Is The "Deplorable Economy" Flashing Warning Signs About Overall Economic Growth Prospects?

For months we've been warning that soaring auto sales represent nothing more than the latest bubble created courtesy of low interest rates, deteriorating lending standards in the form of stretched maturities and weaker credit profiles, and an insatiable demand for auto securitizations from yield-thirsty pension funds which wall street is happily trying to meet (see here, here and here).

Of course, with subprime auto ABS issuance soaring past 2006 levels last year...

Auto ABS Issuance

 

...and total outstanding auto loans up 34% over the previous peak set back in 2005, it's not that difficult to understand our concern.

Auto ABS Outstanding

 

Meanwhile, as Craig Kennison of Baird's Consumer Leisure Group points out, the "Deplorable Economy" (i.e. demand for big-ticket discretionary goods like RV's, boats and 4-wheelers) may also be getting "ahead of itself" despite the expectation of lower taxes rates from the Trump administration.

We like ideas exposed to the deplorable economy, but our powersports checks suggest the Trump-trade may be ahead of itself. Early 2017 could repeat the trading action in early 2016, when many stocks bottomed only after management teams reset expectation. Look for a post-Christmas sale on deplorable ideas like Polaris. We also would look for discounts in the marine space, including Brunswick and MasterCraft, which should benefit from a boot in wealth fueled by a higher stock market, healthy real estate values, and tax cuts. Beyond a job, a tax cut for individuals remains the single most important catalyst for discretionary spending (but a corporate tax cut may be a more important factor for stocks). With that in mind, we favor stocks with heavy U.S. exposure and higher tax rates that have the potential to drop.

 

We are optimistic that policy changes will benefit our coverage universe but see huge risks in trade policy and international exposure. A NAFTA reboot could harm Polaris and BRP. Meanwhile, Harley-Davidson could benefit from policies favoring the American worker – but a strong dollar and foreign retaliation may make life more difficult overseas.

 

A wealth effect among affluent consumers (and expanding credit availability) fueled robust demand for big-ticket recreation products from 2010-2015. However, in 2016, a divergence in growth between various Leisure categories emerged – and our view of the wealth effect became more nuanced. We saw that Leisure categories whose wealth effects are tied to the stock market and real estate values (e.g., marine, RV) continued to grow, while categories whose wealth effects are tied more heavily toward oil and ag prices (e.g., powersports) saw a sharp decline in demand in 2016. We see a bottom forming in oil and ag markets which we believe supports stable to modestly increasing demand in the powersports space in 2017 – and expect fundamentals to support continued steady growth in the marine and RV markets over the next year.

As Kennison notes, the expansion of cheap credit has driven the demand for "Deplorable Toys" like towable RVs to 131% of their previous peak demand set before the "great recession."  Meanwhile, demand for autos has also surpassed the previous peak while demand for other big-ticket toys have also soared over the past two years.

Deplorable Economy

 

And for those that would dismiss the importance of soaring RV sales, perhaps the following chart can help put their relevance to the broader economy into perspective.