Gold News

GM Hits 54-Year Low

The Dow Jones stock index just had its worst June since the Great Depression...

The DOW JONES Industrial Average has lost 9.4% of its value this June, writes Dan Denning for The Daily Reckoning Australia.

   You have to go back to June 1930 to find a worse start to the summer, when it fell 18%.

The Dow only includes 30 major US companies. But in two important ways, this news shows that the US model for prosperity over the last 50 years is in big trouble. While this certainly affects US investors the rest of the world, it's not entirely bad news.

The first blow to the US model is the decline of General Motors, a company that is – in many ways – the epitome of the large, vertically integrated, post-World War Two major corporation.

But GM has made more money in recent years as a finance company than a car company. That's because it's hard to make money making cars when labor is so much cheaper over seas...and when you are selling massive cars at just the time petrol is getting more expensive.

It's hard to believe that it's impossible for GM to make money. Toyota makes money making cars, yet wages in Japan are higher than wages in Mexico or China. But GM has many other legacy costs – not least its pension obligations – and is itself a house divided.

Half-ageing industrial manufacturer and half-modern finance company, GM finds both its core businesses now becoming endangered species. That's why the stock fell to a 54-year low on Thursday this week.

The other blow to the American model is seen in the 6% decline in Citigroup shares. Rome didn't fall in a day either. But Citigroup – the world's biggest bank by assets – is now at a ten-year low, facing billions more in losses, and literally looking to recapitalize its business (and therefore transfer ownership and future earnings) to sovereign wealth funds from the Middle East and Asia.

To recap: Big American firms can't make money making things. Big American firms can't make money lending money. Those are two formidable challenges for the rest of this year and beyond. In fact, they are two big challenges, full stop.

Industrial economy: splat! Financial economy: splat! What's left?

Of course, there are some US firms that can and will compete in the global economy. But what needs pointing out once again is how competitive the rest of the world has become. Nobody ever got rich consuming more than they produced.

For investors, this means broadening your horizons to the many stocks listed all over the globe, as well as other asset-classes – such as Gold – that are not correlated to Wall Street and the US growth story. Because it's not growing right now. It's going to struggle to get back on track given the challenges its two major models now face after 50 years of dominating the world.

The downside, for everyone, is that the resulting global slowdown will hurt. The upside is that the growth in industrial production in the developing world remains a perfect fit for hard-asset investors and resource stocks looking to the new world centers of industry and finance.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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