The Next Subprime Crisis Is Here: 12 Signs That The US Auto Industry's Day Of Reckoning Has Arrived

Tyler Durden's picture

Authored by Michael Snyder via The Economic Collapse blog,

In 2008, subprime mortgages almost single-handedly took down the entire financial system, and now a new subprime crisis is here. 

In recent years, the auto industry has been able to boost sales by aggressively pushing people into auto loans that they cannot afford.  In particular, auto loans made to consumers with subprime credit have been accounting for an increasingly larger percentage of the market.  Unfortunately, when you make loans to people that should not be getting them, eventually a lot of those loans are going to start to go bad, and that is precisely what is happening now.  Meanwhile, automakers and dealers are starting to panic as sales have begun to fall and used car prices have started to crash.  If you work in the auto industry, you might remember how horrible the last recession was, and this new downturn could eventually turn out to be even worse.  The following are 12 signs that a day of reckoning has arrived for the U.S. auto industry…

#1 Seven out of the eight largest automakers in the United States fell short of their sales projections in March.

#2 Overall, U.S. auto sales so far in 2017 have been described as a “disaster” despite record spending on consumer incentives by automakers.

#3 Dealer inventories are now at the highest level that we have seen since the last financial crisis.  Why this is so troubling is because there are a whole lot of unsold vehicles just sitting there doing nothing, and this is becoming a major financial problem for many dealers.

#4 It now takes an average of 74 days before a dealer is able to sell a new vehicle.  This number is also the highest that it has been since the last financial crisis.

#5 Not only is Ford projecting that sales will fall this year, they are also projecting that sales will fall in 2018 as well.

#6 Used vehicle prices are already starting to decline dramatically

The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%.

#7 As I discussed yesterday, Morgan Stanley is projecting that used car prices “could crash by up to 50%” over the next four or five years.

#8 Right now, more than a million Americans are behind on their payments on their auto loans.  This is something that has not happened since the last financial crisis.

#9 In 2017, U.S. consumers are more “underwater” on their auto loans than they have ever been before.

#10 Subprime auto loan losses have soared to their highest level since the last financial crisis, and the delinquency rate on those loans has risen to the highest level that we have seen since the last financial crisis.  By now, I am sure that you are starting to notice a pattern in these data points.

#11 At this moment, approximately $200,000,000,000 has been loaned out by auto lenders to consumers with subprime credit.

#12 Just like with subprime mortgages in the run up to the last financial crisis, subprime auto loans have been bundled together and sold as “securities” to investors.  And just like last time around, this has turned out to be a recipe for disaster

Many auto loans, including those considered subprime, are securitized and sold to investors. But Morgan Stanley recently reported that the share of auto securities tied to “deep subprime” loans – those given to borrowers with a FICO credit score below 550 — has risen from 5.1 percent in 2010 to 32.5 percent today. It said defaults on those bonds have risen significantly in the past five years.

 

Almost a quarter of the more than $1.1 trillion in U.S. auto loan debt is owed by subprime borrowers, and delinquency rates have hit their highest point in seven years.

In the old days, you could always count on the U.S. auto industry to bounce back eventually because of the economic strength of average U.S. consumers.

Unfortunately, the middle class in America is being systematically hollowed out by long-term economic trends that our leaders in Washington D.C. have consistently ignored.

We have become a nation of economic extremes.  There are more millionaires in this country than ever before, but meanwhile poverty is exploding in communities all over the country.

If you live in a prosperous area, things may be going great where you live for the moment.  But as Gallup has discovered, an all-time record high percentage of Americans are worrying “a great deal” about hunger and homelessness these days…

Over the past two years, an average of 67% of lower-income U.S. adults, up from 51% from 2010-2011, have worried “a great deal” about the problem of hunger and homelessness in the country. Concern has also increased among middle- and upper-income Americans, but they still worry far less than do lower-income Americans.

You may have plenty of money in your bank account, and so for you hunger and homelessness are not very big issues.  But for those that are just scraping by from month to month, having enough food and a place to sleep at night are top priorities.  Here is more from Gallup

Americans at all income levels are expressing greater concern about hunger and homelessness, and it is the top worry among lower-income Americans, who are most likely to struggle to pay for adequate food and housing.

