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Discussion: (30 comments)

  1. How exactly were these sales paid for? As long as employment and real wages remains stagnant all you are seeing is the effect of having such an old fleet and the effect of easy financing options.

    1. Jon Murphy

      If the borrowers can afford financing, what does it matter? Default rates are falling, which indicates to me that purchasers can afford to make the payments.

      If you are concerned about economic activity next year, then this year makes perfect sense to buy a vehicle: interest rates will remain low (the Fed has said as much), and one is in a better financial position to purchase a vehicle now. With a little bit of luck, the borrower will either make principle-plus payments on the car (thus reducing what he’d owe next year), or he’d be saving up for next year, so that he can continue to make payments. Either way, he’s better off.

      But, let’s assume he is just replacing his old vehicle (a perfectly sensible move). It is much better to have a new asset than an old one during a recession. Worst case scenario, he can always trade down (sell his new car for a used one). It is much harder to trade up with a restricted cash flow.

      Now, car retail sales will fall in the coming recession. No surprise there. But the conditions for a massive credit crunch certainly are not here. Businesses and individuals have more cash on-hand. While general lending has been rising, it is not nearly where it was pre-recession. Debt-wise, consumers and businesses are in a much better position.

      The upcoming late-2013/2014 recession will be mild (nothing like 2008). I suspect we’ll see annual auto sales only fall by about 6% peak-to-trough, similar to the 2001 recession (for comparison, in the past recession sales fell 40.7%, peak-to-trough).

      1. If the borrowers can afford financing, what does it matter? Default rates are falling, which indicates to me that purchasers can afford to make the payments.

        How ironic. That was the same answer I got when I was pointing out the problem with housing. After the bubble popped and people could no longer afford to make the payments and the lenders had to be bailed out the answer changed.

        If you are concerned about economic activity next year, then this year makes perfect sense to buy a vehicle: interest rates will remain low (the Fed has said as much), and one is in a better financial position to purchase a vehicle now. With a little bit of luck, the borrower will either make principle-plus payments on the car (thus reducing what he’d owe next year), or he’d be saving up for next year, so that he can continue to make payments. Either way, he’s better off.

        After the ‘correction’ you could have purchased a used vehicle or vehicle coming off a lease for a fraction of the cost that you would have had to pay before. You are only ‘better off’ if you have the cash to pay up and the purchase makes sense economically. Given the age of the fleet and the increase in the population the replacement activity makes sense. (Even GM should be able to make a nice profit when sales go up.) But the problem is that the very purchases that make economic activity look good are a threat to the low rate environment. After all, if things are good why would anyone buy bonds that yield nothing? And why save if interest rates are that low?

        But, let’s assume he is just replacing his old vehicle (a perfectly sensible move). It is much better to have a new asset than an old one during a recession. Worst case scenario, he can always trade down (sell his new car for a used one). It is much harder to trade up with a restricted cash flow.

        First, I cannot understand how you can make this argument if we have a depreciating asset that is worth less than the loan amount. Second, the biggest decline in value comes early in the game. That means that you are looking at booking a loss at the very time when you can afford it the least.

        Sorry my friend but anyone who is having trouble economically, which is a big portion of households, should look to the used market.

        Now, car retail sales will fall in the coming recession. No surprise there. But the conditions for a massive credit crunch certainly are not here. Businesses and individuals have more cash on-hand. While general lending has been rising, it is not nearly where it was pre-recession. Debt-wise, consumers and businesses are in a much better position.

        I see no evidence of an abundance of cash on hand when looking at balance sheets. If anything I see assets that need to be written down and liabilities that should be recognized.

        The upcoming late-2013/2014 recession will be mild (nothing like 2008).

        Only if the Fed is permitted to continue its QE-to-infinity activities without spooking the bond market.

        I suspect we’ll see annual auto sales only fall by about 6% peak-to-trough, similar to the 2001 recession (for comparison, in the past recession sales fell 40.7%, peak-to-trough).

        I do not make such predictions because they are too hard. I prefer to look at a trend that is vulnerable and unsustainable and to predict that it will eventually reverse. In this case we have the biggest bubble in the history of the world; the US treasury market. When it pops 1987 and 2007-2008 will look like minor blips. Buy gold and have a getaway plan.

