Aftermath Of The GM Bailout

General Motors — the company that American taxpayers bailed out less than a decade ago, rescuing the company from near-certain bankruptcy after years of mismanagement — continues to struggle, and the dominoes that were toppled by the bailout decision continue to fall.

636198172298775780-lsjbrd-04-17-2016-gli-1-a001-2016-04-14-img-gm-shutdown-jpg-1-1-fhe0e7gq-l792930015-img-gm-shutdown-jpg-1-1-fhe0e7gqYesterday the company announced that it is engaging in a massive restructuring that will close assembly plants in Ohio, Michigan, and Ontario, Canada, eliminate thousands of jobs, and end some car lines.  One of the vehicles  being discontinued is the Chevy Volt, the electric hybrid GM rolled out to great fanfare.  The company said that “GM is continuing to take proactive steps to improve overall business performance, including the reorganization of its global product development staffs, the realignment of its manufacturing capacity and a reduction of salaried workforce.”  GM’s CEO, Mary Barra, said “GM wants to stay in front of changing market conditions and customer preferences for its long-term success.”  One of the “changing market conditions” is the declining public demand for passenger cars like the Volt and the Chevy Impala, which also is being discontinued.

President Trump and the United Auto Workers are both unhappy at the GM move.  Trump said he didn’t like GM’s decision and reports that he told Barra “You know, this country has done a lot for General Motors. You better get back in there soon. That’s Ohio, and you better get back in there soon.”  The UAW, which will see the loss of lots of blue collar jobs held by its members, said:  “This callous decision by GM to reduce or cease operations in American plants, while opening or increasing production in Mexico and China plants for sales to American consumers, is, in its implementation, profoundly damaging to our American workforce.”  The UAW news release added that “GM’s production decisions, in light of employee concessions during the economic downturn and a taxpayer bailout from bankruptcy, puts profits before the working families of this country whose personal sacrifices stood with GM during those dark days.”

GM’s decision will no doubt be devastating to those employees who lose their jobs and the communities where the plants will close.  But it also makes me wonder how even the advocates for the taxpayer bailout of GM less than 10 years ago feel about their decision to prop up GM now.  The underlying question raised by the UAW and President Trump is legitimate:  Was the bailout worth it, in view of these kinds of decisions?  GM remains a public company, and it gets to make decisions that it considers to be in its own competitive interest.  And if changing market conditions really do require GM to cut thousands of jobs that the bailout advocates expected would continue indefinitely, that may just tells you something about the wisdom of taxpayer bailouts generally.

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Blue Chip Gone Bad

In the not too distant past, General Electric was one of the most valuable companies in the world.  GE was the bluest of the blue chips, the maker of light bulbs and everyday appliances, a company so solid and trusted and reliable that it was a standard holding for retirees who bought it because it paid an old-fashioned quarterly dividend.

ge-led-bulbs-led11da19-870-h-64_1000Now, GE’s stock price has plummeted to less than $10 per share, its its renowned quarterly dividend has been reduced to a penny per share, and there’s actually talk on Wall Street that GE debt — which is now rated at BBB — could be reduced to junk bond status.

What happened? Many things have contributed to GE’s abrupt fall.  The company has a lot of debt, some of it generated back when GE had a AAA rating.  The debt has put GE into an increasingly leveraged position as the company’s stock price has fallen, which in turn has put pressure on the trading price of GE bonds.  The company’s lines of business have experienced some down years, and prior management was viewed as too slow to respond to the challenges facing the company.  To address the problem, GE has shifted to new management, which is trying to sell off assets to improve the company’s capital structure, boost the stock price, and keep the company off the junk heap.  And, as GE sheds assets, new management will have to figure out what the company is and where it is going, long term.  GE can no longer get by on its reputation.

GE’s current plight is another example of how the American economy moves quickly, and if companies don’t move with it they can be left behind.  As recently as 2005, GE’s stock market price made it the most valuable company in America.  Now, it’s fighting for survival.  And in boardrooms throughout the corporate world, CEOs should considering this cautionary tale and asking themselves:  “What should I do to keep my company from becoming the next GE?”

Dow And Up And Dow Again

I don’t know what’s harder to read about right now:  political news, or the stock market.

dreamstime_xl_29871962-customSince I don’t want to lose any readers, we shan’t be talking about political news.  But checking out what’s been going on in the stock market recently is equally stomach-churning.  October has been one of the worst months in the stock market in a very long time, generating talk that we’re in the midst of a dreaded “correction.”  Even after springing back up by more than 400 points yesterday, the Dow Jones Industrial Average is still down almost 6 percent this month, making it the worst month since August 2015.  The news for the S&P 500 has been even worse:  in October its down almost 8 percent, its worst month since May 2010.

