Daniel Howes: The good times of almost-free money can't go on forever
Judging by the stock market this week, you’d think the economy’s in the dumps, unemployment is up, and corporate profits are down.
But you’d be wrong. Just the opposite, actually.
No, the proximate cause for the hand-wringing on Wall Street is the realization that the good times of almost-free money and steadily rising stock prices really can't go on forever. And that President Donald Trump’s trade battling with China really isn’t helpful.
The response: sell, sell, sell for some, anyway.
Closer to home here in Michigan, the markets are saying something else. Nine years after the likes of General Motors and Chrysler gutted through bankruptcy and Ford Motor mortgaged the Blue Oval to finance the largest home-improvement loan this town has ever seen, the best times since the golden 1960s are coming to an end.
Today’s version: Money was cheap, for business and for consumers. The average age of the American auto fleet exceeded 11 years, far beyond the expected life of most cars, trucks and SUVs. Low inflation meant small price increases for showroom metal. American buyers deepened their love affair with profit-rich pickups and SUVs.
The combined effect: fattened bottom lines stretching from Dearborn through Detroit to Auburn Hills. It was a virtuous circle that combined to keep juicing sales to record levels. Until it stops.
After nearly a decade of virtually free money, interest rates are rising because the economy is growing. Rising rates make money more expensive. And more expensive borrowing impacts everything from car loans and mortgage rates to municipal bonds, corporate borrowing and profits.
Over the past few months, shares in Detroit's three automakers have slumped at least 20% as evidence builds that the longest year-over-year sales and profit boom in the past 50 years appears to be coming to an end.
For all the talk about a “New Detroit” that supposedly learned the hard lessons of the past, investors are saying, “prove it.” And the hometown autos can’t prove it without actually managing their way through an adversity that still has not arrived but it’s getting closer.
No, the nearly decade-long party may not yet be over, but it sure feels like it's long past beginning to wind down. And when it does, this town's automakers and their suppliers will be facing a new kind of reckoning: did Old Detroit really learn from the truly existential threats of 2008 and 2009?
Detroit's fall from Wall Street favor is a rational market response to a long record of capital incineration, followed by bailout, and more desperate calls for capital, all in less than ten years.
The selling rate is expected to slow further because of rising interest rates, higher prices on new vehicles and plateauing demand. President Donald Trump's trade battle with China is intensifying. And the Federal Reserve's pace of rate hikes is causing investors to assess the collateral damage.
Near the top of the list are Detroit’s automakers. They’re being reminded that nothing stays almost free forever, starting with the money that fuels their business and pads their bottom lines.
Daniel Howes is a columnist at The Detroit News. Views expressed in his essays are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.