Dear Sir or Madame,
Please Allow me to introduce myself, my name is Prince Sultan Foggube Bloggando of Nigeria. I am writing you to seek your assistance in a very complicated financial matter which, if you agree to provide initial financing, could be a very lucrative opportunity to you and your family. You see, my country has been marred in civil strife for many years now, and shortly before my father, The King, passed away he put several million dollars in trust to me and my siblings- we were to use this money to help end the conflict and restore our nation to greatness. Unfortunately militants have seized many of Nigeria's banks and we are having difficulty getting access to these funds. My family's legal counsel has assured us we have every legal right to the funds, however the appropriate legal action to liberate the money will be very costly. I am writing to ask your assistance in helping my siblings and I get access to the money we need to free Nigeria from the rule of militants. For an investment of $1000 I personally guarantee you a 1000% percent return on your money after the civil war is over and our economy is functioning again. In the unlikely event that my siblings and I are not successful in our efforts and hence are not able to repay your kindness, please contact your local US Congressman; they will happily bail you out of any unwise financial decision you've made so long as a lot of other people have made the same stupid decision- and I send this email to 30,000 people every hour, so don't worry, you're not alone!
Sincerely,
Foggube Bloggando
Nigerian Prince (Seriously)
------
Ladies and Gentlemen,
Our nation is under serious threat from a pandemic of poor decision-making, and Congress (as usual) is only making things worse. Case and point, Massachusetts liberal and aspiring Menino impersonator Barney Frank has introduced H.R. 5818, the "Neighborhood Stabilization act of 2008" which will create a $15 billion slush fund with which to bail out unwise borrowers and lenders from their bad financial decisions. More information on the bill and its socialist virtues, comrade, can be found at Thomas.gov by searching "HR 5818."
Ok, ok, I know what you're thinking: '$15 billion hardly seems noteworthy when weighed against other abuses of legislative spending power previously covered in this blog' and you would be more or less right. Nancy Pelosi can't sneeze without appropriating $15 billion these days, but this is not just an issue of wasted tax revenues- bailouts of any kind always have the knocked-on effect of not only rewarding bad decision-making, but also punishing good decision making.
A good four minute summarization can be found in this NPR News Report. (Editorial note: If you're not an NPR listener, I strongly urge you to become one, you will not find a finer, more reliable source of unbiased news anywhere else in the American media.)
Many advocates of such legislative interventionism in the housing markets will suggest that because housing is such an integral part of the US economy, something has to be done to stabilize prices. They will argue that as more homes are foreclosed upon, the glut of unsold houses on the market will grow, which will soften demand, which will contribute to a further drop in home values which will worsen the state of the overall economy. Now there is merit to the economic logic in that argument, strong supply and weak demand always lead to deflated prices, but to suggest that intervention is the only way to prevent a complete bust in the market is a spurious assumption. After a steep enough drop in prices, supply and demand forces will always find equilibrium with one another- as home ownership becomes more affordable demand will eventually grow again as a new generation of home buyers finally begin to see the value in buying versus renting- spurring demand. Matter of fact, this is often the only time renters can afford to get on the property ladder in the first place, so let's not go throwing depreciating home prices under the bus just yet.
But of course none of us should be so naive to think that the elected representatives spearheading this initiative are doing it only out of concern for 'hard-working American families who have fallen on tough times', of course they're doing it for the dozens of big financial corporations that made billions upon billions in bad investments in the subprime mortgage market. The most significant aspect to HR 5818 is federally guaranteeing the mortgages most at risk of default so that lenders will have an incentive to refinance what were once very profitable loans into less profitable ones. With federal guarantees against the loss of their investments, the banks, rating agencies, brokerages, and investors (who not too long ago unanimously denounced government involvement in their lines of business) have not learned the error of their ways, and have no incentive to exercises better judgement when making future investments.
Two of the biggest offenders, Countrywide financial and Bear Stearns, come to mind when considering bailouts. Countrywide and Bear were the two heavyweights in the subprime market before it went bust, and as a result of their extremely bad judgement and lack of proper diversification they were hardest hit when the meltdown began. Bear Stears was in the midst of collapse when the Federal Reserve stepped in and financed a federally guaranteed buyout of Bear by JPMorgan Chase, and even though the Fed wasn't involved in Bank of America's buyout of Countrywide, but given that most analysts saw Countrywide's loan portfolio as an "immense credit risk" BOA must have known that an eventual federally sponsored rescue of the mortgage market would make Countrywide a good investment despite the bad loans on its books.
