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Monday, February 25, 2008 2:14 AM

Manufacturers Pass On Costs As Commodity Prices Soar

Mish Moved to MishTalk.Com Click to Visit.

Commodity prices are soaring. Let's take a look at a couple of them.


click on chart for sharper image


click on chart for sharper image

Manufacturers Pass On Costs

Common wisdom says manufactures have little choice but to pass those costs on.

Indeed, on February 23, 2008 GM announced sticker price hikes of 1.5% due to growing steel, commodity prices.

General Motors Corp. will increase prices by as much as $1,500 on most of its 2008 model year vehicles to offset the rising cost of steel and other commodities, the automaker announced Tuesday.

Prices will go up 1.5 percent on average, though certain vehicles "in hotly contested segments" will be spared increases, including the new four-cylinder Saturn Aura sedan and the base model of Chevrolet's made-over Malibu sedan. Consumers on average will pay about $100 to $500 more for GM cars and trucks.

The Cadillac XLR luxury sports coupe will see the largest dollar increase, at $1,500.

"This targeted price increase is designed to partially recover ever-increasing commodity costs," Mark LaNeve, GM North America vice president of vehicle sales, service and marketing, said in a statement.
On that note, the Mish telepathic thought lines are open.

As is typical when I open the telepathic thought lines, I was once again flooded with telepathic messages. Most were telling me that I have have finally seen the light. Many were crowing that I have finally tossed in the towel. However, the very last message before a sudden, unexpected disruption in the thought lines was asking me to please verify the above dates.

Hmm. Fancy that. A double check shows I accidentally dated the above post February 23, 2008. The correct date of the above article was December 19, 2007.

Following is the correct February 23, 2008 listing.

Big 3 to deepen discounts

Please consider Automakers roll out creative incentives'08 competition, economy tougher.
Detroit's automakers, stung by nearly two straight years of slumping U.S. auto sales, are set to cough up richer, more inventive deals this year as they try to woo weary consumers back into showrooms.

As much as the Big Three want to avoid profit-eating discounts, executives at the companies say incentives -- used well and tactically -- will be a critical part of surviving 2008.
Profit eating discounts? What profit eating discounts? Don't you have to have profits before you can eat them?

Inquiring minds may wish to consider the Implications of GM's $39 billion non-cash writeoff.

For months on end, no make that years on end, I have been told that manufactures "must", "will" or "have to" pass on increased raw materials costs.

Outside of absolute necessities (food and energy), I say they can't. The above is proof. They can't. If they could, they would.

On December 19, 2007 GM announced they would increase prices. I circled the dates on the commodity charts above. Scroll up and take a look. For those who may not know, platinum is used in auto catalytic converters. Iron, aluminum, and copper are used in various components as well. All are soaring and all are way higher than they were on December 19 when GM made its price hike announcement.

What did GM do in spite of commodity prices that kept going up? Gm rolled back price hikes and announced price cuts.

GM Sends $635 million to money heaven

For anyone who did not already know that GM was completely clueless, please consider GMAC loans $635M to its mortgage unit.
GMAC LLC, the lender partially owned by General Motors Corp., agreed to loan as much as $750 million to its residential mortgage unit as it seeks to sell a business that finances vacation resorts.

Residential Capital LLC borrowed $635 million under the agreement Thursday, the Minneapolis-based company said Friday in a regulatory filing. GMAC Chief Executive Officer Eric Feldstein has cited the resort operation as one of the company's best performing businesses.

Pressure on Detroit-based GMAC increased Friday after Standard & Poor's downgraded its credit ratings and those of the ResCap home-lending unit because of difficulty in funding loans. GMAC, controlled by buyout firm Cerberus Capital Management LP, said this week it will shut three-quarters of its North American auto-financing offices this year and cut 930 workers after a $2.3 billion loss last year.

"It's going to be difficult for them to sell anything," said Bradley Rubin, a credit analyst at BNP Paribas in New York. "The appetite to buy real estate assets is limited at best."

