Connecting the dots

In many ways we live in desperate times. Connecting the dots of how we got here is not too hard. Too much credit, too much greed and too much consumption brought us to poor economic health and great imbalance in world markets. Credit-frenzied and wasteful western consumption, on top of emerging market demand spurred great price gains in world commodities. Sub-par yields and returns in conventional equity and bond markets over the past 5 years, brought conventional investors to seek out commodities as a hot new investment class. All of this frenzy fuelled inflation and soaring costs which are now stemming the ability of consumers to consume and the ability of lenders to lend. We are coming full-circle as we must. But the ride back to sanity and equilibrium is proving painful.
Today GM General Motors reported its sales skidded 30 percent in May, well below what analysts had expected. The breakdown highlighted the stark reality auto-makers face: truck sales plunged 39 percent, more than double the 17-percent drop in car sales.
Rival Ford Ford Motor reported that its sales dropped 19.1 percent in May. Truck sales plunged 29 percent, while car sales were off just 1 percent.
Other auto makers will report May sales throughout the day; analysts expect more sharp declines.
Over the past several years, North American auto-makers have defied wisdom and leadership in favour of the fattest-margin clunkers they could make. It appears likely that they will now go bankrupt unless they can dramatically and quickly change their business model away from gas-guzzling to energy efficient. They have left this obvious change so late in the day that it remains to be seen whether they can now respond fast enough to avoid demise. Their Executive officers should be fired and stripped of perks and silver parachutes. The failure of vision and leadership has been not only epic, but stubborn.
Meanwhile their mounting lay-offs will help to swell North American unemployment in the months ahead.
As I mentioned last week on BNN, consumers have had a seismic shift this cycle thanks to the escalating price of oil and gas. They have started to come to their senses. They are turning in droves away from big trucks and SUVs. They are walking more, taking public transit even riding their bikes, anything to minimize their transportation costs. And it is working; North American energy consumption rates are finally falling. It is precisely these trends coupled with the slowing global economy which will ultimately tip the oil demand curve down. I believe it may happen faster than many oil bulls think likely.
On top of softening demand for oil consumption, we are likely to also see softening demand for oil investment. There are now growing demands for increased regulation and controls on who is allowed to invest and speculate in commodity markets.
Lawmakers on Capitol Hill today were holding hearings to look into the issue of potential manipulation in the energy markets through speculators and other institutional investors who have recently been moving funds into commodities as an asset class.
George Soros today testified that new “investors' in the commodities markets were playing a role in driving recent parabolic prices. He also pointed out that spikes were surely aggravating the already wobbling economy and raising the risks for a prolonged recession.
Also see: Sewing the energy loophole shut.
Meanwhile I was not surprised today by news that Credit-card use is surging:
“As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.”
It does not take a PHD in economics to connect these dots. In the short term, economic risks remain high and leave resource-heavy Canada significantly exposed to this ongoing correction. Longer-term I remain hopeful that healthier, sustainable habits will come out of crazy times. History suggests that in the aftermath of financial crisis, the world may end up more enlightened. At least for a time. But its easy for me to say, I am not losing my job, my house and my car. And I have always preferred to take the bus or walk. Gives us more time to think and breathe. And that…has got to be a good thing.