Strange how the alleged solution to the problem created by bad investments seem to be more bad investments eh? Bear and Countrywide and millions of subprime borrowers get saved from their own stupidity, Bank of America, JPMorgan Chase, and the the federal government then make big investments in the companies and people who made the original bad investments, and so on. All the while the people and investors who exercised better judgement are forced to pay for it.
I don't know about you guys, but I'm going to get in on the ground floor and start investing in the next bailout now. Anyone know how to wire money to Nigeria??
Monday, June 23, 2008
Tuesday, June 3, 2008
Why It's Never Your Fault (in even-numbered years):
As the Primary season officially comes to an end tonight, I'd like to take a nostalgic look back at some of this year's greatest hits from PANDER-monium 2008:
"It's not your fault you don't have a well-paying job, it's because of immigration!"
"It's not your fault you got laid off, it's because of NAFTA!"
"It's not your fault oil prices are high, it's because of greedy oil companies and speculators!"
"It's not your fault you're about to have your home foreclosed, you were swindled by your lender!"
I'd like to thank the likes of Hillary Clinton, Barack Obama, Mitt Romney and John McCain for six months of top-notch buck-passing none of us will soon forget- at least until 2010. I guess my greatest regret about all of this is that it has to come to an end sometime (five months from now most likely), but why does it really have to? I've gotten quite used to constantly being told that nothing is ever my fault, can't we just make it so that campaign season never ends and I can finally have indefinite absolution for all my actions?
Surely the American public would go for this in a heartbeat, but I do see a potential long-term problem with the concept. We're slowly running out of our most precious political resource: scapegoats. God help the re-election campaigns of those in government when that happens.
But for now let's relish our gluttonous, guilt-free lives and explore the many specious reasons we're not to blame for anything:
Let's start with the outrage du jour, gas prices. According to Hillary Clinton, the high price of oil is not due to soaring demand in places like India and China, and certainly not due to the fact that almost every car-owning person in the United States uses more gasoline then they should (myself notwithstanding) in pickup trucks, SUVs, and high powered sports cars; it's because of commodities traders and oil companies!
http://www.hillaryclinton.com/news/release/view/?id=7354
But Hillary is far from the only politician choosing to grandstand on the matter, her colleagues in the House and Senate have proven that they can sabre-rattle with the best of them!
http://www.nytimes.com/2008/05/22/business/22oil.html?scp=3&sq=oil%20companies,%20executives,%20congress&st=cse
http://online.wsj.com/article/SB121139083084211051.html
What bothers me so much this is that there are plenty of things to scold big oil about in the context of a congressional hearing, but this isn't one of them. Between Congress and the Consumer, oil companies have been painted into a corner- since the Democratic majority came to power in early 2007, Congress has failed to put any semblance of a consistent, goal-oriented energy policy into law. They have neither allowed for expanded domestic exploration projects (which this Foggy Blogger does not support- though credit the Republicans for at least conjuring an idea, seeing as how even a bad idea is better than no idea at all) nor have they made anything other than a very lame and symbolic effort to increase fuel economy requirements of vehicles sold in the US:
http://wheels.blogs.nytimes.com/tag/cafe-standards/?scp=2-b&sq=cafe+standards%2C+congress&st=nyt
So while Congress holds hearings to chastise fish in a barrel like rich oil executives instead of setting real policy, and while us consumers are out there refusing to make the switch to more fuel efficient vehicles, the price of oil will continue to rise. (And don't tell anyone, but we have only ourselves to blame).
The next station on our Whistle-Stop tour of PANDER-monium takes us to the midwest, where NAFTA (North American Free Trade Agreement, negotiated, enacted, and championed by Bill Clinton) is public enemy number one. Barack Obama and Hillary Clinton were at one point this year locked into a month-long pissing contest to see who could scapegoat our two largest trading partners (Canada and Mexico) the fastest.
http://www.economist.com/opinion/displaystory.cfm?story_id=10766009
Despite the fact that NAFTA did pave the way for significant outsourcing of manufacturing jobs to lower-cost Canada and Mexico, NAFTA has been an overwhelming success for our nation's economy, and indeed in Ohio in particular (over 50% of the states exports go to Canada or Mexico, according to The Economist Intelligence Unit). And at least one of the candidates, Barack Obama knows how good it's been for the American Economy:
http://online.wsj.com/article/SB120459129718608871.html
Back in late February he was involved in a well publicized gaffe in which he tried to assure Canadian diplomats that his protectionist talking points were just a result of him trying to assure the bourgeois voters of Ohio that he is more their comrade than Hillary Clinton could ever be, and that in no way is he gullible enough to believe his own rhetoric.
