Making Sense: There’s Something Odd In The Auto Market

Tesla Motors Inc (TSLA) Model 3

Not spoken often, except around the time auto sales are reported, are the troubling conditions in the auto credit space. As I have reported, periodically, since my Citigroup days, lending reforms imposed on the mortgage banking industry were deliberately not imposed on the auto finance industry. This was done to help the U.S. auto industry to recover from a near-death experience and to, as best as possible, save union auto jobs.

The result is a true bubble in auto lending and in auto production. Today, investors are becoming more discriminating regarding the auto loan collateral in which they invest. At the same time, the used car sector is being flooded with off-lease low mileage used cars. Throw in an aging population, the lowest incidence of young licensed drivers, since before WWII and a preference for urban living, and it just might be that we have already seen peak autos or peak autos per capita.

Tesla Motors Inc (TSLA) Model 3

Irresponsible auto lending

I believe that an editorial published by Bloomberg News speaks volumes:

“Although the amounts involved are much smaller than with subprime mortgages, the irresponsible lending will have consequences. Impossible interest payments are ending in repossession and driving families deeper into poverty. Artificial demand has set automakers up for a fall that may already be underway, with sales down about 8 percent in July from their most recent peak in December. Losses could ultimately destabilize markets, cutting off credit to worthy borrowers.”

Auto lending is too small to cause a systemic problem, like the bursting of the housing bubble, but it does offer us a glimpse of what might have occurred without Dodd-Frank or some other kind of banking regulations. Although the aftermath of the auto bubble is unlikely to cause a recession, it could help to shave a few tenths off of U.S. GDP and U.S. CPI.

Inflation and car loans

I read an interesting article on Bloomberg which states that the weaker U.S. dollar could add 0.2% to U.S. CPI, pushing inflation close to the Fed’s 2.0% target. If the Fed’s target used CPI as its gauge (most recent print was 1.7%), that would be true. However, the Fed’s favored measure and what it uses as its target is Core PCE YoY. That last printed at 1.5%.

Thus, a 0.2% pickup still falls short of the Fed’s inflation goal.The weaker USD can and should add upward pressure to CPI, but the dollar may not weaken forever. Also, there are disinflation and deflationary forces from technology, demographics and a flood of used cars on the market present in the economy.

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Thomas Byrne serves ad the Director of Fixed Income for Wealth Strategies Management LLC. Thomas brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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