And for those of us who aren’t working on Wall Street, the movements of the markets seem random and inexplicable.  Stock are down, then up, then down again — sometimes, all on the same day.  On Monday, the Dow surged upward, then plummeted, and ended up covering more than 900 points in its abrupt mood swing.  You read the reports on the markets that try to make sense of the movements — on Monday, for example, the stated culprit for the downturn was concerns about new trade actions with China, and on other bad days it’s those nefarious “profit takers” — and you really wonder if anybody knows why the markets move as they do.  And this shouldn’t come as a surprise, either:  after all, the markets are the sum of the actions of millions of individual investors, mutual funds, trading bots, institutional investors, portfolio traders, brokerage firms, foreign investors, and countless other actors.  It would be an unusual day, indeed, when all of the disparate participants in the market are motivated by the same news to take the same actions on the same day.

So, what’s a small investor to do?  I think the key is to not overreact, and to realize that investing in the market is supposed to be a long-term thing.  The little guy is never going to have the information the big players do and can’t plausibly time the market or anticipate the abrupt movements.  If you’re in the market long-term, don’t get distracted by the sickening plunges or the big climbs, because you’re really focused on what’s happening over the course of years.  And if you can’t take a long-term view, maybe you shouldn’t be in the markets at all.

Ignoring that stock market app on your phone helps, too.

Empty Malls

Sears announced this week that it is going into bankruptcy.  Once the largest retailer in the United States, Sears disclosed in August that it was closing 46 stores, and with its bankruptcy filing this week Sears identified another 142 stores that will be shuttered.

IMG_6692If you’ve been to one of the ubiquitous indoor malls in America recently, you didn’t need the bankruptcy filing to tell you that Sears has been having serious problems.  For years, Sears was one of the mainstay, “anchor” tenants in countless malls, usually located at the end of one of the concourses.  Sears and other department store tenants were key parts of the mall structure, giving shoppers a chance to check out their varied offerings, from women’s clothing to home furnishings to makeup and perfume, before the shoppers wandered out to hit The Gap or Foot Locker while sipping a drink they got from Orange Julius.  For generations of kids, the “mallrat” experience with their friends on a weekend day was a big part of growing up.

But if you’ve been to one of those malls recently, you’ve seen that some of those big storefronts for the anchor tenants at the end of the concourses are vacant.  Kish and I went to a mall in Bangor, Maine this summer, and it had the big void where one of the department stores used to be.  Many of the slots adjacent to the anchor location also were empty and closed up, leaving the whole section of the mall, where I took the picture for this post, feeling shuttered and empty.  And there’s nothing quite so desolate and deserted as a cavernous mall that is totally devoid of shoppers.

I’m old enough to have seen the whole arc of the American mall story.  I remember when the Summit Mall in Akron, Ohio opened to great fanfare, drawing throngs of shoppers away from the downtown stores to one convenient location.  In Columbus, the City Center mall in downtown Columbus opened in the ’80s as a key part of the downtown Columbus redevelopment plan — but then it failed within only a few years, to be torn down and replaced by a park.  The new approach to retail eschews the closed mall design in favor of open air developments like Easton in Columbus — which feels a lot like the downtown shopping areas that got elbowed to the curb by the malls.  Now we’re seeing many malls struggle, and in some extreme cases, city planners are left wondering what the heck to do with the huge, empty edifice that used to be a roaring hub of commercial activity and tax revenue.

And now Sears is going into bankruptcy.  The story linked above reports that liquidation sales at the 142 stores that are closing will begin in the next few weeks.

Our Ever-Ignored Deficit

The Trump Administration has announced that, in fiscal year 2018, the federal budget deficit was a staggering $779 billion.  That’s a 17 percent increase over fiscal year 2017, and the largest budget deficit in six years.

In short, we’re running enormous, historically disproportionate budget deficits — even though the economy is humming, jobs are being created, unemployment has reached the lowest levels in years, and the federal government is collecting record amounts of income tax revenue.  At a time when we should be balancing our budget, or even running a surplus, we’re farther underwater than ever.

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Nobody seems to really care about this — except a handful of old deficit hawks like me.  The Republicans who used to claim to be the party of fiscal discipline cut tax rates, but they just haven’t gotten around to making the necessary cuts to federal spending that are needed to bring the budget into balance.  No surprise there — cutting taxes and raising defense spending is the easy, champagne-cork-popping part of their agenda; actually digging into the details and deciding which federal programs to cut, and by how much, is the harder, painful part that every Republican running for reelection will happily defer.  And the Democrats, who have never cared too much about balanced budgets anyway, are too busy reacting with outrage to everything President Trump does or says to focus on the deficit.

