Submitted by Tyler Durden on 09/06/2015 21:00 -0400
Having recently detailed the automakers’ worst nightmare – surging new car inventories – supply; amid rapidly declining growth around the world (EM and China) – demand;
Automakers just unleashed a massive production surge to keep the dream alive…
With inventories at record highs (having risen for 61 straight months)…
Continue reading “Why The New Car Bubble’s Days Are Numbered”
This entire teetering edifice is built upon a towering foundation of un-payable debt. Look no further than the story below. Bankers making loans that will guarantee them future losses because they know the Federal Reserve and puppet politicians will bail them out at your expense. The ignorant masses will never open their eyes because they live in a land of delusion and like driving Cadillac Escalades while the party continues.
Submitted by Tyler Durden on 07/01/2015 12:28 -0400
This wasn’t supposed to happen.
With the US consumer hunkering down in 2015 and barely spending more than in the comparble period last year, the only silver lining had been auto sales driven almost entirely by access to cheap credit; in fact, as the chart below shows while revolving credit has barely budged from its post-crisis lows with consumers still failing to fall for the “recovery” narrative, Uncle Sam’s zero cost loans which are now reaching well over 6 years in average duration have provided a generous support for the US auto industry. In addition to the bubble in student loans, car loans have been the only confirmation that the US consumer – that driver of 70% of the US economy – is still alive.
So in a world in which one can buy cars now and worry about the costs later, much much later, auto sales should have been soaring as they have been in recent years, right?
Well, not for GM, which moments ago reported a surprising drop in June auto sales, which declined 3% M/M to 259,353 from the prior month, driven by an 18.1% plunge in Buick sales, with Chevy and Cadillac also posting declines, despite expectations of a 3% headline increase. This even as GM announced pickup deliveries were up 33% with the Silverado up 18%. Curiously, GM’s main domestic competitor, Ford, reported a 9% drop in F-Series sales in June.
In Part One of this three part article I laid out the groundwork of how the Federal Reserve is responsible for the excessive level of debt in our society and how it has warped the thinking of the American people, while creating a tremendous level of mal-investment. In Part Two I focused on the Federal Reserve/Federal Government scheme to artificially boost the economy through the issuance of subprime debt to create a false auto boom. In this final episode, I’ll address the disastrous student loan debacle and the dreadful global implications of $200 trillion of debt destroying the lives of citizens around the world.
“When easy money stopped, buyers couldn’t sell. They couldn’t refinance. First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences. Can someone please explain to me how what is happening in higher education is any different?This bubble is going to burst.” – Mark Cuban
Now we get to the subprimiest of subprime debt – student loans. Student loans are not officially classified as subprime debt, but let’s compare borrowers. A subprime borrower has a FICO score of 660 or below, has defaulted on previous obligations, and has limited ability to meet monthly living expenses. A student loan borrower doesn’t have a credit score because they have no credit, have no job with which to pay back the loan, and have no ability other than the loan proceeds to meet their monthly living expenses. And in today’s job environment, they are more likely to land a waiter job at TGI Fridays than a job in their major. These loans are nothing more than deep subprime loans made to young people who have little chance of every paying them off, with hundreds of billions in losses being borne by the ever shrinking number of working taxpaying Americans.
Student loan debt stood at $660 billion when Obama was sworn into office in 2009. The official reported default rate was 7.9%. Obama and his administration took complete control of the student loan market shortly after his inauguration. They have since handed out a staggering $500 billion of new loans (a 76% increase), and the official reported default rate has soared by 43% to 11.3%. Of course, the true default rate is much higher. The level of mal-investment and utter stupidity is astounding, even for the Federal government. Just some basic unequivocal facts can prove my case.
There were 1.67 million Class of 2014 students who took the SAT. Only 42.6% of those students met the minimum threshold of predicted success in college (a B minus average). That amounts to 711,000 high school seniors intellectually capable of succeeding in college. This level has been consistent for years. So over the last five years only 3.5 million high school seniors should have entered college based on their intellectual ability to succeed. Instead, undergraduate college enrollment stands at 19.5 million. Colleges in the U.S. are admitting approximately 4.5 million more students per year than are capable of earning a degree. This waste of time and money can be laid at the feet of the Federal government. Obama and his minions believe everyone deserves a college degree, even if they aren’t intellectually capable of earning it, because it’s only fair. No teenager left behind, without un-payable debt.
Auto lending is currently 40% higher than the last peak in 2003.
Auto leases are growing at a 20% annual rate.
The average car loan term is now 66 months, the highest in U.S. history.
The average amount financed is at an all-time high of $27,612.
The average monthly payment reached a new all-time high of $474.
The percentage of subprime deadbeats getting car loans has soared to 34% of all loans.
Lenders are doling out loans that are 25% higher than the value of the autos they are “selling”. A new car depreciates 10% the second you drive it off the lot.
