A recent Wall Street Journal piece on the raging insanity in the auto loan market tells you why the current record 125 month business expansion is a ticking time-bomb, not a singular success that warrants the Fed doing “whatever it takes” to extend.
Yet extending the current ragged expansion—the so-called mid-cycle adjustment—is exactly what they are attempting to do. Otherwise, how could anyone in their right mind justify cutting rock bottom interest rates by 75 basis points and pumping $215 billion of fiat credit into Wall Street at a time when the U-3 unemployment rate at 3.5% has touched a 50-year low?
Of course, they call this renewed burst of money-pumping “Not QE”, but apparently now even the english language means whatever these arrogant fools say it means.
But that doesn’t gainsay the truth that money and credit markets are fungible and thoroughly arbitraged, and that in barely 60 days the Fed has removed real government debt from the bond pits at a $1.4 trillion annual rate and paid for it with central bank credits plucked from thin air.
That’s right up there in Bernanke’s league circa 2008-2009—when at least the bonfires on Wall Street were still glowing bright red.
But prolonging the cycle is the very last thing the Fed out to be attempting. That’s because in the era of extreme central bank fostered financialization the longer the cycle endures, the greater the rot that builds up down below.
That is, while the Fed is taking victory laps for surface level “progress” like the irrelevant U-3 unemployment rate of 3.5%, the next round of busted loans, bursting bubbles and mutant malinvestments is being accumulated just below the surface.
In the present case, we are talking about record car loan terms and a record share of auto borrowers who had negative equity on the old loan when they bought a new ride and took out a double-down loan. An especially poignant anecdote in the WSJ story leaves little to the imagination:
John Schricker took out a loan to buy a car in 2017. Then he took out another. And then another.
In two years, the 40-year-old electrician signed up for four auto loans, each time trading in the previous car and rolling the unpaid balance into the next loan. He recently bought a $27,000 Jeep Cherokee with a $45,000 loan from Ally Financial Inc.
Mr. Schricker, who lives in Bethel Park, Pa., said he didn’t intend to cycle through so many vehicles. He replaced one because it had 100,000 miles and another when he went through a divorce, and he changed cars again when his family was expanding.
Mr. Schricker would like to get a new car because the Jeep Cherokee started having mechanical problems this year. He recently discovered the vehicle was in an accident before he bought it, a fact he said the dealership didn’t disclose.
He estimates that even if he sold the vehicle, he would still owe Ally up to $18,000. Ally said it couldn’t comment.
Well, we’d guess it wouldn’t. If Mr. Schricker sold the “asset”, he’d end up with no car, no way to get to work, no transportation for his family and an uncollectible $18,000 debt.
Still, it’s actually only a matter of time before his clunker gives out or a recessionary downturn causes electrician work to shrink—contingencies what would lead to exactly that baleful outcome.
Nor is this an aberrant case. Fully 33% of customers who traded in cars to buy a new one this year had negative equity, compared with 28% five years ago and 19% a decade ago. These under-water borrowers owed about $5,000 on average after they traded in their cars compared to about $4,000 five years ago.