Employment

This Is How It Starts…

By David Stockman  |  November 26, 2018

For years, I thought what was good for the country was good for General Motors and vice versa.

– General Motors CEO Charles “Engine Charlie” Wilson, President Dwight Eisenhower’s first Secretary of Defense, during his 1953 confirmation hearings before the Senate Armed Services Committee

It’s tempting to chalk this one up to “MAGA in action,” or some variation thereof.

That’s General Motors’ (NYSE: GM) announcement this morning that it plans to cut jobs and halt production at multiple plants – including one in Ohio the Donald himself singled out for saving in July 2017.

But it’s just another chapter in the devolving story of American-style capitalism in the 21st century.

Indeed, President Obama has his own photo-op at the Hamtramck plant in Detroit, Michigan, from 2010. And his administration “saved GM” as part of its response to the Great Recession.

It’s all good in the short term: The Dow Jones Industrial Average is up a couple hundred points, and GM has added 5.5% as of the lunch hour.

The stock was “halted for news” at about 10:20 a.m. EST. Here’s how Reuters broke it at 10:37 a.m.:

BREAKING: $GM to take $3.0 billion to $3.8 billion in charges to cut staff, factories; to cut North American salaried staff by 15 percent, five North American plans [sic] could close.

Within minutes, GM surged from $36.69 to $37.37 to $38.75. It’d been up about 2% on the rumor.

After hearing Chairman and CEO Mary Barra say “GM wants to stay in front of changing market conditions and customer preferences for its long-term success,” the shares soared as high as 7.3% from last Friday’s close.

Of course, it means that GM is about to concede that recent net income has been overstated…

Of course, it means Trade War tariffs and other macroeconomic headwinds are creating problems for multinationals…

Of course, Wall Street doesn’t care.

It was a long, slow decline that led to its thundering 2009 bankruptcy.

By then, the brilliant managerial structures Alfred P. Sloan had pioneered at General Motors in the 1920s had atrophied, festered, and putrefied. GM was the most bloated, rigid, and ass-covering bureaucracy the business world has ever known.

I speak from the experience of owning a supplier company that was smashed to smithereens primarily by the GM engineering and purchasing bureaucracy during the last decade of its mayhem.

Well, GM got tons of taxpayer money during the crisis. A leveraged buyout specialist took over, warming the CEO seat long enough to collect a windfall on stock options…

And then they let an old gang from the “bloated, rigid, and ass-covering bureaucracy” days back in the saddle.

GM’s “recovery” was no miracle of government intervention. It’s a statist mess, made all the more so by a bailout that also destroyed the last vestiges of accountability and honesty in American capitalism.

Its unraveling is long overdue.

You Heard It Here First…

It wasn’t the thesis of The Stockman Letter No. 1.

But there it is, under the headline “Corporate America vs. You”:

Crashing stock option values are the proximate cause of modern recessions.

When the Lehman Brothers imploded and the stock market melted down in September 2008, it was Katy-bar-the-door on layoffs and liquidations for the next 10 months.

During that brief period, more than 6 million jobs were eliminated. Inventories were pared by more than $150 billion or 10%.

That’s how we led one of the two sidebars in the “Main Street Beat” section back in August. It was prefatory, to data about how low interest rates have killed the personal savings rate in the U.S.

It’s all about “low interest rates.”

But, now, it’s about how “low interest rates” are going away. Wall Street is waking up to “normalization.” And Corporate America is too.

GM stock is bouncing today because a couple quarterly reports might look good by comparison. It’s a fit of short-term buying.

On a broader scale reactions like this create thousand-point intraday swings. And that kind of action can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the Mother of All Yield Shocks.

About a decade ago Wall Street was desperate for a bailout. Imperial Washington gave it up.

The Federal Reserve is fixing to do the same on behalf of its ultimate masters – to save Wall Street and the Acela Corridor elite…

But it’ll only be ready to step in once the asset prices it inflated implode. CEOs and CFOs are starting to hack off jobs and factories, so we’re getting close…

Our “survive and thrive” plan includes specific asset types and allocations by percentage. But it’s built to suit your approach to the market.

And we will include tactical notes on particular vehicles that will help us accomplish our twin goals of protecting wealth and profiting opportunistically.

Take a look – before the chaos of the Mother of All Yield Shocks – at The Stockman Letter and “The Stockman Model.”

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR