Give Me a Break!

I could be talking about today's curiously bi-polar stock market rally. (I will, momentarily.)

Or, I could be next in line to ask the government for a bailout of my own. (Heck, I may even do that.)

But no, I'm talking about all the global slurping over Obama's election as the next US president.

Yeah, it's an historically significant event. But, come on:

France's junior minister for human rights said, "This is the fall of the Berlin Wall times ten."

Are you kidding me? France, of all countries, whom we rescued from German occupation, says that the end of Communism in Germany was one-tenth as important as electing an African-American president - one that we don't even know yet will make a good one? (The guy went on to say, "on this morning, we all want to be American, so we can take a bite of this dream unfolding before our eyes." Dude - you don't have the intestinal fortitude to be American.)

An Israeli man said, "This may be the beginning of a new world. It marks the end of old elites." Yeah, and opens the door to new elites. But seriously, a new world? He's going to be the next POTUS, for crying out loud. Being African-American makes it a historical watershed. But it doesn't necessary mean he'll usher in revolutionary new ways to govern. Heck, you could argue that he doesn't even know HOW to govern, and will be learning on the job. Just ask his number two guy.

Some are even calling him president of the world, which, I guess, is only appropriate, since he himself called himself a "citizen of the world" on his recent world tour.

But the worst offender was a US foreign policy fellow, who said this:

"If you look at Jesus Christ, he walked on water and fed the 5,000 and he ended up getting crucified, so I think it's not unlikely that President-elect Obama is gonna disappoint some people too."

Wow. Maybe he really is "The One." Or maybe this guy's just another loose-lipped nut.

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On to the rally. Let's see: unemployment is the worst in 14 years, the US economy has shed a half-million jobs in the last two months, Ford and GM are each burning through $7B a quarter and will soon run out of cash, and ... we get a 250-point rally.

The job situation's just going to get worse. At least one US automaker will fail next year, unless we outright nationalize them. Yeah, I know, Obama promised more bailout money. Which will come from ... where? Treasury got to be running out of ink. Also, Obama wants the money to be restricted to use in developing more fuel-efficient cars (you know, ones with fully-inflated tires).

That's not Detroit's problem, see - nobody's buying cars, not even hybrids. (And gas is cheap again.) Why not? Because they're all scared they're going to join the ranks of the unemployed soon. And the banks aren't lending to anybody who isn't uber-prime. And interest rates are going up, not down, in spite of the Fed giving away money (more on that in a minute).

Detroit's problem is a burn rate that is threatening its solvency. So, give 'em another $25B - about $8B apiece for GM, Ford and Chrysler, if you divvy it up equally, though it would probably be based on market cap or assets or ... hey, I know, how about "to each according to his need?" - and they've got another quarter's worth of cash to burn through. They just want to buy time, hoping this recession will end soon.

It won't. And even with more bailout money, one or more will eventually run out of cash and fail.

And that'll just exacerbate things. Washington's talking about the "hundreds of thousands" of jobs that would be lost if GM went down.

Try a couple million or more.

That's the estimate when you factor in the feeder plants, like glass companies and battery makers and seat belt manufacturers. Add in the third-order effects like the cafe next to the battery plant or the bar down the street from the glass company - which will go belly up from being empty at lunch or after work, respectively - and it gets even uglier.

I saw this in Anderson and Muncie, Indiana when I was an S&L examiner during the rust belt slump of the late '80s. Both were big GM feeder towns. Anderson had five financial institutions. Of those, four were given a "5" rating by their regulators, and one a "4." A "5" means, "We're going to find you a merger partner." A "4" typically means, "Next time we visit, we're going to give you a '5'."

You think "jingle mail" - the practice of dropping the keys in the mailbox and abandoning the house to the lender - is a new practice? Wrong. It was rampant throughout the rust belt in the late '80s. They all lit out for Texas, drawn by the oil boom.

Which also went bust, and they did it again in Texas, and headed to California. Then they did it again in the California real estate bust of the mid-90s, and moved to Vegas and Phoenix.

And guess what?

Each of these exoduses (exodi? I don't know) contributed to the S&L crisis, at least the first two. So things are going to also get worse for the banks if a GM fails.

All of this augurs for something other than a simple free-market response. But you know me, I just have this funny aversion from bankrupting the future to make the present less painful.

And that brings me to interest rates. Bond markets are scared of all this bailout money. Treasury issuance is getting huge. Ugly huge. Next week will bring a record deficit for the month of October, the first month in the US fiscal year. And it's going to get worse. We just can't keep adding to it.

Bond guys get this. So rates are going up. Foreign investors are going to demand the same. Heck, we'll probably see our Treasury debt downgraded. And credit's tightening again.

This is all just a mess. And stocks are rallying.

But I'm still short, confident that we have not seen the bottom yet.

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A final note: AIG has already begun paying down its government loan, sooner than it anticipated.

How, you ask?

By floating commercial paper under the Fed's new funding facility that buys commercial paper. In other words, they're borrowing from the Fed via CP to pay back the outright loan they got from the Fed.

Isn't government intervention wonderful?