Subprime Chaos: The Auto Bubble's Bursting And The Data Is Worse Than 2008

Authored by Adem Tumerkan via Palisade Research,

Last week, used car prices had their biggest drop since 2009 – directly after the financial market meltdown of 2008.

Right now, the auto market is showing signs of incredible worry.

Delinquent subprime auto-loans are higher than they were in the last recession.

Look for yourself...

What’s interesting – and worrisome – is that consumers are defaulting on subprime auto loans when the economy is reportedly doing ‘very well’.

Like I wrote last week – there are cracks under the economy’s foundation. And it’s like a bucket of cold water in the face of the mainstream financial media that’s pushing the ‘growth’ story.

We must ask ourselves –if things are going so well, why are subprime loan delinquencies at a 22-year high?”

I can’t help but feel a bit nostalgic. This was the same situation that led up to the 2008 housing crisis. . .

First, there was massive growth in mortgage-backed securities and mortgage debt. Then, the Federal Reserve – led by Alan Greenspan – began aggressively raising rates after years of low rates. Soon after, subprime loans started blowing up – which trickled into the prime loans. And eventually, everything was in chaos.

Using the often-ignored Austrian Business Cycle Theory (ABCT) – coined by the little-known but brilliant economist Ludwig Von Mises – I am blaming the Fed for all this.

Thanks to the Fed, a near decade of zero-interest rate policies (ZIRP) and three rounds of Quantitative Easing (which totaled over $3.8 trillion in printed money) – the consumers became hooked on cheap auto loans. . .

Their policies made the entire system fragile by getting consumers addicted to cheap debt through their easy money.

They then began tightening credit – crippling the borrowers.

Think of it this way – imagine you’re addicted to alcohol. And your bartender keeps giving you cheap drinks each night for months. Eventually, from drinking way more than you should’ve been able to afford, you now have a very high tolerance.

But suddenly – the bartender becomes strict and starts giving you less booze. He tells you, “sorry but no more free alcohol for you.” Problem is, you wouldn’t have drank so much if you had to pay full price for it.

Now you’re left with awful withdrawals – scrounging together all the extra money you can just to pay for a drink. But the only way you can really afford to feel better is if he starts giving out free drinks again or you painfully detox.

Just look at the collapse in auto-loan growth since 2015 – when the Fed began tightening with their end of QE and talk of rate hikes...

Clearly the higher rates had an impact on new auto loans.

But a bigger – and more pressing – problem is that the Fed’s short-term interest rate hikes are making these current subprime auto loans unserviceable. The borrowers are having a harder time paying more interest for an asset that depreciates 15% the moment they take it off the lot.

Clearly, affordability is becoming a problem. . .

As I learned from Ludwig Von Mises and the other brilliant Austrian economists – the Fed created a bubble in auto-loans by keeping rates low and printing trillions. And now they’re going to blow the whole thing up with their rate hikes.

Just like taking the free drinks away. . .

I expect delinquent subprime loans to keep hitting new highs. And I expect the ‘growth’ story the pundits keep pushing down our throats will fade.

Because even if the auto-loan industry and general economy hasn’t rolled over yet, each new Fed rate hike pushes us one step closer to the edge.

0.25% at a time. . .

So, with our Macro-Fragility Index (MFI) alarmingly high in the auto sector – I’m going to spend time looking for opportunities here.

History shows us that when things start their descent into collapse – the subprime market is the first to get hit.

Food for thought. . .


3-fingered_chemist Giant Meteor Wed, 05/16/2018 - 11:16 Permalink

Usually when you a repo a car, you sell it again. Problem is that the people that are delinquent on their car loan don't give a crap about the car. These cars are totally trashed and might as well have been written off in an insurance claim if a meteor hit it. 

In this type of scenario, it costs too much money to actually take the car back since in order to sell it again, it would need thousands of dollars in repair or refurbishment. These finance companies that prey on this market are as in bad as shape as the people they give loans to. 

In reply to by Giant Meteor

truthseeker69 3-fingered_chemist Wed, 05/16/2018 - 12:31 Permalink

It's the same damn story over and over again. 


Bad loans > repackaged and sold to a greater fool > end ups with the government > moronic citizens foot bill by borrowing more from the future. 


The questions I keep on asking myself: if the central bankers keep up distortions the markets, do we ultimately consume ourselves?


The incredibly evil part of these Central Bank induced market distortions is that REAL resources a being misallocated. 







In reply to by 3-fingered_chemist

glenlloyd Winston Churchill Wed, 05/16/2018 - 12:13 Permalink

When it comes time to bail out the fin company I doubt failing to repo their asset will look very good to those handing out the money.

I wouldn't count on this becoming a trend, reselling repo cars isn't all that tough, not like a house. You just send the pile to an auction and let them deal with it. What ever it brings is what ever it brings, the borrower is still on the hook for the difference at the very least, and often more with 'fees' associated with asset disposal.

In reply to by Winston Churchill

I am Groot j0nx Wed, 05/16/2018 - 15:34 Permalink

People are beyond retarded full price for anything now. There were so many houses/mortgages in the 2008-2010 correction that went belly up that the banks decided to bulldoze a lot of them instead of keeping them and having property mortgage companies manage them. This next crash will be great for buying homes or cars at 25-50% off. Until then, realtors and car dealer can f-off. They won't have a pot to piss in soon.

In reply to by j0nx

DingleBarryObummer Wed, 05/16/2018 - 10:54 Permalink

the system is fueled by capital misallocation.  It will go somewhere.  Auto is just once example.  Then the bailouts come.

Lemon socialism - Wikipedia

Lemon socialism is a pejorative term for a form of government intervention in which government subsidies go to weak or failing firms, often with the intent of preventing further, systemic damage to what might otherwise be considered a free marketplace.[1][2] These subsidies can even take the form of a full or partial bailout as happened during the 2008 financial crisis.[3][4][5] The pejorative comes from the perception among free market economists that failing companies are defective lemons that a working free market would replace with better functioning companies in response to market demand and the public-sector involvement this type of state intervention shares with socialism. Confusingly, lemon socialism may also refer to government efforts to transition from capitalism to actual socialism—in this case, it refers to a deliberate strategy of absorbing the losses entailed in saving jobs within the worst-performing sectors of the economy—the lemons—before the nationalization of more profitable industries.[6]

The sentiment was earlier expressed in the adage "Socialism for the rich and capitalism for the poor", which was in use by the 1960s, though the notion of privatizing profits and socializing losses dates at least to 1834 and Andrew Jackson's closing of the Second Bank of the United States.

chunga Giant Meteor Wed, 05/16/2018 - 11:32 Permalink

Take the fraud out of the USA economy and hello Venezuela.

That's why the endless "ism" debates are merely academic; the definitions are obsolete like an old black and white economics movie.

(take note of the fraud heaped on top of this. Full /insurance/ coverage is folded into the financing at the financed amount and never goes down until it's paid off, even though the value drops immediately)

In reply to by Giant Meteor

chunga Giant Meteor Wed, 05/16/2018 - 11:47 Permalink

My very cynical opinion is without the giant military, US wouldn't have reserve currency status and the fraudulent printing press. And without the reserve currency status and fraudulent printing press US, wouldn't have the giant military.

The giant layer-cake of all the other fraud that exists literally everywhere is ancillary and operates off of this symbiosis. As soon as it stops it dies.

In reply to by Giant Meteor