Wednesday 12th November 2008

Just two days to go before the summit in Washington. There has been so much kite-flying and cage-rattling by world leaders it is looking nearly certain that any policy agreement will be interventionist. More liquidity, support of banks, and support of major industries.

The US automobile issue is becoming more serious. This is a huge industry (see below) and the implications of paying all these people, the service industries, retirees and hangers-on (and biz-jets) solvent to make cars that nobody wants, needs or can afford is folly on an unimaginable scale that will hurt the entire world economy, breaking international free trade agreements. It would be better to pay these people to sit at home and make sandwiches. But they want to make cars, not sandwiches. They have enough clout to make that happen, it seems.

Here's a little bit of a report from Bloomberg today.....

Nov. 12 (Bloomberg) -- House Speaker Nancy Pelosi has thrown her support behind the premise that General Motors Corp., the largest U.S. automaker, is too big to be allowed to fail.

In urging Congress to enact emergency aid for the ailing auto industry, Pelosi rejected calls to let GM collapse and sided with the company and its allies in trying to prevent a ``devastating'' domino effect that would cost millions of jobs.

``Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get,'' said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. ``The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.''

Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.

``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''

Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from a 14-year high of 6.5 percent in October, and produce a recession comparable in length to that of 1980-82.

Oil is another key issue that is about to surface. Many oil producers have now geared themselves to need an oil price of around $100 per barrel. No industry experts forecast oil ever coming down to below $60 ever again. While the USD has firmed against most other currencies, that fact is not especially important for most oil producers, who tend to buy their imports in USD.

I think what we are seeing is crazy volatile swings in currencies, commodities and stock markets. The system has become unstable. As in any engineering system, it is usually impossible to predict what an unstable system will do unless you have a working mathematical model of the system -- clearly we don't have that or we would not have 'sleepwalked' right into this situation!

There is no asset class other than gold that seems safe at this time. I see instability increasing, panic at government level and such negative thinking in the population that there is no way this is going to settle. The run-up to Christmas will be hugely significant since 2/3 of profits of many companies are earned as a direct result of Christmas.

Keep focusing on the summit on Friday. Maybe they will surprise us yet, but I have my doubts.