Real household income is 7% lower than it was in 2007, while gas, utilities, food, health insurance, and taxes are significantly higher. The entire consumer spending “recovery” has been nothing but another Federal Reserve/US Treasury engineered debt bubble of auto and student loans. The piper will be paid. The bubble will burst. The losses will be epic. Who coulda knowed? I bet you can’t wait to bail out Wall Street and Obama again. You’ll do it for the children.
Via David Stockman’s Contra Corner
By Editor, Fabius Maximus, a multi-author website with a focus on geopolitics. Reposted from Wolf Street
http://wolfstreet.com/2014/08/07/auto-loans-once-a-boon-for-america-now-malignant/
One of the many oddities of this cycle is that many things that were good during the post-WW2 era have become bad in the era now starting (unrecognizably so, as we remain unaware of our changed circumstances). Like debt. Such as auto loans. Our use of debt gives clues to our future..
Consumer debt in the old world, and the new
During the post-WW2 era increasing debt supercharged economic growth for the young and rapidly-growing West. But after 60 years of this our societies now carry massive debt loads, both public and private — while the numbers of elderly grow (who experience a crash of income upon retirement, plus rising costs to society for their pensions and health care). Carrying our current load might prove difficult; adding to it now is madness.
Plus, there are other factors in play. Fifty years of growing inequality, for still poorly-understood reasons, have hollowed out the middle class — diminishing their ability to carry their existing debt, making them dependent on borrowing to maintain their lifestyle.
Some take another step beyond borrowing. Borrowing to buy cars and homes results in slowly accumulating equity, one of the most common ways middle class households save. Increasingly Americans abandon buying with debt for renting. Rent homes instead of owning. Renting cars (leasing) instead of owning.
Automobile sales point to our new world
Accelerating borrowing was a natural leading indicator of economic recoveries during the post-WW2 era. So economists see the waves of desperate borrowing by consumers since 2000 as a good thing. Hence their excitement about the subprime lending boom that drove the housing bubble. Such as today’s subprime borrowing to buy cars.
The extreme case of this blindness to our changed conditions is glee about the shift to renting cars (aka leasing). It shows vibrant demand for cars! As we see in this excerpt from a report by BofA-Merrill global economist Ethan Harris, 6 August 2014, showing that after mid-2012 leasing grew faster than total spending on vehicles (2012 saw many such transition points for the US economy).
Households go for the low capital option: leasing soars:
Household outlays on leasing are booming at a 20% yoy pace — a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.
Yes, in our society demand is “alive and kicking” by subprime households for cars bought with low-rate loans on easy terms — or even just renting (aka leasing). But does it point to an economic recovery — or exhaustion?.
The terms are very easy
Turning back to people at least attempting to buy, there are four dimensions to consumer loans: the creditworthiness of the borrower, the interest rate of the loan, the length of the loan, and the collateral (the loan to value ratio). A report by Experian Automotive, 2 June 2014, describes the first three.
… average automotive loan term reached an all-time high of 66 months … loans with terms 73-84 months grew to 25% of all loans originated during the quarter. …
The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.
… Market share for nonprime, subprime and deep subprime new vehicle loans in Q1 2014 rose to 34%.
Six- and seven-year-long auto loans! At what point will the borrower have equity in their cars? Especially since these are probably the subprime borrowers that make up 1/3 of auto lending.
The fourth factor is equally ugly. Lenders are lending more than the value of the collateral (i.e., including closing costs and rolling over the deficit of the buyers’ trade-in). These are averages; half of loans have even higher LTVs. From Semiannual Risk Perspective, Office of the Comptroller of the Currency, Spring 2014:
Why are these numbers important?
The changing nature of auto sales tell us much about ourselves. They show how economists do not see the new era beginning. They imply slower growth in the future, as a household’s longer loans with smaller down payments push out their ability to buy their next car. They tell us something about the recovery.
Auto sales have been a major driver of the recovery. Most economists expect auto sales to continue growing, helping power the long-awaited acceleration from slow ~2% growth to 3% or beyond. So the sustainability of auto sales — and the borrowing and leasing that fuels them — matter.
Atif Mian and Amir Sufi show the importance of auto loans to auto sales, and of auto sales to consumer sales. These are from their post “Another Debt-Fueled Spending Spree?“, 31 March 2014. First, lending is rapid:
Second, since the crash, auto sales have grown much faster than overall consumer spending.
Auto sales have been one of the few drivers of this recovery. They have been pushed up by easy credit, longer terms, lower credit quality, and sky-high loan-to-value ratios. But these loans lock the buyer out of the market for years to come. Charge-off for lenders will rise, and in response lenders will re-tighten their underwriting standards. And outstanding auto loans, once useful in the prior era, will become malignant. By Editor, Fabius Maximus.
