Auto Sales Signal Economic Collapse?
If the U.S. economy should encounter a major speed bump—again—is it possible that the trigger for the coming economic collapse could be hiding in plain sight? Or, in this case, sitting right in your own driveway?
Car Business Possibly Not as “Awesome” as It Seems
Leaving aside recent blasts by “The Donald” at U.S. carmakers for outsourcing, generally speaking, the industry is sporting one of the largest “halos” it has enjoyed since its heyday of the 1960s. Current reporting from mainstream sources will tell you that not only are cars better than ever and auto company stock prices are higher than ever, but also the sector is robust and can barely keep up with demand. However, looking more closely at the ins and outs of the business, I was able to discover a few anomalies. The following are some situations (anomalies) and their explanations:
Situation: The Donald is not the only one who can’t pin down precisely where cars are now being made—or, for that matter, what precisely they are being made of. A story from an Internet chat group tells of a young grad student showing off his recently purchased used 2010 Pontiac “Vibe” to his Asian girlfriend. He wants to impress her. This is a cool car, he boasts, opening the hood. He explains that an iconic American company took a base Japanese car, the “Matrix,” and retooled it to be a hi-performance native product. His girlfriend, the story goes, is not impressed. She glances briefly at the mechanical innards and then asks, “If this is a Japanese-American car, why are the labels on the engine in Chinese?”
Explanation: The truth is that like many things in the modern world, the people running the show behind the curtain are somewhat reluctant to share with consumers exactly what they are up to. While officially China has little or no involvement in the North American car business, deep inside sources are suggesting that, unofficially, the use of “aftermarket” Chinese parts for repair and servicing has become one of the biggest international stories that no one is talking about. The trend even includes the high-end German models like Mercedes and BMW, suggests one source I talked to. Customers dutifully instruct mechanics they want to use only “OE” (original equipment) parts, mechanics oblige by calling the dealer and paying a significant dollar premium for these parts, and the parts arrive in boxes discretely marked (in small print) “Made in China.”
If this folly was merely an inside joke on the consumer, it would be bad enough. In fact, however, my sources say that Chinese-made parts tend to be less reliable than parts made from traditional suppliers and many mechanics (especially the independent shops) have had the miserable experience of spending hours of labor to install a designated OE part, only to have it fail within days, requiring the job to be redone at their cost. Several mechanics I spoke with say that, whenever they can source a non-Chinese part for even a simple job—like a brake rotor, for example—they will grab it.
Situation: With such “stealth disruptions” in the supply chain, such as the one described above, you would expect some wild quality swings in brands usually known for good workmanship; indeed, you would have no problem finding them. The current poster child for quality fails is Acura, a formerly premium brand that Honda painstakingly built up over a period of decades to compete with the finest of the European imports. In 2015, Consumer Reports, considered by some the last bastion of truly independent car testing, saw Acura drop very significantly in its annual quality ratings. (Another of the best-kept industry secrets is that 99% of all car reviewers “borrow” their test cars from the very same manufacturer they are supposedly reviewing. Consumer Reports is almost unique in that for decades, it actually buys its test cars anonymously for cash and then resells them right after testing.)
According to the specialty site LongTermQualityIndex.com, the Acura “TL,” once the flagship of the Acura lineup in terms of reliability and overall owner satisfaction, now has more mechanical problems than average and no longer keeps pace with Lexus or even its non-premium cousin Toyota.
Explanation: Much of the explanation here has to do with the “mystery” parts sourcing mentioned above. Ironically, Japanese manufacturers can themselves no longer afford the luxury of Japanese parts and labor! To keep their costs competitive, they are outsourcing all over Asia. And part of the problem has to do with the fact that cars today are no longer merely noisy contraptions intended to wheel you from point A to point B. They are now deliberately marketed as “mobile computers”—in some cases, “mobile offices”—and contain multiple computer chips, as well as wiring systems of such complexity that the line between “mechanic” and “electrician” has become very blurred indeed. It is no coincidence, for example, that the Acura TL model mentioned above has a disproportionately high amount of electronics onboard and the majority of owner complaints about the model are directly related to those same electronics.
It also does not help that the manufacturers, in their constant zeal to shave costs, are deploying the thinnest and cheapest wire looms/harnesses they can find to connect all these exotic components together, even though the common wisdom is that constant exposure to extremes of temperature, vibration, and humidity will stress and degrade literally any wiring system over time. And thinner wire will degrade even faster.