In addition to the woes of the auto industry, the retail industry is going through the worst wave of store closings in modern American history, pension funds are melting down all over the nation, and stocks are primed for a crash of epic proportionsThings are lining up just right for the kind of scenario that I laid out in The Beginning Of The End, but unfortunately most people are not listening to the warnings.

The same thing happened just before the great financial crisis of 2008.  All of the warning signs were there well in advance, and many of the experts were warning about what was coming as early as 2005.  But because it did not happen immediately, a lot of people greatly mocked the warnings.

But then the fall of 2008 arrived and all of the mockers suddenly went silent.

As you can see from the numbers that I shared above, a new crisis has already arrived.

The only question now is how bad it will ultimately turn out to be.

As always, let us hope for the best, but let us also get prepared for the worst.

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FreeShitter's picture

Lots of synder lately......damn its getting doomy in here, 2017, or 18 this time?

JRobby's picture

Cpl Hicks: "Game over man!"

Cognitive Dissonance's picture

@FreeShitter. The Tylers put up on average thirty articles a day. There is bound to be some fluff in there at that pace.

JRobby's picture

In a way, 30 helps to keep ahead of the Trolls. But they are multiplying, thank you Soros/Oblivio

ParkAveFlasher's picture

I can agree that car industry is toast, in and of itself, but would that take down the entire system like subprime?

 

Cognitive Dissonance's picture

It depends on who owns these notes, how they were dispersed among other better quality notes, how they were structured for default and who is insuring them against default among other things.

Interesting times. If at first you do not bring down an Empire, try try again.

JRobby's picture

Dog Food Ad: A new dog food called Derivatives!

"Derivatives! If you want the tail to wag the dog!"

Cognitive Dissonance's picture

It's interesting how humans lost their tail somewhere along the evolutionary trail, yet our tail still seems to control us.

Shocker's picture

People can't keep spending money. They are pretty well maxed.

We still have a long ways to go, to get this job market back on the right path

Layoff List: http://www.dailyjobcuts.com

-

Osmium's picture

I thought that two years ago.  I have no idea where they continue to find someone willing to lend them more money.  Housing ATM all over again?

True Blue's picture

At least we know one more reason why they are pushing so hard for self driving cars; that $100K loan on a new piece of poorly engineered plasic doesn't seem so difficult to make when the car can repo itself.

Comtrend's picture
Comtrend (not verified) True Blue Apr 5, 2017 7:56 AM

This can't be right. Little shopping carts on rubber wheels are selling like candy in the snowflake land.

And Tesla is doing so well even though

Analysts Say Tesla’s Market Gains are Coming from Elon Musk’s Groupies

https://goo.gl/kZNOxd

bob_bichen's picture
bob_bichen (not verified) Comtrend Apr 5, 2017 10:08 AM

RE: Chronic SPAMMER "comtrend"  AKA  "book man"  AKA  "alt-right girl"  AKA "blue fin"  AKA "audio feeline"  AKA "XYTHRUS"  etc. etc.

This troubled individual has used ENDLESS log-on's to trap unsuspecting ZH users to clicking on links to his MALWARE- VIRUS- and TROJAN-INFECTED WEBSITE "dailywesterner,com"

{SINCE HE HAS been regularly outed as a SPAMMER, he has taken to "hiding" the spam links as "goo,gl."   DO NOT BE FOOLED!

DO NOT CLICK ON ANY LINK IN ANY COMMENT BY ANY OF THE FOLLOWING "USERS" !!!

TAKE one minute and send an email to abuse@zerohedge.com INSISTING that the "dailywesterner,com" SPAMMER be permanently BANNED.  Copy and paste the list below.

Users who would like to communicate DIRECTLY with this Spamming Troll may wish to call the number listed on his facebook page:    *67-1-716-216-2454.  [The *67 assures that YOUR number remains anonymous, just like his posts.  Works on ALL phones, cell and landline!]

Comtrend
alt right dude
John Doeberg
book man
alt-right girl
blue fin
audio feeline
TrollAndDump
XYTHRAS

PT's picture

The banks will always lend more money.  That's how they make money.  Then they sell the piece of paper to someone who is dumb enough to buy it.  Perhaps somewhere where it will take 40 years or so before anyone notices that the piece of paper is worthless.  Your pension fund?

