Victims Of The Same Ponzi Scheme: GE & GM Are Telling Us The US Economy Is In HUGE Trouble

America’s twin economic “generals” are both in very deep trouble, and they are signaling huge trouble in the US economy. Here are the details…

by Michael Snyder of The Economic Collapse Blog

America’s twin economic “generals” are both in very deep trouble.  General Electric was founded in 1892, and it was once one of the most powerful corporations on the entire planet.  But now it is drowning in so much debt that it may be forced into bankruptcy.  General Motors was founded in 1908, and at one time it was the largest automaker that the world had ever seen.  But now it is closing a bunch of factories and laying off approximately 14,000 workers as it anticipates disappointing sales and a slowing economy.  If the U.S. economy really was “booming”, both of these companies would probably be thriving.  But as you will see below, both of them have been victimized by the exact same Ponzi scheme, and both firms are sending us very clear signals that the U.S. economy is heading for troubled waters.

Whenever you hear the word “restructuring”, that is always a sign that things are not going well for a company.

And it turns out that GM’s “restructuring” is actually going to cost the firm 3.8 billion dollars…

General Motors said Monday it plans to effectively halt production at a number of plants in the U.S. and Canada next year and cut more than 14,000 jobs in a massive restructuring that will cost up to $3.8 billion.

Of course GM doesn’t have 3.8 billion dollars just lying around, and so they are actually going to have to borrow money in order to close these plants and lay off these workers.

Needless to say, President Trump is not very happy with General Motors right now…

Trump said he spoke Monday with GM’s CEO, Mary Barra, and ‘I told them, “you’re playing around with the wrong person”.’

He told reporters as he left the White House for a pair of political rallies in Mississippi that the United States ‘has done a lot for General Motors. They better get back to Ohio, and soon.’

There is no way that Mary Barra should have ever been made CEO of General Motors, and now the entire world is getting to see why.

In addition to the elimination of about 6,000 factory jobs, GM will also be cutting about 8,000 “white collar jobs”…

In addition to the production cuts, GM said it will reduce its North American white-collar workforce by about 8,000. The deadline passed last week on a voluntary buyout for those workers, and GM spokesman Pat Morrissey told the Free Press that only 2,250 employees have asked to take the offer, meaning as many as 5,750 workers could be cut if the company keeps to its announced total. Analysts told the Free Press to expect involuntary cuts in January.

So why is General Motors doing this?

After all, if the U.S. economy really is “booming” that should mean increased sales for all of the major automakers in the coming years, right?

Unfortunately, the truth is that hard times are already here for automakers.  In fact, Bob Lutz told CNBC that “we’ve got a demand problem on cars”…

Former GM Vice Chairman Bob Lutz said the automaker historically would have raised sales incentives to try to sell more cars before resorting to plant closures.

“Nowadays GM looks at the hard reality, says we’ve got a demand problem on cars, what are we going to do about it. We have to shut some facilities and move production to truck plants,” Lutz said on CNBC’s “Halftime Report. ” “So I think what we are seeing is a fast-acting and reality-oriented GM management.”

In other words, sales are not good and so now is the time to shut down factories.

Of course GM is not the only one that is shutting down facilities and laying off workers.  If you doubt this, please see my previous article entitled “U.S. Job Losses Accelerate: Here Are 10 Big Companies That Are Cutting Jobs Or Laying Off Workers”.

But if General Motors had been much wiser with their money, they wouldn’t have had to initiate a “restructuring” so quickly.

Over the past four years, General Motors spent a staggering 13.9 billion dollars on stock buybacks.

GM executives were able to prop up the stock price for a while, but at this point the stock is down about 10 percent from where it was four years ago.  The following comes from Wolf Richter…

During this four-year period in which GM blew, wasted, and annihilated nearly $14 billion on share buybacks, the price of its shares, including today’s 5.5% surge – getting rid of workers is always good news for shares – fell 10%.

These stock buybacks are a massive Ponzi scheme, and everyone that was involved in blowing such a giant mountain of cash at GM should be fired.

And now thousands of hard working Americans are going to lose their jobs, but it didn’t have to happen.

General Electric has also been victimized by the exact same Ponzi scheme, and at this point they are in a struggle for survival which they are probably going to lose.

