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July 30, 2005

General Motors: A Microcosm of the U.S.?

Market maven Ned Davis, whose firm's work I value, made comments on General Motors that I thought were very interesting:

. . . How, with high levels of car sales, still relatively low interest rates, firm economic growth, and decent job growth, etc., could such a plunge happen to GM earnings? Who saw it coming?

My guess is that GM is indeed a lot like the U.S. in that it has huge unfunded future liabilities, a heavy debt load that is surely declining in quality, dependency on the price of oil, is a victim of lower cost, better quality products from abroad, rising health care and pension costs, and is dependent on overextended consumers.

General Motors put itself in a position where it no only had little margin for error, where even small problems could have very harmful financial consequences. The comparison with the United States overall might be a little too ominous than most of us would like to admit, but it screams for your attention.

Ned goes on to say that high public and private debts and the large twin trade and budget deficits will cause a serious impediment to growth if interest rates continue to rise. I believe the attendant implications for the stock market would be damaging.

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