With the economy seeming entering in to the next recession (or worse), we are all wondering where we can get our money in to become the guy from the Big Short.
As noted in the TL;DR at the top for all the autists who can only read TSE, I believe the auto industry will be the next one to crash.
Here is why:
US households are absolutely jacked with car loans. As stated in this article, ” Auto loans now make up nearly 10% of all household debt, the third largest debt category behind mortgages and student loans. ” While this may not be that surprising, the point is these things are an extremely heavy burden for individuals. Additionally, cars are a significantly more liquid asset to sell than a home… more on this later.
Similar to what was observed in the run-up to the housing market crash, there has been a dramatic increase in the number of sub-prime loans for automobiles. You can read about this here.
Essentially, what we are seeing in the auto industry is the same thing as the housing market: people are taking out way too large of loans they cannot afford.
How does this relate to the current state of the economy?
All of this being said, we know what happens when an economy is hurled into a recession. Companies layoff employees, debts stop being repaid, and people / businesses begin defaulting on their loans.
Since people are extremely leveraged on their car loans, any hiccup to their income may cause difficulty in repaying the loan. This will cause millions of car owners to either sell their car or it will get repossessed. Here is the intro to econ level analysis of how this scenario plays out:
People lose jobs
……………….This causes demand of used cars to increase
Can’t afford car loan
Sell / get car repossessed
……………….This causes supply of used cars to increase
The increased supply and increased demand of used cars causes total quantity demanded to increase (rather dramatically, depending on your opinion of the future of the economy).
There are only so many cars being sold around the country / world. With the quantity demanded of used cars increasing, the demand for new cars will decrease. As a result, firms such as GM and FCAU may struggle to stay in business, let alone make a profit.
Short GM and FCAU… Also Wells Fargo seems interesting. Also I am stupid don’t listen.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.