Déjà view's picture

Check Engine...Air Bag lights...indicating...

 

dark pools of soros's picture

Roast Biden on a pile of Delaware hermit crabs and let people claim bankruptcy like normal again. Magically people will pay the bills that matter and banks will loan to those that can afford it

Rabbi Chaim Cohen's picture

Exactly, Joe Consumer has lost his appetite for the toxic debt that the Government keeps swilling to perpetuate this dead end economic fiasco for another quarter, another year...

marathonman's picture

Anyone remember the mad cow disease epidemic?  They recycled the cow brains and other organs back as cattle feed and ended up nearly destroying the beef industry in Europe.  Fast forward and sub-prime CDO's are the new toxic sludge recycling through the world credit system ready to wreck havoc on us.  And we keep letting the Goldman pirates pillage us...

glenlloyd's picture

Really the collective memory has forgotten everything older than say 2015. Especially now that the 2016 election is over. People retain and understand very little of what happens now, they just muddle along.

Local county raised property values where I live 12% this year and the City set rate used to calculate what you owe in taxes has also gone up. Bet my taxes so way up. Greedy govts are so worried about missing out on any increase in values they forget that there has to be something behind that. When housing values again tank govts won't participate in the decline, they'll stand by the side and look the other way. I think it's time to move on.

I would hate to be a 40/50 yo guy who just bought into a 30 year mortgage...ouch. All that debt and for what? A shack made out of press board and glue? It won't be worth anything when the mortgage is paid off.

People can't seem to live within their means. The problem is we have a govt who caters to that sort of thing at the expense of those who save. At some point the govt won't have the ability to postpone the debt slaves problems with more free money. When that gets here is anyone's guess but I get the feeling that it's going to be sooner than most think.

 

Lockesmith's picture

Actually, they were always doing that. What changed was cooking the offal at a lower temperature, presumably to save on fuel costs.

inhibi's picture

And here I thought that our dick controls us. Learn something new everyday...

As for this article, the car industry has been oversaturated for a decade. Just look how many there are! Toyota, VW, Hyundai, GM, Ford, Nissan, Fiat Chrysler, Honda, Suzuki, Renault, PSA, BMW, SAIC, Daimler, Mazda, Changan Dongfeng, Mitsubishi, Tata, BAIC, FAW, Subaru (Fuji), etc, etc. All trying to get into every market, pushing new cars new models at breakneck speed onto dealerships. New models used to come out every 4-5 years. Now its 2-3.

Ive leased once in my life 3 years back (worst decision ever). Dealership was calling me 24/7 trying to buy my lease back and get me to 'upgrade', apparently so I remain a permanent 'renter' of cars. They seemed desperate. Went back to my dealership few weeks ago. Place was gone! And this was a dealership in an upscale neighborhood that had what I thought was a booming servicing business. Guess I was wrong.

I've worked in the automotive industry for a while before my current gig, and I learned that cars are all pieces of shit. No matter if you get a Lambo or a 2000 Ford F150, the transmissions are built to last you 100-150k without trouble. After that, you can have any plethora of issues: excessive slippage, stuck valves/solenoids, faulty electric pump, etc. Every year, they take more and more material out of the tranny in hopes of lightening the car for mpg numbers. In 2004, all clutches made by Borg Warner, which went into Toyotas, Ford, etc. went from a quarter inch thick 2 piece construction to a 400 piece eigth inch. Needless to say, there is a reason why you see old camry's @ 300k miles, but all new cars are dumped post 150k. Theyve been pushing the margins higher and higher to the woe of every supplier. GM is especially bad. They bitch about cost 24/7, its nauseating. They would rather compromise durability for 2 cents. Ive seen it. Never, ever buy a GM. They make great rental cars thats about it.

space shitle's picture
space shitle (not verified) inhibi Apr 5, 2017 5:49 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

dark pools of soros's picture

Their 2nd gen Volts are in the right direction. Just make sure you can get all of that $7500 tax write off.

Problem is too many people don't keep cars they paid off and hardly anyone works on their own cars. You keep a few then you can fix them cheaper instead of pissing money away having to get things done at the highest price or trading in cars for peanuts

chimchim's picture

No doubt mom & dad end up having to chop and sell hands and feet to bail out this one.
They get to pay, no worries. It won't even effect us or anybody we know.

