Carmageddon Crashes into “the Recovery”

The following article by David Haggith was published first on The Great Recession Blog

Carmageddon, as Wolf Richter has called it, is hitting the US economy exactly as I said a year and a half ago would start to happen at the very end of 2016 or the start of 2017. Measured year-on-year, auto sales have declined every month of 2017, and are now starting to cause the financial wreckage that I said we would experience in what will become a demolition derby for US auto manufacturers.


“A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,” wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients. (Wolf Street)


Stanley now foresees a “multiyear cyclical decline,” along with a declining “willingness of financial institutions to lend as aggressively as in the past.”


After an eight-year boom, the industry appears “to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles….” not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the “diminishing returns” – when you throw gobs of money at a problem and it doesn’t have much impact. Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (“0% financing”), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south.


How many times have readers here heard me stress the economic Law of Diminishing Returns that economists and banksters and CEOs are almost universally ignoring. This exact scenario, you may recall, is what I said would happen this year, only I said it in January, 2016, year before it began:


Auto-traders are auto-traitors

I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a strong economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything.So, the biggest scare here is how blind it proves the experts are who guide the economy.

Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at no loss?

What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-year term. Now, that is the average loan length.

It’s dumbfounding to me that people are stupid enough to site auto sales as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be a trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

…Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

…Total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?


It’s the same thing, but an order of magnitude greater, and anyone who is not steeped in economic denial could have and should have seen this coming. I knew it was coming and how long it would take because it is the same pattern I saw leading into the Great Recession. (I choose to learn patterns from history, but our leaders, including CEOs, do not.) As I’ve said before, we (as a nation) have learned NOTHING.

The Great “Recovery” is all about repeating the mistakes that created the Great Recession in order to recover the glory bubble days; only we are repeating those mistakes at a vastly higher magnitude because the Law of Diminishing Returns has reached the hockey-stick side of the curve. That is as true for the housing market and all of the Federal Reserve’s plans as it is for the auto industry and the consumer banks that operate in that industry.


The fallout from Carmageddon on banks and investors as well as automakers


Derivatives (remember those dangerously cloaked things?) made up of auto loans made to people with good credit have already reached their highest default rate since 2008 when automakers wound up having to be bailed out or barely escaped that kind of perverse salvation plan. JPMorgan Chase & Co. is now tightening up on any more auto loans.

And then there are the subprime junkers:


Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields. These bonds are backed by subprime auto loans that have been sliced and diced and repackaged and stamped with high credit ratings. But those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.


And then there are those issued in 2016. They haven’t had time to curdle.


The 2015 vintage that Fitch rates is now experiencing cumulative net losses projected to reach 15%, exceeding the peak loss rates during the Financial Crisis. (Wolf Street)


According to Bloomberg,


Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitization  … , which is higher even than for bonds in … 2007….  The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending.


Gee, who could have seen that coming? Oh, yeah, me … clear back in 2015:


Auto loans and student loans are a leaning tower of debt. Auto sales have peaked only as a result of a huge extension of looser, loser credit where loan terms are now up to seven years long, and interest is low or non-existent as are down payments. The last time we saw such desperate financing measures in the auto industry was just before the Great Recession, and we all know what happened to the auto industry then. We also know what happened to the housing industry when it peaked because of this kind of looser credit. We’ve learned nothing and have repeated the problem … on steroids. So, another crash is coming. (“Epocalypse Soon“)


And even earlier than that when I wrote …


Another support given was that “sales of autos are still rising.” Wow! Only because of SEVEN-YEAR auto loans, zero-interest loans, and the fact that auto dealers are now counting leases as sales!


That’s the same easy-credit bubble that was created in housing! How can people not see that it is exactly the same thing — only in cars?

…Moreover, how can people not see that this was the same nonsense that got automobile manufacturers in trouble during the last economic crash? It’s why they went down at the same time housing went down. (“Sometimes When I Read Economists My Brain Hurts“)


Because of these extended terms on a rapidly depreciating asset, as I warned way back when the practice began, negative equity now averages a little higher than $5,000, which is the worst ever, and which means banks effectively have no collateral.

As Wolf points out, that negative equity now gets rolled over into a new car loan when the old vehicle is traded in, making the new loans worse than ever. So, the cause of bad debt spreads like cancer. (We see it happening, but we still allow it because we’re dumb like that. At least, those who are bankers and regulators are because they learned nothing.) Vehicle trade-in values have reached their lowest levels since 2010. That kind of date should mean something by association.

