With GM bondholders now in outright rebellion against the U.S. government’s offer to swap their bonds for stock, and with the collapse of negotiations on Wednesday, it’s now widely known that a GM bankruptcy is inevitable by June 1.
What’s not so widely known is the real consequences for the economy and U.S. Treasury bonds.
The General Motors bankruptcy could
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gut America’s auto dealer network;
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cause a chain reaction of failures among auto parts suppliers;
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plunge GMAC far deeper into the red;
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wipe out any positive effects from the economic stimulus package; and
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drive an even larger hole in the balance sheets of America’s largest banks.
Worse, to the degree that the U.S. Treasury Department tries to swallow this giant poison pill by providing massive financing to GM in bankruptcy, it will merely
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cast a pale over the credit and credibility of U.S. Treasury bonds, prompting investors to further question the U.S. government’s triple-A rating;
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drive more investors away from long-term Treasury bonds, precipitating a collapse in the price of long-term U.S. Treasury bonds; and
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push most interest rates sharply higher for all borrowers.
The Obama Administration has so far been able to portray the Chrysler bankruptcy as a success. But anyone who tries to paint lipstick on this mammoth pig will get his head handed to him. It’s far larger than Chrysler, far more complex and far more likely to backfire on nearly all concerned.
Most observers expect the U.S. government will lift up GM from its quagmire. What’s more likely is that GM will drag the U.S. government down — into deeper deficits, and a far steeper decline in Treasury bond prices.
Past Weiss Forecasts:
Martin D. Weiss warned unambiguously about the General Motors bankruptcy on October 11, 2005, with his Money and Markets article headlined “GM Headed for Bankruptcy.”
He also warned, well in advance, about nearly every major financial failure in recent years. (See “The Only Ones Who Warned Ahead of Time.”)
{ 23 comments… read them below or add one }
I’m still trying to figure out how firing your best customers, ala shoving your bankruptcy onto the backs of your American suppliers and dealers, is going to fix anything.
Just wait until sales numbers come in towards end of the year.
The automakers have been firing their best customers for over a decade and look what this policy created. Firing more isn’t magically going to change that.
And the banks are using the same exact business model, fire your best customers (or force them into insolvency) and watch the money roll in (that is sarcasm).
Bleak and getting bleaker by the moment. Thanks for keeping us sane Martin.
Last Fall bond funds fell off a cliff and then seemed to recover. What caused this and will it happen again?
Martin, I have been holding modest amounts of six Inverse ETFs in housing, finances, the DOW, community services. I have been in this position for six weeks—holding out for the big dive in the Market. Your forecasts for this outcome have given me the will to hold on. Your recent bolstering of the DOW to be 5000, makes me believe that my portfolio will soon find strong growth.
One of your faithful—-Dick Hansen, California
Dick,
We have all been holding on and I believe that Martin is correct about a market correction but I doubt it will go to 5000. If it does I would look for a total collapse in prices. If it doesn’t, inflation will come roaring back like we’ve never seen before (if the Fed doesn’t run out of paper and ink, hey who makes that stuff anyway I need to invest!)
Kenneth H.
Mr. Weiss.
I’ve been following your comments on Money and Markets for quite some time and have read your past articles from the Safe Money Report that my father has shared with me.
It seems that you were very confident that inflation was going to be a major problem and that the Emerging Markets were the new super growth area and that they would be a core investment for years to come.In fact you created 2 investment newsletters for these 2 scenarios. But now you feel that a major deflationary force is taking over and most of the YoY returns for all of your newsletters are extremly negative. What makes this situation any different from your other views? Thank You
Shawn B.
Mr. Martin,
Do you think there will be deflation or inflation? To me, the writing on the wall is clear. The USD and many other leading currencies will buy half of what they buy today in a decare or two because we humans have borrowed way too much money from ourselves (with promise to pay in future with interest) and since that much money will not be payable through wealth generation, we will pay ourselves by printing more money. No country is immune from this.
Think when you buy US treasuries or any country’s bonds, you are loaning money to US govt or indirectly to people of that country. So everytime you are buying US treasuries in your 401K with say 30 year maturity date, you are basically borrowing money from yourself today (or your grandchildren) and after 30 years this money will have to be paid back with interest by you (and your countrymen and your grandchildren). If the net wealth generated in this timeframe is not enough to pay principal + interest, this will be monetized by currency devaluation.
There is NO option other than long term inflation to pay for this debt. If any of the experts and Phd’s tell you otherwise, don’t listen to them!
Martin
Do you think we are still heading for a deflationary economy or has this group put us in hyperinflation?–Thanks Rich James
Nothing, nor no one is too big to fail, including The United States of America. If we keep electing imbeciles to office the USA will fail also.
Dr. Weiss: I see you’ve been silent for a couple of days. That worries me. Are you starting to doubt yourself and your contrarian viewpoint? Please don’t. The markets and Wall Street may be seeing “green shoots” somehow, but anyone with any sliver of a brain would just HAVE to know this party can’t last. If we thought we had a hangover with the Dow in the 6,000’s…wait until the shakes come. Maybe you’re just on a much-deserved vacay..