F

Maybe it's time Trump started ranting on about really making things fair.
No gov in the market, period!!!!
NO incentivizing anything with public monies!!
GTFO and let us be!!

TheReplacement's picture

Serious questions: 

 

  • Is there an instrument you can buy to bet against these auto loan securities?

 

  • Same question for retail mall securities?
halcyon's picture

If you need to ask, it is way out of your league.

...and you are way too late - already priced in.

You have to see what everybody else hasn't yet seen , but yet is so.

 

Lockesmith's picture

Is the market able to simultaneously price in both DOW3000 and massive auto loan default? It seems to me that either one or the other can be priced in; the market cannot be both long and short at the same time?

Got The Wrong No's picture

That is a good question, but there are signs of rising student loan defaults, pension fund implosions and commercial real estate issues that may all start to impact the system as well. Doom and Glum selling is a thriving business. I have fallen prey to it more than once and retreated into protection mode while watching the FED paper over the issues. I have come to the conclusion that preparing for a crash is a necessity but living in fear will shorten your life.

stormsailor's picture

yeah man, more than ten years of watching this shitstorm unfold, but it never happens.

The Anti-_-Sheep's picture

Combined with student loan delinquencies, yes. Student loans are the bigger risk. Throw in the disappearing retail stores, other than the booming Dollar Trees, and you get toast bread. 

Lets Buy The Dip's picture

i love zero hedge, at least they talk truth. 

right now they keep saying tyhe market will skyrocket, but YEILDS are down. HERE IS THE CHART ==> http://www.bit.ly/2o12FwR

when yields go down so too does the stock market, The market is doing nothing here, and we await for TRUMP, and TAX policies, so obscure now, but later it may be a BLOODBATH..?? Hope people are READY!??

Whoa Dammit's picture

The problem with new cars is all the expensive gadgetry they are loaded up with. I recently had a Mercedes C class loaner car from the dealer when my old 2002 clunker was in their shop. The same electronic gadets are repeated 5 times in different locations throughout the car. WTF? There was no stick shift anymore becuase of phone space between the seats. I had to get someone to show me how to put it in gear (tiny lever on steering wheel) to get out of the parking space at the dealer. As I told Mercedes USA on their survey after I retreived my clunker--cars are supposed to be driven, not played in. Think how much cheaper new cars would be without all of this useless crap. P.S. the 2002 drives better than the new ones.

Haus-Targaryen's picture

I think many of the "premium" segment cars have started coming standard with a lot of this extra crap to help differentiate themselves from the non-premium segment. 

Because brand perception matters a ton of the U.S. consumer (look how rich I am, I can lease a zero down Lexus for $900 a month) as the non-premium segment cars start to get all the premium toys for a non-premium price -- the premium cars have to get more and more ridiculous. 

My wife's car (2011 BMW) has this stupid "office" feature in the navigation system, where you can (I shit you not) read and review PDFs and Word files on this goofy 4:3 screen if you take the time to load them onto a thumb drive and stick them in the USB slot in the arm rest.  Mind you, it cannot be done while driving down the road, just when the car is on and stopped.  Oh, there is no mouse or keyboard, just this controller thing. 

Then there are the sun shades for rear windows, massage features that do more harm than good, "customizable interior cabin lighting", telephone apps so you can unlock your car from the otherside of the world and puddle lights which illuminate the car markers logo on the ground when you hit the unlock button.

All made possible by low interest rates allowing prices to explode.

Its kinda like the free spas and heated and cooled parking garages on college campuses.

Low interest rates for a long period of time has really odd side-effects.  

ParkAveFlasher's picture

Best car for driving that I've ever driven was a '91 BMW E30 325i.  Manual 5-spd, RWD, with treaded tires and stock shocks, it held the road like a puma.  Tracked like a scalpel.  I used to split traffic along the dotted lines doing 80mph after power-shifting down to fourth to pass.  Lot of glass in the cabin and the sight lines were precise.  It was a mechanical instrument, a tool.  All balance and gearing.  No computer shifting, no gadgets.  The AC didn't even work well.  You had to drive fast to cool it down.  Very high maintenance, I was too young to afford it.