Or is he? Given Obama's record of unblemished support for farm subsidies (and Ms. Clinton's for that matter) can either candidate truly claim to be anything but staunch trade protectionists? As covered in previous publications of this blog, farm subsidies have long been the main sticking point in every free trade negotiation this nation has ever been a party to. Supporting tax-payer funded farm subsidies is anathema to supporting free trade; to attempt to support both is inherently hypocritical.
Free trade always has winners and losers, and it's unfortunate that we have lost manufacturing jobs in this country, but NAFTA only deserves a small part of the blame. Labor unions must shoulder some responsibility as well. Labor unions have had perhaps the most important role in the development of this nation's middle class since the industrial revolution, but in the era of free trade they have hurt their members more than helped them. By constantly demanding higher wages and better benefits they have priced this nation's blue collar workers out of their own jobs. Can anyone provide a rational argument for an assembly line worker in an auto plant to be making $55,000 per year or more when someone not too far away will do it for less than half that amount?
Of course not, because anyone who would defend paying twice what the competitors do in labor costs is certainly not rational, they are more likely emotional. But fluidity in the employment market should not be shunned, it should be embraced! In fact unemployment in this country has hovered at incredibly low levels (under 5%) for more than 20 years, so there are clearly jobs to be had- provided you are qualified....
The problem is that instead of our elected leaders challenging us, they've coddled us. Instead of telling us the truth, that the jobs now being done in Mexico and China for $2 an hour are beneath us, and that we can do better, they prefer to placate us by making unfulfillable promises that they'll bring them back!
This issue dovetails nicely with another highly publicized scapegoat: immigrants. Immigrants flock here because they will do jobs that most of us refuse to do, like pick lettuce and clean toilets. The vast majority of them do not even have a high school education, let alone a college education and hence low-wage manual labor jobs are the only ones immigrants are qualified to do. So if you're someone who's pissed off because you lost your job to an illegal immigrant with no education, my question to you is why the hell did you choose lettuce-picking as your vocation of choice? Why did you squander the opportunity of growing up in the wealthiest nation on earth, where even the poorest of the poor have access to decent education for free, to clean toilets for minimum wage? Don't we owe it to ourselves- and our parents for that matter- to do something better with our lives? To seize the benefits of living in the land of opportunity and lay an even stronger financial, educational, and social foundation for the next generation?
What our politicians should be doing instead of playing the blame game is encouraging us to attain higher levels of education so we can get jobs that can't be outsourced to low-wage and low-education nations and/or low-wage and low-education immigrants here. One of the drawbacks (among the many advantages) of globalization is that a union job in some factory somewhere is no longer a guaranteed ticket to the middle class like it once was. As a result we all have to embrace the sprit of the American Dream by working hard towards improving our competitiveness as a workforce. No politician will ever be able to guarantee us our jobs, only we can do that... and until we do, we'll keep losing them to low wage immigrants and low wage nations (And shhhhh, can you keep a secret?: We have only ourselves to blame).
"It's not your fault you don't have a well-paying job, it's because of immigration!"
"It's not your fault you got laid off, it's because of NAFTA!"
"It's not your fault oil prices are high, it's because of greedy oil companies and speculators!"
"It's not your fault you're about to have your home foreclosed, you were swindled by your lender!"
I'd like to thank the likes of Hillary Clinton, Barack Obama, Mitt Romney and John McCain for six months of top-notch buck-passing none of us will soon forget- at least until 2010. I guess my greatest regret about all of this is that it has to come to an end sometime (five months from now most likely), but why does it really have to? I've gotten quite used to constantly being told that nothing is ever my fault, can't we just make it so that campaign season never ends and I can finally have indefinite absolution for all my actions?
Surely the American public would go for this in a heartbeat, but I do see a potential long-term problem with the concept. We're slowly running out of our most precious political resource: scapegoats. God help the re-election campaigns of those in government when that happens.
But for now let's relish our gluttonous, guilt-free lives and explore the many specious reasons we're not to blame for anything:
Let's start with the outrage du jour, gas prices. According to Hillary Clinton, the high price of oil is not due to soaring demand in places like India and China, and certainly not due to the fact that almost every car-owning person in the United States uses more gasoline then they should (myself notwithstanding) in pickup trucks, SUVs, and high powered sports cars; it's because of commodities traders and oil companies!
http://www.hillaryclinton.com/news/release/view/?id=7354
But Hillary is far from the only politician choosing to grandstand on the matter, her colleagues in the House and Senate have proven that they can sabre-rattle with the best of them!
