The Fed Fails to See GM’s Reality

Two men spoke at the exact same time this morning. Both are well aware their words have the ability to move the markets. One continued to reiterate a rosy economic scenario lies ahead and defended his actions. The other man acknowledged his company’s once most profitable product line needs to be put out to pasture.

Federal Reserve Chairman Ben Bernanke continues to believe that higher commodity prices will “level out” as the global economy slows down. Bernanke refuses to acknowledge the Fed’s monetary policies created a weak dollar that has elevated commodity prices, which in turn has diminished consumers’ purchasing power.

A different economic story was unfolding at the Hotel du Pont in Wilmington. General Motors (GM) Chairman Rick Wagoner told shareholders that high gas prices “are changing consumer behavior and changing it rapidly. We don’t believe it’s a spike or a temporary shift. We believe it is, by and large, permanent.” Wagoner announced GM will close four plants that produce SUVs and medium-duty trucks. The Hummer brand is under “strategic review” and will likely be sold. GM will turn its focus to producing more compact to midsize cars. Part of the upcoming lineup will be the Chevy Volt, GM’s first electric car augmented by a small gasoline engine. The Volt is estimated to go up to 40 miles on electric before it reverts to gasoline. GM expects to launch the Volt before the end of 2010.

Two men bearing two different messages reflect the dualistic nature of Gemini and its planetary ruler, Mercury. Mercury retrograde in Gemini conjoining the New Moon today represents coming up with new solutions to fix a past or long standing problem. Gemini rules the road we travel; at the outset the Fed and GM were carpooling.

Like the Fed, GM initially believed higher gas prices were a temporary phenomenon. People were not ready to give up their love affair of big vehicles. GM and other automakers lobbied Washington against imposing higher CAFÉ standards. The Fed aggressively lowered interest rates and flooded the market with liquidity because it worked in the past. GM went back to rebates and incentives on the monster mobiles because it worked in the past. The Fed ignores the public’s inflation expectations believing they will “moderate over time.” CEO Wagoner reflected that “the last 6-12 months have taught us anything can happen.” GM finally realized if the company is to survive, it would have to produce the kind of vehicles the public wants. Today marks a pivotal moment for GM as Wagoner acknowledged the need to travel down a new road.

Bernanke exited the electric car. It accelerated so quietly he didn’t even realize it was gone. He must have been daydreaming. He looked at the fork in the road and began walking down the pot-holed path, comforted by his optimism the economy will turn around, and the SUV would soon return to give him a ride home.

Related Posts: “GM and Small Cars” and “Saturn in Virgo”

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