Stockman: "We're On The Fast Track To 'Carmageddon'"

Authored by David Stockman via The Daily Reckoning,

Back in the 1950s when GM had 50% of the auto market they always said that, “As General Motors goes, so goes the nation.”

That was obviously a tribute to GM’s economic muscle and its role as the driver of growth and rising living standards in post-war America’s booming economy. Those days are long gone for both GM and the nation. GM’s drastically reduced 20% market share of U.S. light vehicle sales in June was still an economic harbinger, albeit of a different sort.

GM offered a record $4,361 of cash incentives during June. That was up 7% from last year and represented 12% of its average selling price of $35,650 per vehicle, also a record. But what it had to show for this muscular marketing effort was a 5% decline in year-over-year sales and soaring inventories. The latter was up 46% from last June.

My purpose is not to lament GM’s ragged estate, but to note that it — along with the entire auto industry — has become a ward of the Fed’s debt-fueled false prosperity. The June auto sales reports make that absolutely clear.

In a word, consumers spent the month “renting” new rides on more favorable terms than ever before. But that couldn’t stop the slide of vehicle “sales” from its 2016 peak.

In fact, June represented the 6th straight month of year-over-year decline. And the fall-off was nearly universal — with FiatChrysler down 7.4%, Ford and GM off about 5% and Hyundai down by 19.3%.

The evident rollover of U.S. auto sales is a very big deal because the exuberant auto rebound from the Great Recession lows during the last six years has been a major contributor to the weak recovery of overall GDP.

In fact, overall industrial production is actually no higher today than it was in the fall of 2007. That means there has been zero growth in the aggregate industrial economy for a full decade.

Real production in most sectors of the U.S. economy has actually shrunk considerably, but has been partially offset by a 15% gain in auto production from the prior peak, and a 130% gain from the early 2010 bottom.

By comparison, the index for consumer goods excluding autos is still 7% below its late 2007 level.

So if the so-called “recovery” loses its automotive turbo-charger, where will the growth come from?

These industrial production figures powerfully underscore the extent to which the weak expansion of real sales and GDP over the past seven years has been artificially supported by an energetic but unsustainable snapback in the auto sector. The soft June auto sales report further underscores that this happy booster shot is now over. Its opposite — Carmageddon — is metastasizing rapidly.

Still, booming economic growth is exactly what is priced into the still soaring stock market averages. But the Carmageddon story is evidence of the rot which lies beneath today’s mutant economy and lunatic financial bubbles.

It turns out that during June 2017, the average selling price for a light vehicle was $31,720. That’s up 75% from the average selling price recorded 20 years ago in 1997. Yet during that same interval, median household income grew by just 52% (from $37k to $56k).

So how did U.S. households afford to buy their new rides when their incomes have lagged the purchase price of a new car by nearly one-third over the last two decades? They didn’t. Financing for the average new vehicle during June amounted to $30,945 or 97.6% of the average purchase price.

That’s up 29% from the great recession lows and shows quite dramatically how the Fed’s Bubble Finance actually works. Namely, it has permitted the U.S. economy to borrow its way into an auto boom based on the rising collateral value of autos, not a commensurate gain in earned income and sustainable purchasing power of U.S. households.

In fact, since about 85% of new cars are financed, means households are taking out cash to finance transaction fees, pay-off underwater loans on trade-ins or take a joy-trip in their new ride.

Needless to say, borrowing more than the price tag of a new car and financing it over a record 69.3 months amounts to still another version of Ponzi finance. That’s especially true in this instance because unlike homes during the subprime mortgage mania, it is evident even now — before the real car loan bust — that autos depreciate rapidly, and far more rapidly than debt is reduced under current typical loans.

So the repo man will be immensely busy in the years ahead, and that will have its own harmful economic effects. And it also needs be pointed out that auto loans are essentially supported by the collateral value of the vehicle rather than the income and credit worthiness of the borrower.

As the tide of soured auto loans rises, there will be more and more horror stories about wages being garnished and other court-imposed extractions from the hard-pressed households which were sucked into the auto finance Ponzi, and at length defaulted.

Not surprisingly, auto debt per capita is now at an all-time high of $4,200 and is up 40% from the post-crisis low of $3,000 in 2010.

So the Fed may crow about a recovery that has been the weakest in modern history, but it is only a statistical paint-by-the-numbers upturn. It was purchased at the cost of burying U.S. households in levels of auto debt that were heretofore inconceivable, and which, in any event, are surely unsustainable.

The truth of the matter is that the Fed has just caused the pea to be shuffled under a different shell. Thus, Yellen and her posse continue to dismiss the threat of bad debt based on the purported success of “prudential regulation” and the improvement of bank balance sheets and the home mortgage market.

In fact, household debt has just been shoved into the auto file. At the peak of the mortgage boom in 2008 there were 98 million mortgage loans (including second mortgages and home equity lines) outstanding compared to 88 million auto loans.

The latter has now soared to 108 million car loans — an off-the-charts record level that now exceeds the number of mortgage loans outstanding by 35%.