http://www.nytimes.com/2008/05/22/business/22oil.html?scp=3&sq=oil%20companies,%20executives,%20congress&st=cse
http://online.wsj.com/article/SB121139083084211051.html
What bothers me so much this is that there are plenty of things to scold big oil about in the context of a congressional hearing, but this isn't one of them. Between Congress and the Consumer, oil companies have been painted into a corner- since the Democratic majority came to power in early 2007, Congress has failed to put any semblance of a consistent, goal-oriented energy policy into law. They have neither allowed for expanded domestic exploration projects (which this Foggy Blogger does not support- though credit the Republicans for at least conjuring an idea, seeing as how even a bad idea is better than no idea at all) nor have they made anything other than a very lame and symbolic effort to increase fuel economy requirements of vehicles sold in the US:
http://wheels.blogs.nytimes.com/tag/cafe-standards/?scp=2-b&sq=cafe+standards%2C+congress&st=nyt
So while Congress holds hearings to chastise fish in a barrel like rich oil executives instead of setting real policy, and while us consumers are out there refusing to make the switch to more fuel efficient vehicles, the price of oil will continue to rise. (And don't tell anyone, but we have only ourselves to blame).
The next station on our Whistle-Stop tour of PANDER-monium takes us to the midwest, where NAFTA (North American Free Trade Agreement, negotiated, enacted, and championed by Bill Clinton) is public enemy number one. Barack Obama and Hillary Clinton were at one point this year locked into a month-long pissing contest to see who could scapegoat our two largest trading partners (Canada and Mexico) the fastest.
http://www.economist.com/opinion/displaystory.cfm?story_id=10766009
Despite the fact that NAFTA did pave the way for significant outsourcing of manufacturing jobs to lower-cost Canada and Mexico, NAFTA has been an overwhelming success for our nation's economy, and indeed in Ohio in particular (over 50% of the states exports go to Canada or Mexico, according to The Economist Intelligence Unit). And at least one of the candidates, Barack Obama knows how good it's been for the American Economy:
http://online.wsj.com/article/SB120459129718608871.html
Back in late February he was involved in a well publicized gaffe in which he tried to assure Canadian diplomats that his protectionist talking points were just a result of him trying to assure the bourgeois voters of Ohio that he is more their comrade than Hillary Clinton could ever be, and that in no way is he gullible enough to believe his own rhetoric.
Or is he? Given Obama's record of unblemished support for farm subsidies (and Ms. Clinton's for that matter) can either candidate truly claim to be anything but staunch trade protectionists? As covered in previous publications of this blog, farm subsidies have long been the main sticking point in every free trade negotiation this nation has ever been a party to. Supporting tax-payer funded farm subsidies is anathema to supporting free trade; to attempt to support both is inherently hypocritical.
Free trade always has winners and losers, and it's unfortunate that we have lost manufacturing jobs in this country, but NAFTA only deserves a small part of the blame. Labor unions must shoulder some responsibility as well. Labor unions have had perhaps the most important role in the development of this nation's middle class since the industrial revolution, but in the era of free trade they have hurt their members more than helped them. By constantly demanding higher wages and better benefits they have priced this nation's blue collar workers out of their own jobs. Can anyone provide a rational argument for an assembly line worker in an auto plant to be making $55,000 per year or more when someone not too far away will do it for less than half that amount?
Of course not, because anyone who would defend paying twice what the competitors do in labor costs is certainly not rational, they are more likely emotional. But fluidity in the employment market should not be shunned, it should be embraced! In fact unemployment in this country has hovered at incredibly low levels (under 5%) for more than 20 years, so there are clearly jobs to be had- provided you are qualified....
The problem is that instead of our elected leaders challenging us, they've coddled us. Instead of telling us the truth, that the jobs now being done in Mexico and China for $2 an hour are beneath us, and that we can do better, they prefer to placate us by making unfulfillable promises that they'll bring them back!
This issue dovetails nicely with another highly publicized scapegoat: immigrants. Immigrants flock here because they will do jobs that most of us refuse to do, like pick lettuce and clean toilets. The vast majority of them do not even have a high school education, let alone a college education and hence low-wage manual labor jobs are the only ones immigrants are qualified to do. So if you're someone who's pissed off because you lost your job to an illegal immigrant with no education, my question to you is why the hell did you choose lettuce-picking as your vocation of choice? Why did you squander the opportunity of growing up in the wealthiest nation on earth, where even the poorest of the poor have access to decent education for free, to clean toilets for minimum wage? Don't we owe it to ourselves- and our parents for that matter- to do something better with our lives? To seize the benefits of living in the land of opportunity and lay an even stronger financial, educational, and social foundation for the next generation?
