Auto loans on their own are not going to blow up the economy. But…

by cbus20122

The cumulative volume of indebtedness and fixed cost obligations (rent payment is not included here despite the fact that it acts as a similar impingement onto consumer spending) will cause the economy to slow as has already started to be seen.

It’s fairly natural in most credit cycles for things like Auto loans, credit card loans, or student loans to sour first before bigger ticket items such as a mortgage. After all, people can sell their car fairly easily and downgrade if they really need to, it’s not as easy to do this for a home.

In 2008, the housing bubble bursting initially caused the economy to slow down. But this isn’t really what caused the financial institutions to blow up by itself. It was the extreme levering of those loans, derivatives issues, illiquidity, and improper ratings of the financial products being sold (among other things). Those things by and large do not exist to the same degree for auto loans, so we’re at least relatively safe from that perspective.

The Knock-On Risk

I mention the previous paragraph because sometimes things don’t work in such a straightforward manner. What if there were other areas of the credit market that were levered, collateralized, and seeing a lot of similar structures to what we saw with the mortgage market in 2005-2008?

The risk here is that the effects of debt service will impact consumer spending, which will then cascade into other areas of the credit market as the economy slows and credit spreads widen. This could then impinge on other areas of the credit market where things look a bit nastier from a structural perspective.

Where is the Risk in 2019?

We have a lot of debt period, but the structural risk, at least in the USA is in the corporate debt market. Leveraged loans, high yield, CLO’s, LOTS of foreign buying of US corporate debt in carry-trade markets (lots of Japanese and asian buying here), etc. Also lots of debt that can quickly be downgraded and cause a cascade effect on markets, and some similar structural issues surrounding potential illiquidity mismatches.

Not saying this is going to be the problem per se, but if you’re looking for areas of high risk to blow up in a financial crisis type event, it would definitely be the corporate debt market more than anything else.

 

 

Related Posts:

We truly are under attack. We need user support now more than ever! For as little as $10, you can support the IWB directly – and it only takes a minute. Thank you. 231 views