I agree that careless decisions by some of the senior banking executives led us to this current situation. In reality most of these execs who were responsible for this crisis have already left or have been forced to leave the financial institutions. They have made their money and have got away scot-free. The folks that are remaining are the folks that were working in profitable units of the banks(not involved with crisis), or those that have been hired/charged with fixing this crisis and getting things back in control, or relatively junior folks that merely followed orders. These are the folks that are working hard today to keep the system running, These are the folks that are trying their best to help us recover from this crisis. Is it fair on our part to penalize them?
same folks that legalized & encouraged complex risky instruments like CDS etc in the name of liberalization. Don't they have an equal or higher responsibility for this bubble? Implementing the 90% taxation of bonuses for all bankers is a gross violation of individual rights(failing to pay for the work done/wrongly appropriating the money) and discrimination of banking community. This is no different than racial or ethnic discrimination, in this case discrimination is based on industry. This is also gross misuse of powers by the politicians. I can understand this happening in a Tanzania or North Korea but not in the US. The majority of folks impacted by this law are innocents. I'm surprised that there isn't any level headed person in our political system, that can rise above these silly politics and come up with a bi-partisan, honest and just solution.
cars for well over 130+ yrs!! While there has been improvements, optimizations etc the base technology is still the same. Compare this with other fields - Energy/Power, Medicine, Telecom, IT, Aviation or any other field for that matter, we've had multiple disruptive innovations and technology has evolved leaps and bounds during the last century. Due to cheap availability of oil, the auto industry was complacent and failed to innovate. The auto industry in the current state is not sustainable. The technology running our autos need a complete refresh and be environment friendly for the industry to recover and maintain its growth. Since the beginning of this decade awareness of this issue has increased amongst auto companies. Huge amounts of money is being pumped into research in alternate technology cars. I expect this to spawn off a wave of disruptive innovations in the next 1-2 decades. We are currently at the beginning of this cycle.
the auto majors(GM, Ford, Toyota, Honda etc) are researching in new technologies and are in various stages of development of alternate energy cars, there is a slew of VC funded startups that are working in parallel to come up with nextgen cars. Some of these start ups like Tesla, Aptera, Fisker etc are in advanced stages and plan to roll out their cars in the next 12-18 months. I expect some of these new startups to take off and go mainstream(if they dont get acquired!). This transition into alternate tech cars is going to shake up the industry in the next decade. Those players that are not in the forefront and capitalizing on this trend would get left behind and eventually perish. I also see the current gas-electric hybrid cars to be more of a stop gap till alternate energy cars mature . These will eventually get replaced. I expect this transition to clean tech to occur in the next couple of decades.
Next turning to key markets for car consumption US market is past its peak demand. As highlighted in my earlier post due to easy availability of credit & low fuel costs the demand had spiked during the last decade causing an auto bubble. The net new sales of 17-18M vehicles/yr is not sustainable. I see this number settling to between 12-15M vehicles/yr in the near to medium term(once we are out of this recession). US will be upstaged by China as the top car market in the world. Over the next decade I expect the car consumption in China, India and other developing countries to fuel the growth of car industry. This is the beginning of end of US domination of auto industry.
The top 3 American auto companies(GM, Ford, Chrysler) are teetering on the brink and are currently going through the worst crisis of their lifetime. They have been piling up huge losses, losing market share to Japanese, Korean and German auto majors, their shares have been battered and are trading at 50-70yr lows and are almost on the verge of collapse due to a steep drop in sales. Feb '09 was the one of their worst months in several decades and most of them saw a big drop in demand - GM's YoY sales reduced by 53%, Ford reduced by 48% and Chrysler by 44%. For Q4 2008 GM alone lost around $30 billion and Ford lost around $5.9 billion. All the top 3 companies are running low on cash reserves, their corporate rating has suffered making it both expensive and tough to borrow in the market. They are currently looking to the US government to bail them out.
February 2009 has been the worst month for US auto industry in decades. The overall auto industry demand has fallen to 4 decade lows of 9.1M vehicles in 2009. The top 3 US companies sees their demand halved from last year's base. GM was the worst with 53.1% decline, Ford 48% decline and Chrysler 44% decline. The Japanese car companies fared slightly better than US companies however still took a significant hit. Toyota saw 40% decline in sales, Honda saw 38% decline and Nissan 27% decline. There is a virtual blood shed happening in auto market both US and globally.