        1. Jon Murphy

          In this case we have the biggest bubble in the history of the world; the US treasury market. When it pops 1987 and 2007-2008 will look like minor blips.

          No disagreement there. But the bubble will not burst just yet. I suspect 2018-2019. The 2020′s will likely be a giant depression.

          I see no evidence of an abundance of cash on hand when looking at balance sheets.

          Companies are sitting on a record amount of cash. Consumer debt is down about 6% (or $876.5 million) from the peak in 2008. That certainly puts them in a good position for a mild recession.

          The upcoming late-2013/2014 recession will be mild (nothing like 2008).

          Only if the Fed is permitted to continue its QE-to-infinity activities without spooking the bond market.

          Nah, the bond market will have very little to do with this recession (bonds won’t come into play until the next recession, 2018/2019). This recession will likely be driven by consumers tightening their spending due to tax increases and Europe fighting a recession (potential break-up of the Eurozone, btw).

          First, I cannot understand how you can make this argument if we have a depreciating asset that is worth less than the loan amount….

          I understand what you are saying, but my point still holds. He sells his car, trades in for a used, and uses extra cash to pay off as much of his loan as possible. It’s not ideal, but he still has less debt that he had before. (By the way, I am not arguing against your point about buying used. Frankly, I can see no reason why to buy new).

          How ironic. That was the same answer I got when I was pointing out the problem with housing.

          The difference is we are not looking at a bubble here. There are economic reasons for this growth, not the least of which is one you pointed out: an aging fleet.

          Looking at this annual rising trend compared to previous ones, it is quite normal. Everything is just about in median: the growth rate from the trough, the cycle period, and the amplitude. Actually, it is a bit slower than the past two recoveries (but they were faster than median, so take that for what it is worth).

          I think, if conditions were normal, the low credit would warrant a bubble warning. But with DPI growing at a lackluster rate, 2% economic growth, and very high unemployment, the benefits of the low borrowing costs are muted.

          I do not make such predictions because they are too hard.

          I know, that’s why I get paid the big bucks :-)

          1. No disagreement there. But the bubble will not burst just yet. I suspect 2018-2019. The 2020′s will likely be a giant depression.

            If Humpty Dumpty is sitting on the wall what we can predict reasonably is that he will have a serious problem some time in the future. There is no way to see how the US economy can hold on until 2018 before there is a crisis. You still have all that military spending and still have the big demographic problem that sheds light on the unfunded liabilities so much that it is harder for your creditors to ignore it. If the USD cannot do well even though the Euro is in bit trouble as the EU melts down what will happen once the European crisis plays out one way or another? Why would creditors put their money into a country that is just a huge version of Greece?

            Companies are sitting on a record amount of cash. Consumer debt is down about 6% (or $876.5 million) from the peak in 2008. That certainly puts them in a good position for a mild recession.

            That ‘cash’ has been lent out to finance economic activity. It is not sitting under a mattress somewhere. Whenever it is used someone else will have to come up with the money and can no longer use it unless the Fed steps in with more credit expansion. As for household debt, it HAS to decline because the elevated asset values cannot support the amount owing by those households. But each household is also looking at a massive increase in its share of federal and state debt not to mention its share of the unfunded liabilities for your welfare programs.

            No matter how you try to spin it there is no way to make the math work. We are looking at a $16 trillion economy with a $7 trillion deficit, total federal debt of more than 100% of GDP, and more than $100 trillion of total debt plus unfunded liabilities. The end game seems obvious to me; there will be a default on promised obligations and a devaluation of the currency.

            Nah, the bond market will have very little to do with this recession (bonds won’t come into play until the next recession, 2018/2019). This recession will likely be driven by consumers tightening their spending due to tax increases and Europe fighting a recession (potential break-up of the Eurozone, btw).

            I heard similar arguments about the EU problems. Those arguments were wrong because the debt did matter to creditors.

            I understand what you are saying, but my point still holds. He sells his car, trades in for a used, and uses extra cash to pay off as much of his loan as possible. It’s not ideal, but he still has less debt that he had before. (By the way, I am not arguing against your point about buying used. Frankly, I can see no reason why to buy new).

