By: David Haggith
Carmageddon, as Wolf Richter has called it, is hitting the US economy exactly as I said a year and a half ago would start to happen at the very end of 2016 or the start of 2017. Measured year-on-year, auto sales have declined every month of 2017, and are now starting to cause the financial wreckage that I said we would experience in what will become a demolition derby for US auto manufacturers.
‘A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,’ wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients. (Wolf Street)
Stanley now foresees a ‘multiyear cyclical decline,’ along with a declining ‘willingness of financial institutions to lend as aggressively as in the past.’
After an eight-year boom, the industry appears ‘to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles….’ not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the ‘diminishing returns’ – when you throw gobs of money at a problem and it doesn’t have much impact. Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (‘0% financing’), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south.
This post was published at GoldSeek on Sunday, 18 June 2017.