The Curious Capitalist, Justin Fox, Economy, Markets, Business, TIME

Charting Detroit's dependence on low gas prices

Every time bad news breaks for U.S. automakers, journalists and other observers offer one of two main explanations. One is that Detroit doesn't make very good cars, or at least doesn't make them efficiently enough. The other is that American automakers are so burdened by the retiree health care and pension commitments that they made when they were bigger, more prosperous companies that they barely have time to think about making good cars.

There's truth in both of those (personally, I lean slightly towards the latter explanation). But over the past 20 years the short-to-medium-term fortunes of the U.S. carmakers seem to be dependent mainly on one thing: The price of gasoline. The impressive return to profitability of Detroit's Big Three in the 1990s was in retrospect almost entirely attributable to the global oil glut that sent prices at the pump down and kept them there. Detroit makes its money on SUVs and pickup trucks, not on compact cars. Those don't sell well when gas costs a lot.

This is an obvious enough point, I guess, but I still thought it would be cool to plot GM's stock against the price of gas to see if the chart backed up the theory. It does. I used the average price at the pump for unleaded gas, as reported by the Energy Information Administration, and indexed both it and GM's stock price to equal 100 as of January 1995. (I thought about sending the chart to the people and seeing if they could make it pretty, but decided that wouldn't be very bloggy of me.)


Gas prices have dropped in the past six months, and GM's stock price has risen. But a return to 1990s conditions really doesn't seem to be in the cards. Which is why I think we might keep reading scary headlines about the U.S. automakers for a while yet.

How bobbleheads will save the American newspaper

My post the other day about the Webcomic Achewood (it was actually about newspaper economics, but since most of its traffic seems to have come from a link that Chris Onstad put up on his site, I guess that makes it about Achewood), has been generating a steady stream of mostly fascinating comments. Here are a couple about how media enterprises can make money in the age of the Internets that I think deserve their own post (I have abridged both, though). First, Kirk Alexander:

One salient point that I almost never see made when this sort of discussion comes up is that the profit margins that large corporate interests pursue still exist, but they are spread out over wider areas and require more consumerism. For example, the record industry might sell fewer cds now (for whatever reason) but there is more cross-branding and cross-marketing than ever before, between music placement in ads, between toys, posters, t-shirts, bobbleheads - the number of marketable products associated with a popstar has been steadily escalating in the last few decades to the point where certain name brand stars have billion dollar industries only tangentially supported by the product that they are famous for, ie, Snoop might make more off his Girls Gone Wild videos and his energy drink and his yadda yadda than he does off of music. ...

The same is potentially true for newspapers if they can find a way to be inventive. Achewood is a good example of this: the traditional cartoonist 15 years ago was paid by newspapers to license his cartoon, and that was the bulk of his salary. Achewood, however, is given away for free, but is subsidized by a large number of smaller industries underneath the achewood brand - t-shirts, cookbooks, shot glasses, etc. This is going to be harder for reporters, but I think good cartoonists will be able to survive just as much as they did before with some creative thinking and hard work.

My point is this: there are somethings that can be pirated and copied, and there are some that can't. Food, housewares and clothes have to be bought while media can be copied and re-transmitted for free. The media enterprises that are adapting well are more and more often lowering their profits or eliminating sales entirely, and then making up the profit on physical items that have to be bought - e.g., a band giving away mp3s for free but making more profit because they increased their fanbase and more fans bought t-shirts, achewood giving the comics away for free but selling signed prints, etc.

A reader named Amy had this response:

Kirk Alexander brings up an excellent point: Onstad and his wife appear to make their living off of Achewood, despite the fact that there is no charge to view any of the comics, including the whole archive. Onstad generates and provides the content direct, free of charge. He and his wife provide products related to the "brand" they have created and again are directly responsible for delivery to customers.

The middleman, which to keep with the syndicated comics example has historically been newspapers and periodicals, is cut out.

There are direct interactions between the artist and his fans, and the result is a personalization of the product on a level that isn't possible with something like Garfield.

There are non-comic equivalents, Craigslist, Amazon, and the like but the point remains:

Personalization is the future, and in the case of print-news, that's going to be a problem. Although, I think it will be more of a problem for national rags than for local (once they get with it).

Andrew said something similar above: Local periodicals have to personalize their content to local interests.

Google tries everyday to figure out what news I'd like to read and what ads I'd like to see, and bless its little heart, when it gets better at it, it's going to be amazing (at its worst, it's at least entertaining).

That said, I have to disagree with him on his last paragraph:

I don't think cutting-edge, centrist reporting is going to save newspapers. There tends to be this idea floating around that if given an informed choice, people would go for the balanced, rhetoric-free examinations of news, and I just don't think that's the case.