The US economy has repeatedly failed to resume normal growth after the crash. But potentially worse is the decline in long-term growth estimates. Read…. Has America’s Economy Entered the “Coffin Corner”?
Subprime autonation is alive and well. Orwellian Doublespeak most certainly applies to the fact that the MSM and the auto peddlers don’t actually sell cars anymore. They rent them and call it a sale. The 0% interest rates from the Federal Reserve allow these recall specialists to rent millions of cars to millions of deadbeats using the tried and true method of no down payments and low low monthly payments.
The three year leases and 7 year 0% loans to subprime mouth breathers eventually come due. As Zero Hedge points out, the avalanche of returned vehicles after three years might just have a bottom line impact to Government Motors and the rest of the finance companies disguised as automakers.
But keep believing the monthly headlines announcing tremendous auto sales when they are nothing but short-term rentals and cramming inventory down the throats of dealers.
Submitted by Tyler Durden on 08/06/2014 10:01 -0400
When it comes to signs of a US “recovery” nothing has been hyped up more than US auto companies reporting improving, in fact soaring, monthly car sales. On the surface this would be great news: with an aging car fleet, US consumers are surely eager to get in the latest and greatest product offering by your favorite bailed out car maker (at least until the recall comes). The only missing link has been consumer disposable income. So with car sales through the roof, the US consumer must be alive and well, right? Wrong, because there is one problem: it is car “sales” not sales. As the chart below from Bank of America proves, virtually all the growth in the US automotive sector in recent years has been the result of a near record surge in car leasing (where as we know subprime rules, so one’s credit rating is no longer an issue) not outright buying.
From BofA:
Leasing soars: Household outlays on leasing are booming at a 20% yoy pace – a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.
Chart 1: Households go for the low capital option: leasing soars
(yoy growth rate, inflation-adjusted)
It could also translate into even higher leases, which in turn bottlenecks real, actual sales.
Of course, the problem is that leasing isn’t buying at all. It is renting, usually for a period of about 3 years. Which means that at the end of said period, an avalanche of cars is returned to the dealer and thus carmaker, who then has to dump it in the market at liquidation prices, which in turn skews the ROA calculation massively. However, what it does do is give the impression that there is a surge in activity here and now… all the expense of a massive inventory writedowns three years from now.
Which is precisely what will happen to all the carmakers as the leased cars come home to roost. But what CEOs know and investors prefer to forget, is that by then it will be some other management team’s problem. In the meantime, enjoy the ZIRP buying, pardon leasing, frenzy.
Guest Post by Wolf Richter
During the first quarter, 3.7 million credit cards were issued to subprime borrowers, up a head-scratching 39% from a year earlier, and the most since 2008. A third of all cards issued were subprime, also the most since 2008, according to Equifax. That was the glorious year when “subprime” transitioned from industry jargon to common word. It had become an essential component of the Financial Crisis.
As before, subprime borrowers pay usurious rates. These are people who think they have no other options, or who have trouble reading the promo details, or who simply don’t care as long as they get the money. In the first quarter, the average rate was 21.1%, up from 20.2% a year ago, while prime borrowers paid an average of 12.9% on their credit cards, and while banks that are lending them the money paid nearly 0%.
These usurious rates and the fees that are artfully tacked on to the bill at every remotely possible occasion make it nearly impossible that the borrowers can ever pay off their credit cards. They’ll just keep paying the minimum payment, while balances balloon. And they’ll balloon even if the holder no longer charges to the card. Subprime credit cards are there to be maxed out, and the only thing that keeps these folks out of trouble is getting more cards, juggling cards, transferring balances, taking out cash advances on one card to make the minimum payments on the others….
Banks play along, whipped into a frenzy by the sweet smell of usury. Their credit-card promos are once again clogging up mailboxes around the country, and profits on these cards soar, and everyone is happy – banks, borrowers, and of course the American economy that thirstily laps up borrowed money.
“I was surprised they’d give me so much,” the Wall Street Journal quoted one of the winners who’d recently gotten a credit card with a $15,000 credit limit. But as long as new credit cards with ever greater credit limits are available, banks won’t have to worry about charge-offs, no matter what the balance or the cardholder’s ability to make payments.
The St. Louis Fed has a measure for that symptom: the Financial Stress Index. It has been skittering from one all-time low to the next. It shows that years of nearly free money sloshing through Wall Street has just about eliminated any kind of financial concern.
The index, which dates back to 1993 and is based on 18 components, has an average value of zero. Higher financial stress shows up as a positive value, lower financial stress as a negative value. In the latest reporting week, ended June 20, the index dropped to -1.332, the lowest in its history for the fourth week in a row.
The previous period of record lows occurred in February 2007, hitting bottom at -1.268. Stocks were flying high, LBOs livened up lunch conversations, and the media swamped Americans with delicious hype. OK, housing was “taking a break,” as it was called. Banks and mortgage lenders were cracking at their foundations. But so what. Financial stress had been wrung out of the system. There were no risks.