What our politicians should be doing instead of playing the blame game is encouraging us to attain higher levels of education so we can get jobs that can't be outsourced to low-wage and low-education nations and/or low-wage and low-education immigrants here. One of the drawbacks (among the many advantages) of globalization is that a union job in some factory somewhere is no longer a guaranteed ticket to the middle class like it once was. As a result we all have to embrace the sprit of the American Dream by working hard towards improving our competitiveness as a workforce. No politician will ever be able to guarantee us our jobs, only we can do that... and until we do, we'll keep losing them to low wage immigrants and low wage nations (And shhhhh, can you keep a secret?: We have only ourselves to blame).
Sunday, June 1, 2008
Detroit: America's Pusher
"And I walk around, with these tombstones in my eyes, but I know the pusher don't care... if we live- as long as we drive- And I said, God Damn, God Damn that SUV-pushing man"
-Lyrics from "The Pusher" by Van Morrisson, amended slightly to fit the subject of this column.
I was doing a little reading last night in the business section, and I came upon something interesting:
http://www.nytimes.com/2008/05/31/business/31hybrids.html?scp=1&sq=general+motors%2C+hybrid&st=nyt
The first thing I noticed was the term "Land Yacht" that the story lead with, I was delighted to learn of a new sarcastic and derisive term to describe the quintessential mom-mobile, because frankly, "gas guzzler" was starting to become a little hackneyed from overuse. So, first and foremost, thank you Bill Vlasic for writing the article, and as long as I'm thanking you for things, I absolutely love your pickles. They cost a little bit more, you know, because they're in the refrigerated section and all, but they really do taste a lot better and have more crunch. Two tips of the hat to Mr. Vlasic!
More to the point though, this does broach a subject I've been meaning to address lately- the fact that Detroit's business strategy is strangely akin to those of your neighborhood pusher, or "drug dealer" for those of you not familiar with the parlance of our times. Allow me to explain further, some years ago, Detroit got us all hooked on this great new idea in automotive transport...the SUV. The SUV was a perfect fit for so many different demographics it was practically a silver bullet for the all the industries woes. It appealed to moms and dads who felt they needed a bigger vehicle to accommodate their families but were loathe to be 'minivan people'; it appealed nervous or timid drivers because the four wheel drive and sheer size of the vehicle conveyed the illusion of safety to the driver; it even appealed to that notoriously tough to sell to crowd of men trying to compensate for, uh, ahem, something.
Detroit's strategy was brilliant at the time, the cars were bigger, had more horsepower, more room for gimmicks, and had broad consumer appeal. The only drawback was piss-poor fuel efficiency, which probably didn't cross the mind of a Detroit executive or an SUV buyer until maybe 2 weeks or so ago. After all, in the early 90s oil cost $10 a barrel and the average price per gallon of gasoline was around $1. Shrewdly, the brain trust leading the "big three" American automakers made the assumption that like all commodities, the price of oil would stay the same for ever and ever. That's the first thing they teach you in business school actually, that the price of commodities are not the least bit volatile and are not subject to sudden change.
For more than a decade, SUV sales boomed and the "big three" swung back to profitability after years of being Wall Street's version of the "3am after-bar booty call." As the profits began to roll in, Detroit faced a decision, put all their eggs in the SUV and pickup truck basket, or diversify their portfolio of products to ensure that the companies' financial future (and those of their employees) were protected against market risk. In yet another brilliant move, Detroit ignored the first rule of business investment and put all their eggs in the Land Yacht basket.
To be fair, the people running these companies are not stupid, they are all in fact very well educated and shrewd businessmen. The problem is that they were all more focused on their own finances rather than those of the companies they lead. You see, the stock prices of publicly-traded companies like General Motors, Ford, and Chrysler (or as I like to call them, General Fordsler) are not based so much on assets, cash flow, profit margin, market share, or any other voodoo business metric. The fluctuations of stock prices over the short term are almost always based entirely on quarterly earnings reports and sales growth.
As a result, executives have a major incentive to produce immediate short-term growth to appease stock holders as well as to maximize their compensation, because they are paid in large part with company stock. As a result, General Fordsler continued to pour a disproportionate amount of their money and resources into producing SUVs and light trucks to improve sales growth despite steadily rising oil prices and environmental concern over the role of fossil fuels in global warming. General Fordsler also had the added benefit of being protected from foreign competition in this market segment due to a 25% import tariff applied to all imported trucks.
More information on this can be found here under the subheading "the SUV craze":
http://news.bbc.co.uk/2/hi/business/6346299.stm
At the same time that Detroit went all in on their SUV bet, they began to face more competition from foreign rivals- to the point where in today's market, there is not one company selling automobiles in the United States today that does not have at least two different SUV models to choose from. However, as the foreign competitors got in to the game they made a concerted effort to hedge their bets by diversifying their product portfolios with small cars and hybrids, to ensure that if the price of oil increased too much, or if the environmental controversy grew in intensity, they would be well positioned to adjust to the change in the market.
