Tuesday, February 7, 2012
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Resurgence of an Industry
Even if you didn't watch the Super Bowl, you have undoubtedly seen a review or video of Chrysler's "Halftime in America" ad. The Clint Eastwood narrative has been the most talked about commercial from this year's event.
Some argue the automaker bailouts were a waste of taxpayer money so why flaunt their current success? Others argue their resurgence is a political ploy for the Obama campaign since the turnaround happened on their watch. And then there are those who point out that the majority owner of Chrysler is Italian automaker Fiat. Not exactly an American achievement.
Yet the commercial served its purpose. It's monopolized the news media. Everyone has an opinion.
This left me wondering. What other industry would stir emotions this strongly?
If the ad were for Bank of America, who received the largest TARP bailout, would it get this much publicity? Would someone in the manufacturing industry, also seeing a revival, be a headline maker? Could Belgian-owned Anheuser-Busch air a commercial that would raise this much attention?
The auto industry raises the pulse of Americans. True - there are many who think of a car merely as a means of transportation. But those whose blood pumps 40 weight are passionate enough to offset their numbers.
A car is much more than a mere commodity. The auto industry represents middle class America. It defines our blue collar workforce.
Detroit was built around Henry Ford's creation. Steel mills spurred the growth of Midwest cities such as Pittsburgh, Cleveland and Chicago. Automobile production facilities sprung up in their vicinity.
The decline of the auto industry was our first indicator of the looming economic crisis. So maybe it isn't so far-fetched to think it an indicator of economic revival as well.
According to Automotive News, U.S. auto sales jumped 11 percent in January 2012 over the same month last year. It was the best January since 2008.
GM is the only U.S. automaker to report a decline in January. Their 2012 sales were 6 percent lower than last year when they piled on incentives. It should be noted their 2011 sales numbers were pretty hard to beat.
Chrysler boasted the biggest gains. Chrysler 300 sedan sales jumped 273 percent to 4,960 units with the Durango SUV up 152 percent with 3,021 sold.
Not to be overlooked is the Dodge Charger which sold 5,537 units for a 169 percent increase. The Challenger, in the same class, saw a modest increase of 1 percent selling 2,551 vehicles. It marked the eighth consecutive month of year-over-year sales gains for Dodge.
So while Chrysler is boasting the biggest gains, the Dodge performance vehicles have been grabbing the larger market share.
As the auto industry started showing signs of trouble in 2007, this writer wondered whether a rebirth of the muscle car era could spark their revival. The article is still on our website.
We revisited the subject in 2009 with a follow-up here.
A muscle car may take us back to our youth. It may get our hearts racing in a new direction. But right now, don't expect to see one in every garage.
Unemployment figures are improving, but we've got a long way to go before America is working again. Our economic outlook is getting brighter, but still too dark to see the end of the tunnel.
We can yearn to feel the power of one of these beasts, but we can't yet afford to do it.
The 1967 Chevrolet Camaro had a sticker price of $2,400. Adjusted for inflation, that would be $15,495 today.
The 2011 version starts at $22,805. If you're waiting for the 2012 ZL1, expect to pay upwards of $55,000.
Perhaps they'll spark an industry revival. But it's a good thing automakers have more in their stable.
An American Love Story
But not in the Beyonce/Jay-Z, Miranda/Blake or Brangelina category.
Americans are involved in a love affair. With a car.
It might not be their current ride, more likely it's the car of their dreams that remains just out of touch like a high school geek yearning for the homecoming queen from across the gym.
For me, it's the 1968 Pontiac GTO. The penultimate muscle car. From this car, an entire culture was born.
The GTO concept was first developed in 1963 by the man who was Pontiac's chief engineer at the time. His name was John DeLorean.
DeLorean and his staff were playing around with the Tempest, an economy car in the Pontiac line that would later become the LeMans. The Tempest sported a rough-running four-cylinder engine. Since it shared the same engine mounts as the V8, why not give it a power boost?
So he pieced together a prototype of his dream vehicle building up from the Tempest LeMans coupe. He borrowed a 389 cubic inch V8 from the Bonneville along with a four-barrel carburetor and heavy-duty four-speed transmission.
GM policy dictated which parts could be used in their vehicles. Outsourced parts weren't permitted in any of their cars. But the rebel DeLorean demanded only the best in his new creation. He added a Hurst transmission.
It became his personal ride, and he would often lend it to friends to learn what they thought of the car. Each wanted to keep it so DeLorean would build himself another.
He named his creation GTO, or 'Gran Turismo Omologato' - Italian for Grand Touring Homologated. It was a class production vehicle, homologated for racing. The name came to mean a large, high-performance sports car comfortable enough for long trips or 'touring', as opposed to the smaller, less comfortable 2-seater true sports cars.
An outsourced transmission wasn't the only piece making GM brass unhappy. Policy also dictated that no specific model could have more than 10 pounds of total weight per cubic inch of displacement. The GTO weighed about 3,500 pounds. Its 389 motor was almost 40 cubic inches too big.
To get around this, DeLorean declared the GTO an option of the LeMans rather than a separate model. But GM top management still did not embrace his dream. In an effort to placate their chief engineer, they reluctantly agreed to produce 5,000 of these vehicles for the 1964 model year.
The production version featured a 325 hp V8, dual exhausts, floor mounted Hurst 3-speed manual transmission, heavy-duty suspension, front bucket seats and lots of chrome. All for around $3,000.
Buyers could opt for a 348 hp V8 with three two-barrel carbs, a Hurst four-speed manual or GM two-speed automatic transmission, and various other goodies.
