Yesterday’s market was a deep capitulation. Not much fanfare – just a marking down of stocks in search of any buying interest. Toronto had its largest single daily percentage drop since 1987. Oil tanked again below $50 dollars per barrel.

The market now understands that the global credit pool has shrunk severely and that it is not expanding anytime soon. This means deflation will be spread unevenly through the economy and we are not sure were it will all land.

The Auto industry must reduce their wage bill, just to stay in business. Chapter 11 can do it the hard way, or alternatively the unions can sit down and accept a major reorganization of their contract in line with the competition. That will not eliminate every problem that they face, but it is certainly the big one. Outsourcing has fortunately removed the majority of the problem over the past two decades but we now need to finish the job. The industry can then jump into the electric auto cart transition with both feet and grab back market share.

And do not blame management for this one, although there will be a huge shakeup that the industry needed, but that needed to be precipitated by this financial disaster.

You can be sure that a government bailout will now have reorganization strings attached to it. After all, it would be much easier to put it all on the block and let Toyota and Honda to buy it all up. Doing that will actually serve to preserve more jobs than a slow foot dragging reorganization ever would. As we learned a long time ago, it matters little who owns these companies. It all ends up in our pension funds sooner or later.

In fact, I personally think that GM in particular should be broken up into several separate auto companies, as was done to the telephone companies. The consumer is prepared to accept that particularly since manufacturing is now so thoroughly outsourced.

Several hungry competitors will swiftly defend North American manufacturing and quickly grow the industry again. Does anyone really want to go back to Ma Bell.

Markets as yet have no sense of how this will all shake out. The very real fear exists that there may be a second major wave of credit contraction. Such a contraction would undermine good mortgages, good credits, and eliminate millions of jobs from well paying positions undermining the personal credit business.

I do not think that this actually will occur, but it is still ugly. The system has enough juice left to heal up and carry a fair bit of short term unemployment into a period of restored economic activity. At least everyone knows that they must tighten their belts.

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