Look at the readership of the most blatantly biased political "news" blogs. What are the highest rated news radio shows? CNN/Fox News shows?

It's wall-to-wall pundits taking pejorative turns on the words "Democrat" and "Republican"...and actually not a whole lot else.

I don't know that I buy the argument that national media struggle more with personalization than local media do. I mean, Achewood is national. Global even. National magazines have long focused on niches that wouldn't be profitable on a local level. Beyond that, all I have to say is: Wanna buy a Time mug?

Continuing to defend Larry Summers

As promised, I asked Larry Summers what he does for D.E. Shaw. Being the hedge fund guy that he is now, he wouldn't tell me anything on the record. But I can quote from the D.E. Shaw press release announcing his arrival:

Dr. Summers will be involved on a part-time basis in various strategic initiatives and high-level portfolio management activities and, along with the firm's other managing directors, in reviewing the overall operations of the D.E. Shaw group.

Also in the release (which I'd link to except it's a pdf; you can find it here), is this fawning praise from Julius Gaudio, a D.E. Shaw managing director:

Larry has both a world-class mind and a finely honed sense of what's feasible in practice. His involvement will meaningfully enhance our ability to identify and critically evaluate new investment opportunities throughout the world's capital markets.

Okay, so he's not in sales. And as the third-largest hedge fund company on the planet already, according to Alpha magazine, D.E. Shaw probably doesn't need to sign up any new clients. (Here's a great, if 11 year old, story on the firm, which is best known to people outside the hedge fund business as the place Jeff Bezos came from.)

Summers, by the way, did some important academic work in the 1980s and early 1990s showing how the prices of stocks and other securities can stray far enough from their correct values to allow smart speculators to make money. One of his partners in this research, Andrei Shleifer, co-founded what is now a giant money manager, LSV Asset Management. Another of them was blogger Brad DeLong, who will surely be announcing the launch of his hedge fund any day now.

To conclude: I still suspect that the hedge fund industry as a whole has jumped the shark. But Larry Summers is not Fonzie.

Citi, Maria Bartiromo, and Roger Babson

There's a great story in today's Wall Street Journal (you have to pay to read it) about the brouhaha surrounding ousted Citi wealth-management boss Todd Thomson's expense accounts. He was taking Maria Bartiromo to dinner at Daniel (danger, cubicle-dwellers! site plays music!), flying her around Asia, and--most impressively, by my lights--getting a wood-burning fireplace installed in his 50th floor office (which became known as as the "Todd Mahal").

The justification for all of this was that Citi's wealth-management clients really liked schmoozing with Bartiromo and discussing their investments in front of a crackling fire. The cost of all this was coming straight out of their hides, of course, and it probably would have been much cheaper for them to take Bartiromo to dinner themselves and build their own danged fireplaces. But that's what the rich people wanted, Thomson told his bosses.

It all brought back to me something that investing legend Roger Babson wrote in his autobiography in 1935. (What!?! You haven't read it!?!?!) Decades before he became famous for his "Babsoncharts" and for predicting the 1929 crash, Babson was a kid just out of MIT working for a bond brokerage in Boston. He discovered before long that the bonds he was selling (to customers that included his family and friends back home in Gloucester) were marked up massively from the going price down in New York. He complained to his bosses, got fired, and set up his own discount bond-brokerage business. It was a flop. As he wrote 35 years later:

I did not realize that most investors had rather pay considerably more for the same bond if purchased from a fine office with expensive mahogany furniture, than to buy it from a little fellow like me who paid only fifteen dollars a month for desk room and slept in a hall bedroom. Such is the frailty of human nature! This, to a large extent, explains why investors have always got stuck and probably always will! Congressional legislation may provide investors with better information, but it will never provide them with self-control or eliminate their pride.

So true. Although that fireplace at Citi does sound really cool.

Defending Larry Summers

A commenter to my post on hedge funds argues that since Larry Summers is an economist, he's not necessarily just hedge fund window dressing. Larry's not just an economist, he's one of the great economists of his generation. But I still don't believe David Shaw hired him for advice on arbitrage strategies. That said, I'll send Larry an e-mail and ask him what he actually does at D.E. Shaw. (Although that place is mysterious enough that if he tells me, he may have to kill me.)

John Snow also has a Ph.D. in economics, Richard Breeden has an awful lot of market experience (although he's never managed money before), and Madeleine Albright presumably knows a few things about risks and opportunities in emerging markets. I'm not saying these guys are nitwits. I just think the best money managers are hungry and stealthy and unconventional. Already successful, famous people don't really fit that bill.

That said, I fully agree with the commenter's final assessment that, "When Norm Mineta and Elizabeth Dole start hedge funds, panic."

About The Curious Capitalist

The Curious Capitalist

Justin Fox is Time’s business and economics columnist. This is his blog.  About the Author


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