Deflation or inflation of what are we talking about? Currently the dollar and Treasuries are deflating. Metals and oil is inflating. Real estate and automobiles will be deflating even more very soon. Stock market looks like it is about to deflate a bit. Food should be inflating in the far future.
So when you guys throw around these two terms, what exactly are you referring too?
I just bought Jan 2011 calls (leaps) on GLD (gold ETF) and TBT (inverse ETF for 20-year Treasuries). I’m waiting a couple of weeks to see what to do about real estate ETFs and buying puts on SPY or DIA.
I missed you closing date of one offer that ended 5/31/09 but want to invest in that if possible. I have read your recent book and believe in the things you advocate. Any
possibility that door is still open?
The USA can survive only if the people of the US leaders and workers alike will return to the same roots and values that made this country great to start with. all countries that do not tie currency to the gold standard eventually end in up failed. there is too much greed and coruption in America. People need to be more like Sam Walton , he put his customers first and wanted them to have good products at a fair price and make a reasonable profit so we could do that even better. why is that so hard for others to do????
it seems that right now just as in 2001 and 2001 , gold is good to own(actual ETF’s and maybe futures/options) , if the s&P rallies to the 1000 level , with weakness and folks start selling on stops — we could see 650-700 again. it would good to know if you agree and how you would position yourself for such and event???
Riley
buy dollars buy 30 year bonds 5% or more world needs 100% dollar to survive. cheap food & fuel and everything.to many dollars have been lost. print dollars.more dollars will be lost. can not vaule stocks or commodities till the dollar is at 100%.buy gold when the dollar is at full vaule.
http://www.foxbusiness.com/story/markets/bulls-wave-gm-fears/
At the same time, the markets received new evidence the U.S. economy could be headed for a second-half rebound. Specifically, the new orders component of the ISM manufacturing report eclipsed the 50 level, indicating growth for the first time since November 2007 — one month before the recession began.
“Six months from now they are going to note that new orders went above 50 and May was the end of the recession,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald. “Forget about employment and housing. Those are lagging indicators. The party will begin long before those things turn around.”
Maybe I am stupid, but who is this Marc Pado…. Who will be laughing later this year?
DocMay
Martin,
I and my wife made it in the 60’s thru 80’s and were professionals in Engineering and Management for Ford and Michigan Bell. I invested on my own and and made scads of money in South African mines. I got in at $35/oz and out at $800+. I got in at every bottom and out at every top believe it or not. I n the process I also learned of the progressive destruction of our country that has advanced to this day. I was a student of this strategy then. I ceased to pursue money and invested it in avenues that would spread the word (I buy information) as things got late. I reduced my holdings to survival level gold and silver bolstered by pension and SS. I figured that since we were headed for destruction of America-as-we-know-it my ending up with nothing from something vs nothing from a lot as others were doing, we would all be in the same boat except that the difference would be at least I tried to do something.
This is why I have not been a buy and holder. I want hands on control. Since my time of realization that the process was patient gradualism it has lasted too long (High up financial people informed me when I pursued helping Ford to overcome GM as number One, that Ford wanted to remain number Two because it was” too expensive to be number One. You”ll see when it gets to hard times and everyone is trying to survive”). I tried the NEW WORLD of investing like businesses and stocks and always lost money through theft via the smile and the outstretched handshake. My last hope was Weiss, this time with the Million Dollar “Club”-I have been a long time subscriber and agree with your “what’s going to happen” but what is missing is– when. This is where my short term side comes in. I am not doing well so far with K.V. This is my last resort. America is doomed. Nobody today cares. Apathy is the last step of decay in society. America’s depth of caring and understanding is contained in a blister pack hanging on a circular drum in a 7Eleven.
And now congress is arguing with the car CEOs about the plan to close a bunch of dealerships around the USA. What a mess.
Those familiar with the grear depression (which I lived through) know pump priming of the US Govt. did not work–we had a saevere recession within the depression in 1936–we did not recover from the depression until we started up the shut down manufacturing sector via military codntracts starting from the Britrish and it took 4 years and massive buying by the US for the US dto fight world War II. This depression/drecession base cause is the shut down of Approx. 1/2 of US manufacturing by transfer out of the USA. The base cause was the destruction of the level playing field for US manufacturing in that our tariffs were about equal (varied by industry) to USA taxation–Foreing product paid their fair share–US manufasctures thrived -paid good wages emmployed our US citizens. Nafta etc trade agreements deatroyed the level playing field as imported products for the most part paid near zero US taxes (tariffs) probiding the foreing base manufacturer whether US or Foreing owned the equivelent cost advantage in addition to low labor and regulation costs. The result high volume manufactures were shut down if they did not move their production to foreign locations to escape USA high taxes and gain low priced labor. US lost the jobs. the tax revenue of the jobs destroyed - most had to accept lower paying jobs that lowered government revenue-a good many accepted expensive welfare. To compound the situation the USA developed a huge balance of payments problem as we used our then good credit to buy what we did not produce from the world to tune of 800 Billion more than we sold the world. We will not recover from this depression until we once again restore our USA manufacturing and balanve of payments—no one in government is trying to do this –the massive spending cannot correct the problem–the result : it will be years of adversity–the dollar will continue to loosse value so the products we need and no longer manufacture ourselves will rapidly rise in price creating added hardship on US citizens. The solution–restore the level playing field with the world–2 choices–1. Restore the tariff systen that was successful for over 100 years or 2 Since foreign products do not pay our taxzes change the system with zero taxes for USA manufactures and shuft to a national sales tax system wherein foreign products will pay the identical taxes paid by USA manufactured products. This is fair to all and the USA firms will still have the extra costs of US Govt. regulations which are expensive. The above represents conclusionof the Austrian School of Economics which I was taught as classical ecomonics in late 1930’s To be prosperous long term a nation must produce what it consumes sell to the world the same value of goods it buys from the world.–The above reprents the base ecomomic problem no the apparent problem.—–the big spenders think will solve our economic problems.
