Now that cash for clunkers is over, let’s examine what reality looks like. August (the cash for clunkers program time period) experienced an annual new car sales rate of 14.1M vehicles. September is seeing new car sales at an annual rate of 7 – 8M — a 28-year low. For some perspective, here are previous year US new car sales: 2008 – 13.2M, 2007 – 16.1M, 2006 -16.5M, 2001 – 17M. So welcome to the new economy i.e. what happens when you remove federal government steroids. Demand is half what it was in 2001. Keep in mind that financing was and continues to be largely aided by federal government programs.

I am sorry to write that not a single auto manufacturing plant in Europe has been closed this year –yet they are experiencing a similar drop in auto sales, and a similar cash for clunkers program (they designed it). So in Europe & the US there is a lot of manufacturing infrastructure that has yet to be moth-balled. Indeed in 2009 & 2010, there remains an excess capacity to build 12M more cars per year. That tells us there is a tidal wave of unemployed yet to hit western economies. Keep in mind that US industrial utilization is already at multi-decade lows of 68%.   

Side rant: Mercedes threw $billions into Chrysler for years. But I’m sure Fiat will figure it out and take market share from Toyota. That’s how it will have to be done because this is a zero sum game. Are you really going to buy a Chrysler-Fiat over a Toyota ?

According to Keynesian economics, federal governments need to be the buyer of last resorts to soften economic contractions. But sometimes (some would suggest almost always) this spending is purely wasteful. Case in point: many of the purchasers of new cars (both in the US & in Europe) were not otherwise in the market for a new car. Many would have waited a few more years and even then bought a used car. This tells me that cash for clunkers was almost certainly a waste of our money.

Here is further disturbing information: one of my clients has been looking at buying a vehicle for the past several months –both pre, during, & post clunker timeframes. He noticed that during the cash for clunker program the same vehicle was priced about $4500 more than it was before the program. So in effect, the consumer paid the same amount of money, but we gave auto dealers and manufacturers a $4500 gift from us – the tax payer. Look for auto companies to post a hugely profitable month, then it is back to depression economics in auto sales.  

The purpose of this article is to set a mindset that current federal government largesse is merely delaying a day of reckoning. Sure it is softening the blow, but unless organic growth is stimulated, you’ve done nothing other than spend money you don’t have (just like Japan did). We are living on borrowed time. The stock market will eventually price-in reality (some time in 2010). What do you think will happen to US & Global economies when central/federal government incentives & gimmicks are removed – as they were with cash for clunkers?  Before you answer that question, you should know that 100% of the GDP growth seen globally this year has been because of government spending (not organic consumer-business spending/investment). Answer: the economies will tank, just like the pull-back in auto sales after cash for clunkers.

What will happen to home purchases in the US once the new home tax credit ends in November? The US housing sector continues to contract in every way except for homes bought with the assistance of the tax credit. Why is the CEO of Toll Brothers (large house builder) selling all the shares he can? Does he know more about the US housing industry than we do? Yup.