Saturday, January 24, 2015

Unemployed Students Buying New Cars

Many People Are Jumping Into New Cars
For a long time I have had a problem as economist and others have pointed to the auto industry as proof that the American economy is on the mend. Today in America we see a land where even unemployed students are buying new cars. Claims that the auto market is hitting on all cylinders with annual sales topping 16.4 million, the highest since 2006 is a simplification of the situation and not giving enough focus as to where the sales are coming from or originate.

The facts behind what is pushing this market forward are very disturbing. Over 31% of all new auto loans this year were to subprime borrowers. Subprime loans now account for 36.5% of all outstanding auto loans. The easiest way to become a subprime borrower is by defaulting on previous debt obligations. In a shocking development, auto loan delinquencies surged by 13% in the last quarter, remember this is in a quarter the government claimed showed a solid 5% growth in the GDP. This means subprime loan delinquencies now stand at 18%. Issuing billions of debt to subprime borrowers for housing proved to be a disaster and going forward we should expect the same trend to reveal itself in autos.

Pretending to sell automobiles to people either dependent on money from the government or no means to pay for that automobile is not a good business idea. When you have huge financial lenders and the rest of the Wall Street banking consortium doling out 7 year 0% loans and subprime  loans as if it were candy it’s easy to move inventory. Sadly, while this may temporary boost the GDP the issuing of what is destined to become more bad debt always comes back to haunt us in the long run. A big problem is that often this increases the monthly obligations of someone who is already struggling.

We keep hearing about sales not about soaring profits. If the auto business is indeed healthy and booming why have GM profits fallen from $9.2 billion in 2011 to $5.4 billion in 2013, and on course to fall to $4 billion in 2014? Record levels of channel stuffing produces sales gains, but no profits. Why is their stock well below its 52 week high and near where it was in 2010 during its IPO and after it was rescued by Obama. We see the same thing with Ford as their profits have fallen by 35% versus last year and they are lower than they were in 2010. Another sign of problems is the rumbling coming out of Honda claiming the market has become a cutthroat low profit nightmare.

Auto loan debt continues to ratchet higher every month and is at an all-time high of $950 billion, up 33% since 2010 when the Fed, Wall Street, and the political class in Washington decided they needed new debt bubbles in auto loans and student loans to jump start our moribund economy. Recent figures showed that there are 65 million auto loans outstanding, and the average debt now stands at $17,352. Currently over 30% of auto “sales” are actually leases. The rest are financed over an average of 65 months. This means that virtually all new car sales are nothing more than 3 to 7 year rentals, this is a shocking way to look at what many people spin as proof that the economy has regained its footing.

The average student loan debt is now $33,000. Until the Obama administration went Keynesian much of student loan debt was primarily held in the private sector. When Obama entered the White House total student loan debt was $620 billion and delinquencies totaled $50 billion. There are now $1.3 trillion of student loans outstanding, with the Federal government accounting for $830 billion and guaranteeing a large portion of the rest. Delinquencies have skyrocketed to $125 billion and is not aging well. Going forward it is clear another taxpayer bailout beckons.

While I have focused on student and auto loans I'm aware this subprime buying binge has broadly spread to a wide range of consumers. Is was best said by someone who wrote "Only a University of Phoenix African Studies major is more of a subprime risk than the millions of ecstatic Escalade drivers cruising around our urban ghetto paradises." The Federal Reserve has been pumping in trillions of dollars of liquidity into the economy and much of it has resulted in pulling future consumption forward. These polices will soon become a headwind to both future sales and growth. This is more proof of just what an infusion of money from the Fed can produce and how it adds to the great distortion.

1 comment:

  1. This sounds very similar to the mortgage crisis of 2008. That was something which didn't end up well at all for anyone. I don't see this really having as big of an impact in the auto industry simply because the amount of money is much smaller, but it could still be a very big problem that our economy would have to deal with.

    Freddy @ Jacky Jones Chrysler Dodge Jeep Ram