S&P analysts wrote today that GM and Cerberus support for GMAC "must be materially less than it was several quarters ago." GMAC's counterparty credit rating was cut to B+/C from BB+/B. The rating on ResCap was lowered to B/C from BB+/B, Standard & Poor's said in a statement today.

"We're extremely disappointed in Standard & Poor's action today," GMAC spokeswoman Gina Proia said in an interview. "We remain committed to taking the steps needed to improve our business."
With that decision GM just pissed away 3/4 of a billion dollars it did not have and cannot afford to lose. ResCap is headed to zero and the "brilliant" minds at GM cannot see the obvious.

Bernanke's Surprise

I continue to be impressed with the flexibility of Gary North who is writing about Bernanke's Surprise. Let's take a look at what Gary North is saying:
You have read the headlines about the Federal Reserve's new policy of inflation to solve the credit crisis.

I ask you bluntly: "Have you reallocated your investments so as to hedge against the FED's wave of fiat money?" Be honest. Have you?

I hope not. Why? Because the reports are all wrong. I don't mean a teeny-weeny bit wrong. I mean completely wrong.

The FED has not been inflating. The FED has been deflating.

Hard to believe? It surely is. I find it difficult to believe myself. I had thought the FED would inflate ("Reality Check," August 28). So did everyone else. But the data are clear. The FED has shrunk the money supply since mid-August, 2007.

In support of this, I offer evidence from the FED itself. I have assembled the data and the charts. Click the link: What the Federal Reserve Is Doing to Solve the Credit Crunch.


The bullish stance of American investors is being hit hard by a falling stock market and falling real estate prices. The hope of most investors who are long – and most are long – is that the FED will intervene on the side of the bulls. In fact, the FED has been intervening on the side of the bears.

Because this is so far out of character, the media are blind to the data. They listen to Bernanke's assurances of aggressive monetary policy and think, "stimulus." He even says this magic word.

Do what Nixon's Attorney General John Mitchell once said: "Watch what we do, not what we say." They did, and he went to jail.

Watch the statistics of what the FOMC has done, not what Bernanke says they have done. If you don't, you're in for a big surprise.
I like Gary North. He has his position and he is willing to change his mind when the data changes. I welcome newcomers to the "deflationista viewpoint" and Gray North seems to have taken that position. Please see Bubble Economy Endgame for the origins of the term.

The Fallacy of Cost Push Inflation

Here are two additional excerpts from North that I want to highlight.They are in reference to Bernanke's Valentines Day testimony before Congress.
"[Bernanke] warned about rising oil prices as part of the "inflation front." This, of course, is economic nonsense. Rising oil prices do not cause price inflation. If oil prices rise, then consumers must cut back elsewhere in their budgets. Cost-plus inflation is a fallacious idea based on ancient fallacies that should have died off after the rise of modern economic theory in the 1870's. But it is still popular, even at Princeton University, I guess.

There is indeed a fiscal stimulus: a $150 billion increase in the Federal deficit. Our checks will be in the mail. But where, pray tell, is the monetary stimulus? So far, there has been the opposite of a monetary stimulus. There has been a monetary contractus.
North is one of very few who understand that rising oil prices or commodity prices in general do not constitute inflation. He also sees how ridiculous it is to expect the $150 billion in stimulus to work.

However, I must point out that my model is not exactly the same as Gary North's. I look at the expansion of both money and credit and I also consider velocity. In regards to the latter, I expect the Fed will soon expand money supply. If and when the Fed does start monetary pumping, inflation will only result if it exceeds the destruction of credit and that money makes it into the real economy.

When that happens (and it will), I will be interested to see Gary North's position. No doubt when it happens some will be wondering why I too am not flexible. My answer, in advance, is that my model already presumes monetary expansion will occur, but velocity will negate it.

Monetary pumping lasted for years in Japan. It did not help one iota. Velocity was close to zero and banks hoarded cash. Once again I refer to my Interview with Paul Kasriel, Is the Fed Deflating? and Things That "Can't" Happen for what lies ahead. The answer is not inflation.

Mike "Mish" Shedlock
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