If Things Are So Swell . . .

By Eric Peters, Automotive Columnist

A canary may have just keeled over. Not in the coal mine — but in the stock market. Shares of Ford — healthiest of the Big Three automakers — are down 8 percent, according to Bloomberg. And it’s not just Ford, either. GM, Honda and Toyota stocks are down, too.

Could it be related to the gloomy news that the number of new mortgage applications has just hit a 13 year low? That the yield on 10-year U.S. Treasuries is a barely break-even-with-inflation 3 percent? That there are almost1.5 million fewer Americans employed full-time today than there were in 2006, even as the population has increased by 16 million since then?

We’re fed a steady diet of Happy News about the economy by the mainstream media punditry — and perhaps things are happy, if you’re a mainstream media pundit with a seven figure contract. In that case, the purchase of a $30,000 new car — the average price paid for a new car last year — is not to worry. But given that the median household income of an American family is $51,017 (down from $51,100 in 2011) it may be that ordinary people are beginning to worry a lot. Signing up for a $300 monthly payment for the next six years (which would finance a $22,000 car at zero percent interest) doesn’t seem like such a hot idea, especially with the new healthcare taxes kicking in just a few days from now. People with money who had insurance are discovering that their┬ápremiums are going up — and not by a little bit.

Maybe now’s not the right to buy (whoops — finance) a new car.

This Fear — this dawning awareness that things may be on the verge of becoming harder and more expensive, that the reality check is very definitely in the mail — is starting to reflect in the wilting stock prices of ostensibly healthy automakers. Ford — remember, healthiest of the Big Three — announced that it expects to earn $7-$8 billion next year after a bumper-crop $8.5 billion for 2013. It’s still profitable, but the profits will be less — unless there’s a trends turnaround. GM recently posted similar: third quarter 2013 income is off 53 percent — a possibly ominous development, even though overall the bailed-out behemoth has been generating profit for 15 consecutive quarters. In addition to buyer heebie jeebies, GM also still has the albatross of the UAW Retiree Medical Benefits Trust hanging around its neck. GM must buy 140 million shares back at $25 a share exactly one year from now, in December 2014. Or put another way, GM has exactly one year to earn that much net cash (count the zeroes) to pay off the UAW before it pays shareholders.

But the buying power of the average American — not just his ability but his inclination — is the decisive factor. And the buying power of the average American is going down — not up. Lower household income; higher cost of necessaries (food especially). Higher — and new — taxes. The very real specter of Zimbabwean inflation at any moment. It is enough to give a sensible person pause.

There is an argument — one I buy into — that the recent uptick in the fortunes of the car industry can be credited to two factors, both of which are dissipating.

First, the blowback from the odious “Cash for Clunkers” program, which artificially stimulated demand for new cars by artificially making scarce (by destroying them) perfectly usable used cars and making more expensive those not destroyed, such that many people decided to go ahead and get a new car since the cost difference was no longer that great.Remember: People were paid to throw away their old cars — or put another way, the purchase of new cars was heavily subsidized. But that’s all gone now (excepting the subsidies for hybrid and electric cars, of course).

The other factor was (and still is) interest rates on new car loans, which have been low to nonexistent for several years running. Free money is another artificial inducement — one that eggs on what Greenspan called “irrational exuberance.” It applies to car loans as much as home loans

But, inevitably, the chickens come home to roost. Someone’s got to pay the bill.

I suppose they could just kick out the loan period to seven — maybe eight — years and keep the con going for a little while longer. I doubt it’ll work, though — for the simple reason that most cars are sufficiently depreciated by five years old to leave their loan-holders very much under water, owing more on the car than the car’s worth by that point. The banksters are many things — greedy, amoral, sociopathic — but they are not stupid. They aren’t going to write seven, eight year car loans . . . unless of course they can leave someone else holding the bag. Which they may be able to do.

But interest rates? Forget about it. When they begin their inevitable uptick — expect this to happen by summer — it will be impossible to sweep under the rug. And it will probably do to the car industry’s fortunes what Bernie Madoff did to his “investors.”

Grab onto something. It’s going to get bumpy.

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2 Responses to “If Things Are So Swell . . .”

  1. Parris Boyd says:

    Agreed. Meanwhile, former Assistant Secretary of the Treasury Paul Craig Roberts has been arguing that the low interest rates are part of a well-orchestrated scam designed to conceal massive bank insolvency. Banks are holding bonds, and low interest rates drive up the price, enabling banks to "balance" their books. Mr. Roberts has warned that the artificially induced low rates can't last forever, and predicts lots of bank closures when rates rise. "It's going to get bumpy" indeed.

  2. Ron says:

    1) The banks are ALREADY writing 7 year loans and have been for years.

    2) "Irrational exuberance" was not used by Greenspan to describe the auto loan industry. He used it to describe an overbouoght stock market, and followed that remark by a reckless series of overly aggressivbe interest rate hikes which not only tanked the stock market, but also the entire economy.

    3) Newer cars are NOT fully depreciated after only 5 years. Not even close. 200,000 miles is the new 100,000 miles.

    4) Cash for Clunkers, which I agree was beyond dumb, is no longer a factor in new car sales. That ripple ran its course long ago. CfC did permanenlty harm poorer people, though, as low-end used car prices are about double what they were prior to CfC.