So, after I made this post today, mostly for entertainment purposes, I read up on the GM bankruptcy situation. This article from NYT was interesting. I disagree with the titular premise entirely. Even the article provides scant evidence for a fast GM bankruptcy procedure. Here’s the best plan that the article offers:

One plan under consideration would create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy.

Less desirable assets, including unwanted brands, factories and health care obligations, would be left in the old company, which could be liquidated over several years.

Treasury officials are examining one potential outcome in which the “good G.M.” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week.

When I read “brands,” I think about factories. I wonder which GM factories are the most efficient. I’m reasonably sure that Ford’s most efficient factory is in Brazil. That’s not insignificant. What happens if GM’s is outside the US? Does that count toward the good GM, or does that go to the multi-year liquidation? What about GM’s factories in the US? What happens to the workers there? … And herein lies the rub.

Assume that at least a single US factory closes. The workers at that factory might possibly have a lawyer. That lawyer might possibly raise some point that slows the process down. See, in law there is a thing called “due process.” I don’t know anything about law, but I know that “due process” is about getting a fair shake. There are rules, and when someone complains, there are rules about that. But that takes time.

Taking time is not “surgical.” Taking time causes all sorts of stuff to happen. And it’s not just the workers at the factories that might close. It’s the bondholders. It’s the suppliers. It’s the dealers. This is a big, messy problem. There might be a company that emerges from this process in two weeks, but it won’t be anything close to the GM we know today. A great bulk of the problems are going to take time. People need to make arguments. Judges need to listen.

Look at the NYT article (page 2). It discusses pensions, health care, and other things that might complicate the whole procedure. Their best example is a steel company that went bankrupt, shifted its obligations outside of the bankruptcy proceedings, and then went bankrupt again. Does this mean that the best outcome we can expect is that we kick the can down the road a bit? That’s scary.

Actually, the thing that scared me the most was the realization that in order for this bankruptcy to move fast, due process must be suspended. Someone who cares about law would tell you 1) that can’t happen, and 2) that would be horrible. Of course, I would answer with 1) due process has been suspended before for economic reasons (long ago) and 2) my point was to show that it is more likely that the process will take a long time.

Anyway, I actually have done some cursory research (aside from reading GM articles, I looked at other corporate bankruptcies. I even read about liquidation procedures. BORING.), and I now will stand behind the position that there’s no chance for a “surgical bankruptcy.” There’s just no reason to assume it’s possible with a company the size and complexity of GM.

Conclusion: This is an attempt to play hardball with the bondholders and UAW, who are still acting as if another bailout is guaranteed. A rational person would conclude that another bailout is guaranteed. It would take all sorts of arrogance to assume that a fast bankruptcy is possible. If we go down that road, I’ll place bets assuming that political capital evaporates. Then things get interesting.

The other thing I did today: I read a lot of Orange County, CA housing blogs. Socionomics is of great interest to me (warning: there’s a lot of bad science and pseudoscience when you look up that word). I buy the argument that social mood drives social change. More specifically, I am interested in whether or not social mood is changing towards thriftiness. If social mood changes enough, then nothing the Fed can do will bring back the consumption of 2007.

This is important for the deflation/inflation debate (which will be very easy to answer in hindsight, but is a real problem right now). A society of savers will virtually guarantee a deflationary outcome until prices are reasonable. Then, and only then, can inflation take over.

Unfortunately, my findings were not simple. It’s possible that Orange County, CA has more individuals with entitlement issues than anywhere else in the world. The vast majority of OC blogs were certain that the worst was over for their housing market, that the OC was different, and that the OC would lead the rest of the US out of the recession. Also, the existing houses are going to be torn down so that new, custom homes can be built. This viewpoint runs so counter to my own that I cannot objectively judge which one of us is crazy. That’s a problem. If enough people have the opinion that things have already bottomed, it’s possible that we can have a “recovery.” We might blow another bubble that lasts 10 years. We could succeed in kicking the can down the road. This scares me.

Conclusion: I need to watch the foreclosure stats in the OC. If things start getting worse on that metric soon, my confidence increases that this recovery is a head-fake. Note, GDP might increase second half even with a false recovery. Even Krugman has that view.

Update: Another conclusion is that SEO is a terrible source of sampling error.

The last thing I looked at today was technical indicators in the market. I hate to say it, but the technicals aren’t telling anyone jack right now. The only thing I’d be willing to bet on is increased volatility. If tomorrow is at all well-behaved, I’ll be opening both put and call positions. There seems to be equal reason to assume a pop positive as a pop negative. I’ll bet against a smooth move sideways. If tomorrow’s not well behaved, it will be a sign that I was a day late.

Conclusion: technical trading is a bad idea right now.