Washington Bigfoots Detroit, Pension Funds Gone Wild, Saying "Nein" to Stimulus, Accurate Analysts Dissed, and More!

Posted On Mar 30, 2009 By

by Addison Wiggin & Ian Mathias

  • Obama sets stiff terms for next round of auto bailouts — GM chief gone
  • Gov’t agency backing pensions moved aggressively into stocks — right before the ’08 crash
  • Rob Parenteau’s take on the latest "Rube Goldberg" bank bailout
  • Wall Street’s best and brightest punished for being right
  • Readers sound off about the Post Office, visas for foreign workers

  “What we’re trying to let them know is that we want to have a successful U.S. auto industry,” the president told Bob Schieffer on CBS’ Face the Nation yesterday.

What better way to do that than fire the company’s CEO of eight years? Rick Wagoner, a man with 32 years experience in the auto industry, was unceremoniously dismissed from his job at the helm of GM over the weekend.

There was a time in the U.S. when a public company’s board of directors made these types of executive decisions. Not anymore. Not in Obamanation.

  Meanhwile, Bob Nardelli, who’s best known for fleecing Home Depot of $210 million when he quit as its CEO, will remain as Chrysler’s chief.

Nardelli isn’t going to get off scot-free, however. The White House is giving Chrysler 30 days to execute a joint venture with Italy’s Fiat.

  “We think we can have a successful U.S. auto industry,” the former community organizer turned leader of the free world continued on CBS. “But it’s got to be one that’s realistically designed to weather this storm and to emerge at the other end much more lean, mean and competitive than it currently is.

“And that’s gonna mean a set of sacrifices from all parties involved — management, labor, shareholders, creditors, suppliers, dealers. Everybody’s going to have to come to the table and say it’s important for us to take serious restructuring steps now in order to preserve a brighter future down the road."

Instead of car guys making decisions about what cars to build and market, the U.S. is now going to have this group doing its bidding: “a cabinet-level group that includes the secretaries of Transportation, Commerce, Labor and Energy. It will also include the chair of the President’s Council of Economic Advisers, the director of the Office of Management and Budget, the EPA administrator and the director of the White House Office of Energy and Climate Change. The task force will be led by Treasury Secretary Geithner and National Economic Council Director Summers.”

If nothing else, this ought to be enormously efficient… and entertaining.

  GM and Chrysler have used up most of the $17.4 billion in federal money that’s flowed their way since December. The task force insists bankruptcy is still an option if the firms don’t shape up. But we don’t think they’ll have the cajones to go that route.

Bankruptcy would still throw UAW contracts and pension obligations under the microscope, a political risk the Obamaniacs will be wary of. Not least of which is the fact that those pension costs will be laid on the Pension Benefit Guaranty Corp. (PBGC) — the government agency that insures traditional pension plans for private businesses.

  Earlier this month, the PBGC was running a deficit of $11 billion.

Now comes word that just before the stock market crashed last fall, the PBGC began switching a good chunk of its portfolio out of bonds and into stocks, emerging markets and private equity. Oops.

The PBGC hasn’t revealed the current state of its balance sheet. It’s only reported its fund fell 6.5% in the fiscal year ended Sept. 30. God knows what’s happened since then.

  This fresh round of auto industry scuttle set off a round of “risk aversion” as world markets opened for the week. The Dow plunged nearly 200 points in the first five minutes of trading today.

The markets won’t recover until the U.S. government is done meddling with them. That will be years… and years… from now.

  The dollar, meanwhile, as has been its wont when fear grips equities, climbed against every major currency in the world… except the yen. The dollar index is within spitting distance of 86 again this morning.

  Gold, the more classical hedge against risk, scoffed slightly at the dollar’s paper strength and dropped to nearly $915 this morning. Oil likewise retreated toward $50.

  “The weight of evidence in the U.S. continues to confirm a sharp recession,” says Rob Parenteau, continuing to read tea leaves for The Richebacher Letter, “but there is a growing weight of evidence that the free fall in the last quarter 2008 is not being repeated in Q1 2009.”

“The Chicago Fed’s monthly real GDP proxy, for example, is back below -3 after approaching -4 in prior months. This is still a severe recession profile, but no longer is the U.S. economy tracking along a depression-like implosion as was developing in Q4.”

Getting Better

Mr. Parenteau remains skeptical of the Public-Private Investment Program, the Treasury’s new scheme to get toxic “assets” off the banks’ books.

“It strikes us as a Rube Goldberg mechanism that should make Tim Geithner’s mentor, Bob Rubin, quite proud… Taxpayers get to socialize any eventual losses, in other words, while private equity gets a leveraged long position.”

“None of this requires congressional approval, which provides an end run around the bailout backlash, but the role of the Fed in this scheme once again reminds investors of the curious nature of contemporary money.

“Along with the quantitative easing moves announced by the Fed last week, no wonder the Chinese are getting concerned about the ultimate value of their Treasury holdings.”

  Chinese skittishness over the dollar has much to do with the latest deal from Beijing.
 
Word from China’s Xinhua News Agency is that China and Argentina have agreed to set up a currency swap worth $10.24 billion. That is, trade between the two countries will henceforth be settled in yuan. Heh.

China already has similar agreements with South Korea, Malaysia, Indonesia and Belarus.

  “I will not let anyone tell me that we must spend more money,” said German Chancellor Angela Merkel over the weekend. She was responding directly to British Prime Minister Gordon Brown, who’s been pushing for a $2 trillion worldwide commitment to government spending at the G-20 summit, which begins Thursday in London.

