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The Auto Industry’s Check Engine Light Is On

Summary:
Hey, auto industry. Your check engine light is on! A couple of weeks ago, we reported on the strained retail bubble. But that’s not the only balloon that Fed has managed to inflate with almost a decade of easy money.For the last several years, the auto loan market has ballooned to record levels – nearly .1 trillion. That compares with 7 billion at the end of 2015. Over the last two years, the amount outstanding on auto loans has increased 21%. More disturbing is the rise in subprime auto lending. Deep subprime loans made up the fastest growing auto financing segment in the fourth quarter of 2016, increasing 14.57%. Subprime loan balances also climbed 8.62%. As ZeroHedge pointed out, “Deep Subprime” borrowers have increased by double the amount of any other bucket.” According to

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The Auto Industry’s Check Engine Light Is On

Hey, auto industry. Your check engine light is on! A couple of weeks ago, we reported on the strained retail bubble. But that’s not the only balloon that Fed has managed to inflate with almost a decade of easy money.

For the last several years, the auto loan market has ballooned to record levels – nearly $1.1 trillion. That compares with $987 billion at the end of 2015. Over the last two years, the amount outstanding on auto loans has increased 21%. More disturbing is the rise in subprime auto lending. Deep subprime loans made up the fastest growing auto financing segment in the fourth quarter of 2016, increasing 14.57%. Subprime loan balances also climbed 8.62%. As ZeroHedge pointed out, “Deep Subprime” borrowers have increased by double the amount of any other bucket.” According to Bloomberg, about a quarter of all auto loans fall into the subprime category.

In other words, lenders are making a lot of risky car loans. Shaun Bradley of Anti Media put it this way.

And what happens when people borrow money to buy things they can’t really afford? Ultimately, they struggle to pay for it.  And unsurprisingly, delinquency rates on auto loans are climbing rapidly, as MarketWatch recently reported.

According to Federal Reserve numbers released last December, 6 million Americans were delinquent on auto loans. At the time, analysts said they expected those numbers to increase. This during a period of low unemployment and a supposedly healthy economy.

We also see other signs of stress in the auto industry. Passenger car sales plummeted in March, marking a third straight monthly decline. Sales fell 1.6%. The AP called it “a strong indication that years of sales growth have come to an end.” Inventory levels have started to climb, and dealers are piling on incentives trying to lure people out to the car lot.

That feeling of , you may feel as you read this isn’t unwarranted. This looks a whole lot like the housing market in 2007, complete with the bundling of high risk auto loans into products similar to mortgaged backed securities. According to Bradley, investment fund managers have bought billions of dollars worth of this securitized debt. In fact, as Bradley points out, the parallels between the housing bubble of 2007 and the current auto bubble are downright eerie.

A deflating auto loan bubble alone probably isn’t enough to create a major crash like we saw in 2008, but you have to remember, this isn’t the only bubble floating around out there. We’ve already discussed the aforementioned retail bubble. Then you have the student loan bubble, along with a more general ticking debt bomb.

The Fed can keep right on telling us the economy is rolling along nicely and that it plans to continue raising rates over the next year. But we can all see that check engine light glowing on your dashboard. You might want to get that looked at.

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