First, Honda introduced the Insight, the first hybrid car to be sold commercially in the United States. Honda followed that with its hybrid Civic and Accord models, Toyota also got in to the act with its Prius and Camry hybrid models. All of these cars have been such huge success stories that Honda and Toyota have actually struggled to meet the demand since their introduction. All these models do between 40-50 mpg city, and 30-36 mpg highway.
Going for the bad business hattrick, General Fordsler largely ignored the market until their gas-guzzling golden goose was all but dead and the writing was on the wall:
http://online.wsj.com/article/SB120957431268556721.html
http://online.wsj.com/article/SB121200752206127227.html
Facing a decling population of junkies, the General did what any good pusher would do, figure out a way to get people hooked again! Ford was the first, introducing the Escape hybrid in 2005. The Escape's green credentials were modest though, because the car was built on the Escape SUV platform. Hybrid or not, SUVs will never be able to compete with small car fuel effeciency- particularly small car hybrids- because they're just bigger. The bigger they are, the more energy they take to move, simple as that. But now GM and Chrysler are also introducing hybrid models, and guess what? None of them are cars either!
As the Bill Vlasic piece linked above points out, GM and Chrysler decided to up the ante on Ford by building not a smaller, more fuel effecient hybrid, but bigger and less fuel effecient hybrids. In addition, they have all yet to debut a hybrid car to compete with Honda, Toyota, and even Nissan, who recently started selling their Altima hybrid model nationally.
Not surprisingly, GMs Yukon and Tahoe hybrid models have not been successes in any sense of the word- a Hyrbid that gets only 20 mpg seems to be stuck in market purgatory: it doesn't appeal to traditional hybrid buyers due to unspectacular fuel economy and it doesn't appeal to traditional large SUV buyers due to unspectacular pricing as compared to a conventional model.
Perhaps another approach will work better?
www.chrysler.com/refuel
The "Let's Refuel America" sales pitch is Chrysler's attempt at ignoring the increasing cost of energy and duping consumers into their old buying patterns. Unfortunately, Chrysler didn't do a very good job of disguising this as a good deal:
http://www.thestreet.com/s/is-chryslers-299-gas-deal-a-good-bet/newsanalysis/business-news-update/_msnh/10418752.html?&cm_ven=MSNH&cm_cat=FREE&cm_ite=NA
According to research by TheStreet.com, Chrysler gives you the option of large cash allowance (i.e. discount off sticker price) and no gas guarantee, or a small cash allowance with the gas guarantee. In the example given by TheStreet.com, if you bought a Dodge Ram pickup truck, you'd pay $2500 upfront for the gas guarantee. Seeing as how most of us finance our cars these days, that $2500 you didn't get in cash allowance would be financed and you'd pay interest on it which, unless you had a really good interest rate, would almost certainly outweigh any potential cost savings from paying $2.99 per gallon for gas (up to 12,000 miles per year) for three years. In fact because most car loans these days are 5 year loans, you'd likely still be paying for the $2500 you didn't get off the original price of the car long after the price guarantee expires.
By contrast, if you had taken the extra $2500 cash back and put it into a savings account, it could earn interest for you and over a few years might be enough for a downpayment on a hybrid car that might seem a hell of a lot more appealing when gas is $5, $6, or $7 dollars per gallon. A possibility that doesn't seem that far-fetched if the price of oil continues to rise.
http://www.marketwatch.com/news/story/goldman-sachs-raises-possibility-200/story.aspx?guid=%7B4B702F7F-41F8-45F0-A133-630F12F2C764%7D
Certainly this isn't the first time that a commercial enterprise has tried to fool consumers with a shell game of some kind, so what makes this noteworthy? There's a larger point here. We import almost 10 million barrels of oil per day, and a lot of it comes from places with less than sterling democratic credentials (like Canada) and/or well-known reputations for not liking America (like Canada). Some of the others we import from, to name a few, are Saudi Arabia, Nigeria, Venuzuela, Kuwait, Russia, Iraq, and Chad.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
As the price of oil increases, its becoming harder and harder to ignore (even though we're all trying really really hard!) the fact that every day we send billions of dollars worth of our national wealth abroad. Instead of recognizing this as the economic and national security threat that it is, Detroit has mostly pussyfooted around (with Washington's complicity) with small and mid-sized cars because they only have a 2.5% import tariff advantage in that segment, not the 25% advantage they have with trucks and SUVs.