            How do you sell a car that you do not owe free and clear without paying the loan off? The car isn’t yours to sell because it also belongs to the creditor. As I said, given the depreciation cost and a collapse in prices if there is a recession there will be no excess cash at all.

            The difference is we are not looking at a bubble here. There are economic reasons for this growth, not the least of which is one you pointed out: an aging fleet.

            How ironic. That was one of the answers I got when I was pointing out the problem with housing.

            Looking at this annual rising trend compared to previous ones, it is quite normal. Everything is just about in median: the growth rate from the trough, the cycle period, and the amplitude. Actually, it is a bit slower than the past two recoveries (but they were faster than median, so take that for what it is worth).

            Everything depends on improving credit conditions and access to easy terms. This means that the FHA needs to get another $15 billion of so to cover its losses and a continued bailout of the GSEs as far as the eye can see, not to mention the Fed’s willingness to keep buying lousy mortgage paper for several years. But all those depend on your foreign creditors and the signals sent by the gold market.

            I think, if conditions were normal, the low credit would warrant a bubble warning. But with DPI growing at a lackluster rate, 2% economic growth, and very high unemployment, the benefits of the low borrowing costs are muted.

            We can’t say this with any confidence. Europe collapsed even though its economies were not growing very rapidly.

          2. Jon Murphy

            We can’t say this with any confidence.

            I can.

            Why would creditors put their money into a country that is just a huge version of Greece?

            There are superficial similarities, sure, but there are some major differences, not the least of which is the US has its own currency. Whether you like it or not, the US has tools at its command to forestall the problems Greece had.

            To expect the US to hold on for another 5 years is hardly a great leap of faith. Europe has done it and, as you have so rightfully pointed out, they are in a lot worse shape than us. Debt will be a problem, but where are the alternatives? Europe? Japan? If you are China, and you are looking to boost your foreign currency reserve to keep your currency peg, who are you going to buy?

            Regardless, there is no bubble in the automobile industry. I can say that with absolute certainty.

          3. We can’t say this with any confidence.

            I can.

            Yes you can. Just like Bernanke could say that there was not housing bubble and after it popped that the damage was contained. He was wrong. I suspect that you are as well.

            There are superficial similarities, sure, but there are some major differences, not the least of which is the US has its own currency. Whether you like it or not, the US has tools at its command to forestall the problems Greece had.

            Actually, those ‘tools’ can make its problems worse. The Greek central bank can’t destroy the Euro on its own but the Fed can certainly choose to destroy the USD by monetizing any new debts as it is doing. The USD is a fiat currency and all fiat currency goes to zero eventually. Since 1971 the USD has lost more than 80% of its purchasing power, which is only marginally better than most of the other major currencies. During the same period gold has increased its own purchasing power by around 300%.

            To expect the US to hold on for another 5 years is hardly a great leap of faith. Europe has done it and, as you have so rightfully pointed out, they are in a lot worse shape than us. Debt will be a problem, but where are the alternatives? Europe? Japan? If you are China, and you are looking to boost your foreign currency reserve to keep your currency peg, who are you going to buy?

            I do not think that the EU is really in much worse shape than the US because the EU does not spend 50% of its tax revenue for military purposes. While the demographic trends are very bad for the EU I do not believe that they are as positive for the US as the cheerleaders are claiming. The EU already has its huge number of ‘disabled’ workers on the books. The US numbers are now swelling and with each passing year add a bigger and bigger burden that was not there before. And then there is the cumbersome EU bureaucracy. It is more likely that it will fail and that voters will reject Brussels than American voters will reject the big government growth that has been seen under the Bush/Obama administrations.

            Regardless, there is no bubble in the automobile industry. I can say that with absolute certainty.

            There are too many factories and too many workers for the demand that exists. While the ageing fleet and a few natural disasters may bump sales higher there is no way for all of the companies to make profits without closing down facilities and getting rid of quite a few workers. While I do not see an immediate problem in automobile sales it is too dependent on credit expansion to fee complacent. That said, I would rather own GM than a ten year treasury bond right now.

          4. Jon Murphy

            By the way, my “whether you like it or not” comment was meant to mean whether you like the tools at our disposable.

