Economic Breakdown on the Financial Highway

The stock market fell 100 points on the Dow index on Friday. We hope Daily Reckoning readers are out of US stocks. Sooner or later this jig is going to be up. You don’t want to be heavily invested when it does.

Right now, the market is dilly-dallying. Investors are enjoying a picnic. Alas, they’ve spread their picnic blanket on the side of Vesuvius. It could blow up at any time.

We are in a depression. Not yet a ‘great’ depression. But it’s a pretty good depression; and we’ll take what we can get.

Depressions take time. They go away eventually, but not before they’ve done their work. Among the jobs this one has to do is to knock stocks down to bargain levels. Or hold them down while inflation takes them to bargain prices. Either way, we’ve got a long road ahead. In the meantime, we’ll keep our Crash Alert flag flying. The dilly-dallying could end any day – in a panic to get out of stocks.

Depressions are illusion-killers.

One fellow imagines that somehow he will be able to afford a new house – even though he hasn’t got a real job.

A real estate investor thinks the market for new condos in Florida always goes up…no matter how many they build.

GM believes it will muddle through somehow… It loses money on each sale; maybe it can make it up in volume!

The job of a depression is to destroy illusions…to bring people down to earth. And that begins with questions:

Is this stock really worth 20 times earnings?

What happened to the buyers?

How do I know the bank is solvent?

In this weekends’ Washington Post, a columnist wonders what GM executives were thinking when they allowed the best automotive franchise in the world go broke. They probably weren’t thinking much at all. They didn’t need to. Business was good for a very long time. American auto sales expanded for an entire century. Remember the glory years…’50s…the ’60s? GM came out with new and better models every year. People paid attention – they measured the fins…admired the chrome…and listened to the roar of GM horsepower.

The highway system was getting better and better. Salaries were increasing – at least, until 1973. Gasoline was 25 cents a gallon. Everyone wanted to ‘See the USA in a Chevrolet.’

But nothing fails like success. GM was the world’s biggest and most successful company. Naturally, it attracted parasites. The unions wanted more and more – more paid time off…more health care benefits…better retirement programs. Management became parasitic too. It was too comfortable and too well-paid to resist. Everyone went along…getting what they could get…all the way to bankruptcy.

“When a machine broke down and stopped the assembly line,” explains Paul Ingrassia in his book Crash Course, “workers would take an unscheduled break and wait for an electrician or machinists instead of rushing to fix it themselves. Only skilled tradesmen were allowed to repair machinery, even if ordinary workers were capable of doing it – rules enforced not only by the national contract but also by the separate local contracts at each factory. The electricians or machinists often took their time getting to where they were needed, so that the plant would have to go into overtime to make up for lost production and everybody would get more money.”

As GM goes, so goes the nation. The 20th century saw Detroit hustle and bustle…then it went on cruise control. That was true of the whole country, too; America was so successful she couldn’t overcome it. Like the labor unions at GM, every major group got a little edge…a little advantage…food stamps for the poor…bailouts for the rich… And everywhere you looked there were more petty tyrants enforcing pettifogging, perverse rules.

“This sidewalk is closed,” announced a municipal employee, working on the sidewalk on Charles Street in Baltimore last week.

It was a silly matter. But Americans have become so burdened with claptrap rules that they no longer question them. And they’ve become so accustomed to being bossed around that the fight has gone out of them.

“No, it’s not,” your editor replied, stepping over a pneumatic hose.

“Dumb son of a b****,” came the response…

The Daily Reckoning