Deflation — Of Tires and Debt

With U.S. auto loans now approaching seven years, could the market be feeling an itch?

According to the Consumer Financial Protection Bureau, 42% of all car loans made in 2017 were 72 months or longer. A recent Wall Street Journal report indicates that loans of 85 months or more represented 1.5% of all new loans and that a third of all new loans are longer than six years. The article also states that, due to higher interest rates now compared with a decade ago, middle-class Americans cannot afford their cars and are increasingly choosing to roll over the debt into new loans. As with a reliable car, the strategy is to just keep rolling along, but there’s evidence to suggest that a breakdown is imminent, and that auto debt deflation will take hold.

The chart below shows the share price of Credit Acceptance Corporation (ticker CACC), which is one of the leading providers of auto loans in the U.S. CACC made a low in October 2008 at a price of $10.09 per share. Since then it has appreciated by almost 5,000% into a high of $509.99 in April this year. The Elliott wave structure, however, tells us that the advance is running out of gas. In fact, the engine could have stalled already. A major clue for that comes with the triangle structure between 2015 and 2016. In impulsive movements, triangles occur in the fourth wave position and so, with such a major triangle occurring in the structure, we can conclude that it is very probably a fourth-wave pattern of Primary degree. What that means is that the advance from 2016 has been the final wave of the entire movement from 2008.

Notice also that the advance from 2016 has occurred by hugging the lower bound of the uptrend channel whereas the high in 2015 occurred near the upper bound. This is another clue that the move from 2016 has been a fifth, and final, wave which are often less powerful than third waves.

The April 2019 high could have marked the end of CACC’s advance but it’s too early to tell. Should September’s high of 498.06 hold as resistance and the share price break down below the channel, it would vastly increase the probability that the top has already been seen. Either way, the structure of CACC tells us that a major wreck in the auto loan sector could be dead ahead.

Credit Acceptance Corp CACC chart