In light of this, I think Chrysler should rename their gas guarantee gimmick plan the "Let's refuel the jumbo jets of the Saudi royal family."
No matter how many sales gimmicks or half-assed attempts at fuel effecient vehicles General Fordsler rolls out, it won't change the fact that the price of oil will continue to go up, and as it does, us oil junkies will be just like any other addict: at the complete mercy of our pusher.
-Lyrics from "The Pusher" by Van Morrisson, amended slightly to fit the subject of this column.
I was doing a little reading last night in the business section, and I came upon something interesting:
http://www.nytimes.com/2008/05/31/business/31hybrids.html?scp=1&sq=general+motors%2C+hybrid&st=nyt
The first thing I noticed was the term "Land Yacht" that the story lead with, I was delighted to learn of a new sarcastic and derisive term to describe the quintessential mom-mobile, because frankly, "gas guzzler" was starting to become a little hackneyed from overuse. So, first and foremost, thank you Bill Vlasic for writing the article, and as long as I'm thanking you for things, I absolutely love your pickles. They cost a little bit more, you know, because they're in the refrigerated section and all, but they really do taste a lot better and have more crunch. Two tips of the hat to Mr. Vlasic!
More to the point though, this does broach a subject I've been meaning to address lately- the fact that Detroit's business strategy is strangely akin to those of your neighborhood pusher, or "drug dealer" for those of you not familiar with the parlance of our times. Allow me to explain further, some years ago, Detroit got us all hooked on this great new idea in automotive transport...the SUV. The SUV was a perfect fit for so many different demographics it was practically a silver bullet for the all the industries woes. It appealed to moms and dads who felt they needed a bigger vehicle to accommodate their families but were loathe to be 'minivan people'; it appealed nervous or timid drivers because the four wheel drive and sheer size of the vehicle conveyed the illusion of safety to the driver; it even appealed to that notoriously tough to sell to crowd of men trying to compensate for, uh, ahem, something.
Detroit's strategy was brilliant at the time, the cars were bigger, had more horsepower, more room for gimmicks, and had broad consumer appeal. The only drawback was piss-poor fuel efficiency, which probably didn't cross the mind of a Detroit executive or an SUV buyer until maybe 2 weeks or so ago. After all, in the early 90s oil cost $10 a barrel and the average price per gallon of gasoline was around $1. Shrewdly, the brain trust leading the "big three" American automakers made the assumption that like all commodities, the price of oil would stay the same for ever and ever. That's the first thing they teach you in business school actually, that the price of commodities are not the least bit volatile and are not subject to sudden change.
For more than a decade, SUV sales boomed and the "big three" swung back to profitability after years of being Wall Street's version of the "3am after-bar booty call." As the profits began to roll in, Detroit faced a decision, put all their eggs in the SUV and pickup truck basket, or diversify their portfolio of products to ensure that the companies' financial future (and those of their employees) were protected against market risk. In yet another brilliant move, Detroit ignored the first rule of business investment and put all their eggs in the Land Yacht basket.
To be fair, the people running these companies are not stupid, they are all in fact very well educated and shrewd businessmen. The problem is that they were all more focused on their own finances rather than those of the companies they lead. You see, the stock prices of publicly-traded companies like General Motors, Ford, and Chrysler (or as I like to call them, General Fordsler) are not based so much on assets, cash flow, profit margin, market share, or any other voodoo business metric. The fluctuations of stock prices over the short term are almost always based entirely on quarterly earnings reports and sales growth.
As a result, executives have a major incentive to produce immediate short-term growth to appease stock holders as well as to maximize their compensation, because they are paid in large part with company stock. As a result, General Fordsler continued to pour a disproportionate amount of their money and resources into producing SUVs and light trucks to improve sales growth despite steadily rising oil prices and environmental concern over the role of fossil fuels in global warming. General Fordsler also had the added benefit of being protected from foreign competition in this market segment due to a 25% import tariff applied to all imported trucks.
More information on this can be found here under the subheading "the SUV craze":
http://news.bbc.co.uk/2/hi/business/6346299.stm
At the same time that Detroit went all in on their SUV bet, they began to face more competition from foreign rivals- to the point where in today's market, there is not one company selling automobiles in the United States today that does not have at least two different SUV models to choose from. However, as the foreign competitors got in to the game they made a concerted effort to hedge their bets by diversifying their product portfolios with small cars and hybrids, to ensure that if the price of oil increased too much, or if the environmental controversy grew in intensity, they would be well positioned to adjust to the change in the market.
