Counterfeit Economy in the Automotive Industry

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The auto industry financing has been getting into some truly dicey lending standards of late. According to CNW Marketing Research, new cars sold to consumers with a subprime credit rating increased about 60% in 2010 from the prior year.  Now that whatever demand there was for autos has already pulled forward,  Government Motors is rolling out interest free loans in an attempt to move a large gas guzzler inventory. Incentives at GM at now 13% of the sales price versus 10.6% for the industry. Zero Hedge has been tracking the channel stuffing at GM and showed this chart.

GM Month-End Dealer Inventory

Unfortunately for GM and their customers the mix of vehicles are simply not well suited to high gasoline prices. So let’s do the counterfeit economy analysis: a bunch of sales to subprime customers, centering around gas guzzlers heavy on light trucks,  stuffing dealers with inventory, and now a huge surge in gasoline prices and other inflationary pressures. The end result should be clear and obvious, a big cyclical downturn in autos and a new round lending losses for banks.

Gasoline prices in the last week truly came home to roost, and the driving season is just beginning. So far consumer behavior has not resulted in curtailed driving (second chart).   The impact of 70 cent higher year-over-year gasoline prices or $1,000 per year per household (and higher for subprime folks) will have to be made up somewhere: taking on more debt, deferred spending elsewhere, maybe going the squatter route and not paying on the underwater mortgage.

Retail average regular gasoline price

U.S. gasoline demand

Faced with 6% three month annualized retail inflation (per MIT survey)  there is evidence that overall consumer spending is tailing off (see Gallup chart).  The relatively successful last gasp Christmas funded with more debt can be seen.  In the last several weeks consumer confidence especially for the bottom 90% has dropped considerably.

consumer spending weekly

Changes in Perceptions of U.S. Economy Over Last Three Weeks, February 2011


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