A Lump Under the Rug

Guest Post by Eric Peters

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The other day, GM announced it would no longer report monthly sales figures. Instead, it would hold on to those numbers internally and only reveal them publicly at the end of each quarter.

A GM spokesman says that “thirty days is not enough time to separate real sales trends from short-term fluctuations in the market.”

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Possibly.

But 90 days  – a quarter is three months – is just as arguably too long to give shareholders an opportunity to act before they potentially lose their shirts. The obvious example here being the economic implosion of 2007. If you’d waited three months to dump your GM stock back then, you’d have lost a lot of money.

Granted, other corporations also report quarterly. But the car business is much more of a barometer of the overall health of the economy than, say, Boeing – whose profits depend largely on a relative handful of big-ticket buys by other large corporations (and the government) rather than hundreds of thousands of small ones by private individuals.

Now, here’s where things get interesting – in the Chinese proverb sense.

The change in reporting coincides with another change in the car business.

There hasn’t been much reporting of it, but loan-issuing standards have all of a sudden been tightening up. Interest rates are going up. Free loans – i.e., zero percent financing – are going away. The average rate on a new car loan is up to 5.7 percent now – the highest since 2009.

That means higher monthly payments. But that’s a problem when people can only afford so much per month. It’s been free (or very low cost) loans which have kept sales of new cars propped up for years.

That and extending loans.

Six, seven – even eight years.

But they can’t be extended much farther. Seven, maybe eight years is probably the limit or very close to it – because by seven or eight years very few cars are worth even half what they sold for new.

Some are worth considerably less than half.

But the monthly payment at seven years is still the same as it was that very first monthly payment – when the car was still worth making payments on. By seven years, it’s probably no longer worth it. People stop paying. The car gets repossessed – and re-sold. But for small potatoes now.

The balance of the loan value gets written off.

The banks are well aware of this – which is why they won’t be writing nine or ten year new car loans. Bankers are usually pretty good at covering their own asses.

Meanwhile – and perhaps not just coincidentally with the decision to change the way sales numbers are reported – there is very likely going to be a sharp uptick in the price of the average new car.

Because there has to be.

Because there is no such thing as a free lunch.

Trump may have announced a dialing back of the federal fuel economy (not “emissions”) fatwa – and deserves kudos for it – but even so, the damage has already been done – and the car companies are betting on more to come because Trump may be gone three years from now and his successor could simply reimpose the fatwa.

They are product-planning accordingly.

What that means, in car industry jargon, is that they’re designing cars to deal with the prospect of a federal regulation requiring that each new car average at least 50-plus MPG and that there will be new regs classifying the harmless, inert gas carbon dioxide an “exhaust emission” subject to EPA regulation.

This is why so many new cars have small, turbocharged engines – even big trucks and SUVs like the 2018 Ford Expedition (a huge SUV) I recently reviewed. And that obnoxious “auto-stop/start” system, which shuts off the engine every time you hit a red light. And transmissions with twice as many gears as was normal just a few years ago.

And more to come.

It’s all there because of the current federal fuel economy fatwa. More such will be there if a fatwa decreeing C02 to be an “exhaust emission” is issued.

And these additional parts – and more complicated parts – aren’t free. Their cost has been hidden by free loans (zero interest financing) and also by factoring the higher cost of the vehicle over a longer period of time – the six, seven and even eight-year loan.

But you can only sweep so much under the rug. Eventually, a lump begins to show.

GM, perhaps, is anticipating this. Watch for the other car companies to follow suit.

What comes to mind are the Five Year Plans of the old Soviet Union. Stalin decreed impossible-to-meet production quotas and in Soviet Russia, if you didn’t make your quota it was off to the Gulag – or worse.

So, the managers fudged the numbers. Hid them, changed them. Outright lied about them – figuring that they might as well, since to tell the truth would expose them to the full hurricane force of Stalin’s fury.

Today, no one’s going to the Gulag. Well, not yet.

But there is incentive to glaucoma-ize what’s going on. No one seems willing to talk about the untenability of the federal fatwas, least of all the car companies. The managers, for their own cynical reasons, want to Play Ball – because they are short-timers receiving Big Pay while they’re there and once they’re not – well, who cares? Off to another gig – or a very comfortable retirement.

But car buyers can’t play ball. They can only buy what they can afford and when they no longer can, it’s Game Over.