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Dave Kranzler
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I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock... More
My company:
Golden Returns Capital
My blog:
Investment Research Dynamics
  • Industrial Production, The Fiscal Cliff And Socialism 0 comments
    Dec 14, 2012 7:36 PM

    It has become crystal clear that Detroit automobile manufacturing employees who live in a home in which the mortgage is underwater are going to be in an economically advantageous position when the Fiscal Cliff is resolved.

    The Federal Reserve released its monthly industrial production report for November today. It came in at a "hot" up 1.1% vs. .3% expected. As has been the pattern for almost all economic reports this year, October's number was revised lower from -.4% to -.7%. It high highly probable that today's report will also be revised lower next month. Here the actual report: LINK

    It is always important to analyze the "sub-index" components that go into producing the headline-grabbing overall index that has the financial media doing cartwheels. Once you look at the "guts" of the report, you'll see that the overall number is of low quality and not sustainable without a lot more Government spending. On a side note: this is one reason I fully expect that one way or another a Fiscal Cliff agreement will be hatched to kick the spending deficit/debt accumulation catastrophe down the road some more.

    If you pull up that report and scroll down, you'll find a section called "market groups." There you'll find this note in reference to automotive products: "the index for automotive products rose 3.4 percent, its first increase in five months." If you scan through the rest of the footnote, it's obvious that auto parts were the most significant factor in fueling the November over October gain in industrial production. The November number that will be revised lower next month. I say this because if you look at this chart posted by Zerohedge earlier this month, you'll see that General Motors has essentially "stuffed" its dealer inventories with a record amount of inventory in November: LINK

    Please understand that General Motors is controlled by the Government and therefore is incentivized to use taxpayer dollars to support sales at General Motors in order keep the massive union labor force employed. In fact, the Government subsidizes every part of GM auto production from the factory floor to the end buyer. GM subsidizes production by subsidizing sales. It does this because the floor financing used by dealers to take delivery of unsold cars is provided by the old GMAC. GMAC is owned by the Government. A sale at GM is recorded when the car leaves the factory floor and goes to the dealer, not when the end user buys it. After the sale is recorded, GM could give a crap what happens because it has received a transfer of money from GMAC (Ally financial which is owned by the Treasury) and now the dealer is on the hook for unsold cars.

    Then, the dealer uses floor financing from GMAC. If the car never gets sold, GMAC the Treasury the Taxpayer is on the hook. You see how this works? The fact that there's record inventories of GM cars piled up on the dealer floors is likely the result of the Government triggering production in excess of end user demand. This is why, in my view, a big part of the reason that the industrial production number looks so robust for November. I only have the dealer inventory data for GM because that's all Zerohedge tracks and I don't have time to hunt down numbers for Chysler. But I would bet that there's a similar dynamic for Chrysler, which is 6% owned by the Government.

    This is all part of the insidious socialism that is engulfing our system. It's a massive transfer of taxpayer wealth that is going into the bank accounts of the upper management at GM and to the giant auto union at GM. This is not an anti-Obama/Democrat or anti-union rant. I'm just pulling back the thick cloud of gray smoke away from the headline data to show you what's going on. Not only does the economy look stronger from a production standpoint, but monthly auto sales also appear to be a lot more robust.

    There's a lot more issues with the data in this latest IP report that are highly problematic. If you are interested you can surf around the site in the "About" section and see what I mean. I did that and it would put you to sleep if I wrote about it here.

    In addition to the massive wealth transfer going on in Detroit, I found a news item earlier this week that I did not see widely reported by the mainstream media. It turns out that House Democrats are trying to attach legislation to the Fiscal Cliff agreement that would provide mortgage principal reductions for underwater homeowners: LINK

    Interestingly, the biggest impediment to Obama's implementing FNM/FRE mortgage principal reductions, Edward DeMarco, head of the Federal Housing Finance Agency, is about to get replaced by Obama: LINK Make no mistake about it, Obama wants this guy around about as much he wants his Portuguese water dog to take a dump in the Oval Office.

    I don't really know what to say about this other than if everyone wants socialism and a massive transfer of privately earned and taxed wealth to go to underwater homeowners and Detroit auto manufacturing executives and union workers, so be it. But regardless of how you want to view this issue from a public policy standpoint, if they implement widespread FNM/FRE mortgage principal reductions it will be a huge negative for economy and our entire system.

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