  2. The Unknown One

    That number is now up to 15.47 million SAAR.

    1. Thanks Unknown, just updated the post, thanks very much.

  3. Jon Murphy

    I do suspect that November’s numbers will be somewhat lifted by Sandy. December’s numbers will be more interesting to watch

    1. maybe we could have a hurricane every month to keep car sales humming…

    2. the numbers are also inflated by channel stuffing. GM has 788,000 vehicles in inventory as of November.

      http://www.zerohedge.com/news/2012-12-03/gm-channel-stuffing-wtf

      Also, there’s some good coverage of the “sub-prime” car loan market. Many of these sales are going to people who will default on these loans.

      http://www.zerohedge.com/news/will-we-never-learn-subprime-auto-loans-accelerating-again

      1. MacDaddyWatch

        Autos and trucks held in inventory at either the factory or at a dealership are not counted as retail sales until somebody buys them. The numbers are NOT inflated.

        1. Jon Murphy

          Thank you. I grow tired of explaining that conspiracy theory to these folks.

      2. Citizen B.

        “the numbers are also inflated by channel stuffing”

        Vehicles damaged by Hurricane Sandy do need to be replaced and the average auto is 10+ years old.

        788,000 cars in inventory result in an average of ~157 vehicles per GM dealership. It will be interesting to see if that number falls or grows over the next couple of months. (math: 788,000 divided by 5000+ dealers)

  4. Jon Murphy

    That’s fair. I do want to be clear that these low interest rates and bond yields will come back to bite us. What I am saying is that they will not bite us yet.

    1. That’s fair. I do want to be clear that these low interest rates and bond yields will come back to bite us. What I am saying is that they will not bite us yet.

      The system is extremely vulnerable to external stresses. Sadly, we are one bank failure or one idiot shooting up a Walmart away from a run in the bond market. With involvement in Syria, Iran, Afghanistan, Libya, Mali, Yemen, etc., there is too much of an opportunity for some rouge ruler to take advantage and add the last straw on the camel’s back. If that happens you will see the USD lose half its value against gold in a heartbeat and the rout will be on.

  5. MacDaddyWatch

    The fleet of U.S. autos is at its all-time oldest average age–America is driving millions more of very old clunkers than ever before in history. Combine that with the number of vehicles Sandy KOd that need replacement and all-time low financing costs, why should a modest surge in auto sales almost 4-years into an economic “recovery” be surprising?

    In contrast, it should be surprising that auto sales are not 25% higher.

  6. hitssquad

    “Since 1971, when Nixon closed the gold window, I have seen the USD lose more than 80% of its purchasing power.”

    90% of that inflation occurred before 1992.
    http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

    Inflation for the year:
    1974 was 11.03 %
    1979 was 11.22 %
    1980 was 13.58 %
    1981 was 10.35 %

    America has never seen inflation like that since then. The last time it saw even just 4% was 1991. The last time it saw at least 6% was 1982. If being off the gold standard causes hyperinflation, why hasn’t America seen annual inflation over 3.85% at any time in the last 20 years?

    1. “Since 1971, when Nixon closed the gold window, I have seen the USD lose more than 80% of its purchasing power.”

      90% of that inflation occurred before 1992.
      http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

      As John Williams has shown the way that inflation was measured was changed by the Clinton Administration. Had the old measures been used we would have seen a much larger and much more accurate number being reported.

      1. hitssquad

        Therefore, controlling for real inflation, the price of copper actually crashed?

        1. It all depends on your starting point. The price of copper crashed when low grade open pit mines and leaching pads were developed after prices exploded in the 1970s. Capital was flowing into the sector for a very long time and even as prices were crashing managers were always projecting a hockey stick. The problem with copper today is that the high price is keeping a lot of those massive old mines open. When prices crash again, and they will, many mines will be shut down forever. That will mean a huge problem for users when the economy picks up again. They will have to innovate and figure out how to use a lot less of the metal and keep prices from exploding.

          If you look at copper prices you will see a steady decrease over the past 100 years just as we would expect when new technology helps improve recovery rates and opens up new targets. That said, high-grading practices are a big problem for the underground mines that may follow the open pit giants if price levels fall substantially from here.

