so a multiple of earnings is out. I’m a CPA and I don’t know that I understand the soundness of their accounting for penisons. I suspect that their unfunded pension liabilities wipe out any shareholders’ equity.

Let me close with an anecdote about a sucessful use of the stock price-to-earnings ratio to shock someone into more clearly evaluating a stock:

During the dotcom bubble, one of my CPA clients asked me what I thought about Cisco Systems.

I looked up the P/E ratio of 392 to one(!!) on the internet [I consider between 6 and 16 to one to be the historic norm] and I asked him:

“What do you think about getting your money back in 392 years?

He thought for a second. “That’s kind of a long time…”

I nodded sympathetically. “Yeah, I kinda thought so, too.”

He didn’t buy and the stock declined by more than 90 percent.

A 60 month loan, no money down, monthly payment would be about $623 million. One day late on a payment, here comes the repo man.

The government doesn’t have any money; all it can do it take it (or borrow it) from those who do.

That this simple fact escapes the brains of so many millions is horrifying. With no understanding of where money comes from, where it’s going is far less important, because generating, not redistributing, wealth is the key to solving economic problems.

Scott

The DOW may never go back to even 10,000 while Barack Obama is in office. Any stock increases will likely be due to the “bail outs” of specific companies. If, for instance, you think that Obama will bail out General Motors—you might want to place a bet on that particular stock. The global warming stocks will also rise. However, these possible events will royally shaft the rest of the economy! The free market will be effectively destroyed and wealth will be determined almost solely by political favoritism. In other words, we will have a socialist economy.