Juggling Dynamite

The subprime lending madness that led to the bursting of the US housing bubble in 2006 has spread through auto loans ever since. Once lending and leasing rates were cut to zero, and wage increases remained flat, dealers turned to lower lending standards, zero down and longer and longer financing terms in their efforts to keep pushing product. But all madness must eventually meet its deserved demise. We must be getting close.

Experian, which analyzes millions of auto loans, says the percentage of US car loans that were delinquent or ended up in default with the vehicle being repossessed surged 70% in the second quarter of this year. Here is a direct video link.

And as for Canada, oh sure, we folks are a lot smarter up here… See: Eight-year car loans drive sales and deepen Canadians’ debt problems

“The average term of a light-vehicle loan in Canada is 69 months, close to a peak of 72 months set in the third quarter of 2013, according to data from marketing information company J.D. Power. The borrowing adds to signs Canadians are continuing to buy big-ticket items and tuning out warnings about unsustainable debt growth.

Longer-term car loans are leaving Canadians in debt for a longer time, Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ontario, said in a telephone interview. “On a 96-month loan it takes 80-plus months before you are back in the money,” he said.

…The president of the Credit Counselling Society, a non-profit consumer service, says 10 to 15% of the 30,000 people his company meets every year are receiving advice because of car loans.

While stretching the term of a zero-interest loan doesn’t add to the total borrowing cost, it delays the point where the vehicle’s worth becomes greater than the debt. Hannah also said long-duration loans can entice people into taking on more debt than they may be able to handle… “It’s not in the consumer’s best interest to take out a longer-term loan for a depreciating asset.”

“Consumer’s best interest”? When was that ever a concern of corporate owned policy makers? The most recent dealership campaigns led by Hyundai Canada are for 96-month, zero-interest loans. Next up 10 year terms? This oughta end well…

Chanos speaks in length on his long career as a short-seller. [Warning: short-selling is very high risk, and not a recommended strategy for most people.]  Here is a direct audio link to the Bloomberg business segment.

The interview offers interesting insights on the conviction needed to succeed with rules-based risk management and the courage to bet against the consensus view.   He also talks about the reckless deployment of capital routinely exercised by Wall Street and corporate executives that buy shares at high market valuations and freeze in fear at market bottoms. The following chart shows the pattern of corporate buy-backs since the last market peak in 2008.

I am reminded that amid the crash of ’29, Herbert Hoover first sought an investigation of the ‘evil short-sellers’ rather than into the investment banks and the reckless sales forces that drove stock prices to nose-bleed levels that then collapsed on the masses. The more things stay the same…

If you haven’t seen this excellent Frontline report (originally released in April 2013), there was an encore presentation of it this week. Critical issues for financial market participants to comprehend.

Retirement is big business in America, but is the system costing workers and retirees more than what they’re getting in return, asks FRONTLINE correspondent Martin Smith. Here is a direct video link.

And now that the Canadian market has this month finally reclaimed its bubble peak from June 2008–and the few who were able to hang on through 50%+ losses, have now spent 6 long years making back their losses–the question to ask all those confident financial advisers today is, “ok, so what’s the plan to avoid repeating that painful cycle all over again?” Remember we are all 6 years older now, 6 years less time to waste in a journey to financial security.