Some people argue that times are good right now, so what’s the big deal?  Maybe the deficit really doesn’t make that much of a difference, they suggest.  But if the U.S. government can’t live within its means when the economy is strong and record tax revenues are rolling in to the federal treasury, what is the deficit going to look like when the economy turns sour, payrolls get cut, and tax revenues fall?  Just how big is this deficit going to get, anyway?

It all seems pretty ironic to me.  President Trump boasts of being tough with foreign governments on trade and international relations, and putting America’s interests first in all things — but the need to sell bonds to finance the growing deficit does exactly the opposite.  The Chinese, the Saudis, and everybody else who is buying the U.S. bonds we are selling are thereby acquiring enormous leverage, and if they start demanding higher interest payments before they make their purchases we’re in a world of hurt.

So pay no attention, folks!  It’s all boring numbers, anyway!  Let’s forget about the serious, long-term aspects of running a government, and go back to talking about the latest outrages that will dominate the news cycle for a day or two until some new and exciting outrage comes along.

Condemned To Repetition

George Santayana famously observed:  “Those who cannot remember the past are condemned to repeat it.”

I thought of old George when I read this article reporting that some banks, amazingly, have decided to once again offer zero down payment subprime mortgages.  Apparently it’s only taken ten years for banks to forget the lessons they purportedly learned during the last subprime mortgage lending bubble, when the collapse of countless numbers of bad loans brought the economy to the brink of total disaster.

tips-for-buying-foreclosed-homes-mstAccording to the article quoted above; “Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent.”  In addition to the “education session” and documentation and counseling requirements, recipients of the loans have to live in the houses with the mortgages.

The lending agencies think that residency requirement will keep out the investors looking to flip houses, which is one of the conditions that contributed to the prior housing bubble and subprime mortgage debacle.  Another purported protection against disaster is that the housing market is strong, there’s a shortage of homes for sale at entry-level prices, and therefore homeowners who can’t make their payments supposedly will be able to sell their houses and repay their mortgage loans.  And proponents of the lending program say it helps poor people and working families to buy houses and build personal wealth.

I’m all for people becoming homeowners if that’s their dream, but if banks think that things like education sessions and counseling are going to allow them to avoid problems when the economy turns — as it inevitably will — they are dreaming.  It’s not hard to forecast that some aggressive loan officers will push the rules, some house-flippers will figure out a way to take advantage of the programs, some bad apples will take out the mortgages and then abandon the houses when times get tough, and then we may well be back in the same perilous situation that existed in 2007 and 2008.

I hope not everyone has forgotten what happened to bring on the Great Recession.  And I hope some political leader makes it clear that banks are welcome to follow whatever practices they think are appropriate for their businesses, but this time, if it all goes to hell, taxpayers won’t be bailing them out — again.

Calling For Seasonal Workers

Go to any seaside town — or for that matter, any resort, tourist destination, or other business that does seasonal work — and you’re likely to hear the same refrain:  the local shops and restaurants just can’t find enough employees to fill their needs.

summerhelp_crop380wOn one of our first nights in Stonington, we went to an event where we rubbed elbows with some of the locals, and one of the big topics of conversation was the labor shortage.  One restaurant that the residents particularly like didn’t open this summer because it just couldn’t find enough workers, and another had to cut back its meal service.  And as you walk around town, you see the same young people working at multiple places.  The young woman taking your order behind the lunch counter today is likely to be working at the local hardware store tomorrow.

There are two primary causes for this situation.  The first is the unemployment rate, which is at its lowest level in years.  In June, the unemployment rate was 4.0 percent.  Some economists think, practically speaking, that’s as close to “full employment” as America is likely to get.  That’s good news for workers, who have lots of bargaining power and who can command higher wages.  But it also means that some of the Americans who might otherwise gladly fill seasonal jobs waiting tables on the seashore or working at gift shops are already working full-time in other positions, leaving seasonal employers without the pool of labor they had drawn on in the past.

And the second cause is the H2-B program, which allows employers to obtain visas to bring in “guest workers” from overseas.  The problem, though, is that the program is capped at 66,000 visas each year — a number that hasn’t changed since 1992.  This year, more than 5,600 businesses applied for more than 142,000 such visas, and the Department of Labor had to allocate the visas by lottery.  If you weren’t one of the lucky winners — as was the case with some of the businesses here — you’re out of luck.

And it’s particularly tough for labor-intensive businesses like restaurants.  Owners can man the cash registers and restock the shelves at gift shops, but they can’t really serve as cook, waiter, busboy, and dishwasher all at the same time.  As one of the restaurants here realized, the only alternative is to not open for business.

A lot has changed in the American economy since 1992.  Maybe Congress should take a break from its constant fundraising and look at updating a program that provides a useful safety valve for small businesses who are dependent upon recruiting seasonal workers.