Over the last couple of decades US has been experiencing an 'Auto Bubble' similar to the housing bubble or the dot com bubble. The demand in US auto industry is unsustainable. Overall there are around 251M vehicles in US and 199M licensed drivers this translates to around 1.3 vehicles/driver. I think this would most likely be the peak vehicle ownership ratio. It will start going down from here and eventually settle down between 1-1.1 vehicles/individual. Here are some of the key factors that led to this bubble:
Source: www.boombustblog.com2008 will go down as a record year in the history. Most analysts and economists were predicting a slowdown in the economy and a soft landing earlier this year. However no one was even in the ballpark w.r.to the actual events. The complete world was taken by shock with the magnitude of the financial mess and global recession/slow down. There was unprecedented volatility in global stock markets, commodities like oil, Gold etc, Currencies, interest rates and a whole bunch of key economic fundamentals. This is expected to be the worst recession (some are even calling it depression) since the great depression in 1929. Almost all developed countries and key emerging/developing countries like China, Russia, Brazil, India etc are impacted in this global crisis.
Some of the key highlights/statistics from an economic perspective are listed below
ü All major stock markets down from their record highs in Oct 2007
o Dow is down almost 40-45% from its peak
o NASDAQ is down by around 45%
o S&P 500 is down by 40%
o BSE Sensex is down 55-60%
ü S&P 500 market has lost $6.17 trillion dollars in Market cap in the last year
ü S&P broad market index which has around 11,000 stocks in developed and emerging markets has lost around $17.7 trillion YTD
ü The entire Investment banks segment has been wiped out – Bear Sterns & Lehmann doesn’t exist anymore, Merrill Lynch has been acquired by BoA, Morgan Stanley and Goldman Sachs have converted into commercial banks
ü After Lehmann collapse the entire global credit market was frozen and there were massive money injections from multiple governments (US itself is investing over a trillion dollars this year to re-energize the market)
ü Several large & reputable US financial institutions have failed – Wachovia, Washington Mutual , Fannie Mae, Freddie Mac, AIG etc.
ü 25 US banks have failed so far this year and has been acquired by FDIC
ü US Federal Reserve interest rate is at a 50yr low of 0.25% with today’s cut
ü Oil started our 2008 at little under $100/barrel and reached a peak of $147/barrel in July and dropped to $40/barrel in Dec
ü In the last 15 months Gold which is typically the most stable asset went from <$700/ounce to a peak of $1020/ounce and is now back to $800/ounce
ü US Dollar has bucked a multi-year trend of weakening against global currencies and has appreciated against major global currencies by almost 15-20%
ü The US auto industry is in Doldrums and giants like GM, Ford and Chrysler are on the verge of going bankrupt
o GM’s stock is at a 80 yr low
ü US unemployment rate has gone up to 6.7% and number of unemployed people has increased by around 2.7 million during this year
ü All major global economies are either in recession or in the verge of getting into recession
o Ireland, New Zealand, France, UK, Germany, USA, Japan, Italy, Singapore, Spain to name a few
o China growth is expected to slow to 7.5 – 8 %. This is its lowest since 1990.
o India growth rate is expected to slow to 7.5% (from the 5yr average of close to 9%)
After reading the above the first question that comes to mind is have we seen the worst of this crisis?
I think we are in the middle of this crisis what we have seen so far is the first half of the crisis. There is more of financial crisis that is yet to come, Lay-offs are just starting out and has accelerated in the last 3 months and it will continue thru most part of 2009. There will be budget and spending cuts leading to reduction in customer spending and consequently impacting a wide range of industries etc. To cut to the chase the current scenario will continue thru the first half of 2009 and should start flattening out as we go thru the year. I expect the stock market to be volatile and fluctuate within a band during most of 2009 and start the climb up in 2010.
Is this shake out/recession good for us?
At the outset some of the news we hear and what we see in news would seem scary. However this is part of the economic cycle. The best part of open markets/economy is the self-correction. Companies start becoming inefficient and add lot of fluff over the years. These economic downturns are the times when some of the weak players are eliminated and strong players become more efficient and focused. While we go thru lot of pain in the near term it is good from a longer term perspective. Stock valuations, real estate valuations etc are very attractive now and while there is a little down side to it in the near term over the medium to long term they will start climbing up and this is a good time to start investing.
Stop worrying & start investing!!!