Wanting the car to fail, they never included it in sales literature. It was known strictly by word of mouth among car enthusiasts.
To their surprise, they never reached the showroom floor. The salesmen claimed them for themselves and ordered more for resale. They sold quicker than they could restock them. In its first year of production, 32,500 GTOs were sold.
Sales continued to skyrocket. In 1965, 87,000 GTOs hit the streets. By 1966, sales climbed to 96,000 vehicles.
Fierce competition was born among other GM lines. The Chevelle was reinvented for the working class folks who wanted to play on the weekends. Oldsmobile introduced its 442 as a luxury version of a muscle car. Soon, every manufacturer could boast of its own powerful pony.
These were the glory days for American automobile manufacturing. They produced vehicles driven by market demand, not push out cars into an unwilling market. Automakers today would do well to follow this same strategy.
They were reasonably priced and easy to work on. Repairs and upgrades could be made by the average home-garage mechanic. They gave middle class America a reprieve from the daily grind. Empowered them with a sense of control.
There were no cell phones to distract a driver. The mere excitement of a rumble under the seat gave them all the thrill they needed.
Eventually, insurance rates started to soar on high-performance vehicles. Removing lead from the gas created functional issues, causing prices to soar as new technology had to be created. The gas shortage of the 1970s dealt the final blow to the muscle car era.
The era may have ended, but the dream remains alive today. Follow it on every race track, drag strip and off-road venue across America.
Government Meddling in Private Markets a Detriment to Prosperity
Over the past few weeks, I have argued that strong institutions are necessary for a prosperous society. It is via strong institutions that private capital is risked, an absolute imperative to economic growth. I have already discussed a strong military and a strong legal system, particularly strong contract law. Such things are clearly public goods that are the prerogative of the government.
However, before we continue the discussion of other necessary strong institutions, it is worth a diversion to discuss the unintended and often calamitous side effects of government intervention into markets best left private.
In 1938, as the Great Depression was finally winding down, the National Housing Act was amended to create The Federal National Mortgage Association (FNMA), known best as Fannie Mae (Fannie has siblings such as Freddie Mac and Ginnie Mae, but for the purposes of this discussion I'll limit my scope to Fannie Mae). Fannie Mae started out as a pure government institution. However, in 1968 it was converted to a publicly traded company (but still retaining, as you will see, government backing).
The purpose of Fannie Mae was to stimulate home ownership by creating a liquid secondary market for mortgage loans. It also provided for the "securitization" of these loans into bond instruments that could be freely traded on Wall Street. Historically, banks were cautious about investing in long term (often 30-year) mortgage loans as such assets would remain on their balance sheets for extended periods, creating long term risks. Particularly interest rate risk.
Imagine the solvency of a bank with a bunch of 30-year mortgages for assets when the cost of its funding liabilities (usually savings accounts) skyrocket in a rising rate environment. So the intent was noble, except for one important point: The government had no business or purpose in the private mortgage market as it can in no credible way be considered a public good.
If a secondary market for mortgages were a viable private enterprise, the private market would have created this vehicle. And likely would have, had the government not superseded it. Similarly, as private capital markets developed, mortgage loans would indeed have been securitized and traded between investors - suiting the purpose of individual investors as their own needs dictated. Unfortunately, such developments were choked off by huge government intervention with the creation of Fannie Mae.
How is Fannie Mae a subsidy? Although not explicitly back by the U.S. Treasury, as a "Government Sponsored Enterprise" or GSE, Fannie Mae benefited from what everyone believed was an "implicit" government guarantee - the notion that the government would not allow it to go broke. This is exactly what occurred when Fannie eventually became insolvent in the fall of 2008, forcing a Federal bailout costing the taxpayers, by some estimates, a third of a trillion dollars. That is with a "t."
Leading up to the crash, Fannie and her siblings borrowed at near risk-free Treasury rates, and devoured the majority of the mortgage loans in the U.S. At the peak, Fannie and her siblings owned more than two-thirds of all the mortgages in the U.S. Wow!
As the conventional markets got saturated, Fannie devised ever new ways to further push home ownership, with relaxed terms such as low or no down-payments and modified credit standards that allowed for applicants with questionable credit characteristics to borrow large sums for the purpose of purchasing a home. This became known as the "sub-prime" portion of the market.
Please Note: If this had been left to the private market, banks might be forced to keep these loans on their balance sheets for extended periods, and such loose credit standards WOULD NEVER have passed muster. But with the ability to quickly sell such loans into the secondary market, the looming credit problems would be somebody else's problem - in this case the U.S. Taxpayer. And don't blame the banks, as other government regulations REQUIRED them to participate in this process.
If it were just the ultimate collapse of the government-sponsored mortgage market, it would be bad enough. But such abnormal sums of capital flowing into the housing sector created a gross perversion. First a big run-up in real estate prices and then, of course, a terrible collapse - followed by millions of foreclosures. And the crash affected virtually everyone, even those who never got a sub-prime loan or those who owned their home free and clear. And it is not over, as the market still struggles with what some estimate will take several decades before equilibrium returns.
To be fair, homeownership rates did increase during the aforementioned period, to unprecedented levels. Immediately prior to the collapse, nearly three in four Americans owned their home - often referred to as the American Dream. Unfortunately, this dream was not based on fiscal sanity, and was only possible with an absurd implicit guarantee - courtesy of the U.S. Taxpayer. Of course, we all know the dream turned into a nightmare, which is so often the case, when the government (often with noble intentions), meddles in markets best left private.
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