Could a Car Company be the Canary in the Coal Mine?

April 23, 2020

My Dear Reader,

Recently, car enthusiast and reviewer Doug Demuro made a bold claim: Infinity will not survive this economic event.  While that may sound like click bait or a gotcha title, he actually makes a few good points.  For instance he makes the point that Infinity itself has downsized the number of models available “The QX-50 and in addition the QX-60 are both coming up on 10 years old. So in a world where Mercedes-Benz has 8 different SUV models, Infinity has 3, two of which are a decade old.” This may not seem like much, but if you remember the oldsmobile brand, the last few years of that brand were subject to many cuts and downsizing as the company attempted to get cheaper and cheaper.  This created a downward spiral of cost cutting that also cut profits and reduced the brand affinity for the consumers.  Doug also pointed to the fact that most of the buyers for Infinity were car rental shops “There’s a big difference between Infinity’s success in 2017 and in the early to mid 00s. There are two types of buyers for Infinity now, car rental companies looking to have an upgrade option and people who are looking to buy cheap.” This obviously indicates that Infinity is not a desirable brand and for cheap brands, the only way to stay competitive is to cut more and more costs. But the potential failure of Infinity is not just a story of business failure and mismanagement, I believe that it could instead be a canary in the coal mine.

Perhaps you’ve seen the recent news stories regarding the prices of oil and the potential failure of hundreds of oil companies. Not only does this impact the people working inside those industries, but it also impacts the banks who loan these companies money.  But Simon Black warns us that this could extend past the oil industry

“And it’s not just the energy sector. Banks with loans to retail companies could take a hit. Banks with commercial real estate loans could take a hit. And banks’ consumer loan portfolios will undoubtedly take a hit as millions of newly unemployed people stop paying their bills. There will likely even be sovereign debt defaults, and banks will take a huge hit from those. There’s more than $250 TRILLION worth of debt worldwide, much of it owned by banks. If even 1% of that debt goes to zero, a number of banks won’t survive.And if you think that bank failures aren’t possible, please remember that oil prices hit MINUS $40 yesterday. Nobody thought that was possible. And yet it happened. EVERY scenario is possible. And this leads me to a very central idea: I don’t know if the stock market is going to rise or fall. I don’t know what’s going to happen to oil prices. But I have a strong suspicion that the government and central bank are going to keep working together, printing incomprehensible sums of money to bail everyone out– especially banks. This ‘whatever it takes’ monetary policy could come at an extremely steep price.”

So it’s not just Infinity and their woes, or the oil prices. It’s the banks who loaned out the money and the people who will lose jobs because of this political ineptitude that will be the lasting legacy of this virus. And I fear that this will hurt more people than the Wuhan Flu ever could.

To your creation and potential,

Kevin Prendiville