But it was also a big-league “nein” to President Obama, who’d hoped other leading economies would join in, borrow and spend like the U.S. plans to.

Now the G-20 summit is shaping up to be no more consequential than other, similar gatherings. Expect lavish dinners, street protests and a meaningless, cliche-ridden communique at the end of the whole thing. Political theatre at its finest.

  Meanwhile, the plan here at home is running out of time. Half of the U.S. work force is on the payrolls of companies with 500 or fewer employees. A new survey release by the Fed this morning shows many of those companies are nearly tapped out.

"They have used every source of funding they know to stay alive,” says consultant George Cloutier of American Management Services. “They have maxed out their credit cards, they’ve depleted their 401(k) (retirement plans) and borrowed from family and friends."

The Fed survey says that 69.2% of bank loan officers had tightened their lending standards for businesses with annual sales under $50 million. None have eased their standards since July 2007.

Our recommendation: don’t wait. Get your Retirement Plan B program right here.

  It’s no secret only a handful of Wall Street analysts foresaw any problems with the housing market and the financial industry. But at least now they’re being rewarded for their farsightedness with promotions and generous pay increases.

Yeah, right.

Many of them are being shown the door for biting the hand that feeds them. Meredith Whitney, who nailed the balance-sheet troubles at Citi, left Oppenheimer & Co. last month, and her successor has already given Citi a higher rating. Ditto for Goldman Sachs and Morgan Stanley.

Last week, Deutsche Bank’s Mike Mayo quit, complaining he couldn’t speak freely, and bank analyst Dick Bove is being sued by BankAtlantic for a critical report he issued while working for Ladenburg Thalmann.

We admit we’re torn. While we hate to see the likes of Whitney and Bove getting kicked to the curb, this kind of thing is par for the course in a bust. Everyone loves it when the bubble is getting bigger. Look out when it bursts… scapegoats and villains are suddenly around every corner.

At least we’re not the only messengers to get shot at, spit on and genuinely despised.

  “The USPS plan to cut one day a week of mail delivery,” write a reader responding to our report of the Postal Service’s budget woes on Friday, “is just postponing the inevitable and ensuring a government bailout within a few months.”

He suggests: “Cut home delivery to three days a week. The USPS could continue business delivery five/six days a week if there proved to be a real need. Fuel, equipment maintenance and personnel savings would be several billion dollars. Early retirements would absorb most of the excess personnel.”

  “Presently, I am living in a third-world Central American country where they have no home mail delivery,” writes another reader, “so this may be one of the first things that happens in the U.S. on its way to becoming a third-world country too. The post office here cannot afford home mail delivery, and apparently, the USPS no longer can either. Unless everyone does not mind paying $1 or $2 for a postage stamp.”

  “I’ve run into a number of U.S. citizens who have been laid off,” writes a third reader in response to a proposal to sell vacant houses to foreign workers that has veered into a discussion of the H1-B visa program, “only to subsequently discover everyone laid off in their company/department was replaced the following day with a foreign worker on a temporary visa, typically H1-B.

“The foreign workers end up with more cash in their pockets than the Americans since they get a tax-free ‘stipend’ in the U.S. and payment of salary back home — tax-free. The company eliminates expenses for income tax processing and remittance, Social Security and Medicare taxes, unemployment insurance, disability insurance and other benefits.”

The 5: A sign of things to come?

One alternative gaining traction among readers who’ve written in over the last week: Close the H1-B program, build bigger fences at the borders and keep those jobs for Americans who, whether they possess the talent or not, are more than happy to keep their jobs in exchange for high and rising taxes, entitlement programs, unemployment and disability insurance and the like.

Seriously. We heard a report this morning that the number of hate groups in Maryland has more than tripled in the last 18 months… the main recruiting devices being rising unemployment and immigration issues. That trend is afoot nationwide, apparently.

On days like today, with the fuzzy line between government and industry getting fuzzier and the rising disquietude caused by anxiety over the future, it feels like we’re only a couple of angry speeches away from learning how to goose step… doesn’t it?

Regards,
Addison Wiggin
The 5 Min. Forecast

P.S.: Our friend Dr. Kurt Richebacher grew up in Alsace when it was still part of Germany. He saw the rise of the Nazis in a similar post-credit bust in the 1930s, when economic turmoil began to warp political opinion and impugn the minds of free men.

Specifically, his work was analyzing the day-to-day underpinnings of the credit and currency markets. But with increasing f ervor, he criticized the lack of macroeconomic thought among American policymakers and businessmen. He had been warning, for example, what a disaster the housing market would become for individuals as well as banks since early 2000s… but despite some prominent relationships, was unsuccessful at curbing the tide. Only a handful of intelligent and well-prepared readers heeded Kurt’s advice… and are enormously grateful they did.

We lost Kurt’s formidable mind in 2006, but with his legacy in mind, we’re preparing to found a society in the good doctor’s honor later this month. If you’re already a fan of his work, we think you’ll be pleased with the program. If not, we recommend you pay attention… details are forthcoming.

P.P.S.: We’re also keeping our eye on three more Obama-era government mandates that could begin being put in place as soon as April 2 (that’s Thursday!). These mandates will provide critical support for an alternative energy source our analysts have dubbed “Sonoma Grizzly Power” …and could mean big returns for early investors.

Given this administration’s penchant for reorganizing industry, there may be few other ways to invest successfully in the next few years than right alongside them. Don’t wait… read your report here.


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