It goes without saying that to generate 108 million auto loans, any consumer who could fog a rearview mirror had to be admitted into the auto finance game. Accordingly, subprime auto debt is now at an all-time high — notwithstanding the overwhelming evidence from the financial crisis that much of this debt will become delinquent or default when either payroll checks falter or used car prices tumble — leaving car loans hopelessly underwater.

The latter point is crucial and underscores why this time the auto debt contraction cycle will be far worse than 2008-2009. That’s because nearly one-third of vehicle trade-ins are now carrying negative equity.

This means, in turn, that prospective new-car buyers are having to stump-up increasing amounts of cash to pay off old loans, thereby pressuring volume-hungry lenders and dealers to extend loan-to-value ratios to even more absurd heights than the 120% level now prevalent.

That’s kicking the metal down the road with a vengeance!

At the end of the day, the precarious nature of the debt pyramid that underlies the auto market cannot be gainsaid. It belies the illusory debt-fueled prosperity of the auto sector, and, instead, underscores how consumers are being led even deeper into the Fed’s colossal debt trap.

That’s why GM’s June results were truly a harbinger. Even the Fed’s own surveys show that the household sector is tapped out on the auto credit front, and that auto loan demand has turned negative for the first time since the 2008-2009 collapse.

Current paychecks are still barely keeping up with inflation — especially as reflected in the cost of food, energy, medical and housing. Needless to say, if employment growth falters during the inexorable recession just ahead, the Fed’s debt-o-topia will come full circle.

After rebounding during the past two years at a rate between 5% and 6.8% year-over-year, even credit cards are again tapped out.

With balances now exceeding $1 trillion, they are back to the unsustainable level of May 2008 just before they blew up during the Great Recession.

So why are the casino gamblers still buying the dips?

Because that’s “what’s working”… until it doesn’t.


Dilluminati j0nx Thu, 07/06/2017 - 13:53 Permalink

Hyundai down by 19.3%they have 18's being delivered, they finally discounted.  And we bought, but overall I agreewe sold a truck for $100 les than we bought it 3 years ago, used prices are ridiculous and we went new insteadand screw the certified used deals.. and off lease, value isn't there

In reply to by j0nx

VWAndy Thu, 07/06/2017 - 13:25 Permalink

  This carmagedon is a feture not a bug. It looks to me they intend to outlaw old cars in favor of GM and the others. Think of it like Obomba car care.

Bemused Observer realmoney2015 Thu, 07/06/2017 - 14:17 Permalink

That was obvious from the beginning. A behaviorist might have drawn parallels with the way a lion kills off all the 'old' cubs in a pride when he takes eliminate them immediately to make room for his own. For the new, digital cars to take over, the roads will have to be cleared of all the 'old cubs'. Anyone watching 'digital' over the years understands that its aim IS to take over, and many, many 'old cubs' are being slaughtered, in many, many fields. Personally? I think this is a HUGE mistake. Epic. We are allowing the entire fabric of society to be deliberately unwoven by a small, determined group who do NOT have our interests at heart. And they are replacing it with some 'whole cloth' of their own.

In reply to by realmoney2015

realmoney2015 Thu, 07/06/2017 - 13:25 Permalink

Good. My 02  Camry still only has 165k miles. I figure I got at least another 100-150k. Then I can buy a decent used pickup when once the market comes back down to reality. 0 down, long term leases, loans more than the cars are worth. It's bizarro world out there 

EscondidoSurfer Thu, 07/06/2017 - 13:30 Permalink

Cars are made so well that they hardly need repairs and certainly not replacement like the old days.  Short car repair and auto parts sellers also.  200K miles is normal for every brand and model.

NumNutt EscondidoSurfer Thu, 07/06/2017 - 13:46 Permalink

Except now they are like all your other appliances, they are made to be disposable. try putting a Prius in your garage and rebuilding the motor. Good Luck! I have a 1992 Toyota Corolla that I let the kids learn how to drive with, it is a beater. But have rebuilt the engine twice, has like 350,000 mile on it, still going strong. Great for them to learn how to drive, maintain, and repair. The newest car I own is a 2005. I keep all the vehicles in top running condition, fuck new cars with all the electronic crap, and the monthly payments, still not planning to by a "new" car for the foreseeable future.

In reply to by EscondidoSurfer

daveO booboo Thu, 07/06/2017 - 14:17 Permalink

That's a clear sign of the FED's meddling. Designs used to remain the same for decades. Then, the gold window was shut and financial-ization(low interest, long term loans) replaced seekers of quality. Now, it's all cat and mouse games between the the buyer(mouse) and the dealer(cat).

In reply to by booboo

bloostar Thu, 07/06/2017 - 13:39 Permalink

Just traded in my 11 yo car for a new one (well, 4yo) after saving for a few years (remember saving for things people? Back in the day?).. I don't think the salesman knew what to do with his pcp and hp paperwork when I declined.. That's me out the market for another 7 or 8 years though. Feels great! It's going to be a buyers market soon with all the unsold inventory.. Lots of discounts going on.