Speaking of the Great Recession, do you remember how some housing lenders made the subprime mess as bad as it was by not checking on the credit data of those they were making loans to? Those loans got batched into the derivatives that went bad. Well, the nation’s largest sub-prime auto lender, Santander Consumer USA, has only been verifying 8% of its loans! (Again, we learned nothing!)

In other collateral damage this week, General Motors announced an extended closure of two of its car manufacturing plants. This is partly due to drivers switching to SUVs, but the increase in SUV sales is less than the decline in car sales. Multi-industry factory output across the US is down for the second time in three months, and that number, too, is driven largely by the crash in auto production.

Carmageddon has been building insidiously each month since the start of the year, but the impact of decline is now waking up banks, manufacturers and investors to the significance of this event, which I said back in January of 2016 would be just one part of a massive and slowly unfolding “Epocalypse.”

As the impact is summarized on Wolf Street (linked to above),


Over the longer term, Jonas gets outright bearish – and with good reason. He expects a slump that will last years. For 2018, he cut his previous estimate of 18.9 million down to 16.4 million, which may still be high. And for 2019 and 2020, he slashed his estimate to 15 million sales.


And how bearish for auto sales is this?


But he notes that to maintain sales even at that low level, the government would have to step in and subsidize in some way new car purchases.


There we are! We are right back to government bailouts of the auto industry in one form or another, even to maintain declining sales.

You see, the warnings given during the Great Recession were completely sure: if you bail the failures out once, you create “moral hazard,” which causes the greedy to double down on their stupid risks. They learned nothing. Forget the idea that CEOs are smart … unless by “smart” you mean smart at con games. If you cannot learn from an event as obvious and global as the Great Recession, you cannot learn from anything … not even to save your soul from its own corruption.


Why is it important that I point out that I predicted these things?


Because if someone can show these events are predictable — in how they will fall, how hard they will fall and even WHEN they will fall, then it becomes inexcusable that we went down this path all over again! The idiots who cause the problem can no longer say, “Well, we cannot be expected to have seen something like this coming.” Yes, they can be and should be expected to have seen it coming. It is inexcusable that they did not! So, let’s cut off that path of escape from responsibility for the wreckage that is coming due to their uninhibited greed and foolhardy risk taking.

It is also important because it is about destroying the economic denial that is rampant throughout this nation and that will destroy the nation entirely if it continues.

By Guy Sie (Flickr: Seven Deadly Sins - Greed) [CC BY-SA 2.0 (], via Wikimedia CommonsFinally, it is important because you might just stop to think that, if someone predicted the catastrophe that is unfolding right now a year before the first actual signs of failure began, then you might want to pay attention to rest of what he was predicting. And I beat that drum again and again because so few people are listening, and it is far past time that they did. It is time for this nation to wake up to its own economic stupidity.

Carmageddon was a completely foreseeable and, so, completely avoidable pile-up!


Racer Sat, 06/17/2017 - 14:50 Permalink

If you bail out a bankster when they make mistakes but initially make loadsa dosh but then have HUGE losses, then they learn to do the same again and again and again - risk is completely removed and they stand to gain a massive amount of money before it all goes sour. And not even a slight hint of a conviction let alone a prison sentence.

Knave Dave Racer Sat, 06/17/2017 - 22:30 Permalink

Yes. We are now seeing the "moral hazard" that was talked about back then but completely ignored. It's WHY they learned nothing. No prison sentences from Obama. None will be forthcoming from Trump either (not even for Pillary), though I'm sure the statue of limitations has kicked in for all their banking-related crimes by now.

In reply to by Racer

Knave Dave JoeTurner Sat, 06/17/2017 - 22:28 Permalink

Or just deflation. Hyperinflation will only happen if the money spills over from the stock market onto mainstreet. I think it is more likely that the money simply evaporates as easily as it was snapped into being when stocks and bonds crash, and their values have to be written off as losses ... even on the Fed's books.

In reply to by JoeTurner

new game Knave Dave Sun, 06/18/2017 - 08:52 Permalink

deflation most likely.collateral is impairedwages flat and less as compared inflationconsumers are maxingbrick and morter shift to click and ship a bright spot in a zero sum game. but just a shift of the work force.vacancy at commercial level is soaring.real estate is the next leg to wobble.gdp to shift to zero even with trillion of influencebright spot is the killing industry with uuuge sales abroad and domestic ramp up.all this adds up recession. cars first then homes. deflationary for sure...

In reply to by Knave Dave

Basilian Sat, 06/17/2017 - 15:35 Permalink

There are "no idiots" in finance -- they know exactly what they are doing and all of them make profits from all of their repeated "idiotic mistakes" ... if ignorance is accepted as an excuse then so should 110% claw back or they could opt for the beheading option. When will the writers here ever wake up to the fact that you are not uncovering idiocy ever --- you are not smarter than the people making huge money that allow you to call them idiots.

