Friday, December 19, 2008

David Carlisle’s 2009 Crystal Ball

We will return to service retention in January – it is an answer to a problem. With all this bad news all around us, I thought I’d eek out the cheer out there. I had dinner with Hyundai’s Frank Ferrara last week and he seemed to be buying into a 10-11MM unit vehicle N.A. industry forecast for 2009. Frank is a glass half full kind of guy and challenged my last few industry forecasts. Frank is very bright and understands this industry at a molecular level. I test ideas with Frank. I go to Mark Thibault to borrow his brain – Mark was a policy wonk at a Washington think tank before GM. Mark understands politics and economic fundamentals better than anyone I have ever known. Pete Bennett at Nissan is my arch Republican genius (maybe beyond our simple definition of genius) friend who keeps me honest with the facts, and tolerates my non-Republicanism. My mentor for the past 20 years has been Honda’s Dick Colliver. Talking with Dick about what’s going on is like hooking a supercharger up to your brain. In the Superbowl of selling cars and trucks, he is the MVP. When I need to get inspired about how fast we can change, I go to GM’s Charlie Hyndman, VW’s Eric Carlson (one of the industry’s truly class acts) , or Navistar’s Joe Kory.

So, I listen, talk, and become influenced by some of the real good people in this industry. I also have a dark side.

I must confess that I am a news junkie. All day long I get bombarded with email news flashes from the WSJ, NY Times, CNN, Detroit News, Automotive News, Dealers Edge, and more. I read the Times at lunch, and watch 2 hours of news every night. I read the phony newsletters emailed from software companies, consulting firms, and integrators urging us not to lose sight of customer satisfaction, service sales, and, oh, well, yeah, software in this economic downturn (sort of like reading Exxon Mobil white papers on global warming). It is very interesting to watch/read the news on something that you know something about. Guys and gals who look good in a suit, can speak with real sentences, and have some relevant qualifications are interviewed by too-perfect looking broadcasters (who all speak like they came from Buffalo) and are urged to say something profound. Or, they write it all down in a column in the newspaper. Here’s what I have noticed. Many or most of these people are fairly ignorant – they simply do not understand what’s going on. Dave Leonhardt, Tom Friedman, folks like this. I am not going to rant and rave about these guys. However, it is important to acknowledge a fundamental understanding of what the “news” represents. Much of it is not fit to print – “news” seems to be dominated by outrageous ignorant opinion. This being the case, we should not put too much stock into what floats to the top every day in the world of news. We need to rely more on our own intelligence and sense of logic.

So, what’s going to happen in 2009? Let’s start with where we are right now – we are trapped at the front end of a Keynesian Paradox of Thrift. People, urged by the media and all those experts out there, are cutting back on spending. This thrift virus is spreading throughout the global economy and companies are making less stuff and, therefore, laying off workers. These laid-off workers are clamping down on their spending, and acting as a visible example in their local communities of what can happen to every Joe/Josephine The-Plumber out there. It is a lot about fear, lack of confidence, and uncertainty.

What else do we know? Regardless of politics, we know that Barack Obama is a pretty bright person; he is well informed, welcomes diverse opinions, and can figure things out. He figured out how to beat both Bill and Hillary’s bid for the nomination. The trillion dollar question is what will Barack do? Simple. He will be just like the guy who won the election – he will be logical, bright, and decisive. It is important to note that the problems in front of us are not insurmountable.

Let me give you some cheer. The Empire State Building was built in 11 months – we can do things fast here. In 2007, while Madoff was deep into cooking the books, while we all knew that sub-prime loans were a disaster, while the real estate market was braking hard, the automobile industry still sold 16,154,450 cars and trucks. On May 2nd of this year the Dow closed at 13,058. While all this witches’ brew was cooking, a tad over one year ago, on October 9th 2007 the Dow closed at its highest point ever, 14,165. Logic tells me that, to sustain a modest recovery, we don’t have to finish fixing all of our problems that were festering behind the scenes in 2007 and earlier this year. We can recover once we heal the most gruesome wounds of confidence.