MEFOBILLS GotNuttin'todo Thu, 07/06/2017 - 15:02 Permalink

Stockman has been wrong since 2008, so I assume he means the royal "we" I'm usually critical of Stockman, but he is right in this case.  The auto market was bubbled with subprime loans.  This then signals to manufacturers to make moar cars.  The debt cycle then diverts people's income toward servicing the loan, enriching the banker.  Meanwhile the car depreciates.A cardinal rule of economics is:   You don't use debt to buy depreciating assets.  Debt as money should only go toward those things that improve the future.  Under Kaiser Wilhem, that is how they successfully managed the German economy.  Loans from banks were directed into industry, and then industry produced goods and services in a virtuous cycle.  The loans were paid back with improved productivity.(Industry in the West actually uses profits for most of its expansion; industry does not go to the bank and take out loans, like the textbooks say.)Stockman is not offering any solutions.  A good rule, is that if you are going to complain, then at least offer some solutions.  

In reply to by GotNuttin'todo

Kayman Thu, 07/06/2017 - 13:40 Permalink

The Fed has made their owners filthy rich and the debt is fobbed off on the rest of the country. Monetary policy once was used to support the real economy.  Now Monetary policy doesn't even know where to find the real economy.

IronForge Thu, 07/06/2017 - 13:42 Permalink

Good for TSLA?Cheap Gas, Inv glut, rebates, and discounts...  ...  just in time for the Model 3 roll-out.   Wait until someone leaks out the Battery replacement mileage and costs... ... hearalding the next surge of PHEV/H2 SUV/ Crossover Model launches

rejected IronForge Thu, 07/06/2017 - 14:18 Permalink

France is eliminating all Diesel and Petro sales in 2040. In fact they claim they will eliminate ALL 'fossil' fuels at that date.  Only Fukushimas, solar and wind allowed.… imagine other nations will do this trick to force buying electric cars. Volvo says it will stop all internal combustion engines by 2019. control of our transportation choices is rapidly increasing. I pity the future generations. Maybe it a good thing they've been dumbed down!

In reply to by IronForge

monk27 rejected Thu, 07/06/2017 - 16:16 Permalink

Sorry, but by 2040 chances are we will be back to horse & buggy as reasonably cheap oil will be long gone. Liquid fuel will probably sell with a huge premium and it will be most likely coal derived.P.S. Ever tried flying an electric plane or have some heavy duty delivery done by an electric truck ? Thought so...

In reply to by rejected

Dilluminati Thu, 07/06/2017 - 13:47 Permalink

Hyundai down by 19.3%We bought a new Hyundai accent this weekend, paid tag/tax/full price just shy of 13K and a full $700 was taxes.  We sold used a pickup for $1,900, and got rid of a sunfire so pretty much washed in the insurance.  Now here is the kicker: they allowed us to put down 2K on Discover which I will pay off and get cash back,  they offered 5.9% interest 60 or 48 months, we took the 48.  I'll pay the balance in August 1st payment and cash for all but the last payment + 30 dollars.  So the car will be shown as paid off and the title comes through clean.But we have the cash set aside and at 13K for a new car with 100K warranty, 5 year roadside.. were like ok, now is now.Nobody in our area got hungry for awhile and finally they ran a real deal for cash buyers or 2000 cash-back for their financing, we also got the $400 for spouse recent grad.  I'd a bought a subaru but can't say no to a new car for that price.   Subaru forgot to offer a deal and didn't get the sale.  So all said and done we dropped two clunkers and paid 11K for a new car.I think the market is eff'd up also, I think all cars are going to get cheap her soon, I'm awaiting some deals on trucks AND POSSIBLY the new ford ranger, but again Ford thinks I have 30K for a car?  They are fucking halucinating.. I'll not drive it off the lot and take that hit

az_patriot (not verified) Thu, 07/06/2017 - 13:49 Permalink

When you start seeing price reductions at the dealers, let me know.  Until then, this is all a bunch of fake news.  I've seen NO real signs of ANY of this.

Dilluminati az_patriot (not verified) Thu, 07/06/2017 - 14:07 Permalink

Search AutoTrader for Hyundai, they won't give you a fair offer for a tradein, don't even bother waiting for their KBB #'s.  But the people gripping about the market forget to mention saelling on Craigslist and getting a top dollar for a used vehicle you have.  The Hyundai Accent is plain jane auto.. four wheels and an airconditioner and satellite radio.. no rear camera and the other BS in base model but you can buy new now for under 13K.  Put a limit of 13K in the autotrader search and see what used junk you come across, then decide.. sell yours?  Buy new? 

In reply to by az_patriot (not verified)

az_patriot (not verified) Dilluminati Thu, 07/06/2017 - 16:25 Permalink

It may depend on where you live, but Craigslist in our area is mostly full of lunatics asking WAAAAAAY too much money for their used cars, and a bunch of crap cars with salvage titles.  When most people try to sell a car on their own, they overvalue it in staggering proportions.  Craigslist is also loaded with scammers.  Caveat emptor!

In reply to by Dilluminati