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Thursday, November 20, 2008

Gold, Cars and Government Bailouts

Deflationary forces are pushing the price of gold lower. However, beyond the short-term price for paper gold, some of the news is surprisingly bullish. I'm putting out an update to my recent gold report today, with some very interesting news on supply and demand. The director of the World Gold Council was on CNBC yesterday talking about it. You can see that video here:

Some of the bullish news for gold ...
* Global demand rose 18% to 1,133.4 metric tonnes from 963.3 tonnes a year earlier.

* In dollar terms, the jump in demand was even bigger. Dollar demand for gold reached an all time quarterly record of $32 billion in the third quarter, a whopping 45% higher than the previous record … set in the second quarter.

* Identifiable investment, which includes purchases through exchange-traded funds and of bars and coins, climbed 56% year over year to 382.1 tons.
There's a lot more in the update. Look for it today.

In other news, the Big 3 Automakers left Washington empty-handed after Congress couldn't agree on a$25 billion rescue plan. Apparently the lawmakers were upset that the car manufacturing CEOs flew to Washington on private jets. I don't remember anyone asking if bankers used private jets when we handed them $700 billion. The real argument against it is that even if we loan them $25 billion, the automakers' business model is broken and they'll be back with begging bowl in hand pretty soon. Even the automakers admit that $25 billion is only a bridge to the next step.

It's already been shown that it will cost the government more than $25 billion if we don't give loans to the Big 3. The auto industry is 4% of our GDP. Not bailing it out will probably cost $400 billion to $750 billion in unemployment insurance, welfare payments, related businesses going broke, etc. So opponents of the plan must be thinking that the eventual cost of the bailout will be more than $750 billion. Still, you have to wonder why they're balking at $25 billion when the US government has already spent $4.3 TRILLION in bailouts.

UNLESS ... the real opposition to the bailout is that letting the car companies go bankrupt is a chance to break the back of organized labor. And some people feel that's a worthy goal no matter what the cost. After all, if they can pay American workers the same wage they pay Mexicans, then car companies won't have to ship any more production to Mexico.

I was in favor of the bailout, with many strings attached. Those strings would include ...

* Increase American automobile fuel efficiency by an average 10 mpg over the next 10 years and 20 mpg in 15 years.
* Combine the big 3 into big 2, and start laying off non-essential personnel.
* No more executive bonuses until the crisis is passed, and any percentage wage cuts for workers is matched by at least double that in percentage wage cut for top executives. After all, GM line workers make $27.81 an hour, while the CEOs of Chrysler, Ford and GM earn a combined $24.5 million per year.
* No more foreign outsourcing of jobs.
* Cut advertising budgets to 1/10th of what they are now and put the saved money into building cars, not marketing them.

There are other strings I'd attach, but you get the basic idea. Bailouts have worked in the past. Chrysler was given a government loan back in the early 1980s and this helped Chrysler survive at the time. Lee Iacocca said, "We borrow money the old fashioned way. We pay it back". In his first year, Iacocca fired 33 of the 36 vice presidents and streamlined the management. He cut workers' salaries, but they couldn't really complain because he set his own salary the first year at only $1.

There are still many problems that car makers will have to overcome, including their staggering legacy costs. But I think failure is a very bad option. America is a country that runs on cars. I think we need a car industry, and I don't want to see our manufacturing base hollowed out any more than it is, because at some point, we'll need it. After all, if there's a war, are we going to buy our tanks from China?

Meanwhile, at the US EconoMonitor, Robert Reich makes some good points about the massive TARP bailout of Wall Street's biggest banks:
Hank Paulson has just about burned through $300 billion, and it's not clear what the public has got out of it. Perhaps things would be worse without the bailout but they're certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG. That's not what taxpayers bargained for.
Mr. Reich's proposal: Force the banks to stop paying dividends, executive compensation or deferred bonuses, or doing any more acquisitions, and instead use their money to start lending. To that, I'd add the proposal that any company living on government handouts can't use private jets. If it's a good enough rule for car manufacturers, it's good enough for banks.


Consumer Prices Fall Record 1% as Energy Plunges The overall and energy decreases were the biggest since the government began keeping such records. Data on the overall CPI date back to 1947, and the energy data go back to 1957.

Crude Oil Falls, Approaching $50 a Barrel, as Slowing Growth Saps Demand Crude oil fell for a fifth day, approaching $50 a barrel, as the weakening world economy increased concerns that demand for fuels will slow.

Goldman Cuts 2009 Oil Forecast, Closes All Its Oil Trading Recommendations Goldman Sachs Group Inc. cut its forecast for the average price of New York-traded crude oil in 2009 to $80 a barrel from $86, adding that it was closing all its trading recommendations for oil.

China Plans First Fuel-Price Cut in Two Years to Help Stimulate Economy China, the world's second-largest energy user after the U.S., is accelerating plans to cut fuel prices for the first time in two years as the nation's economy slows and oil costs fall, the country's top planner said.

Corn, Soybeans Fall a Third Day as Stocks Rout Increases Demand Concerns Corn and soybeans dropped for a third day as stock markets slumped, increasing concern that a worsening global economy will curb demand for food, feed and fuel. Wheat prices declined for a fourth day.

Bernanke May Find Deflation `Back on the Table' as Threat to U.S. Economy Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Ecuador Audit Commission Finds `Illegality, Illegitimacy' in Foreign Debt Ecuador's debt audit commission said it uncovered ``illegality and illegitimacy'' in the country's foreign obligations, findings that may give President Rafael Correa the legal basis he's sought to halt bond payments.
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