Coming to a Neighborhood Near You – Cheap Chic

Be warned.

The fact that President Obama’s latest bank bailout plan was greeted by the steepest market sell-off during his administration tells a tale.

As I analyze in the latest issue of Crisis Strategy Alert , it is a complicated story with a simple conclusion: You can’t pour four trillion gallons of red ink into a two-trillion-gallon drum.

Bush’s Treasury secretary, “Hanky Panky” Paulson, seemed bumbling and inept when he tried to devise a $700 billion plan for removing toxic assets from the books of the nation’s banks. Tim Geithner seems equally out of his depth with his $1.5 trillion plan, because he is confronting the same incorrigible arithmetic. He can’t readily restore the normal functioning financial system by removing the toxic assets from the banks, because the fallen assets are of a magnitude to swamp the banks’ capital.

The dirty little secret of the moment is that the banking system is insolvent.

What does this mean?

Think of it as a low-lying Eskimo might think of the melting of the polar ice caps. What we have considered the “normal” economic climate for many decades has abruptly shifted. This has not melted everything all at once. But the meltdown is well underway. The steady drip, drip, drip of unemployment rising and profits falling will continue until it becomes a flood. The worst is yet to come.

To shift metaphors, the challenge of the bank bailout is roughly equivalent to administering a heart transplant on the run. The banking system is the heart of the economy. Until a credible new system of credit circulation is introduced to replace our zombie banks, the economy cannot return to health.

The economic consequences of several more years of meltdown will be dire. Eventually, commentators and news broadcasters will update their vocabulary. They will cease calling this episode of deleveraging a “recession” and begin to refer to it as a “depression.”

How “great” this depression will be is still to be decided. My guess is that it will be far worse than the Great Depression that followed the Crash of 1929.

Without going into too much analysis of the macroeconomic dimensions of the depression now unfolding, I think several consequences are already clear. For one, the coming “lost decade” that President Obama recently warned of will be a period of significant cultural change.

One consequence is that there will be a bull market in horror. If you think of the great Hollywood horror movies – Frankenstein (1931), Dracula (1931), Dr. Jekyll & Mr Hyde (1931), Revolt of the Zombies (1931), The Mummy (1932), King Kong (1933), The Mark of the Vampire (1935), The Bride of Frankenstein (1935) and The Walking Dead (1936) – you’ll notice that many of them were made in the 1930s. That’s because the horror movie was well suited to the public mood during the last depression. People walked into the cinemas already frightened.

In those days, the special effects were limited. But Hollywood made its horror movies of Great Depression with great acting talents such as Bela Lugosi and Boris Karloff. I imagine that what the next generation of horror films lacks in acting charisma will be made up in special effects.

Of course, special effects in movies won’t be the only type of morphing going on; no country can experience a fall from a great height without an accompanying change in attitude.

During the maniac phase of the credit cycle, it was a great thing to make $100 million. It was a better thing still to make $1 billion. And if you made it you had no qualms about showing it. Big fancy houses and big fancy cars were the epitome of the American dream.

Now, during the depressive phase of the credit cycle, you may not want to be mistaken for one of the Wall Street bankers who shared in $18 billion of bonuses for ruining the world financial system. This implies a new trend towards cheap chic.

Conspicuous consumption will be out.

Yes, the truly rich will have enclaves, as in the Great Depression, where they can go cruise in their yachts and relax. But unless you are among them, you won’t want to be cruising in a land yacht through a newly tatty neighborhood of repossessed houses.

Indeed, several years ago, well before the current crisis, one of the wealthiest and shrewdest members of the Maryland Club explained at our annual Christmas lunch why he permitted himself the luxury of having a butler but insisted on driving a crummy car. “The day will come when it won’t be safe to drive the streets of Baltimore in a big, fancy car.”

His views may have seemed eccentric three years ago. Now they seem like wisdom. I think that you can count on tastes in enclaves of suburban prosperity to follow the logic of this billionaire. Cheap chic will scramble high-end brand loyalties. And high-ticket items such as cars, so important to the American psyche, will not be purchased in the same patterns as they were before the crash.

I think the auto brand that will pick up the biggest market share in the current depression is Hyundai.

Hyundai cars are well made and boast the best warranty in America, ten years and 100,000K miles. And they incorporate a wealth of technical features at a value price. The Hyundai Genesis, which sells for less than $30,000, was named “North American Car of the Year” by a jury of 50 independent auto journalists at the recent North American International Auto Show in Detroit.

The company also has undertaken a promotion allowing anyone who buys a Hyundai now to return it if he loses his job in the next two years. And this public relations coup will likely lead to greater sales.

If you want to explore investing in Hyundai Motor Motor PFD (KSE: 005385.KS / ISIN).

It trades in the U.S. as Hyundai Motor Co Ltd (PINK:HYMLF), recent price $37.04, as well as on the Korean Stock Exchange.

Hyundai will be the new Mercedes before this depression ends.

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