August 2, 2017
July auto sales was a blood-bath for U.S auto makers. The SAAR (Seasonally
Manipulated Adjusted Annualized Rate) metric – aka “statistical vomit” – presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR). But the statisticians can’t hide the truth. GM’s total sales plunged 15% YoY vs an 8% decline expected. Ford’s sales were down 7.4% vs an expected 5.5% drop. Chrysler’s sales dropped 10.5% vs. -6.1% expected. In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.
Note: These numbers are compiled by Automotive News based on actual monthly sales reported by manufactures. Also please note: A “sale” is recorded when the vehicle is shipped to the dealer. It does not reflect an economic transaction between a dealer and an end-user. As Automotive News reports: “[July was] the weakest showing yet in a year that is on tract to generate the industry’s first decline in volume since the 2008-2009 market collapse.”
The domestics blamed the sharp decline in sales on fleet sales. But GM’s retail sales volume plunged 14.4% vs its overall vehicle cliff-dive of 15% And so what? When the Obama Government, after it took over GM, and the rental agencies were loading up on new vehicles, the automakers never specifically identified fleet sales as a driver of sales.
What really drove sales was the obscenely permissive monetary and credit policies implemented by the Fed since 2008. But debt-driven Ponzi schemes require credit usage to expand continuously at an increase rate to sustain itself. And this is what it did from mid-2010 until early 2017:
Auto sales have been updated through June and the loan data through the end of the Q1. You can see the loan data began to flatten out in Q1 2017. I suspect it will be either “flatter” or it will be “curling” downward when the Fed gets around to update the data through Q2. You can also see that, since the “cash for clunkers” Government-subsidized auto sales spike up in late 2009, the increase in auto sales since 2010 has been driven by the issuance of debt.
Since the middle of 2010, the amount of auto debt outstanding has increased nearly 60%. The average household has over $29,000 in auto debt. Though finance companies/banks will not admit it, more than likely close to 40% of the auto loans issued are varying degrees of sub-prime to not rated (sub-sub-prime). Everyone I know who has taken out an auto loan or lease has told me that they were not asked to provide income verification.
Like all orgies, the Fed’s credit orgy has lost energy and stamina. The universe of warm bodies available to pass the “fog a mirror” test required to sign auto loan docs is largely tapped out. The law of diminishing returns has invaded the credit market. Borrower demand is tapering and default rates are rising. The rate of borrowing is rolling over and lenders are tightening credit standards – a little, anyway – in response to rising default rates. The 90-day delinquency rate has been rising since 2014 and is at a post-financial crisis high. The default rates are where they were in 2008, right before the real SHTF.
The graph above shows the 60+ day delinquency rate (left side) and default rate (right side)
for prime (blue line) and subprime (yellow line) auto loans. As you can see, the 60+ day
delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in
2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the
2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%,
which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about
200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day
delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this
We’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is nearly 60% greater. But the real problem will be, once again, the derivatives connected to this debt.
The size of the coming auto loan implosion will not be as large as the mortgage implosion in 2008, but it will likely be accompanies by an implosion in student loan and credit card debt – combined it will likely be just as systemically lethal. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.
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