The Bottom Line
By Chad P. Wilson
June 3, 2009
Foundation Bank -- The Fate of an American Icon
Volume V Issue VI
A monthly financial commentary for our
Friends, Clients and Advocates
Bastions of the 20th century continue to crumble before our very eyes as we watched GM file for bankruptcy on Monday of this week. GM is a very different company today than it was in the 1960’s when one of its ad campaigns lauded, “What’s good for GM is good for America.” From its roots in 1908, GM became the biggest automaker in the world in 1931. During World War II, they made everything from military vehicles to machine guns. They participated in the post war boom increasing their pre-eminence in the auto industry. However, in the 1960’s they came under pressure for the quality of their product. Losing market share in the 1980’s forced them to retool for higher quality vehicles, and facilitated a switch to higher margin, Sport Utility Vehicles. GM stock topped out at over $80 per share in 2000. The stock experienced a gradual decline from September 11, 2001 onward. The explosion in gas prices and the Great Recession of 2008 were too much for the company. It’s future is now in the hands of bankruptcy judges.
The Obama Administration tells us that GM will survive, but that they will look very different post-bankruptcy than they do now. Since they have filed a Chapter 11 bankruptcy, this means that they have protection from their creditors while they reorganize their business. This reorganization includes selling off some of their assets, reworking some of their existing contracts, and erasing some of their unsecured debt. For example, they announced yesterday that it was likely that a Chinese company would be purchasing the Hummer brand. It is estimated that they will remain under bankruptcy protection for 60-90 days. Obama declared that they will emerge “leaner and meaner.”
What do you think about the bankruptcy process? Is it a good thing? Is it a foolish reward for companies to let them off the hook for exorbitant debt and risky business practices? Or is it a viable option when economic storms arise to allow businesses to reorganize themselves and move forward? What’s better and what is best? To be sure, our opinions on the matter will be shaped by the day as GM and Chrysler work through this complicated and controversial process.
Rates are inching up. Have you noticed? The 10-year government bond has made quite a move in the last week or so, back above 3.5%. This means that mortgage rates have also gone up. If history repeats itself, rates should have an upward biast in the future, and inflation could be an inevitable eventual result. With the Fed pumping more money into the system than ever in the history of the world, inflation will take center stage as a higher risk than deflation. Though no one would say that our economic woes are all behind us, there is a general consensus that financial Armageddon has been dodged, at least for now. The Fed considered that scenario a bigger fish to fry than inflation. Once they have some confidence that the doomsday scenario is less and less of a risk, they will focus on fighting inflation. Once that happens, you could see short-term rates (including CD’s and variable commercial loan rates) increase dramatically in a short amount of time. No one knows how quickly these events might unfold. So if you are a homebuyer waiting to lock your rate, don’t be too greedy. Rates in the 5-6% range are still incredibly low on a historical basis. Is it possible that inflation could take hold with such force that in the future we’ll talk about the good ole’ days when rates were below 10%? Only time will tell.
Chad P. Wilson, CFP
Foundation Bank – a division of McKenzie Banking Company, McKenzie, Tennessee - 731-554-2423
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