A few things have happened since my last ‘View from 20,000 Feet’ Post on this Blog 12 days ago (see Post dated November 13). This Post discusses my views on several of them, and concludes that for the first time since I predicted a serious downturn in the U.S. economy over 3 years ago I am beginning to feel like the child who ‘gets what they wished for’ and then wonders ‘why they wished for it’. In fact, I really didn’t ‘wish for’ what is now happening, and what I think will happen going forward from here – nothing good economically and otherwise – as to have done so would in my view have been both Machevallian and in a personal sense, self-defeating. I think circumstances where an entire population suffers must become everyone’s problem, no matter how well positioned one is financially – but more on that later (read what I call ‘The Pygmy Story’ at the end of this Post).

What I consider to be important economic-related events of the past 12 days include:

1. The visit to Washington by the Presidents of Chrysler, Ford and GM. Enough has been written on their inability to see past the luxurious seats of their respective corporate jets to sink a large ship. That is a symtom of executive excess, it is not the issue. The issue as I see it is how are U.S. (and Canadian) direct and indirect auto and auto related jobs retained. It seems to me that this will only occur if for starters union negotiated fully benefited wage rates are rolled back to non-union rates paid by Toyota. Absent this, I think it unlikely the ‘Big Three’ (now an oxymoron) can be competitive going forward. This would be a rollback of approximately 40% in the U.S. (and perhaps a like amount in Canada although I don’t know that number) based on recently reported GM versus Toyota fully benefited labour rates of U.S.$73 versus U.S.$43. I consider it meaningful that the Chairman of Toyota came from Japan last Thursday to open a new Toyota assembly plant – one day after the plea was made in Washington for an ‘unsupported in economic or business plan terms’ U.S.$25 billion bail-out contribution by the aforementioned company Presidents. In this regard:

• I see the only way these labour rate reduction can happen in an efficient manner is if the ‘Big Three’ enter Chapter 11;

• this may force ‘supply chain companies’ into Chapter 11 to likewise efficiently realize labour rate reductions – but so be it;

• such wage rate reductions will further erode the U.S. state and federal income tax revenue base, which will make all of the incremental debt currently being incurred in the U.S. more difficult to service and pay down in due course; and,

• as a Canadian who spends 3 months each year in the U.S., I wonder what all this means to Canada – particularly southern Ontario – whose extensive automotive assembly plant and supporting plant structure, following the Autopact agreement in 1968 between the U.S. and Canada, became - and currently is - an integrated part of a ‘North American’ auto industry. The question I have is whether U.S. protectionism would extend to closing those plants, notwithstanding the risk that Canadians would purchase less ‘Big Three’ products than they historically have done?

2. The ‘bail-out’ of Citibank. At least this time U.S. taxpayers are potentially getting some return on an equity portion of the bail-out amount, are not putting money into a company that is unrestricted as to dividend payout, and are putting money into a company that may control executive compensation to some degree. An important question in all of this is ‘Where were the Boards of Directors of Bear Stearns, Lehman Bros., AIG, Fannie Mae and Freddie Mac, Citibank, etc. etc.? While an unhappy thought (I am a Chartered Accountant – CPA in U.S. speak – by training, not a lawyer), I think it would not be a bad thing from a personal economic perspective to be a litigation lawyer in the upcoming environment.

3. President-elect Obama has just announced his ‘economic’ team, and has announced a introduction of a further ‘economy rehabilitation plan’ (my words) aimed at creating employment for up to 2.5 million Americans. His plans apparently include employing people on infrastructure projects – which on the surface (no pun intended) makes great sense to me. The question I continue to have is ‘where is all this money going to come from, and how is it going to be serviced and repaid?’. The first part of this question has an easy answer, Mr. Bernanke’s printing presses. The second part is to me an imponderable in circumstances where the U.S. income tax revenue base is almost certainly going to fall, perhaps precipitously.

The U.S. Consumer (and I assume the Canadian Consumer)

1. In the last 2 trading days the S&P has increased by over 13%. Who is kidding who? Market makers, traders and investment advisors must be reacting and hoping, not analyzing. Speaking of analyzing, one New York based analyst yesterday downgraded his forecasts for retail profits downward for the 5th time in 3-4 months yesterday. His explanation was that ‘the facts have changed’? Where has he been?? No fundamental facts related to the U.S. consumer – housing starts, sales, foreclosures, confidence, etc. have to my knowledge changed in the past 3-4 months. Events I have thought for some time to be predictable have occurred and continue to be confirmed.

2. Consumers may now be taking the position that ‘if something is not on sale, don’t buy’. They also may finally be thinking that just because something is on sale they ‘don’t need to buy it’. In any event, U.S. Black Friday retail sales – now predicted by some likely to be down by as much as 50%, which strikes me as far too pessimistic – will be something to carefully watch this coming Friday.

My Developing Concern

When my sons were small children (they are now in their 30’s) I made up many stories for them to teach them what I consider to be important life lessons. I geared my stories to children. One I called ‘The Pygmy Story’.

A shortened version of The Pygmy Story goes like this:

“An explorer in deepest Africa chanced upon a tribe of 30 pygmies. They were happy little people, with lots to eat and drink from their hunting, fishing and ‘honey finding’ activities. The Explorer decided to live with them for a few days. On the 2nd day he was with them he called them to the center of their village at 12:00 noon and gave them each a chocolate bar – something they had never had. He did this on successive days until he ran out of chocolate bars. The explorer made a fatal mistake. The pygmies were cannibals, and the day the Explorer ran out of chocolate bars the pygmies ate him instead.”

The moral of the story obviously is: ‘you can’t take things away from people that they have and leave them happy’. No one who has enjoyed our U.S./Canada ‘North American advantages’ over the past many years is going to be happy if their standard of living is seriously reduced – or even reduced somewhat for that matter. The question I am asking myself is: ‘What would such a circumstance mean with respect to crime rates, personal safety, etc., etc.

Stay tuned.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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