A retired senior manager from a “Big Three” manufacturer I interviewed said that it was well known that employees on the factory floor who “over-snugged” the positioning fasteners on the central wire loom would, more often than not, end up with a car that simply would not run once assembly was complete. His company deliberately ordered the wire fasteners left “loose”—even if this effectively guaranteed service issues over time, as vibration, temperature, and stress took their toll. (As opposed to “snug,” which, conversely, guaranteed that a high percentage of cars leaving the factory would simply refuse to start and have to be written off as scrap.)
Situation: Here is where things get interesting. With such pervasive use of outsourced parts and the deliberate selection of cheaper components (such as the thinner, lower-grade wiring harnesses mentioned above) you would assume that all this resulted in massive costs savings, which the manufacturers could merrily pass along to the consumer…? Well, you would be completely wrong. In fact—and this is in spite of prattle from the Fed about how constrained overall costs are—car prices have been creeping up year-to-year and model-to-model more reliably than almost any “hard” consumer good you quickly name.
The price of an “average” (mid-stream) model now is a hefty $32,000 or so. But remember, we who are living on the planet today stand in silent witness to the greatest transfer of wealth (from the poor to the rich) since the post-Civil War era. Which means the wealthy can—and do—buy more upscale cars than ever before.
Therefore, it should surprise no one that most of the real “sticker shock” is at the high end of the spectrum, as makers target their super-premium offerings to the class that is benefiting the most from current, bizarre, economic trends. A four-wheel-drive twin-turbo Lincoln “Navigator” will run you about $80,000 out of the showroom, for example. If you want the car armored and bullet-proofed—presumably to avoid blowback from neighbors and friends less fortunate than yourself—most dealers will offer this “option” for another $75,000 or so.
The net result, say the cynics, is that, during a time of clear Economic Crisis, America’s showcase industry is deliberately distancing itself more and more from the frugal, value-oriented buyers, and focusing more on the deep-pocketed purchasers, the players, the blingsters, and the wannabees
Explanation: The party line from the carmakers is that higher costs are a direct result of the following factors (source: “Why Car Prices Keep Rising,” Cars Direct, January 27, 2012):
- Changes in Consumer Demand
- Government Standards and Regulations
- General Compliance Including Recalls
- Import Duties and Taxes
- Higher Cost of Steel
- Increased Cost of Materials, Generally
- “Incentives” and Advertising Costs
- Higher Proportion of Expensive Electronics that Consumers Expect; and
- Currency Fluctuations
Of course, on closer look, many of these headings become suspect. Blaming “demand,” for example, is just a fancy way of saying that, if consumers refuse to overpay for premium models that offer a higher margin, then we will simply have to raise prices on the cheaper models, too. “Incentives” suggest that the commissions paid to top salespeople have to be increased to keep them—presumably—from joining Wall Street where—also presumably—their ability to vend screen doors to submarine captains would be even more welcome.
And, don’t forget to factor in consistent anecdotal reports from working mechanics that the more modern cars are actually less sturdy and reliable than their antecedents (allegedly in an attempt to keep government-mandated mileage numbers up by reducing weight in places the consumer will not notice—such as, for example, the unibody construction, floor pans, structural members, and welds, or by fabricating key engine components such as the water pump out of plastic that will invariably warp and distort over time).
In this way, you end up with a paradigm that is uncomfortable for both producers and consumers alike. Namely that, as component prices fall because of deflation, makers are raising prices for the same reason that, allegedly, dogs lick their privates—because they can.
Similarly, while as consumers we are conditioned to unequivocally accept changes to our products via the mechanism of government regulation, one perhaps has to wonder if such constant meddling has actually made cars a better or worse value over the years…?
My favorite example are those bizarre “third brake lights” which can pop up almost anywhere on the rear of your vehicle, depending on the type of car and the creativity of the car’s designers. Your government fell in love with the concept based on early research from northern Europe that showed a “significant” decline in rear-enders once these bulbs were installed. Small problem, though—none of the geniuses involved with this endeavor bothered to ask, did accident stats decline for a clearly identifiable physiological/neurological reason? Or did they decline simply because the strangely positioned lights were at that time new and unexpected, and therefore caught the attention of drivers behind the vehicles equipped with them?
If the former reasoning were correct, the concept would be intrinsically valid. If the latter, however, were correct, then logic suggests the effectiveness of these strangely positioned third lights would decline significantly year-to-year, as drivers became progressively “accustomed” to them…
While I was unable to find any researcher brave enough to tackle this politically sensitive issue in recent times, I did manage to track down the 1998 NHTSA Technical Report #HS808696, entitled “The Long-Term Effectiveness of Center High-Mounted Stop Lamps,” written barely 12 years after the devices were first made mandatory (which was in mid-1986). This startling report clearly states that even at that early date, their “effectiveness has declined over the years.” Typical of government research, no attempt was made to determine why. My only hope is that one of the authors of that report will stumble upon this essay and will finally figure out what he missed!