On Monday the stock slid another couple of percent, and so far this year it is down a total of 58 percent…

Not a day passes lately without GE stock getting hit by some unexpected development, and today was no exception.

GE shares, which are down 58% YTD, dropped over 2% on Monday, after sliding as much as 4.1% earlier in the session and approaching its financial crisis low of $6.66, following a research report by Gordon Haskett analyst John Inch which prompted fresh questions about the treatment of goodwill at GE Capital.

In the end, GE is probably heading for total collapse.

But if GE had not blown 40 billion dollars on stock buybacks in recent years, they would be in far, far better shape.  The following comes from the Marketwatch articlethat I quoted the other day…

GE was one of Wall Street’s major share buyback operators between 2015 and 2017; it repurchased $40 billion of shares at prices between $20 and $32. The share price is now $8.60, so the company has liquidated between $23 billion and $29 billion of its shareholders’ money on this utterly futile activity alone. Since the highest net income recorded by the company during those years was $8.8 billion in 2016, with 2015 and 2017 recording a loss, it has managed to lose more on its share repurchases during those three years than it made in operations, by a substantial margin.

Even more important, GE has now left itself with minus $48 billion in tangible net worth at Sept. 30, with actual genuine tangible debt of close to $100 billion. As the new CEO Larry Culp told CNBC last Monday: “We have no higher priority right now than bringing those leverage levels down.”

Combined, General Electric and General Motors have blown more than 53 billion dollars on stock buybacks, and now both companies are in huge trouble.

The executives that gutted the finances of both firms by engaging in these sorts of Ponzi tactics should all be fired and should never be hired by anyone else in the corporate world.

For years, big corporations have been borrowing massive amounts of money to fund reckless stock buybacks, and that has helped to fuel an amazing bull market run.

But now the game is imploding, and the unraveling of this massive Ponzi scheme is not going to be pretty.

About the author: Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Blain: "GE’s Credit Meltdown Is Coming At Just The Right Time To Ruin Everyone’s Day"

“Reversion to the mean is the iron rule of markets..”

Let’s have a Brexit Free morning.. see how the dust settles, who kills who, and who is left standing on Monday morning..

Two of the most important of Blain’s Trading Mantras are:

“THE MARKET HAS NO MEMORY”

“THE MARKET’S ONLY OBJECTIVE TO INFLICT THE MAXIMUM AMOUNT OF PAIN ON THE MAXIMUM NUMBER OF PARTICIPANTS”

Bearing these in mind, and what’s going on globally, I’m wondering if its time to set up for the big corporate bond buying moment. There is nothing to be fearful about when it comes to volatility. Just be ready for it. For bond markets to be an opportunity… prices have to move dramatically lower. And I think they will as the market wakes up to smell the proverbial coffee.

Long ago, in a galaxy far far away…

There once was a company in far-off Texas that grew and grew its energy and commodities business into a AAA rated behemoth hailed as “American’s Most Innovative Company” year after year. Everyone was happy. They all got massive bonuses right up to the moment Enron went bust on the back of massive accounting fraud, and bond holders were hosed.

17 years later there is another former AAA corporate darling on the cusp of being downgraded to Junk. After reporting $30 bln of unexpected charges and a shortfall in insurance reserves in October, GE’s bond spreads have ballooned as investors start to panic about accounting probes, crashing demand for its products, worries about its $115 bln debt mountain, and the perception of a liquidity meltdown.

Investors are right to be scared. The last few years has seen a bond binge with spreads dramatically tightening on the back of free money. Now its reversing. Investment-grade bond spreads have widened across the board as the bond market wonders who else might be swimming without their bathing suits…

You have to ask what credit analysts do all day…

Nearly half the $6 trillion investment grade bond market is now rated within a single notch of being downgraded to Junk. Not that ratings actually mean that much – another lesson investors seem to have conveniently forgotten just 10-years after they swore they’d never trust ratings again. It’s just too easy to forget they are just expensive opinions.

Over the last 8 years US corporates have gorged on cheap debt – and used it all to buy-back their own stock or payout the Leveraged buyout funds that own them. Debt has risen while profitability has declined. Converting equity into debt to give cash to owners means they haven’t built new plant to make stuff that will repay debt. That multiplies their vulnerability to rising interest rates. 

