If you look at 2 companies that were in the news this week, General Motors (GM) and General Electric (GE), these were companies that did very well in the late nineties until 2000.But why did they do well?
They did well because they moved from manufacturing towards finance. A kind of microcosmos for the entire US economy.
You had GM losing money making cars, they were making money financing cars. Same thing with General Electric (GE). They have turned into a finance company. And all the earnings growth in GE really came from financial services.And a lot of those earnings were phony.
The reason these companies have collapsed 90 percent or more from where they were of the peak of the bull market in 2000, both GE and GM peaked out around then. They have lost 90% and we are finding out that a lot of the earnings growth over that time period were phony just like most of the economic growth in the US economy was phony.
It was all a trick about spending borrowed money that could never be repaid because it went on consumption. I was issuing reports on GM going bankrupt in 2002, 2003. I could see what they were doing. I could see they were making all their money on finance and that would come the day when all the people they borrowed money could not pay the money back.
I was calling General Electric an hedge fund mascarating as a company.
There are some good viable parts of General Electric, they still have some manufacturing and aircraft, medical equipment and imaging, appliances. There is some value in those assets, in those businesses. But I think their liabilities from their finance division are bigger then their real assets and ultimately the company would go bankrupt if it wasn`t for the Federal Reserve.
No one is talking about bankrupcy in General Electric, only in General Motors. But the interesting part is the similarity between the 2 companies. Two manufacturing companies making more and more earnings from finance and paper shuffling than on legitimate production.
These 2 companies are a microcosm of everything that has been wrong with our entire economy.
Peter Schiff is the President and Chief Global Strategist of Euro Pacific Capital. As a result of his accurate forecasts on the U.S. stock market, economy, real estate, the mortgage meltdown, credit crunch, subprime debacle, commodities, gold and the dollar, he is becoming increasingly more renowned.
He has been quoted in many financial TV channels like CNBC, CNN, Fox News, Fox Business Network, and Bloomberg T.V.. In Peter Schiff`s blog you can track all his investment and trading ideas for 2009 as well as all his public appearances on TV, video or in the press.