      2. hitssquad

        “The problem with copper today is that the high price”

        You can’t have it both ways. If the annual inflation rates for the past 30 years have been as high as you and John Williams say, then the current price of copper is low. And it isn’t just copper whose price is low. It’s every commodity.

        To recap, changing inflation calculation methods to make present incomes seem low will necessarily also make commodity prices seem low. There’s nothing you can do to the method to make one seem high and the other seem low. They both have to be made to seem either together high or together low.

        “When prices crash again”

        According to the implications of your own inflation claims, real prices already have crashed, and are continuously crashing further.

        1. You can’t have it both ways. If the annual inflation rates for the past 30 years have been as high as you and John Williams say, then the current price of copper is low. And it isn’t just copper whose price is low. It’s every commodity.

          But it isn’t. It is low if you compare it to the price in 1914 but not 2000. Even the understated inflation cannot explain the massive increase in price. For that you have to look at infrastructure build activity in the developing world and the central banks’ money printing activities.

        2. To recap, changing inflation calculation methods to make present incomes seem low will necessarily also make commodity prices seem low. There’s nothing you can do to the method to make one seem high and the other seem low. They both have to be made to seem either together high or together low.

          That is not true. The banks can create money and credit but can’t guide it and it will flow to very unexpected places.

          http://goldsilverworlds.com/wp-content/uploads/2012/07/silver_price_trendline_2000-2012.gif

          http://www.lagunabeachbikini.com/wordpress/wp-content/images/2011/editorial/wheat-price-2000-2010.png

          Inflation does not show up as an across the board increase in commodities. It can show up as an increase in home prices, stocks, art, services, food, etc. The best way to measure it is to look at the growth of the supply of money and credit, not by looking at the BLS reports.

        3. According to the implications of your own inflation claims, real prices already have crashed, and are continuously crashing further.

          Gold was less than $300 a troy ounce and copper was less than $0.80 cent in the early 2000s. Both have gone up sharply as have many other commodities and prices are higher even after the 2008 correction. The secular trend is up as the USD continues to be devalued by Fed money printing. But in all secular bull markets there are periods when you get strong and sharp pullbacks. This one will not be any different. The issue is what price point do we get that pullback from and that depends on the commodity in question.

      3. hitssquad

        “That is not true. The banks can create money and credit but can’t guide it”

        What I just explained to you seems to have flown right over your head. “The banks” aren’t deciding what arbitrary inflation rates you use in your own calculations. That’s something *you* do.

        If. You. Pick. High. Rates. In. Your. Own. Inflation. Calculations. Then. Any. Given. Individual. Commodity. Price. Controlled. For. Such. Inflation. Will. Appear. Low. In. Comparison. To. Past. Inflation. Adjusted. Prices. For. The. Same. Commodity.

        For example, if you arbitrarily choose to assume that prices overall have risen 1,000-fold over the past 112 years (since 1900), then, instead of the mere 14% decline in inflation-adjusted copper prices observed using typical assumed inflation rates, we would observe instead a near 99.9% decline in inflation-adjusted copper prices.

        The higher the inflation-rates you assume, the lower the recent copper prices will appear to be in comparison to those of the distant past. Again, this has nothing to do with any possible actions by “the banks”. It’s just pure logic.

        1. What I just explained to you seems to have flown right over your head. “The banks” aren’t deciding what arbitrary inflation rates you use in your own calculations. That’s something *you* do.

          Arbitrary? The facts are what they are and do not change if you game the way you measure something. The fact that the BLS deliberately understates inflation is not a debate any longer. We know when the methodology was changed and why it was changed. We can apply the old methods to the price data and calculate inflation in the same way as it used to be calculated or apply the new methods to the old data and see what we get. If we had used the current methods to report inflation in the 1970s there wouldn’t be much showing up. If we use the 1970s methodology to report current inflation we would find that it is much higher than what is being reported.

    2. America has never seen inflation like that since then. The last time it saw even just 4% was 1991. The last time it saw at least 6% was 1982. If being off the gold standard causes hyperinflation, why hasn’t America seen annual inflation over 3.85% at any time in the last 20 years?

      Because the way that inflation was measured was changed.

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