Then some reeking details infiltrated the Financial Stress Index. By the time Bear Stearns collapsed in early 2008, it was ratcheting higher erratically. In August that year, it spiked. Then Lehman popped, stocks plunged, junk-bond yields soared, bank CEOs wondered who’d be next, and on October 17, it peaked at a cathartic 6.27. Wall Street had gotten tangled up in its own underwear.
The Fed’s tsunami of free money bailed out Wall Street and our over-indebted corporate heroes. Among them GE whose CEO Jeff Inmelt was a Class B director of the New York Fed, which handled the bailouts. And the Financial Stress Index plunged. By December 2009, it was back at zero. Financial stress was expunged from the system even as the greatest unemployment crisis in recent history was ravaging the country. On the sound principle that handing unlimited amounts of free money to Wall Street would reward Wall Street.
But the Financial Stress Index has a peculiar feature: it pinpoints the time when credit quality deteriorates, when asset prices have been inflated to dizzying levels, when subprime lending becomes a low-risk business model, when reckless financial decisions are being made by everyone in the system, from cardholders to bank CEOs, and when a new set of logic explains in detail why this craziness is perfectly reasonable. Yet these issues are time bombs that are cluttering up the shelves, ticking away.
Meanwhile, thanks to record low financial stress in the system, subprime cardholders are happily spending themselves into nirvana. But once they’ve run up their balances to vertigo-inducing heights, the banks open their eyes. Stunned by what they see, they don’t want to play anymore. They stop raising credit limits and sending out new cards. Then they see the other time bombs ticking on their shelves. And suddenly we’re back to 2008. That’s what the record low financial stress index is pointing at.
The thing is, banks are again taking the same risks that triggered the Financial Crisis, and they’re understating these risks. It wasn’t an edgy blogger that issued this warning but the Office of the Comptroller of the Currency. And it blamed the Fed’s monetary policy. Read….Federal Regulator Details Crazy Risk-Taking By Banks, Blames Fed
This is a syndicated repost courtesy of Testosterone Pit. To view original, click here.
You know we are near or at a market top when shit stains like Ally Financial are brought public by fellow shit stains – Citi, Goldman, and Morgan Stanley. You’d have to be brain dead or an Ivy League trained economist to buy this turd sandwich at $25 per share. You’d have to be retarded shit eating muppet to buy this worthless government manipulated joke of a company. This is the company that has been doling out billions in subprime auto loans to the Free Shit Army for the last three years in order to prop up General Motors auto sales. They have been doing this because Obama and his minions instructed them to do so. Now that they are loaded with hundreds of billions in loans that will never be repaid, Obama is dumping this piece of shit on the public market where the Wall Street shysters will try to convince you to buy it. Jim Cramer thinks it’s the bomb.
I decided to go to their last SEC filing to get the real scoop about this joke. Here is the link:
http://www.ally.com/about/investor/earnings-releases/
Here are my pithy observations:
What do you think is going to happen when the $54 billion of subprime auto loans they’ve doled out over the last four years start to really go south? What do you think will happen as interest rates on their debt ratchet upwards? If they are already losing almost a billion per year, the future will be epic.
They originally filed to go public in March 2011. I wonder what took so long. I guess they wanted to get their loss under $1 billion before allowing the masses to buy into their success story.
But I’m probably wrong. Facts don’t matter. This is a fantastic investment opportunity for the muppets. Step right up and buy some Ally Financial. You bailed them out once, why not do it again?
Ally Financial Inc. (ALLY) priced its initial public offering at $25 a share after markets closed on Wednesday. The IPO price was at the low end of the expected range. The company sold 95 million shares Thursday morning for gross proceeds of $2.38 billion.
The low-end pricing of the stock is just another poke in the eye to U.S. taxpayers. All the proceeds will be used to pay back the U.S. Treasury’s $17 billion bailout of the company known as GMAC back in 2008 when the financial crisis hit. Thursday’s sale reduces the federal government stake in the company from about 38% to around 14%.
Underwriters are Citigroup, Goldman Sachs, Morgan Stanley and Barclays Capital, which have an overallotment option on an additional 14.25 million shares.
One analyst at BTIG has already put a Buy recommendation on the bank’s stock with a price target of $31 a share, according to a report at TheStreet.com. That is arguable given that Ally failed its most recent Federal Reserve stress test and has set up a subsidiary on which the bank intends to shed all its bad loans.
Ally also has about $79 billion in remaining debt that the bank has to roll over constantly as the principal payments come due. From Ally’s point of view, if interest rates never rise about 0.25%, it is all right with the bank.
Shares opened down 3% at $24.25 and have since picked up slightly to $24.57.