Best car for keeping was my '87 Corolla, inherited.  I think it went up to 350k before I totaled it.  It was beaten like a mule.  Oil changes and electrical system replacements only.

Best car for riding, the '83 Cutlass Supreme.  Front sat four across.  Backseat like a couch cabin.  Trunk like an attic.  Transmission went at 60k.

No safety gadgets, no fancy screens.

Cars today are uncomfortable and impractical, overbuilt and too expensive.

Roadwarrior's picture

I have 3 2000 honda insights IMO one of the best cars ever made. And easy 65 mpg in the winter when it warms up I can easily get 75++. My best was 108 mpg for 1038 miles using less than 10 gallons on one tank of gas. I drove from Vegas to Albaqueque on about 6.5 gallons of gas, nothing I know of is even close.  

Antifaschistische's picture

I like my car....it's very nice.   But I couldn't figure out how to change from AM to FM.   How hard can they possibly make it.   I could add to the list.

I've said this before on ZH....costing $850 to replace a headlight assembly when I used to change them for $14 is completely absurd.

They keep doing everything they can to make cars more and more expensive....and due to our laws that limit competition, we'll continue to be screwed with cars.

As for the collapse....another 2008 will come.....another emergency 5 Trillion will get dropped into the fixerup dump truck and we'll buy another five years.   Trump isn't going to be a "bite the bullet" and fix all the budget stuff.....and neither will the one who replaces him one day.

chubbar's picture

Well, lots of moving parts with this problem. Cars depreciate quickly because they wear out and require maintenance regularly, unlike housing (which does require some maintenance but can be deferred for a while). Having subprime loans in that space is pretty risky. What happens when as predicted, used car prices get cut in half THEN we see a recession (I argue we have been in one, if not depression) and these loans are defaulted on? The collateral is no good or valued less than half of the outstanding loan balance. If the loan isn't forgiven then the car owner can't get another car AND he will always be upside down on the loan.

If the loans are written off, who takes the loss? How are they structured, and with derivatives, how is this magnified? Were these trick fucked into being A rated paper by the banksters like they did with the subprime mortgage notes and stuck into pensions?

Sounds to me like another gov't bailout, quite honestly.

When people don't have any money, lowering lending standards doesn't give them any more money, it just makes borrowing it easier. The gov't needs to know that people don't have money, they need better jobs or just a job to begin with (income). This idea that they are going to borrow themselves wealthier is nuts, especially in the auto market.

The people in this country are largely ignorant about money and the gov't is complicit in furthering this ignorance. This whole economy is based on easy money, which is based on loans which are based on people being able to borrow and the discretionary income necessary to buy stuff other than necessities (food, rent) is rapidly running out for the general population.  The collapse is going to be epic.

Teja's picture

Read it on ZH by some Irish guy I think... Car Economy is similar to War Economy, in some ways. Stuff bought at high costs and mostly on credit, with extremely high deprecation. New cars loosing half of their value after three years. And a large part of the investment is not really necessary, it is prestige only (see the comments about cars full with electronic gizmo). For countries, shiny weapons are a prestige thing too, and also often bought on credit (see USA).

States need to buy weapons because other states do. Similar with cars - you need to buy large cars because your neighbours do. One side is prestige, the other safety - you don't want to be caught on your bike or in your subcompact between your neighbours SUVs. At least 50% of car costs are related to this.

Financially, cars do not only suppress people with private debt, but also governments because of all the investments needed to keep the system running. At least in cities, a 95% public transport system would be much cheaper if you count repair costs, parking, pollution, health.
I am paying $90 per month for a good public transport system. Compare that to the costs of leasing or buying a car, without the fuel and all costs to the state. They could double the ticket prices (and hopefully capacity and quality) and it would still be a bargain.

Change won't happen, though. Cars are like a virus, like one author (Herrmann Koflacher) claimed. Any person getting rid of their car just creates driving and parking space for others. Electric and autonomous cars might change that a bit in the long run, but much too slow.

Whitmore's picture

Wifey had a 2011 CRV for a bit. The steering wheel "seek" arrows that change the radio station only cycled between the 5 PRESET stations! So, to browse the full FM band you had to reach over to the radio to do it. . .where of course, the 5 preset buttons are as well. WTF!? Sold that because we couldn't even fit a car seat in the back without jamming my knees against the dash. What a wonderful family car, right? Every subaru, toyota, honda etc. that I look at has some awful feature or compromised design macro that kills it for me. 