Knave Dave Basilian Sat, 06/17/2017 - 22:26 Permalink

While I'm staying with the notion that they are total idiots because I think they genuinely believe their stupid plans will work, they are also geniuses at operating politicians in order to get bailed out when their stupid plans do not work. So, I guess that makes them idiot savants. I agree with the 110% clawback. Corporate law needs to be rewritten so that 100% of their personal wealth is at stake. Corporations offer too much shielding, which ecourages extravagant risk taking. Also, they these guys have paid less in taxes than most people, not just because of all the loopholes that most people don't qualify for, but because of the lower capital gains tax rate they've enjoyed for 35 year. They keep selling the dumb masses on trickle-down economics, and the dumb masses keep falling for it because they entertain the fanasy that one day they will be rich, too, and they sure down't want the government taxing them at the top rate when that happens. Since the rich suckered them with this plan, let the masses claw it all back from the rich. The rich make most of their money off of capital gains, for which they now do nothing but stick money in an ETF or some other form of computer-operated, algorithm-jacked trading platform, and then they get away with lower taxes for doing less work and making more money. Claw it back! (Or the beheading option.) --Knave Dave

In reply to by Basilian

Dame Ednas Possum Knave Dave Sun, 06/18/2017 - 07:56 Permalink

Dave, they are evil rather than stupid. You are too lenient on them. If a few internet pundits can work it out, then these criminals with rooms full of tax-payer funded analysts certainly know the low-down. It's just that they also have the 'smoke and mirror' analysts employed to formulate the marzipan icing to coat the massive pile of bullshit. Protocol 20:  we shall destroy capital, we cause depressions, we send gentile states bankrupt, we maintain tyranny through usury. None of this is a naive mishap of well meaning boffins. It is evil.  

In reply to by Knave Dave

ShorTed Sat, 06/17/2017 - 16:32 Permalink

Losses on subprime auto-loan backed securities projected to exceed the peak losses during the Financial CrisisC'mon, bigger losses than the housing bust?  I'm calling bullshit.  There's just over 1.2 Trln of TOTAL AUTO LOANS.  Subprime is only 300 - 350 bln.

Knave Dave ShorTed Sat, 06/17/2017 - 22:17 Permalink

No, not bigger than the housing bust. Bigger than the auto bust that coincided with the housing bust during the Financial Crisis. Don't you remember when the Fed bought GM and Chrysler stock to bail them out in order to save the banks that were their financiers and when GM's finance division, GMAC, turned over and was never known by that name again. The US Treasury bough almot 80% of the stock and still holds most of that bad investment. That $17 billion tax-payer infusion will never get paid back now. (… ). The Fed offered the same kind of deal to Ford, but Ford turned them down. We're going down that same road again.

In reply to by ShorTed

northern vigor Sat, 06/17/2017 - 17:22 Permalink

Knave Dave writes this as if we are wringing our hands worrying about the manufactuurers, dealers, bankers and government.I would guess that 90% of us are anticipating the crash like school boys on the last day of school waiting for the bell to go. I say lets get this rodeo going.

Knave Dave northern vigor Sat, 06/17/2017 - 22:05 Permalink

That's because this is Zero Hedge. I would guess you could turn those numbers around for 90% of the MSM watchers. I'm sure they haven't got a clue what's coming. I say the same thing you do because it is suffocating to live in this endless slow drip of an economy. The sooner they stop patching the dinosaur along and we all take the big fall, the sooner we can start rebuilding something better. Only problem with that theory is that the 90% who watch the MSM will take the Fed's word and the economists word that we just need to do it all over again ... like we did last time. They NEVER learn!

In reply to by northern vigor

CRM114 Sat, 06/17/2017 - 18:28 Permalink

It's a really fundamental marketing error, from what I can gather anecdotally.They are not building the vehicles people want.It's what marketing is supposed to be; find out what people want then build it.But no, for the last 30 years marketing has been 'Build what we want to build, then persuade enough suckers to buy it'. Same with every other product. The entire marketing industry needs to get personal with a lamp-post and some piano wire.I don't want 'compatible with my iPhone', or a 9 speed gearbox, or DEF, or 593 airbags, or 1,984 black boxes I can't adjust with a wrench and neither can the dealer for $100 an hour.Build what I want and I'll buy it. It will be a LOT cheaper than you are currently offering, and a LOT cheaper to maintain.They've not just killed the Golden Goose, it's mincemeat.

