Days of Thunder Deflation

Is the auto-loan bubble already bursting?

This month, President Donald Trump visited the Daytona 500, the iconic Nascar race loved my millions. Trump is the first sitting President to visit the Daytona 500 since George W Bush in 2004 and, if you excuse the pun, he lapped it up as he travelled round the circuit in “the beast,” that oh-so under-stated Presidential car which runs at a heart-sinking 8 miles to the gallon (really, what would Greta say?!)

The timing of Trump’s visit to the Mecca for American petrol-heads couldn’t be better. Last week, statistics announced by the New York Fed showed that, after a huge increase in auto-loans over the past few years, more and more people are not keeping up with their debt. Auto-loan and lease balances in the U.S. now stand at a record $1.33 trillion, but whereas high-quality borrowers are still managing to service their loans, low-quality, subprime borrowers are not. And, given the explosive growth of subprime auto-lending in recent times, that means overall delinquency rates are actually worse than at the time of the Global Financial Crisis. All combined, prime and subprime auto-loan delinquencies that are 90 days or more past due now stands at $66 billion. Compare that with 2010 when, in the aftermath of the crisis, the same measurement stood at less than $40 billion. Looking at 90+ days delinquent auto-loans as a percentage of all loans, that measurement hovers around 5%, the same level it reached in 2010. Note the big difference here. In 2010, the economy had imploded and was just limping back to recovery. In 2020, the economy is running on all cylinders. Can you imagine what delinquency rates will do should the economy now turn down?

There may already be a warning that the bubble is bursting. The chart below shows the relative performance of Credit Acceptance Corporation (ticker CACC), the bellwether subprime auto lender, versus the financial sector. CACC has been underperforming the sector since the middle of last year and the trend, at this juncture, remains down. This is a sign that all is not well with CACC, which probably means that the market sniffs an emerging problem. In the auto sector, it appears that days of debt deflation lie ahead.

200225 - MG