Situation: While the bare sales numbers reported by the automakers look good, those who have taken the time to study the numbers find them suspect as well. There appears to be serious doubt whether the reports from the automakers are based on actual flow-through demand from consumers, or merely “optimistic” demand from their own dealers, perhaps aided and abetted by some arm-twisting en route…? The cynics say, if there is any truth to this, then — similar to 2006 — such “creative bookkeeping” could be a trigger to another Economic Collapse…?
Explanation: In fact, there does appear to some truth to these accusations. The definitive piece on this topic appeared in Zerohedge in late summer of 2015. The thrust of the essay was that so-called channel stuffing (stuffing the delivery channels with cars that have no actual buyers, somewhat similar to the Chinese practice of building entire cities that have no actual residents) had reached levels never seen before in the history of the sector. The piece was especially unusual because it contained a very small amount of text and was mainly aerial photos of locations where the auto giants had rented space to store cars that were listed as “sold” but, in fact, were—like puppies in a window—awaiting actual buyers. These locations included mothballed airstrips and even decommissioned military bases! (Source: “Never Been More Cars on the Sidelines,” Zerohedge, June 11, 2015.)
Situation: Off the top of this essay, I posed the question whether, if another economic crisis arrives similar to the 2007 blow-off, could the car sector be a trigger? Well, let’s put all the pieces of this puzzle together and see what comes up:
First, we have a macroeconomic environment where, according to the experts, deflation reigns; the poor get poorer while the rich get richer; car prices stubbornly rise year-to-year; published automotive demand may be neither genuine nor organic; new car quality is dubious, especially the electronics; the long-term durability of the newer computer systems remains a mystery (although, if past experience is any guide, it is hard not to imagine a scenario where as a car ages, the cost of repairing or replacing the electronic components will far exceed the depreciated value of the car itself!); and fast car loans are readily available to high-risk borrowers (those with terrible credit) because the planners currently running the show believe that getting people to borrow to buy stuff they cannot afford—and possibly do not need—is the key to perpetuating a system that keeps themselves and their cronies at the tippy-top of the food chain. Could this possibly be a recipe for disaster?
Explanation: Many experts think, yes, it indeed could be. At the very least, the numbers are quite distressing. According to Zerohedge:
- Today, almost 90% of all new car “sales” are financed. The average (mid-stream) car payment is $500.00 a month. In the history of the sector, these are the highest numbers ever recorded in both categories.
- More than 55% of used car sales are financed, too—also a record.
- The number of subprime car loans (higher-cost loans to borrowers who, just a few short years ago, would not have qualified for a car loan) being sold is increasing on a linear basis—and so is the number of delinquencies on those loans. Repackaged debt instruments from these deals (i.e., aggregates of debt composed of loans from these higher-risk borrowers) have losses over two times the industry average. Sixty-day-plus delinquencies for subprime auto loans have now risen above crisis levels to 5.16% currently—levels not seen since 1996.
- People who can’t swing a mainline loan at three or four percent interest are, predictably, having trouble keeping up with loans that have interest rates twice as high.
- The payback period on these new car loans is also breaking records. They are now, on average, six years long—and seven-year loans are right now becoming commonplace.
- As loan periods extend outwards, not only are owners still paying off their debts past the period of the original manufacturer’s warranty, but they are making payments on a depreciating asset they do not even own. In the industry, it is now accepted that a larger number of drivers than ever before are now “under water” or “upside down” on their loans.(“Upside down” and “under water” mean that the car owner owes more on the vehicle than it’s worth. Assume you have $15,000 worth of car payments to make on a depreciating car that is now only worth about $10,000. That means you are $5,000 upside down. If, at that moment, you decide to trade in this car and buy a new one, you will have to pay the price of the new car plus the $5,000 you owe on the current car. Your monthly payments will be much higher because you’re effectively rolling over what you owe on your old car to the loan on your new one. Now you’re really upside down! According to Edmunds, 30% of car sales that had a trade-in were ones in which the owner still owed money on the vehicle. The average amount of negative equity: $4,502. [Source: “Another Bubble Popping?,” Zerohedge, March 22, 2016.])
The Bottom Line?
At the end of the day, no one really knows what the next trigger will be for future economic collapse. Nonetheless, the comparisons between the current mess in the car sector and the conditions in the housing market that sparked the 2006 catastrophe are pretty unsettling. At first glance, this seems like yet another instance of the central planners and their pals directing their efforts to creating yet another debt bubble that temporarily gives the impression, the nuance, of prosperity and economic growth. Of course, as is well known to any toddler with a pack of gum, the real problem with bubbles is that eventually, they pop.