Goverment Motors

So now we live in a world where GM is bankrupt.

At 8 am today, GM will file for protection from creditors via Chapter 11 of the United States Bankruptcy Code. GM’s core assets will be sold to a Debtor-in-Possession (DIP) and the “new” GM will be restructured by the Court with new owners: the unions, the bondholders, and the DIP lender. What’s new this time is that the DIP lender will be the United States Treasury.

Around the world, countries are coming to the rescue of their automobile industries. And they ignore the fundamentals that cause the industry to be chronically unprofitable.

The problem is, the world has the capacity to build about 100 million cars and trucks a year, but there’s only demand for about 70 million. That excess capacity will make the industry lose money. And as long as governments intervene to “save jobs” that excess capacity will remain.

So don’t expect the Treasury to get out of the car business anytime soon. By saving jobs, they gain loyalty. But by supporting a zombie industry, they assure that they will alway be needed. And it’s nice to be needed.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T13:11:33+00:00 June 1st, 2009|Global Market Update|0 Comments

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