Guilty as charged: I have been living in the auto industry bubble. But, it's now time to look at things from a fresh perspective in front of potentially four interest rate hikes from the Fed this year.
Over the past year, I have delved into the world of high-end auto reviews (see Mercedes Maybach review below). Here's how it works: Automakers kindly drop off six-figure cars at my house for a few days and I drive them around, taking photos, videos and documenting the overall experience. A whole bunch of cool content then ensues. During this span -- which has brought many childhood dreams to life (I had a McLaren for a few days -- enter "LMAO" here) -- several common themes have emerged.
First, these high-end supercars are getting even faster -- to the point where you have wonder about legality. Second, these cars are akin to rolling computers -- the BMW I just dropped off could be controlled by the keyfob, and if you got out of your lane the car puts you back in the lane automatically. Mind-blowing. And finally, the cars are getting way more expensive in light of the increased horsepower and amenities (which in the case of the Bentley, comes with a wine fridge in the backseat).
Unsurprisingly, this rising level of auto luxury has come alongside a surging stock market that has buyers willingly plunking down their credit card or some cold hard cash to get a new toy. The same thing could be applied to non-luxury cars, say mid-size sedans from Ford (F) , Toyota (TM) and General Motors (GM) . They are receiving hosts of new features that have caused buyers to reach deeper into their pocketbooks. Meanwhile, it's also causing people to trade in their cars more often than they would have in the past, in order to stay up to date. A Ford Focus has turned into nothing more than an Apple (AAPL) iPhone that has to be upgraded every few years.
But all this activity has triggered several dangerous trends underneath the glitz and glamour that always surrounds the auto industry. And with the Federal Reserve possibly on track to raise interest rates four times this year, it's time investors pay closer attention to the realities of the auto space. Just think: someone that reached to buy a new car last year will see higher credit card payments, and possibly monthly mortgage outlays if they have an adjustable-rate mortgage (ARM). In turn, that could impact how they spend at Target (TGT) store this coming back to school shopping season. That's how the Fed often sows the seeds of a recession -- pricking bubbles in one hot asset that in turn spills over into other areas.
Several data points to consider:
- Losses for subprime auto loans, annualized, were 9.1% in January, up from from 8.5% in December and 7.9% in the first month of 2016, according to S&P. The rate is the worst since January 2010 and is being fueled by worsening recoveries after borrowers default, notes S&P.
- More than six million U.S. consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.
- The U.S. finished last year with about $1.2 trillion in outstanding auto loan debt, up 9% from the previous year and 13% higher than pre-crisis peak in 2005, in inflation-adjusted terms according to DOT data.
While the auto bubble isn't going to explode when the Fed raises rates later this week, it could get the ball moving and make the second half of the year pretty interesting for the industry (and those in other industries) and those invested in the space. In the meantime, bring on that Tesla (TSLA) Model 3 for review.
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