Juggling Dynamite

As in 2007-08, achieving peak auto sales this cycle has been a reckless, financially destructive chapter for the masses, and right on cue, the inevitable default phase has begun with losses coming back on financiers once more. Trustee in Bankruptcy, Scott Terrio reports from the front lines of the consumer debt bubble bursting in Canada, see: I can’t afford my car! What are my legal options?

“Overall vehicle costs can add up to 1/3^rd or more of a person’s monthly living expenses, adding in loan/lease payments, fuel, maintenance & insurance. Two late-model financed cars can cost as much as much as $2,000/mo.  when factoring in all real costs.

…Furthermore, two thirds of all financed cars in Canada are on terms of 72 months or longer. So Canadians are taking longer and longer to pay those cars (which end up worthless) off, meaning their cash flow is minimized for longer than ever.

Low interest rates have been a huge contributing factor to all this. Easy & cheap access to money, not to mention an increasing predilection toward leasing, have meant bigger & more expensive cars in the driveway to better keep up with those dastardly Joneses.

In our practice, we see people whose cars are killing their finances…Many of them ask what they can do to get out from under an onerous finance contract or lease. They’ve decided their car is costing them too much. So what can you do to get out of your car deal?”

The answer: either declare bankruptcy or file a proposal to restructure one’s debts.  Either way the vehicles flow back to the financiers for fire sales and write downs.

Advised and led by their US trained finance types, China has followed the same hide-your-debts-playbook that brought down Enron, Worldcom and global financial markets in 2001-03, as well as Bear Stearns, Lehman and global markets again in 2007-09. The difference this time is the unprecedented scope and scale: China is a whole country, the world’s largest population and the second largest economy. The main benefactor of credit-fueled cash flows from the west over the past 15 years, China forgot that credit expansion is a finite cycle and spent like a drunken sailor throughout. Now it’s left holding a leverage on leverage bomb of unprecedented proportions, with sketchy debts oozing out of every crack and crevice.

We should expect that the liquidity and solvency problems there will be felt though highly connected world markets.  This is a necessary part of the great cleanse and reset so needed to reboot asset prices and the economy.  So, long-run positive, but short to medium term dangerous for capital.

Kyle Bass, Hayman Capital Management’s chief investment officer and managing partner, discusses China’s economy and the global risks to financial markets.  Here is a direct video link.

A footnote here:  Mark Mobius has run long-always Emerging Market mutual funds for Templeton Funds for years, he is always buying and always bullish, no matter what returns and risks are likely to be.

A caveat I would add on the health care and insurance costs discussion in this clip, it’s not just that corporations have gained too much control, but also that we individuals have abdicated too much personal responsibility for our own life and health choices.

The progressive leader takes aim at Wall Street spending and explains how a billionaire real estate mogul won over the working class.  Here is a direct video link.