Bond covenants have become progressively softer and less onerous even as US corporates have binged on ultra-low rates selling bonds to investors desperate to buy anything yielding half-a-tad more than Treasuries. (For readers unfamiliar with bond market terms like a tad, smidge or a bit, its dead simple; a tad is bit more than a smidge, or is it smidge is tad less than a bit?)

Once again Ratings lie at the centre of the problem. Fund managers still have rules like “only buy investment grade bonds”, so they do - assuming a rating is the guinea stamp (guarantee) of investment quality, and that attaching a slew of As to a bond somehow justifies buying stuff they just don’t really understand.

Another unintended consequence of QE is yield tourism - investors who were safe in the shallow-risk toddler pond of Government bonds found themselves forced into deeper more dangerous waters of high-risk BBB and Hi-Yield Junk in search of meaningful yields. As the default-sharks gather, the inevitable feeding frenzy is about to start….

Yet another consequences of the crash of 2008 are pages of regulatory overkill and rules that have killed bond market liquidity by constraining banks from doing stuff like making markets or acting as brokers. Markets are dramatically less efficient. Bond markets in the most difficult sectors are trading a massively wider bid/offers and become “distressed” at the first sign of trouble. That’s a long way of saying there will be zero liquidity when fear becomes flight. (And that’s why anyone trying to sell illiquid bonds today is discovering they are a distressed seller!)

(Nor has it helped that banks have seen fit to dismiss most of the experienced sales staff who might have understood underlying value and how to trade difficult debt, and replaced them with young graduates who can just about navigate themselves around the daily sales sheet, but understand nothing about providing liquidity.)

In short, GE’s credit meltdown is coming at just the right time to ruin everyone’s day. Its not as if thing aren’t bad enough already…  

When I was a lad, the trip upstate to see the Treasurer of GE was one of the most fearsome of tasks for a young debt origination banker. I’d try to explain demand and the success of the fantastic deals we’d just completed for Ford and GM, and have these dismissed as irrelevant as they had nothing in common with GE. I was unsubtly told If I wanted GE’s debt funding business, I better be prepared to “pay to play” by providing lots of cheap MTN funding before I’d get a public bond mandate from them.

20 years later and GE still has $115bln of outstanding debt. Prices on the benchmark GE 4.4% 2035 bond longer-dated bonds have crashed from near par to near 82% in recent weeks. I imagine I’d get my arm bitten off if I offered them new funding today. Or maybe not.. I read a comment yesterday: “GE does not plan to raise new debt until 2020, so the recent increase in bond yields will not increase current interest expenses.. the company plans to pay down debt through asset sales before returning to bond markets.”  Am I convinced? That sounds like a company facing a classic liquidity squeeze. What is Plan B if asset sails don’t work fast enough?

Its spread will likely widen further. Banks and other lenders are buying credit default protection. A few weeks ago, the Commercial Paper market effectively slammed shut to the name. If the rating is further cut to junk, then there will be a wave of enforced bond sales from buyers who can only hold Investment Grade Paper – further widening the pain.

Corporate defaults are a fact of life – a fact many US bond pundits are now waking up to. Recent new deals across the Investment Grade sector have struggled to achieve much market excitement. I can’t help but be amused by bond analysts writing stuff about how attractive bond spreads look at these levels. It feels to me like a crisis is brewing…

Very simple question… why would you buy mega risky high yield debt at 6% when I can sell you absolutely solid secured asset backed alternative debt at 7-8% that’s uncorrelated to the coming debt debacle?

Meanwhile….

Fed Head Jerome Powell is warning the Fed’s rising rate campaign may stall next year on the back of slowing demand overseas, the likelihood of fading fiscal stimulus next year, and the effects of the Fed’s previous hikes now being felt across the economy.

That could mean we’re looking at any big bond correction on credit fundamentals being capped by a slow down in rate rises – the new normal economy of lower growth and constrained inflation?

When bond prices do correct they are going to look very good value if we are into a new normal. Which is why I’m wondering if its time to go bottom fishing on a crash – but in very selective names.

16 Nov 2018

Blain's Morning Porridge, submitted by Bill Blain