The Economy Guy

Stocks soared today, up 221 points, on the news that the recession is over, birds are singing, and world peace has broken out.

Bonds, on the other hand, increased interest rates by 0.25% on the 10 Year Treasury – very bad news indeed.  What could this sudden increase in bond rates mean???

1. It could mean that the economic recovery has started, and it’s time for interest rates to start going back to “normal” levels.
2. It could mean that there are a lot of people worried about future inflation – caused by the current Obama spend-orama.
3. It definitely means that someone is selling bonds.
4. If this someone is China, and other nations, it is spelling a very bad, hurtful time for Americans in the near future.

The Dollar and Gold went sideways today.

Oil and gasoline jumped to recent highs with not top in sight.  Hold onto your wallet firmly, as the oil companies have their sights on it.

In the news today……

GM is bankrupt – and now is the time to look under the hood to see how this deal real works.  First a little background.

1. President Bush made the first bailout to GM because he didn’t want GM to fail “on his watch.”  Naturally, the Obama transition team was looking over his shoulder encouraging him.
2. President Obama set up a “Car Czar” to oversee the restructuring of the US auto industry.
3. GM and Chrysler took the poison pill from the government.  Ford did not take it.
4. President Obama fired the CEO of GM.

But, the news today is that GM officially NO LONGER EXISTS.  So, what happened in this bankruptcy.

1. GM will be split into two companies
   1. The GOOD GM parts will form the future of GM, and the government will inject an additional $30B into this company.
   2. THE BAD GM parts will be owned by the government (that’s YOU.)
2. The GM bond holders were “coerced” by the government into accepting about 29% of their principle – and get it in the form a new GM shares.  I saw a great example of this in a CNN interview this morning where a school teacher had $70,000 worth of old GM bonds, and will end up with about $200 worth of new GM shares.  I know, you asking about that 29% figure – well, so am I.
3. The GM shareholders were wiped out.
4. GMAC was spun off into a new bank – the Ally bank.
5. The United Auto Workers (UAW) walked away with a massive share of the new GM shares, and took some very severe reductions in the prior privileges.
6. The US Government will end up with 60% of the “new GOOD GM” shares.  For those of you new to corporate governance, anything over 50% share ownership is an absolute controlling interest.

So, what’s so bad, you ask???  Well, let’s start with the stock market reaction – they loved it, as the GM Bankruptcy signaled the beginning of the new economy, and its all UP.  So, stocks soared.

Let’s look at the irony of this event.

1. President Bush should have let GM fail – by fail, I mean go bankrupt.  Isn’t that exactly what’s happened??
2. By letting GM fail earlier, it would have cost the taxpayer much less money.
3. And, GM wouldn’t have gone out of business, it would have restructured itself and emerged as a new GM
4. But, isn’t that what’s just happened – a new GM.
5. Yes, but it cost a lot more time, and that translates to a lot more money, your money.
6. If it had been allowed to just fail, that “bad GM” piece would have been sold off by a court appointed liquidator, and YOU wouldn’t have been stuck with it.  In other words, the current plan is MORE money out of your pocket.
7. The “new GM” is now owned (controlled) by the US Government, and you know as well as I know that they will meddle in everything the “new GM” will be doing.  
8. For example, it will “dictate” the types of vehicles that GM can manufacture.  But, what if the “market” doesn’t want THAT vehicle, but actually wants a different vehicle???  It just costs market share, and that means YOU will suffer more in the future.
9. But, you say, what if the government gets it right, and designs the perfect car???  I just can’t stop laughing at that thought.

On a more serious note, here is what might happen in the future.

1. A disgruntled bond holder could sue the government for breaking commercial law in its bankruptcy proceedings by giving the bondholders an “unfavorable” position in the bankruptcy settlement.
2. A dismissed GM car dealer could sue the government for harming their reputation, and NOT ever giving a reason for that particular car dealer being dismissed.
3. The UAW workers will suffer a lot under this new deal as most of them will be losing their jobs over the next 18 months.
4. But, wasn’t the purpose of this GM Bailout to protect the US worker, and keep those jobs???
5. No, obviously that wasn’t the purpose, as seen by the number of UAW workers who will be joining the dole lines.
6. GM management will TRY to get out from under the government thumb as quickly as possible.  But, will the government allow GM to break those chains?  I truly doubt it in the current administration.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8721 (up 221 points)
10 Year Treasury Bond – 3.72% (up 0.25%) – another massive interest rate increase.
Euro – $1.4147
Gold – $980 (no change)
Oil – $68.58 (up $2.27)
Gasoline $1.79 (up $0.05)