Just as we predicted, it seems - despite the "everything is awesome" jobs data - that auto sales exuberance has hit the wall of credit saturation. Despite a surge in incentives in Q1, GM US auto sales rose just 0.6% (drastically lower than 6.0% rise expectations) and Ford rose 7.8% (missing expectations of a 9.4% surge). As J.D.Power notes "there are worrisome trends below the surface" of auto sales and with inventories at levels only seen once in the last 24 years (and tumbling used car prices), the automakers have a major problem if this is anything but 'transitory'.
Very simply, if you borrow too much money life gets harder and the things that used to work stop working. For a country, lower interest rates no longer induce businesses and individuals to borrow and spend, and government deficits no longer translate directly into more full-time private sector jobs. Growth slows, voters get mad, politics gets crazy, and generally bad times ensue. The only question is why this is a surprise to the people whose choices brought us to the edge of the abyss.
While Citi and others are quick to point out that the originate to sell model isn’t prevalent in the auto loan industry, the inability for lenders to securitize subprime loans may well put the brakes on US auto sales. After all, the pool of creditworthy borrowers is finite. That means that at a certain point, incremental sales must be engineered by making ineligible borrowers eligible by resorting to looser underwriting. If there's no ABS demand for paper backed by loans to subprime borrowers, lenders will stop lending and at that point, you can kiss the US auto sales "miracle" goodbye.
Of course, if things were as good economically as we are told by Wall Street and the mainstream media, would the ECB really be needing to drop further into negative interest rate territory and boost QE? By fully committing to hiking interest rates, and promoting the economic recovery meme, changing direction now would lead to a loss of confidence and a more dramatic swoon in the financial markets. Such an event would create the very recession they are trying to avoid.
Since the end of 2013, US automaker stocks have dramatically underperformed the market. This bewildered many as auto sales surged on the back of easy credit and the entire industry was proclaimed a great success. However, the reason for the underperformance is simple - stock investors discount the future and with a mal-investment-driven excess inventory-to-sales at levels only seen once before in 24 years, they know what is coming next.
While Asian stocks continued their longest rally since August overnight, led higher for the third consecutive day on the back of Japan (+1.3%), Australia (+1.2%) and China (+0.4%) strength, European stocks have as of this moment halted their longest rally since October (Stoxx -0.1%) and U.S. index futures are little changed. Oil slipped from an eight-week high despite yesterday's massive rise in US oil inventories on hopes Saudi Arabia may be forced to cut production as its budget strains grow actue and the kingdom is forced to seek a $10 billion loan, its first material borrowing in a decade.
Following yesterday's torrid 2.4% March opening rally, which resulted in the biggest S&P gain since January and the best first day of March in history on what was initially seen as very bad news, and then reinterpreted as great news, overnight futures have taken a breather, and erased a modest overnight continuation rally to track the price of oil lower.
Don't look now, but the chickens may be coming home to roost in subprime auto, a space we've been warning on for years. As lenders continue to lower their underwriting standards in order to feed Wall Street's securitization machine, more and more dodgy loans have found their way into ABS collateral pools. Now, the delinquencies are piling up.
The Fed doesn’t see it coming and would be petrified by the prospect of a Wall Street hissy fit were it actually to express doubts about the sustainability of this so-called recovery. At the same time, Wall Street fails to recognize the obvious truth that the Fed is out of dry powder. If it attempts QE4, it will be a confession of total failure and lack of efficacy. If it actually seeks to launch negative interest rates, it will ignite a political firestorm of untold intensity. So both parties are unprepared for what is coming down the pike, and that makes this time truly different. There will be no massive liquidity injection and quick reflation of risk assets because even the Fed can’t push on a string when it is out of dry powder.
There was much at stake in today's retail sales report, because had the Census reported another miss in the headline, ex auto and control group data, it would have made the Fed's job of maintaing the illusion of a recovery into a rate hike cycle virtually impossible. Luckily for Yellen, the numbers came out and they were were beats across the board.
There has been an economic coup d’état in America and most of the world. We are now ruled by about 200 unelected central bankers, monetary apparatchiks and their minions and megaphones on Wall Street and other financial centers. Unlike Senator Joseph McCarthy, we actually do have a list of their names. They need to be exposed, denounced, ridiculed, rebuked and removed.