We've owned Audi, Land Rover, Toyota, Jeep, Honda. ALL service departments are insanely over-priced for labor and parts. Laughed my way out of a Toyota shop when they quoted thousands to do brakes, a serpentine belt and some other general maintenance. I've learned to be handy over the years because of shit like this. Now I can walk into an auto parts store, drop $100 and have that shit done myself.

I've also learned that I'll drive used premium brands from now on. Despite all the back and forth about reliability trade-offs, I haven't experienced a huge difference. As long as you maintain your vehicle it will be good to you. If the costs are greater, I don't mind because I'm keeping the vehicle for a long period of time. If I'm DIY'ing or paying $850 for a headlamp it's going to be for a car I care about and own for a long time. 

10-year old A4 runs like a top at 140K miles. Total cost of ownership probably tops out at around $27k, and that includes a few major $1-3K preventative maintenance and repair bills. Not bad for a car that still looks nicer than a lot of stuff on the road and stickered close to $50k with its options. It was a lease trade-in when I bought it and I haven't had a payment in years.  

 Looking forward to seeing what challenges the LR4 throws at me!

-W.

Haus-Targaryen's picture

Agreed. 

I am a YUUUUUGE fan of used premium cars.  I have an 11 year old Lexus and the wife has a 6 year old BMW. 

I've run the gammit with cars, worst car I ever owned was a Toyota Corolla and the Lexus I have now is likely the best. 

Lexus has a couple issues, but with 178k on the clock I am not going to complain.  I see a few people online running these up to 300k and would love to get something similar out of it. 

Nobodys Home's picture

My 1995 C220 runs like a top, purrs like a kitten, looks 80% and I plan to keep it at least another 3 years.

man from glad's picture

I've had my 1985 300D for 30 years. Just breaking it in. Tanks they are.

Deathrips's picture

That car saved my life. I loved mine. head on freeway 8 flips into field...no broken bones. firefighters had to shut it off with an axe.

 

RIPS

Diatom's picture

The Mercedes W124 are the most reliable cars in history. Small number of moving parts.

The suspensions were incredibly simple. There' s a Oporto taxi car with the original engine in the

Mercedes museum in gGermany with 1,8 million km. That's a portuguese plate...

https://en.wikipedia.org/wiki/Mercedes-Benz_W124#/media/File:MB_W124_mil...

My car is a 96' 1.6  125hp Civic Coupe. 180k km 8 litersper 100 km 1000 euro market value.

Bought used with 40 k km. The best deal of my life. It´s a light extremelly reliable car. In the last 5 years is doing

5km trips 4 times a day 5 times a week. Thats a very demanding use. The handling is superb. Can do 8000rpm easily.

This car was the base for the 98´ Integra with 190hp. The best FWD in history at the time

In all this time the only problem was a  60 euro clutch piece because i didnt change the DOT fluid.

Iguess the best cars were made in the 90...

JRobby's picture

Try the MB's with the "air bag" suspensions! Had one I picked up for a friend throw a suspension fault code with 12 MILES on the Odo.

The bags deflated and it looked like a "low rider" Better run straight back to the MB dealer for "warranty repairs".

Bad Goy's picture

Because people and Americans specifically have poor decision making skills and impulse control.  They think they need Leather, navigation, sunroof, etc. and suddenly they've added 50% to the price of the car in options.

And as for your enromous center console, that's my personal pet peeve.  Maybe if a car has a clutch and manual transmission I can understand it, but the center console is a wate of space that could be used to carry one more person.

Oldwood's picture

Come on! How else are we going to feel "special"?

chimchim's picture

MB's are soooooo over-rated.

chimchim's picture

MB's are soooooo over-rated.

Yog Soggoth's picture

That is one of the things that led to the downfall of the Packard.(except Air Cool-ditioner) Prior to the depression there were hundreds of companies vying for the next coach, then as things consolidated into the big three true logical innovation was rarely rewarded. I would buy a 80's or 90's Subaru over most modern cars. The boxer engine is foolproof, suspension awesome, and top speed is impressive. If they only made a full size truck like that.