I just listened to President Obama address the U.S. and the world a few minutes ago from the White House. His topic - the background to, and how the American people should view, the impending Chapter 11 bankruptcy filing of Chrysler which will take place (almost certainly) later this afternoon. My comments, based on what I heard the President say, are as follows:

• this is a water-shed event for the U.S. auto industry, the current U.S. economy, and U.S. economic recovery. Consistent with my previously expressed views, the U.S. Administration is not going to stand by and allow the Chrysler and related U.S. support jobs to be lost - at least not without a hard fight even if the result is ‘postponement of job losses’ but job losses in the end;

• all interested parties (Chrysler management, suppliers, the UAW, the Canadian Auto Workers, etc.) and all but a few lenders agreed to sacrifice part of their capital or incomes to assist in the restructuring process. Those few lenders who did not agree (and, as interpreted from the remarks of CNN commentators, who may have had insurance on their loans that they could realize on only if Chrysler filed for bankruptcy) refused to do that to the displeasure of the President. As a result, as President Obama painted the picture it was this small group of ’speculators’ whose recalcitrance resulted in the need for bankruptcy;

• as I expected, the U.S. Administration will financially support Chrysler until and when it ‘comes out of bankruptcy’. All funds committed to Chrysler’s business viability up to date and subsequently will be repaid before, as President Obama put it, Fiat takes over control of Chrysler. The underlying negotiations leading up to today between Chrysler, Fiat and (I presume) the U.S. Administration obviously ceded control of Chrysler to Fiat - a point not picked up on by commentators by the time I stopped watching the coverage. This is a further example of control of major U.S. assets leaving the U.S.; and,

• the U.S. Administration will do everything it can to expedite the Chrysler bankruptcy proceeding in order to protect the Chrysler labor force, the Chrysler dealers and their employees, and Chrysler’s suppliers and their employees. That said, no matter how powerful the Office of the U.S. President, that Office is not above the law. Accordingly, it will be interesting to see how quickly the Bankruptcy Court will act (I presume extremely quickly), but more to the point what steps will the ‘recalcitrant creditors’ take to delay the process and get want they (or their insurers) want - and what will that activity mean to the viability of Chrysler. It is hard to imagine that Fiat has committed to do a deal with Chrysler ‘no matter what the outcome to the bankruptcy proceeding’. It is also hard to believe the Bankruptcy Court will knowingly take shortcuts to circumvent ‘due process’ as I presume such activity would be appealed, resulting in time delays. At some point commercial reality may dictate to Fiat that the deal is too complicated for them.

I see this ‘play’ as being far from over with much at stake. I still believe the U.S. Administration will do everything in its power to avoid the loss of jobs an ultimate Chrysler failure would mean the to the U.S. economy. I believe the actions of the U.S. Administration are directionally correct. I also believe the road to Chrysler coming out of bankruptcy protection may not be as smooth as President Obama seems to believe it will be. I see there being unforeseen twists and turns in it. To me what is going on here is ‘reverse chicken soup’ - that is, ‘it can’t help and it might hurt’.

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An article this morning titled ‘Consumer spending, new jobless claims dip’ reports U.S. consumer spending dropped by 0.2% in March, worse than the 0.1% decline economists expected, and that incomes dropped 0.3%, also worse than expected. At the same time the U.S. personal savings rate rose to 4.2% from 4.0% in February while new applications for unemployment aid fell to a seasonally adjusted 631,000 last week, down from 645,000 the prior week. The number of people continuing to draw unemployment benefits jumped to almost 6.3 million, the highest on record dating back to 1967, and higher than economists had expected. The article goes on to list further U.S. job losses announced this week (Textron – 8,300, being 20% of its workforce; GM – 21,000 factory jobs by 2010; Timken – 4,000 by 2010), yet reports that “many analysts predict the recession is easing in the current quarter”. I am not certain how any economist or analyst is of the view that the end is in sight for the U.S. recession any time soon. I have just finished watching President Obama (12:10 EST) present his views on the impending Chrysler bankruptcy. Given what I see as the importance of this, I am going to immediately summarize my thoughts on it in a separate post which will be posted within the next 30 minutes.

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There are multiple articles this morning reporting on Chrysler – more seem to be published ‘by the minute’. A London Times article titled ‘Chrysler set for bankruptcy as talks stall’ reports (as do most others) that Chrysler appears to be headed for Chapter 11 protection from creditors today after talks with lenders broke down last night. The article reports the US Treasury is now believed to be preparing for a brief “surgical” bankruptcy that would avoid liquidation and would pave the way for a deal with Fiat as early as next week. The article further reports President Obama is likely to make an announcement on Chrysler today.

