Americans are falling behind on their car payments…
If you’ve been reading the Dispatch, you know the price of oil has plummeted as much as 75% since June 2014. Two months ago, it hit its lowest level since 2003.
Since then, oil has rebounded 45%. But even after that big bounce, oil is down 61% from its 2014 high.
• The world has too much oil…
New technologies like “fracking” have unlocked billions of barrels of shale oil that was once impossible to extract. From 2007 to 2014, oil production in U.S. shale regions jumped eight-fold.
For a while, this led to a huge boom in shale oil stocks. Occidental Petroleum (OXY), the largest U.S. shale company, jumped 158% from 2007 to June 2014. EOG Resources (EOG), the second-largest, surged 300%.
• But when oil prices crashed, oil stocks crashed, too…
The Market Vectors Unconventional Oil & Gas ETF (FRAK) has plunged 58% since June 2014. This fund tracks U.S. shale oil and gas companies.
Shares of the world’s five biggest oil companies—Exxon Mobil (XOM), Chevron (CVX), BP (BP), Total SA (TOT), and Royal Dutch Shell (RDSA.L)—have fallen an average of 29% over the same period.
Schlumberger (SLB), the world’s largest oil services company, has plunged 36%. Oil services companies sell “picks and shovels” to the oil industry.
• Oil and gas companies slashed spending by 23% last year…
They sold pieces of their businesses. They abandoned more than $100 billion in projects. The industry has even laid off more than 250,000 workers since oil prices peaked.
And more job cuts are likely coming. Investment bank Barclays expects oil and gas companies to cut spending by another 15% this year.
• The oil crisis is spreading to the car industry…
During the boom times, oil “roughnecks,” who work on the drilling rigs, were easily making more than $100,000 a year.
Now thousands of these folks are out of work…or have taken huge pay cuts. Just like businesses, people have to cut expenses when they’re making less money. And people in major oil-producing states aren’t paying their car bills…
CNNMoney reported last week:
North Dakota, the epicenter of the shale oil boom and subsequent bust, experienced a 42% spike in seriously delinquent (60 days or more) auto loans during the fourth quarter, according to TransUnion.
Louisiana, another state hit hard by the oil crash, had the highest auto delinquency rate, while late payments in Texas and Oklahoma jumped about 14% apiece.
• Delinquency rates could keep rising…
Many shale oil companies need $50 oil to make money. With oil at $41 a barrel, lots of companies are still losing money.
Half of U.S. shale oil companies could go bankrupt, according to CNNMoney. Tens of thousands more oil workers could lose their jobs.
• As Dispatch readers know, borrowed money caused the U.S auto industry to boom…
Auto sales have climbed six consecutive years. Last year, U.S. auto sales hit an all-time record of 17.5 million.
Americans bought many of these cars on credit. Since 2010, the total amount of U.S. auto loans has surged 50%. Last year, the auto loan market topped $1 trillion for the first time ever.
A few weeks ago, we explained what’s driving this borrowing frenzy. In short, it’s never been cheaper or easier to get an auto loan. Borrowing costs have collapsed. In 2007, the average interest rate for an auto loan was 7.7%. Today, it’s 4.3%.
• The auto loan industry is starting to crack…
Subprime auto loan delinquencies hit a twenty-year high last month. “Subprime” describes a loan made to someone with bad credit.
Financial Times reported last week:
The rate of “subprime” motor loans overdue by more than 60 days rose to 5.16 per cent in February. This surpassed the post-financial crisis peak and was the highest since the 5.96 per cent reading in October 1996, according to the rating agency.
• Subprime auto loans are the new subprime mortgages…
Reckless lending practices fueled the housing run-up from 2000 to 2005. Thinking housing prices would “never fall,” lenders issued mortgages to folks who couldn’t afford it. When housing prices crashed, subprime borrowers defaulted on their loans. The implosion of the housing industry sparked the 2008 financial crisis.
• Investors who predicted the housing collapse made a fortune…
Hedge fund managers like John Paulson and Kyle Bass knew housing prices would eventually fall back down to earth. They made billions betting against lenders who made bad loans.
Companies like Washington Mutual, a savings bank holding company, suffered huge losses during the 2008 financial crisis. It eventually went out of business.
• Several Dispatch readers have asked how to bet against the subprime auto loan market…
From 2000 to 2005, DR Horton (DHI), the largest U.S. home builder, gained more than 1,100%. Lennar Corporation (LEN), the second-largest, gained nearly 900%.
The crazy run-up in these stocks made them obvious short candidates. When the housing crisis hit, DR Horton’s stock plunged 89%. Lennar plunged 94%.
Despite record car sales, U.S. carmakers haven’t had a big rally. In fact, they haven’t gone up at all. General Motors (GM), the largest U.S. carmaker, has fallen 14% since 2011. Ford (F) has dropped 21%.
We don’t know why record car sales have failed to spark a rally in U.S. automaker stocks. Perhaps folks are wising up to the Fed’s funny money. After all, the housing crash wiped out millions of people financially. Investors who see that cheap credit is the only thing driving record auto sales are saying “we’re not falling for that again.”
• We don’t recommend shorting automaker stocks…
But there is a way to “short” the fragile auto loan market. You can bet against the reckless government policies that caused the lending craze in the first place.
Regular readers know the Federal Reserve has pinned its key interest rate near zero since 2008. This has made it extremely cheap to borrow money not just for cars, but for everything. With interest rates at ridiculously low levels, nothing is too expensive or too extravagant for Americans to buy.
All this cheap money has pushed prices of commercial property, stocks, and bonds to all-time highs.
Meanwhile, the “real” U.S. economy has barely grown since 2009. The financial system has lost touch with reality. We’re now living in an “Alice in Wonderland” economy.
• The market needs to unwind years of reckless borrowing…
Industries that thrived on easy money will suffer huge losses. Stocks and assets that boomed on easy money will crash.
When the financial system has its “reality check,” gold will be the big winner. Gold is a safe-haven asset. Investors turn to gold during times of uncertainty because gold is money. It’s preserved wealth for thousands of years through every kind of financial crisis and reckless government policy.
Just last week, Casey Research founder Doug Casey said buying gold is “really a way to short government—or go long on government stupidity.”
We suggest holding cash, too. As we mentioned, stocks, bonds, and commercial property prices are all near record highs. They will likely plunge during the next crisis. Setting aside cash will put you in a position to buy stocks when they get cheap.
For our best advice on how to protect your wealth, we encourage you to read our newest book, titled Casey Research’s Guide to Surviving the Coming Financial Crisis. In it, we explain how to protect yourself from stock market crashes, economic recessions, and even destructive government policies. Click here to claim your copy.
Chart of the Day
Large American car stocks have been dead money.
Today’s chart shows the performance of General Motors (GM), Ford (F), and the S&P 500 since 2011. You can see that GM and Ford have done far worse than the S&P 500…despite six straight years of rising auto sales.
Although cheap money has goosed auto sales, it has failed to boost auto stocks. You would have lost money investing in Ford and GM over the last five years.
Delray Beach, Florida
March 21, 2016
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