CRM114 Moe Hamhead Sat, 06/17/2017 - 21:29 Permalink

I have a radio, with an aux input. I connect the phone with the aux input, and custom-made a dash mount from a dollar store windscreen mount. I now have all 1,000+ albums available. Job jobbed. I make up a playlist before setting off, or at stops.I do not have bluetooth, hands-free, compatible-anything, call-answering bollox because I don't want to drive into a tree/ditch/other car answering my phone. And I want to be alert to dodge the people who do, of which there are a f#ck of a lot these days.If people need to contact me on the move, they know to text or be ignored. I'll answer at my next stop. 

In reply to by Moe Hamhead

edotabin Moe Hamhead Sun, 06/18/2017 - 02:51 Permalink

ain't happening unless you shell out the big $$. Quiet is my #1 criterion when purchasing a car. I don't want to hear the engine, I don't want to hear the road and i definitely do not want to hear wind noise. Until very recently noise was not paid any attention and even when it was it was restricted to the luxury vehicles. Most reviews about lower and mid-priced cars discussed cup holders and other BS.I loved the large sedans in the 80s. They rode like a whisper quiet cloud. Now we have to have stiff suspension for all the racing we do on a daily basis in our Honda freakin' civics. Do automatic cars even need a tachometer? A tach would only be useful in a manual shift when you are racing and trying to push it close to the limit without blowing the engine.And these 4 cylinder engines that are supposed to be more My car is a v6. It is a large car and does 0-60 in about 5.5 seccs. I'm having it painted and am driving a dinky 4 cylinder rental. The no power, all noise and vibration dinky car gets 3 MPG more in combined city/hwy driving. 3!Everything is totally ass backwards.

In reply to by Moe Hamhead

Honest Sam CRM114 Sun, 06/25/2017 - 09:12 Permalink

You must have learned "Marketing" at Compton Community College.Marketing, Brand Management, Pubic relations and Advertising have only one mandate:To CREATE demand for something people do not want, need, or must have.That puts your entire wordy article at risk of being wrong, including the part about not getting bailed out this time around, should it come to that.Fail.Not deep or informed enough.

In reply to by CRM114

HK21E Sat, 06/17/2017 - 19:08 Permalink

As long as the automotive industry thinks that 50k+ is a fair price for a pickup truck, my wallet stays closed. I wouldn't pay 1/2 that for a new vehicle. I will keep driving my 15 year old car and maintaining it, and the banks and the automakers can both kiss my ass. 

CHoward Sat, 06/17/2017 - 20:37 Permalink

Knave Dave says dealers are now oonsidering a new lease of a car as a sale.  Well, not too long ago I was reading an article where in China - they consider a sale at the point the item was made (right off assembly line) - before its even left the factory.  Beat them apples.

Silver Savior Sat, 06/17/2017 - 20:45 Permalink

I predict sub 10k car sales soon. They are not even trying to get rid of excess cars. No cash for clunkers even! Everything is credit. Easy credit. Yeah these economists are pretty dumb. It's like they have these degrees in finance and are still stupid. Around here only weed growers can afford new vehicles. They get those big 50k trucks. Most rugged looking fellers you have ever seen. They look like they have nothing but are loaded.

hola dos cola Sun, 06/18/2017 - 00:15 Permalink

Logic says the automotive industry, in collusion with the financiers, will covertly lobby for political measures that'll take out a huge chunk outof the bottom of the saturated market.Most likely an environmental tax on older models, new safety regulations that become compulsary... use your imagination.The little guy gets forced outof his cheap car and will be forced to 'upgrade'. That at a cost ofcourse but more importantly another 'sale' and/or 'loan' will be registered for you to toy with.P.S. The day 'unhackable' cars become illegal is approaching fast.

Ban KKiller Sun, 06/18/2017 - 08:13 Permalink

Back in the day, nineties, went to see the folks at automotive lease guide, ALG. They had crystal ball on the conference table. "What's that for?" I asked in jest. "That's where we get our numbers from."  Ha ha ha ha. They were not kidding, what do you need the numbers to be? All starts and ends with accounting.

Secret Weapon Sun, 06/18/2017 - 08:13 Permalink

I am thinking that in the very near future people will be more worried about the availability and price of food than they are about being able to afford a new car. 

ALANBEEKMAN Sun, 06/18/2017 - 08:49 Permalink

My takeaway from this article.Don't be stupid or lazy and trade-in your current vehicle.Take the time and effort and sell it first, for a fairprice, using any number of sell by owner apps.You'll have more leverage walking into a dealerwith cash in hand.