On many levels we live in a Boom or Bust Business Cycle. The unnatural peaks and valleys are caused by the manipulation of money and credit, which causes excessive and unwarranted “investment” that inevitably leads to a downturn (or even a crash) when the artificially induced supply is disproportionate to demand.
The housing bubble of the early 2000s is an obvious example of this.
Cash for Clunkers (same era) is another — and its unfortunate effects are just now beginning to become obvious.
As with housing in the early 2000s, the federal government decided it would be a good idea to “stimulate” new car sales by enacting a program that paid people to throw away perfectly good used cars. The idea being that they would then buy new cars to replace the ones thrown away.
Many (but not all, bear with) did so. This created a boom in new cars sales. Not only because there were fewer good used cars available, but also because the ones that remained had gone up considerably in price due to (wait for it) limited supply. This artificial scarcity in turn became the artificial incentive to buy a new car.
Actually, to take out a loan on a new car.
The remaining used cars that survived Cash for Clunkers were still less expensive than a new car. But they were now expensive enough that few people could afford to plunk down cash for one. That meant financing — and the interest rates on a loan for a used car tend to be much higher while interest rates on a new car loan were (and still are) much lower.
Another artificial incentive to “stimulate” the sale of the new over the used.
But even with low interest financing, the cost of a new car is higher than ever. So high, in fact, that most people have to take out a six or even seven year loan — the new normal — in order to make the monthly payments manageable.
The cost of new cars is high — the average new car sold for more than $30k last year — because of two factors, and they are in a very real way additional artificial “incentives” that have distorted the car market to the point of absurdity.
One, government keeps piling on mandates — safety and emissions — which add parts or require new designs, none of which comes free and often comes very expensive. The VW diesel debacle is a case in point. We know now that the cost per car to make the “cheating” diesels meet Uncle’s mandates amounts to several thousands dollar per car — an amount so high that the cars are not worth “fixing” and so will be thrown away instead. And because the cost to make Uncle-compliant diesels is so high, VW has decided to make them no longer (see here).
Two, buyers want gadgets. Even “economy” cars now come with or offer LCD touchscreens and power pretty much everything. Which is fine — except people can’t really afford this. Or the mandated-by-Uncle equipment. Debt is necessary to make it all feasible… temporarily.
Very much like early 2000s McMansions with granite countertops, faux stone exteriors and vaulted ceilings.
Most people cannot really afford a $300,000 McMansion. And most people can’t really afford a $30,000 car.
Debt makes it seem like they can.
For a while…
And even those who see the scam — and don’t want anything to do with the faux prosperity it (temporarily) creates — are nonetheless carried along by the rip tide. In the early 2000s, bubble-ized 4,000 square-foot McMansions at $300k drove out reasonably sized (and reasonably priced) housing. It was the McMansion — and the debt load that came with it — or forget it.
It’s the same with cars. Because most people — or at least, a sufficiency of them — are dumb enough to buy a car they can’t really afford, cars in general become increasingly unaffordable for everyone. And the chickens are now coming home to roost, just as they did with houses — for exactly the same reasons.
Ford — which had been booming as recently as six months ago — just revealed a second quarter downturn approaching ten percent and ruefully issued a statement accompanying this disclosure that it expects the rest of the year to be “much weaker than normal.”
This is a canary in the coal mine.
Ford CFO Bob Shanks tacitly admitted this in language that’s easy enough to parse if you understand the code words. “We’re starting to see a maturation of the economic cycle,” he said.
Indeed we are.
Mazda just posted a 42 percent quarterly profit free-fall. Part of this has been attributed to foreign exchange losses which is part of a general trend reflecting a slumping of sales across the board. Nissan and Toyota are having a hard time, too. GM’s sales are down 18 percent. Overall, sales are down about six percent, industry-wide. This after a record high (in terms of total sales) 2015, when almost 18 million new cars and trucks found buyers.
Well, found debtors.
But now those sales are wilting just like a long Vegas weekend on Viagra. For the reasons described above and also because there is now a decent supply of good used cars available again. In particular, the supply of ex-leased cars is now very large. These are relatively new, relatively low-mileage vehicles that have depreciated by a third to 50 percent or more.
Which gives people who don’t want the six-to-seven-year debt load of a new car the option to buy a good used car that they can pay cash for.
Maybe you can see what’s coming.
Grab one, while you still can…
The economic backwash of too-expensive new cars — “incentivized” by easy credit and excessive but spread out, to make it seem affordable, debt — and the reappearance in the marketplace of affordable alternatives (good used cars) is causing sales of new cars to wilt, probably precipitously, as invariably happens in a Boom-Bust cycle.
The car industry will squeal for help from Uncle — just like back in the early 2000s. And Uncle will be happy to oblige, as he always is.
But Uncle’s “help” always comes at a cost.
The last time he “helped,” good used cars became artificially scarce and unnaturally expensive. Expect something similar to happen again, in order to “stimulate” new cars sales and re-set the cycle.
The public will be swooned by a PR campaign describing anything not new as “dirty” and “unsafe,” lacking all the latest equipment mandated by Uncle. New “incentives” will be put on the table to get people out of them and into a new car (and a new loan). The government may even issue edicts formally outlawing these — ahem — “dirty” and “unsafe” cars.
That plus the general conditioning of the public to be obsessed with electronics, with gadgets, the automotive equivalent of Huxley’s centrifugal bumble puppy and electromagnetic golf, will assure a strong — but hugely artificial — demand for new cars.
And the merry-go-‘round will continue.
The ten-year new car loan is just around the corner.
Wait and see.