I have read your advice for surviving the coming economic meltdown - you said sell out of the market now and take your losses before it gets worse. With the market on the rise, and not having sold out of mutual funds yet in my retirement account; do you still say sell now, or try to ride it up a little longer? Not knowing how far it may rise before the meltdown you predict makes it very hard to know when to convert to cash holdings. What is your up to the minute advice for a 58 year-old trying to recover value in his retirement account but scared of it going to hell in value even more than it already has?
Dear Martin,
You have recommended a mutual fund called Federated Prudent Global Income Fund, class C shares in your Safe Money Report for investors to diversify away from the U.S. dollar. I read part of the perspectus and I like the way the fund looks, but the fees look expensive to me. One example it gives is that assuming $10,000 was invested on class C shares for 1 year and were not redeemed at the end of that year, and 5% was earned during that year, $206 would be charged in operating fees. Now correct me if I’m wrong, but it seems that if 5% of $10,000 is $500 that almost half of the investment earnings would be eaten by fees. Am I missing something? It seems like even if a higher percentage was earned that’s an awfully high fee ratio. Please comment. I’d really like to find a better investment than the treasury money market because I have a lot of cash sitting there. But I want a safe place to put it that makes more than .01%.
-Jane
Martin:
Having been an English major in my glorious youth, following this is difficult for me.
What I do understand is that the people who should have been protecting the interests of the American people have been protecting their own, to our detriment. Essentially, the Elmer Gantry gene, which arises with some regularity in the U.S. is out of the box again. The swindlers are in charge. Why didn’t any of those bankers who allowed no doc loans, no down payments, no information on taxes or income, suffer the consequences of their actions? What happened to the Sherman Anti-trust laws? What is this nonsense of being “too big to fail?” They should fail. How could Congress ever allow the kind of deregulation that it did? Or allow the imbalance of trade? Both the Republicans with their self serving greed, and ties to the war machine (Eisenhower’s warning about the industrial/military empire rears its head) are unbelievable. How could Chaney work for Halliburton and get $34 million dollars severance pay and still vote for War as a VP? Isn’t that an amazing conflict of interest? Their unbridled capitalism, with no regulations, and their profiteering at our expense is beyond shame and beyond decency. The Democrats, instead of creating a middle class, are involved in weird support of anything sexually perverse and seem to think that the sixth commandment is their personal baliwick. They leave me in total amazement. How about protecting the interests of the workers which was their initial
claim to fame? They have allowed all of this “one world” universe stuff as though
everything is equal. Our founding fathers created a wonderful document in the constitution predicated on centuries of observation which these clowns are destroying for personal gratification and self serving.
I think that the citizens have to enact laws which allow Congress only 4 year terms, with public money paying for their election, and free T.V. They have to get in, and get out. We need less lawyers and more bookkeepers, because, clearly, they can’t count.
We have had too much buying and selling of the American dream by the Congressional class…and they have been rented and sold by all kinds of vested interests. They represent everything but the American people.
Can’t we, as Americans, stop being consumers and start being citizens. We need to stop wandering in the halls of Walmart buying Chinese goods, and return to buying American (what’s left of what’s manufactured here?) And we need to demand our congressmen/women get their spending under control. We are about to become the Weimar republic. Bush wasn’t bad enough. We have had enough of social engineering on behalf of the Congressional set. They can’t handle immigration, all they care about is being elected, and being bought by the highest bidder.
We need to pay attention to the constitution, to the degradation of the Press, and change the laws that allow them to set their salaries and benefits. Get them in, and GET THEM OUT. Do it now, before it is too late.
Multinational bankers are now ramping up their financial terrorism as they have repeatedly done to so many other countries for many years. We need to audit and then uncouple from the Federal Reserve (which is neither) NOW.
Hi Martin, I was wondering if you have read the article by Matt Taibbi, entitled “the bailout how goldman sachs runs washington .” Matt seems to have done his home- work. I would value your opinion.
Regards, Dan Jones
So Holden here in Australia (GM’s local manufacturer) have just been granted a further $200m line of credit. Holden say this (and other granted funds) will be primarily to support exports but will it really help?