Hallelujah! Here We Go Again…

Perhaps that’s what you think when you read Money Morning each day.

But anyway, today we’re referring to something sent in by a reader.

Money Morning reader Paul sent us an email on Saturday saying, “Here we go again…” followed by a link to a Sydney Morning Herald article titled “GM to pay $A3.9b for auto financier”.

We share Paul’s thoughts, here we go again…

Or kind of. Except we’ll make the point that what Paul refers to never really stopped. By that I mean excessive leveraging. As we’ve written many times before, the so-called deleveraging in financial markets and household balance sheets has been a massive lie put about by those who want the borrowing gravy train to continue.

A cursory look at the statistics will show you that even where there has been a small decline in borrowing in one sector it has been more than made up for by borrowing in another.

But I encourage you to read the article for yourself. To be fair to the SMH, the paper has just syndicated an article written by the Associated Press, so we can’t really blame them for the journalistic, er, quality of the article.

But we can blame them for running such tosh.

I mean, take the opening paragraph:

“General Motors Co. will buy AmeriCredit Corp. for $US3.5 billion ($A3.93 billion), a deal that allows the automaker to expand loans to customers with poor credit and offer more leases, key areas where GM must grow to accelerate its car sales.”

When we read that your editor’s head literally slumped into our open hands. Expanding loans to customers with poor credit is a “key area” for GM? Oh Lordy! But it gets better, or is it worse? Anyway, read this:

“Only 4 percent of GM’s sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition. ‘If you just had a modest increase from 4 to 5 per cent, that’s a significant number it its own right,’ Liddell [GM's chief financial officer] told reporters.”

Because of course GM would stop when it gets to 5 per cent. That’s right, there wouldn’t be a temptation to increase it to 6, 7 or 10 per cent would there? No, of course not.

If you recall, General Motors had to be bailed out by the US government to the tune of nearly USD$60 billion less than two years ago.

Why did it need the bailout money in the first place? For many reasons. But chief among them were company killing retirement and redundancy funds.

On top of that it was building crappy cars which it then had to bribe customers to buy using the incentive of zero percent finance.

But even that wasn’t generating enough cash to keep the company solvent. Even that incentive couldn’t encourage enough chumps to stump up the cash for its crappy cars. So it had to provide incentives to those with low credit scores too.

How could that possibly fail? As we’re told repeatedly by the mainstream press, interest rates are never going up again so the increase in household debt won’t be a problem. Similarly, with a zero percent interest rate for the life of a car loan, it must be impossible for anyone to default because there is no interest rate risk for the borrower.

It didn’t happen like that though did it. Hence the USD$60 billion bailout.

But as I’ve mentioned above, the fact that GM is hoping to increase its exposure to subprime borrowers isn’t new, it’s just ramping things up a little further.

It goes to show you that despite the massive bailout, and despite the ‘cash for clunkers’ programme, the auto industry is a terrible business to invest in.

It shows you that without massive intervention by governments and without taking on company-busting risks, car companies live on wafer thin margins.

Even the Ford Motor Company [NYSE: F], which didn’t receive direct government handouts – but which did benefit indirectly thanks to the Obama ‘cash for clunkers’ programme – could only manage a USD$2.7 billion profit for the last financial year on the back of a massive USD$116 billion of sales.

Yet despite that it’s been enough to see the Ford share price more than double this year! We’d go as far to say that it’s become one of the darlings of the American stock market.

And now it seems the Australian auto industry is on the verge of getting yet more handouts.

Has Australia ever subsidised an industry more than it has the likes of Toyota, Ford, General Motors and Mitsubishi?

The latest ruse offered by Australia’s first unelected female prime minister is for a $2,000 taxpayer funded rebate for anyone who trades in a pre-1995 car in order to buy a fancy environmentally friendly car.

No prizes for guessing what’s going to happen to the price of used cars over the next couple of years.

Of course there are plenty of conditions attached to the handout. Such as you need to have been the owner of the traded in car for at least two years, and the car you buy has to meet a minimum ‘green’ standard.

There could be a nice little earner here for scrap yards to offer a warehousing service. Pay them a fee and they’ll store a crappy car for you, registered in your name for two years. Then when you ‘trade it in’ for a new car you’ll get the rebate.

But anyway, we’re sure the handout will be fully maxed out before long, with $2,000 of your tax dollars going straight from your wallet into the hands of your friendly neighbourhood car dealer.

However, it’s all for a good cause because apparently, according to the Australian Financial Review it’s going to “cut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

Naturally that sounds like a lot. 1 million tonnes less of a gas which is unproven to be environmentally unfriendly, and $344 million in fuel savings.

But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.

And as for the $344 million in fuel savings. Savings for whom? According to the AFR the so-called Cleaner Car Rebate scheme will cost taxpayers $394 million.

So the fuel “savings” will actually be an additional cost to the tax payer of about $50 million.

It’s the old robbing Peter to pay Paul story that’s so typical of government interference.

Besides, who says the scheme will cut any emissions at all?

We’d like to know how the 1 million tonnes in CO2 savings has been calculated. Has it been calculated on a like for like replacement? In other words, based on the assumption that the owner of the spanking new Toyota Camry hybrid will drive the car exactly the same way as the crappy pre-1995 bomb.

From personal experience we’ll say that’s unlikely.

Prior to trading in our 1996 Hyundai Lantra Sportswagon (and very sporty it was too!), we would only drive the thing to work in Fitzroy from home in Frankston two or three times per week.

And each time we made the 40km journey in each direction, we did so in the knowledge that we were never sure we’d make it home without the help of the RACV. Every day was an adventure… hill starts especially!

But after we traded the bomb in for a spanking new hip-hop red (that’s the manufacturer’s description, not your editor’s) Hyundai Getz, guess what that’s done to our driving patterns?

Yep, you’ve guessed it, we now drive to work every day, and have only used public transport less than a handful of times since then.

And based on the so-called CO2 savings you’ll get from buying an eligible car such as the Toyota Camry hybrid, it won’t take that much of an increase in driving patterns to wipe out the CO2 savings.

Because according to the Toyota website:

“Hybrid Camry’s 2.4 litre engine produces 142 grams per kilometre of carbon dioxide. This is equivalent to a small car with a 1.3L engine. Compare this to petrol-engine cars in its class which produce up to 60% more CO2 per kilometre.”

So to put it simply, it’d only take a 60% increase in vehicle usage to completely offset any of the supposed gains. If your editor’s new car experience is anything to go by, the actual carbon dioxide savings are likely to be negligible.

Look, let’s admit it, we are in the middle of an election campaign. The whole point it seems of election campaigns is to outspend your opponent.

But hats off to the PM for coming up with a policy that combines savings, increased government expenditure, and a green policy all in one.

It’s the Holy Trinity of election policies. Forgive us if we don’t yell Hallelujah!

Cheers.
Kris Sayce
For Money Morning Australia

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Tagged as: car, credit, financial, market, tax