Other articles note that GM has until June 1 to finalize an acceptable (to the U.S. Administration) restructuring plan and, I think importantly, that GM’s restructuring plans include canceling up to 40% of its U.S. dealerships within the next two years. I continue to believe (see earlier posts on this blog) that the U.S. Administration will not allow either Chrysler or GM ultimately to fail. The two companies employ too many people in the U.S., and their respective operations indirectly employ even more U.S. residents in the auto parts supply, component, and ancillary (advertising agencies, printing companies, etc., etc.) businesses for the U.S. Administration to walk away from all those jobs. That said, assuming I am right whatever restructuring occurs will result in more U.S. job losses. if I am wrong, look out ‘a long way below’.

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A Wall Street Journal article today titled ‘China’s Stimulus Spurs U.S. Business’ reports that “China’s efforts to quickly pump up its economy are providing a much-needed boost for U.S. businesses as well”, and that “A growing number of companies, from tire and excavator makers to fast-food chains, are benefiting from China’s $585 billion stimulus program, which has quickly funneled money into everything from bridges to consumers’ pockets”. The article reports:

• Caterpillar Inc.’s Chief Executive James W. Owens as saying the company’s excavator sales in China have returned to record levels in recent months, bouncing back from plummeting sales over the winter;

• Lakshmi Mittal, CEO of Arcelor Mittal, the world’s largest steelmaker, saying China’s stimulus package is finally starting to increase demand for steel;

• a U.S. based economist as saying “The hope is that China would become an engine of growth to drive the global economy out of this severe recession - much as the U.S. was the engine of growth that drove the global economy after the dot-com collapse; and,

• a recent World Bank forecast says stimulus spending in China will represent three-quarters of the 6.5% GDP growth it sees for China this year.

The article also reports the World Bank as saying that much of the Chinese stimulus money is for “projects that were already envisaged in the government’s longer-term plans”. This is important, because the article more than once refers to the speed at which China has been able to mobilize its stimulus spending on projects that have long been in the planning stages – in contrast to the U.S. where many of the ‘stimulus spending projects’ are in early planning stages or have to be ‘invented’ (my word). In any event, that China’s stimulus spending activity is already proving positive for heavy equipment and steel manufacturers is very constructive (no pun intended). That China is leading the world in economic recovery is no surprise to me. China has an extraordinarily large U.S.$ holding and a low cost work force. But think hard about what you would have said only 10 years ago if someone had told you the U.S. economy was going to be in ruins in 2009 and China would be looked to as a very important part of its salvation. Unless you are different than most, I suspect you would have laughed and ordered another drink. I further suspect few Americans are laughing now, are likely to laugh again for some long time, and many are ordering two drinks instead of one.

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A New York Times article today titled ‘Japanese Output Rises by 1.6 Percent’ says Japanese Industrial production rose in March for the first time in six months, and is poised to continue growing. The article also reported the Japanese central bank left its benchmark interest rate steady at 0.1%, held off further moves to boost corporate financing, but still expects Japan’s economy to shrink 3.1% in 2009 – higher than the 2% plus contraction it predicted in January. The rebound was led by a jump in electronic parts and machinery shipments. Japanese factory output is projected to jump 4.3% and 6.1% in April and May respectively. Japanese exports rose 2% in March from February, the first increase in nearly a year. These numbers are encouraging, but I continue to think for meaningful recovery to occur in the U.S. and the rest of the world – perhaps with the exception of China and other economies that hold large U.S.$ reserves - the U.S. job losses must be reversed and U.S. consumer spending must pick up significantly. So far that seems not to be happening.

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The Fed said this afternoon that it ‘sees signs recession may be easing’ and that the economic outlook has “improved modestly” since last month. That said, the Fed left the interest rate at 0.00% - 0.25%, and decided against taking any new steps to shore up the economy. Fed policymakers offered a less dour assessment of the economy than the one it provided in mid-March, saying:

• the economy has continued to contract, though the pace of contraction appears to be somewhat slower;

• economic activity is likely to remain weak for a time;

• while consumer spending has shown signs of stabilizing, it is still being constrained by rising unemployment, falling home values, and hard-to-get credit; and,

• weak sales and credit difficulties have forced businesses to cut spending and lay off workers.

The Fed’s statements are not what generally was expected – see earlier posts today. What the Fed said today is nothing new. I suspect the Fed is taking a ‘wait and see’ attitude – and the Mr. Bernanke not only has all of his fingers crossed, but all of his toes crossed as well.

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An article just released titled ‘U.S. economy tumbles in first quarter’ says:

• the U.S. GDP contracted by 6.1% in Q1 2009 as exports and business inventories plummeted. This was a much larger drop than the 4.9% drop expected by economists and follows a 6.3% Q4 2008 decline;

• an advance U.S. Commerce Department report shows business inventories plunged by a record $103.7 billion in Q1 2009, as firms worked to reduce stocks of unsold goods. This accounted for 2.8% of the GDP contraction. This was reported as good news because it suggests manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels while concurrently recent manufacturing surveys have shown an improvement in new orders;

• exports dropped by 30% in Q1 2009, the biggest decline since 1969, after dropping 23.6% in Q4 2008. This decline accounted for 4.1% of the GDP contraction;

• business investment dropped 37.9% in Q1 2009, and residential investment dropped 38% - the biggest decline since the second quarter of 1980;

• consumer spending, which in the past has accounted for about 70% of GDP rose 2.2% in Q1 2009, boosted by a 9.4% increase in durable goods purchases, the first advance after four quarters of decline;

• U.S. home loan applications fell last week to the lowest level since mid-March, even as mortgage rates clung to record lows. The Mortgage Bankers Association said its mortgage applications index, which reflects demand for both purchase loans and refinancings, fell 18.1%.

