By Michael Pistol
When looking at macro economic trends going into 2011, this new year will be all about confidence. And confidence is an emotion. Ultimately, it’s incontrollable.
The main international developments that will affect your activity, and profits, will be firmly revolving around the value of the Canadian dollar, the price of oil/fuels, U.S. economy, the EU sovereign debt crisis, and corporate (automotive) debt. Let’s have a quick look.
The main worry for the auto dealer is the U.S-Canadian dollar parity.
Remember 2006-2007 when the average vehicle sold in Canada was about 16 to 17 per cent more than in the U.S.? Remember the mayhem?
At the time of this writing, the U.S. greenback buys 0.9797 of its Canadian counterpart. For 2011, expect the loonie to hover around parity, but it’s not expected to reach the $1.10 June 2006 level.
From a downside perspective – as a cyclical currency – the Canadian dollar is influenced by commodity pricing, particularly sensitive to concerns China may slow as a result of policy measures aimed at curbing inflation, which is fueling speculation of further tightening.
China is currently fraught with the worst kind of inflation, that driven by rising costs – cost/push inflation, and is infinitely more worried about inflation than about slowing growth. Chinese year-on-year change of M2 money supply hit almost 30 per cent in November 2009.
From the upside perspective, recent strong inflation data may mean the Bank of Canada will have to raise rates sooner than expected, triggering another upside evaluation. Additionally, as the U.S. and Canadian indicators suggest, growth may be picking up, expect the target rate to rise to 1.50 per cent by the middle of next year.
All eyes should be on General Motors, Volkswagen and Daimler.
Volkswagen and Daimler have massive debt coming due (starting in 2011) with $46.2 billion and $39.9 billion respectively, according to the Moody’s Investors Service.
As the credit markets are still weak – especially in Europe - expect some turmoil for these two companies.
As General Motors goes, investors are buying with a huge expectation of a pop in the price because GM should make its way back into the Standard & Poor's 500 index shortly. Membership in Standard & Poor's 500 is important because most mutual and hedge funds buy corporate shares based on it. Also, the large investment banks will do whatever it takes to keep the price above $33 a share and avoid triggering any computerized sell orders. With a drop under that level, and non-admittance in the 500 Index club – the selling stampede may be unprecedented.
For 2011, don’t expect the oil to reach the peak of $147 per barrel seen in July 2008, nor slumped to the low of $40 during the downturn. The average pricing may be into the $70 to $90 range, which will translate to about $1.05 to 1.10/L of regular unleaded gas in Canada.
If China/India region collapses under inflation pressures, we’ll see much lower pricing, even under the $1/L level. However, due to the massive amount of Canadian household debt (expected to surpass U.S. in 2011) and increased cost of living (especially energy and foods), the Canadian vehicle sales may actually be lower than in 2010.
Still the world’s largest economy, the U.S. is continuing to suffer from the damage caused by the credit bubble. It is likely that the balance sheet recession in the U.S. will be tested again in 2011.
If the housing double-dip surprises to the downside, you should not be surprised to be talking about more consumer credit problems.
Additionally, it is entirely possible that a large U.S. state or city can’t come up with the cash to make a bond payment. Such a default would influence markets worldwide. Arkansas was the last U.S. state that failed to pay its debt - in 1933. It had borrowed heavily to build its infrastructure, and later found itself overwhelmed by its debts. It sounds familiar, doesn’t it?
Add to that the effect that yield curve manipulation and added money from the Fed, have had on the leading economic indicators (LEI). Without this help, the LEI has been negative and predicting recession all year.
After the Greece and Irish bailouts, it has been revealed that Spain's government and its banks would need to raise up to 73 billion Euros next spring. Portugal is also in dire straits, and 2011 will most likely be the year of reckoning.
There is also talk of a sovereign debt restructuring mechanism and the dreaded “haircut” for the bond investors. Expect the Euro to get back to the Greece crisis levels - $1.20, or possibly lower.
The European Commission is pushing to double the size of Europe's $586.52 billion bailout fund for indebted euro-zone countries, which will bring the total to over $1 trillion.
The European crisis may not influence Canada directly, but due to the international credit system and banking liaisons, any turmoil in the Old World will affect you. And, also, don’t forget the Canadian (still) mostly European demographics.
Aside from Europe’s troubles, ultra-easy monetary policy in developed markets like the U.S., Europe, and Japan have increased inflationary pressures across the developing world, and here’s the big bubba for the 2011. Although the recession is technically over, distant geo-political events will influence your own dealership activities like never before.
If in 2010 we witnessed the end of the Great Recession, in 2011 we’ll be testing the very beginning of the Great Correction – which literally ends the great credit super-cycle that began more than 50 years ago.
Although North American may climb to about 11.8 to 12 per cent by the year’s end, Canada may see a mere two per cent uptick, if that. As such, the incentives war will continue unabated – perhaps moving down to the car segment.
Additionally, in 2011 we’ll see the first real foray into the consumer auto lending business by Canada’s Big Five banks. Therefore, a different type of mentality of selling (fewer) cars to cash/credit strapped, way over-leveraged Canadians.
As we’re going into 2011, the thinking is that the boys in the engine room have realized that now it’s truly a zero-sum game. Simply put: there’s no more money. Remember, this year is all about confidence. And in order for you to win, someone else must lose.
Michael Pistol is an independent automotive analyst and publisher. He can be reached at firstname.lastname@example.org