Summary
The devaluation of the US Dollar means higher prices for goods, commodities, and auto-parts in both domestic and imported goods. It also means higher fuel prices, and a lower standard of living. The top economic experts, such as Jim Sinclair, expect the US Dollar to continue its devaluation for quite some time, due to the size of the national debt, the worsening derivative and sub-prime crisis, and government mismanagement of the economy.
Analysis
This article in the WSJ was composed of pure political spin. To say that the US Dollar is going to magically turn around, ignoring the economic and political facts and fundamentals, is just foolish. The article is an example of the failed "Operation White Noise" which was an attempt to deceive the American public as to the state of the US economy through spin in the press and political jawboning. As a result of this present US financial market disarray and unwillingness on the part of US leadership to do the correct thing, gold is going to $1650 and the US dollar to .5200. If you buy into the “taka-taka" of Operation Blitz then your finances will become "taka-taka." Add to this the fact that many opposing killing machines are too close to one another in the Strait of Hormuz guarantees that serious problems have to occur." (end of quote) I think the above quote by Mr Sinclair, perhaps the most noteworthy currency and gold expert in the world, sums up the present economic state of the economy. $750 trillion in worthless derivative debt, in a world economy of only $150 trillion. I believe most can comprehend the implications. The mild correction in the US Dollar right now, is only temporary, the reality of the fundamentals of the US economy will continue to propel the US Dollar in its downward spiral. The European currencies also suffer from similar difficulty to the US Dollar, and eventually the US Dollar will begin to drag down the European currencies with it. However, in relation to the US Dollar the Western European currencies may appear to continue rising in value, only because the US Dollar is so weak. The Canadian Dollar, once .60 to the US Dollar is now its equal in value. The Canadian dollar is also known as the Petrodollar, its value is directly tied to the price of oil and metals. The Canadian Dollar, or Loonie in Canadian slang, is expected to be a big winner, as it is expected to continue to rise with the value of energy, oil, precious and base metals, including the price of the platinum and palladium needed in catalytic converters in automobiles.
I quote Jim Sinclair, perhaps the top dollar and gold analyst in the world today, and then I will get to the implications for the automobile industry.
Quoting Jim Sinclair from his article The Dangerous World We Live In:
"Here is the Axiomatic Economic Law: When financial markets are in disarray all attention has to be focused on the financial market. At such a time both monetary policy and fiscal policy are rendered ineffective. Where we are concerned the inventory of failed real estate must be allowed to work itself off and the fraudulent over the counter derivatives cannot be resuscitated. Sorry but that is a violation of the law that will only make the final condition unthinkable. We are presently violating the law.
The devaluation in the US Dollar is seen in relation to the cost of goods and commodities. Thus, it is not the cost of goods that are rising, but the value of the US Dollar that is devaluing. Thus goods do not increase in value, rather the currency declines in value against the goods.
As the US Dollar devalues the cost of automobiles both American brand and foreign brand will increase. This will hurt sales for both types of automobiles, which is why Warren Buffet has recently invested in used cars dealerships.
In actuality there is no such thing as an American made car, as the production of most cars that may be American branded or American assembled is dependent on parts that are made overseas. The cost of both automobiles that are imported and the parts to automobiles that are imported for American assembled cars will increase. Therefore the cost of both imported cars, and domestic cars will increase significantly, because the parts for domestic cars are made overseas, specifically in nations as China, where the value of currency will be increasing against the US Dollar.
With the devaluation of the US Dollar will come inflation, or rising prices. This price inflation, better termed currency devaluation, will cause the price of most goods, including automobiles to increase both imported and domestic.
Asian cars are generally less expensive than American brands. The declining US Dollar will raise the price of imported merchandise. However, the Japanese Yen, which is controlled by the Bank of Japan, makes its money from the Yen carry trade, or the cheap borrowing by foreigners of an inexpensive Yen. Even if the Yen carry trade unwinds against the devaluation of the US Dollar, the Bank of Japan will make an attempt to keep the Yen affordable.
China is also preparing to enter the US auto market, with a new Chinese made automobile, that will be substantially less costly then its Japanese and Korean rivals.
Commodities, especially oil and fuel costs will increase with the devaluation of the US Dollar. Fuel and oil costs are susceptible not only to the devaluation of the dollar causing price inflation, but to the political instability in the Arab nations, and to "peak oil" the shortage of energy and oil resources. Thus the cost of gasoline will increase making it more difficult for Americans to drive fuel inefficient American automobiles. High fuel costs would favor continued use of foreign, especially Asian cars that are gas efficient.
Catalytic converters are an essential aspect in automobiles. Platinum and Palladium are presently essential in the making of catalytic converters. As the price of these precious metals increases so will the cost of making catalytic converters. Although this is only one part of the automobile, combined with the cost of imported parts for American made automobiles, the cost of both autos and fuel will increase substantially, and sales will suffer.
Automobile sales are directly effected by both consumer credit, and the health of the home goods and housing industry. Consumer debt is presently at all time highs, and banks which are themselves having severe difficulty, are tightening credit. Despite claims made by "Operation White Noise" the housing and mortgage crisis has barely just begun. Nobody knows what the exact amount of worthless debt, derivatives, and bad mortgages is, but if worthless derivatives alone value over $750 trillion dollars, mostly in the USA and Western Europe, and the entire world economy is only $150 trillion, the housing and mortgage crisis is just beginning.
To summarize, markets are cyclic, and we are in a short-term correction in the US Dollar, that is being covered-up by "Operation White Noise" for political purposes. Fundamentals will prevail and the US Dollar will continue its long downward spiral for quite some time. The cost of automobiles both domestic and imported will increase and sales will suffer. Fuel costs will increase, and consumer credit will shrink. The majority of the market will find it difficult to purchase both fuel and automobiles, and sales will suffer. There will be a new wealthy class which takes advantage of the new economy, but they are a very small percentage.
Warren Buffet's decision to buy into the used car market is based on these facts, and I believe he is making a good long-term decision. other areas to consider are motorcycles, scooters, bicycles, and public transportation such s trains and buses.
It is also true that markets are cyclic. I am realistic, and base my writings on facts and fundamentals. The markets in the USA will bottom and turn positive, after the economy has gone through the necessary adjustments. This will not be in 2008, nor in 2011, as Mr Sinclair states 2011 will be the worst year. But in perhaps 5, 10, or 15 years, after the cycles have reversed, the USA with its unique business acumen and ingenuity will once again be the place to be, and will once again be the rising star of a much different, broader, and inclusive world economy.
