General Motors Struts It’s Stupidity

I see that GM plans on buying back stock to fend off the unwanted attention of several shareholders who are/were thinking of filing suit against the company for building up a “cash hoard” instead of giving all of its profits (“returning cash”) to shareholders. Rather than face its tormentors in court – as the company should – it has knuckled under to pressure (including one bozo who demanded a seat on the board (for what reason he merited one, I don’t grasp).

This is the same company that went bust back in 2008-9 and had to go crawling to the governments of Canada and the US for bailout money. And now it is determined to pay out its cash cushion just to fend off greedy speculators rather than face them down in open court and call them what they are, leaches on the face of the capital markets.

Worse than that, when we measure the balance sheet strength of GM today using the SVA “Stability Ratio” as the fundamental measure of balance sheet quality, it turns out that the quality of the GM balance sheet today is only somewhat better than the GM balance sheet in 2008 before plunging into bankruptcy. Indeed, given the highly cyclical nature of the auto business, the Stability Ratio of today would only be rated as reasonably but far from unduly strong. We would certainly not consider that the company is a hoarder of cash!

Looking at the valuation of the company in the stock market, I see that despite the apparently rosy outlook for profits that the stock market is refusing to pay up to the usual highs that the stock enjoyed before 2008-9, and if one of the reasons is that management is willing to back down to any two-bit hyena than it does not merit anything more as the financial risks are too great to bear in another cyclical slowdown.

From my point of view, we can look on this company and happily eschew its stock for any kind of investment – and that is our stance. “Interesting but…”. Put yourself in the shoes of the governments who bailed them out, and the unions who still rely on the success of this company, and the reaction to this story is – or should be – a lot different!

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Japanese Consumer Confidence Bites the Dust

I almost feel sorry for the unfortunate Japanese authorities who keep trying to push on the Quantitative Easing string only to find out that the problem isn’t money or lack thereof. A deeply insolvent national balance sheet – and getting worse – is killing the country, and still their monetary authorities (and prime minister) just don’t get it. 12 months in which consumer spending has been flat (3 months) or down (9 months) should be sending a massage … but apparently not.

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Mario Draghi – Superhero?

Mario Draghi, president of of the ECB, has been lauded in the press lately for “forestalling a further crisis in Europe”. It seems to me that he should have been hung in effigy instead. The “problem” in Europe is too much debt overhang. Rather than deal with that reality, Draghi has found yet another way to kick the can down the road a bit further so that it can cause a further problem down that road, only one which is worse for having to deal with the additional debt load.

In 20-50 years time, people are going to look back on this time with incredulity that our central banks permitted the massive and unregulated issuance of debt and not only said nothing, but indeed was instrumental to its creation.

Brings to mind that famous book, Extraordinary Delusions and the Madness of Crowds as yet another example of collective insanity.

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Is There Any Efficacy to Lowering Corporate Taxes?

The Globe and Mail printed a column by an economist whom I think is particularly out to lunch stating that people were surprised that the reduced corporate tax rates were not resulting in additional capital expenditures and therefore growing economic activity. Hopefully, the reader has now opened up The Limits of Debt and Black Hole Economics and realizes that cutting corporate taxes is not only an approach which cannot produce more activity but worse, makes government balance sheets worse off, adding to the already over-burdened economy.

All that corporations are doing, of course, are buying back stock and not investing – as the Black Hole mathematics clearly underlines must occur. For the American One Percent Party (a.k.a. the Republicans), not only is their platform of cutting corporate taxes doomed to fail, but worse, it is indeed only making things worse for the vast majority of the American population.

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Black Hole Economics

Black Hole Economics

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The Limits of Debt

limits-of-debt original

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New Appearance

This is my latest appearance on BNN:

http://watch.bnn.ca/market-call/january-2012/market-call-january-10-2012/#clip598290

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