It’s happening again…
The government is blowing another subprime bubble.
Longtime Casey readers know the U.S. government caused the housing bubble of 2007–08.
In short, easy money policies caused housing prices to spike 46% in six years. Convinced that housing prices “never go down,” lenders began issuing mortgages to folks who couldn’t afford them. Many of these “subprime” borrowers defaulted on their loans. The housing bubble popped, causing a financial crisis.
• Auto loans are the new subprime…
If you’ve been reading the Dispatch, you know that the government’s easy money policies have only gotten worse. The Fed has held interest rates close to zero since 2008. This has made it comically cheap to borrow money to buy things like stocks, bonds, commercial property, and cars.
Americans have been buying a lot of cars recently. Auto sales have climbed six straight years. Last year, the U.S. auto industry sold 17.5 million vehicles: an all-time record.
Folks are buying these cars with borrowed money. During the second quarter of 2015, 86% of new car buyers borrowed money. The average new car buyer today borrows $27,700. That’s about $3,000 more than in 2011.
The length of loans has also increased. Today, new car buyers have almost 66 months, on average, to pay back their loans. In 2009, the average for new car loans was just over 59 months.
• U.S. auto loans have surged 50% since 2010…
Last year, the value of U.S. auto loans reached $1 trillion for the first time ever. There’s now 47% more automobile debt in the U.S. than credit card debt.
It’s never been cheaper to get a car loan. In 2007, the average interest rate for auto loans was 7.7%. It’s now 4.3%. It’s also never been easier to get a car loan. Investor’s Business Daily reports:
About 11.5% of new-car buyers had credit scores below 600 (defined as “subprime” and “deep subprime”) in Q3 2015, the highest figure for Q3 since 2007, according to Experian data. They also accounted for 32.2% of used car sales in Q3, up from a year earlier but below levels during the recession and the early recovery years.
• The subprime auto loan market is showing signs of stress…
Delinquency rates for subprime auto loans hit 4.7% in January. That’s a six-year high, according to Investor’s Business Daily. A loan is delinquent when a borrower falls 60 days behind on payment. The default rate for subprime auto loans hit a six-year high in January.
• The auto boom would die without easy money…
According to a recent report by the New York Fed, a 1% rise in auto loan rates would cause auto production to fall by 12%. Sales would drop by 3.5%.
• E.B. Tucker, editor of The Casey Report, warns the auto boom will end badly…
Almost no one actually buys their car. I did it last year and the dealership's finance manager was confused why I wouldn't want to take “the free money.”
There are two ways to increase sales of big ticket items. Drop the price or lower the borrowing requirements.
Car makers love easy Fed money. They've been able to raise prices and raise sales by pushing the “free money” onto customers.
The pitch is compelling…nothing down and no interest, just sign and drive.
E.B. predicts the auto industry will bust when the economy turns down…
But money's never free. Even the free money has to be repaid. That's where the problems start popping up. That's what you're seeing in these delinquency rates and you're going to see a lot more of it.
Mark my words, we are in a recession right now. The government will later revise numbers showing we were in a recession around the turn of this year…who knew?
In a recession, people lose their jobs and they have to make choices. They have to decide what bills to pay now, and what bills can wait. Food doesn't wait. Believe it or not, neither does cable T.V.
But the monthly car bill…
• Dispatch readers know signs of a recession are all around…
Sales for Caterpillar (CAT), the world’s biggest machinery maker, have fallen 38 months straight. Last month, John Deere & Co. (DE), the world’s biggest agricultural equipment maker, warned of a slowing global economy. A.P. Møller-Maersk (MAERSK-B.CO), the world’s biggest shipping company, recently said the global economy looks worse today than it did in 2008.
On Tuesday, CNN Money reported that the U.S. manufacturing sector shrank for the fifth straight month in February. The sector is now in its longest contraction since the 2009 financial crisis.
Even the U.S. consumer, which had been a bright spot for the economy, is hurting. Wal-Mart (WMT), Kohl’s (KSS), Macy’s (M), and Sears (SHLD) are just a few major retailers that had awful holiday shopping seasons. Many major U.S. retailers are closing stores to cut expenses.
• Easy money hasn’t helped the “real” economy…
The U.S. economy has grown just 2.2% since 2009, its slowest “recovery” in more than six decades. And the real median U.S. household annual income has fallen from $57,795 in 2008 to $55,218 today…
Meanwhile, the S&P 500 surged 180% since March 2009. That’s far higher than the 136% average gain by U.S. bull markets since 1932.
• We recommend holding a significant amount of physical gold…
Gold has held its value for thousands of years. It’s an excellent store of value because it is easily divisible, easily transportable, has intrinsic value, is durable, and has consistent form all around the world. No matter what happens to the economy, gold will hold its value.
We also recommend holding a significant amount of cash. Holding cash will put you in a position to buy quality stocks when they get cheap.
As stocks get cheaper, E.B. is watching for an opportunity to buy “Empire Assets” at bargain prices. That’s our nickname for strong businesses you can buy at a good price and hold for years. He’s watching one industry in particular…
I'm waiting for once-in-a-decade prices on food stocks.
When people can't afford to eat out, they go to the grocery store more. I want to own the companies that stock the shelves…companies like cereal maker Post Holdings (POST) and B&G Foods (BGS), which sells the iconic Green Giant frozen vegetables.
These aren't fly-by-night companies; they're consistent, solid, and trusted…but they could soon trade at fly-by-night prices. That’s when I’ll step in and buy them.
Accumulating Empire Assets is a key strategy we use to build lasting wealth in The Casey Report. You can invest along with us by signing up for a risk-free trial of The Casey Report.
Chart of the Day
It’s never been cheaper to take out a car loan.
Today’s chart shows the annual interest rate for 48-month new car loans. In 2007, the interest rate on an average car loan was 8%. Today, new car buyers pay an average rate of just 4%, which is an all-time low.
Easy money policies have made it incredibly cheap for Americans to buy cars. With interest rates near all-time lows, even people with shaky finances can drive nice new cars.
For now, the media isn’t talking about this much. But when the U.S. economy turns down, many subprime borrowers won’t pay back their car loans. The subprime auto industry could blow up…just like the subprime mortgage industry did in 2007.
Delray Beach, Florida
March 03, 2016
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