Aside from the consumer spending statistic and inventory reductions, I don’t see any of this as good news in the context of near-term U.S. economic recovery. How, if at all, this data will influence the current ongoing Fed meeting and what the Fed says in its release planned for this afternoon remains to be seen.

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An article today titled ‘Recession Has Changed Lifestyles‘ says the current recession has forced a majority of Americans to alter their lifestyles, and many are upset about it, but that many are optimistic about their financial prospects over the next year. Of survey respondents:

• 56% said the recession has caused them to make significant changes in the way they are living;

• 25% said they are “angry” or “upset” about having to do so;

• 66% have lost a job or have seen someone close to them get laid off or lose a job; and,

• 71% have had their wages or hours cut or seen it happen to a close friend or relative.

Assuming the survey included enough respondents to make it statistically valid to a reasonably close tolerance (say even +/-5%) I think these percentages are quite remarkable. I say this considering that many economists were not acknowledging the U.S. was even in recession as late as 8 – 10 months ago, and pending release of April numbers the U.S. recession may be worsening. Think of things this way: Many people who have lived in the United States, Canada and the other G7 countries over the past – say 20/50 years – have lived comparatively (compared with most of the rest of the world) pretty idyllic existences. If you live in one of those 7 countries think how often when you ask your friends and acquaintances the question “How are you doing” you have been given the answer ‘not good’, ‘terrible’, ‘poorly’ or ‘sh—ty’. Unless your experience is different than mine the replies, even today, (irrespective of how those who are asked really feel) are ‘great’, ‘good’, ‘never better’, etc. It has been obvious to me as long as I can remember that ‘you can’t take things away from people’ and leave them in a happy state. If the U.S. and developed country economies do not come out of recession in the near term I think the results of surveys such as the one reported will only worsen. If the U.S. recession and recession in other developed countries worsens, I think it inevitable that the populations of those countries will become ever more unhappy – which cannot lead anywhere good.

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An article today titled ‘Can U.S. interest rates effectively fall below zero?’ says that economists and traders expect the Federal Reserve to signal this afternoon (April 29) that it is about to become much more aggressive in its efforts to drive rates effectively below zero. The Fed has been intervening (or promising to intervene) in the debt market as part of its effort to bring down long-term rates. The Fed’s target rate cannot be negative, but if it succeeds in bringing long-term rates to where they would be based on the traditional spread between short and long-term rates if short-term rates could go negative it is arguable that to some degree the Fed in part will accomplish the same thing. It is expected such measures will be aimed at forcing market interest rates lower, which would in turn result in lower rates on everything from mortgages to corporate bonds. Interestingly, the article says an “internal study recently leaked to the media suggested the ideal target interest rate would be minus-5 per cent, based on the current levels of unemployment, inflation and output”. To the extent there is any accuracy to the existence of such a study and its reported conclusion this suggests to me that an ‘inside and up-to-date look’ at current U.S. economic statistics (which presumably the Fed has) likely is showing the U.S. recession is worsening, not flattening out or improving. Today’s Fed report may prove to be an important indicator of where things stand and where they may go in the next few months. The article says that “Economists and investors are also on the lookout for comforting words from the Fed that the central bank has not lost sight of the possibility that throwing around so much money could spark inflation”. It will be interesting to see if the Fed addresses that this afternoon.

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An article says a group of Japanese firms including Toshiba Corp, Kazakh state uranium company Kazatomprom, and a unit of Canada’s Uranium One are reported to have opened Khorasan-1 in Kazakhstan, and that Khorasan, with uranium reserves of more than 80,000 tonnes, will produce about 180 tonnes of the commodity this year and reach full capacity by 2014 when it is due to start yielding 3,000 tonnes of uranium a year. The article says the companies have invested about $430 million in the project so far and that about 2,000 tonnes will be shipped to Japan to fuel its nuclear power plants. Kazakhstan, a former Soviet republic west of China, is reported to have a fifth of global uranium reserves. To put this production in perspective Canadian based Cameco, the world’s largest non-government owned uranium producer, produced 7,589 tonnes of uranium in 2008 (17 million pounds, source: company annual disclosure). As projects such as the one in Kazakhstan develop it will be important to watch the world demand/supply relationship for uranium and the effect increased supply will have on the market price of uranium.

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