Let’s take stock what’s most wrong with the current economy as it heads into the Obama triage:

  1. Unprecedented mortgage defaults caused by massive volumes of subprime loans.

  2. Gutted real estate values caused by an oversupply of homes and mortgage defaults, as well as a lack of more fundamental demand. This has effectively nuked home equity loans as means for financing a vehicle.

  3. Extremely tight credit mostly caused by post-bailout risk-related constipation in the banking industry. This has made it very difficult for dealers to get wholesale credit and for customers to get vehicle loans.

  4. Gutted 401K plans, personal investments, and retirement savings caused by this bear market. Investment savings are down by 40% and the willingness to tap into these shrinking funds to make a large purchase is very weak.

  5. Every day somebody in the news says something more outrageous about the economy not yet bottoming out and that we might slip into another depression.

Everything italicized above (2-5) is part of Keynes’ Paradox of Thrift. The real number of what’s most wrong right now might not be 5; it might be 20. Regardless, 80% of whatever numbers we come up with in a debate will still be Paradox of Thrift issues. As we look in the triage line, what won’t Obama do? He won’t buy out the defaulted mortgages made to people who could not afford to own a home in the first place. These people will continue to be unable to afford a home and, post-default, they will actually have more money to spend than before. So, these sort of defaults help break us out of the Keynesian Paradox. He already said he will not be balancing the budget, at least in his first term. Besides, the current deflation and strengthening of the dollar bumps this issue out several years. He will not worry about rampant deflation because it is actually helping things out right now. He will not worry about GDP because the recession is global and negative GDP growth is a reality for most of the major global economies. He will worry about credit in a macro sense (wholesale credit) and at a more micro sense – rising credit card debt has now become larger than disposable income. Credit card debt is a huge problem that is feeding the Paradox, but is too big to fix during one term in office.

At the heart of the problem is the Dow Jones Industrial Average. It has become more of an emotional index that is linked to most issues in the Paradox of Thrift. It is reasonable to assume that the harbinger of economic recovery will be the Dow at 10,000. This represents a 20% gain from recent performance. Americans, bless them, have short memories. In November we all reset our personal wealth to portfolio values reflected by a Dow at 8,500. We cut back and stopped spending because, amongst all the other bad things, we were poor. When the Dow gets to 10,000 we will all be richer again and we will look back at the 1500 point ride and convince ourselves that the recession is definitely in recovery. The press will confirm this with merry stories from more of their ignorant sources that we will think are pretty smart.

Barack is a very smart person. He will figure this out and focus on the FDR-esque underpinnings of the Dow. It is a lot about fear, lack of confidence, and uncertainty. Fear, uncertainty, and doubt is usually pushed upon us by people who have a reason to make us doubtful about something (like Obama), but the fear, uncertainty, and doubt that pervades the news today is of our own making.

So, here’s my forecast for 2009:
  • Production cuts will make the first half of 2009 a self-fulfilling prophesy – this will hugely help with lowering dealer inventories, cutting incentives, and aligning supply with demand.

  • Inside of 4 months we will see spending increase on maintenance parts as people feel better about investing in their current vehicles. This is the I’m-tired-of-all-the-bad-news-and-want-to-get-on-with-life paradox.

  • We will see the Dow go back over 10,000 inside of 6 months, and it will be stable because the news services will have harvested just about all the bad news out there that is imaginable.

  • With this, spending will increase and vehicle sales will increase as well. I think we will see a 12-13MM unit 2009, not the 10-11MM unit year that others are predicting.

  • The new-home market will somewhat come back in the 4th quarter, but not at the entry-level – it will be more from pent-up demand at the higher customer income levels. More importantly, Obama’s public works stimulus program should have some positive impact on jobs (2nd quarter) and construction equipment sales in the 3rd quarter of 2009. Construction equipment exports will get some boost in 2009 by the ever weakening dollar.

  • Food price deflation and low crop prices will be an issue for Ag in 2009, but it will create 2010 opportunities.

  • Goods will start moving, new regulations will start regulating, and Heavy Truck will start to rebound in the 4th Quarter of 2009.
So, in a nutshell, I’m feeling better about 2009 than many of you. Thank you all, and all please have a wonderful and safe holiday season. Come back in January and help restart the Paradox of Confidence.

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