First, Honda introduced the Insight, the first hybrid car to be sold commercially in the United States. Honda followed that with its hybrid Civic and Accord models, Toyota also got in to the act with its Prius and Camry hybrid models. All of these cars have been such huge success stories that Honda and Toyota have actually struggled to meet the demand since their introduction. All these models do between 40-50 mpg city, and 30-36 mpg highway.
Going for the bad business hattrick, General Fordsler largely ignored the market until their gas-guzzling golden goose was all but dead and the writing was on the wall:
http://online.wsj.com/article/SB120957431268556721.html
http://online.wsj.com/article/SB121200752206127227.html
Facing a decling population of junkies, the General did what any good pusher would do, figure out a way to get people hooked again! Ford was the first, introducing the Escape hybrid in 2005. The Escape's green credentials were modest though, because the car was built on the Escape SUV platform. Hybrid or not, SUVs will never be able to compete with small car fuel effeciency- particularly small car hybrids- because they're just bigger. The bigger they are, the more energy they take to move, simple as that. But now GM and Chrysler are also introducing hybrid models, and guess what? None of them are cars either!
As the Bill Vlasic piece linked above points out, GM and Chrysler decided to up the ante on Ford by building not a smaller, more fuel effecient hybrid, but bigger and less fuel effecient hybrids. In addition, they have all yet to debut a hybrid car to compete with Honda, Toyota, and even Nissan, who recently started selling their Altima hybrid model nationally.
Not surprisingly, GMs Yukon and Tahoe hybrid models have not been successes in any sense of the word- a Hyrbid that gets only 20 mpg seems to be stuck in market purgatory: it doesn't appeal to traditional hybrid buyers due to unspectacular fuel economy and it doesn't appeal to traditional large SUV buyers due to unspectacular pricing as compared to a conventional model.
Perhaps another approach will work better?
www.chrysler.com/refuel
The "Let's Refuel America" sales pitch is Chrysler's attempt at ignoring the increasing cost of energy and duping consumers into their old buying patterns. Unfortunately, Chrysler didn't do a very good job of disguising this as a good deal:
http://www.thestreet.com/s/is-chryslers-299-gas-deal-a-good-bet/newsanalysis/business-news-update/_msnh/10418752.html?&cm_ven=MSNH&cm_cat=FREE&cm_ite=NA
According to research by TheStreet.com, Chrysler gives you the option of large cash allowance (i.e. discount off sticker price) and no gas guarantee, or a small cash allowance with the gas guarantee. In the example given by TheStreet.com, if you bought a Dodge Ram pickup truck, you'd pay $2500 upfront for the gas guarantee. Seeing as how most of us finance our cars these days, that $2500 you didn't get in cash allowance would be financed and you'd pay interest on it which, unless you had a really good interest rate, would almost certainly outweigh any potential cost savings from paying $2.99 per gallon for gas (up to 12,000 miles per year) for three years. In fact because most car loans these days are 5 year loans, you'd likely still be paying for the $2500 you didn't get off the original price of the car long after the price guarantee expires.
By contrast, if you had taken the extra $2500 cash back and put it into a savings account, it could earn interest for you and over a few years might be enough for a downpayment on a hybrid car that might seem a hell of a lot more appealing when gas is $5, $6, or $7 dollars per gallon. A possibility that doesn't seem that far-fetched if the price of oil continues to rise.
http://www.marketwatch.com/news/story/goldman-sachs-raises-possibility-200/story.aspx?guid=%7B4B702F7F-41F8-45F0-A133-630F12F2C764%7D
Certainly this isn't the first time that a commercial enterprise has tried to fool consumers with a shell game of some kind, so what makes this noteworthy? There's a larger point here. We import almost 10 million barrels of oil per day, and a lot of it comes from places with less than sterling democratic credentials (like Canada) and/or well-known reputations for not liking America (like Canada). Some of the others we import from, to name a few, are Saudi Arabia, Nigeria, Venuzuela, Kuwait, Russia, Iraq, and Chad.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
As the price of oil increases, its becoming harder and harder to ignore (even though we're all trying really really hard!) the fact that every day we send billions of dollars worth of our national wealth abroad. Instead of recognizing this as the economic and national security threat that it is, Detroit has mostly pussyfooted around (with Washington's complicity) with small and mid-sized cars because they only have a 2.5% import tariff advantage in that segment, not the 25% advantage they have with trucks and SUVs.
In light of this, I think Chrysler should rename their gas guarantee gimmick plan the "Let's refuel the jumbo jets of the Saudi royal family."
No matter how many sales gimmicks or half-assed attempts at fuel effecient vehicles General Fordsler rolls out, it won't change the fact that the price of oil will continue to go up, and as it does, us oil junkies will be just like any other addict: at the complete mercy of our pusher.
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