Moody’s: negative outlook for largest ever $1.1 trillion auto loan market

“Signs are there that we might be approaching an inflection point in the marketplace for autos,” William Black, managing director at Moody’s, said in  on Tuesday.  No credit expansion lasts forever.

Moody’s is also forecasting a drop in used-car prices thanks to pressure from a record number of off-lease supply.

When it comes to auto loans, Moody’s said strong competition among banks, credit unions and finance companies has led to looser underwriting standards. That is “driving rising delinquencies and losses,” the report said. Here is a direct video link.

Moody’s: We might be approaching an inflection point for autos from CNBC.

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Lacy Hunt on the ‘worst economic expansion’ since 1790

This interview was actually longer and more detailed than the 2 min clip Bloomberg posted. Too bad, because they post hours of drivel from others. Hunt is a rare independent-of-big-banks-economist with a valuable command of historical perspective. He explains why we will be paying for the latest debt-funded recovery for years to come.

Lacy Hunt, Hoisington Investment Management chief economist, explains why he thinks the U.S. economic recovery has been disappointing. Here is a direct video link.

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Plant-based diets improve health, planet and food supply

A new study published in the Proceedings of the National Academy of Sciences finds that if the U.S. population opted for a plant-based diet, instead of an animal-centric one, it would reduce greenhouse gas emissions from agriculture by about 28% and increase total food production for humans by about 23%.  Today 47% of soy and 60% of corn crops are grown to feed livestock, not to mention all the water waste and pollution these practices bring.

Now factor in the massive health benefits and cost-savings from a dramatic drop in diet related illness and disability–including heart disease, obesity, diabetes and cancer, and the rational course is obvious.  Starting just one person at a time, better ideas can spread. The motivation is overwhelming, see Study finds plant-based diet could reduce green-house emissions and increase food supply.

Industrialized animal agriculture is the largest singular driver of climate change, responsible for more greenhouse gas emissions than the entire transportation sector, and is also the culprit behind mass deforestation, water, and air pollution. Considering most people consume about double the amount of protein they need, two-thirds of which comes from animal sources, our everyday eating habits are taking a massive toll on the planet. What’s more, despite all of the resources used and pollution created, one in eight people still suffer from food scarcity.


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Investment marketing wrappers and the rot within

Exchange Traded Funds (ETFs), mutual funds or indices are only a marketing wrapper or package around a group of individual securities. Reassuring names aside, their investment prospects can only be as good as the individual constituents within– defined by their market price versus earnings, sales, assets, cash flow and future prospects–and the macro cycles at hand.

Worse this time, this market cycle has seen trillions in indiscriminate fund flows driven by central banks into ‘passive’ security packages all around the world. Just one example, the QE-world-leader the Bank of Japan, now personally owns some 75% of all the ETFs in the country, as shown in this graph courtesy of  This is not about investing.

Mindless global fund flows have become so garish and irrational this cycle that even people like Robert Shiller–who partnered with index producer Standard and Poor’s over the past decade- are having to admit the allocations make zero sense:

“The strength of this country was built on people who watched individual companies. They had opinions about them. All this talk of indexes, it’s a little bit diluting of our intellect. It becomes more of a game,” Shiller said Monday on CNBC’s “Trading Nation.” “It’s a chaotic system.” See: Robert Shiller on what worries him about passive investing.

The idea that buying and holding packages of hideously over-valued securities is sound investing has never been true. It has however, been the marketing machine of choice in the fee-gorging financial sector.

Perhaps buyers prefer not to contemplate the worry and risk of over-valued asset markets and prefer anesthetizing marketing wrappers that gloss over the unpleasantness of rot within. It will not protect them from it though.  Out of mind remains real and present danger.

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MacLean’s: How Canadian homes became debt traps

Tale as old as time:  over-spending, under-saving, taking on debt to elevate ‘lifestyle’, tax-payer backed programs designed to enable bad habits, and a finance sector recommending destructive behaviors including the ‘miracle’ of Home Equity Lines of Credit (HELCOs) and ‘borrowing to invest’.  See How Canadian homes became debt traps:

HELOCs have been around in Canada since the 1970s, but in the mid-1990s, lenders started marketing them to a wider swath of consumers. Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20 per cent.

The pace of growth has slowed since then, but balances still hit $211 billion last year…

It marks a fundamental shift in the way Canadians think about homeownership. “Whatever happened to getting to the end of a mortgage and owning your home?” says Gilbertson, the trustee in Vancouver. “It’s less about truly owning our homes today and more about having another revenue stream to fund our lifestyles.

Traditionally people reach a trigger moment when they can no longer pretend—a job loss, say, or divorce or illness. But increasingly bankruptcy counselors are noting a rise in clients filing simply because they have far surpassed the end of what their cash flow can service, even while they are still working, and before any major life shock.

“The insolvency business is cyclical, and we’re at least a year overdue for shedding blood in the system,” Scott Terrio, [an insolvency estate administrator] says. “If ever we were poised to hit that right on the head, it’s now.”

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Debt-fueled-consumption-supercycle in retreat: “We’ve wasted our gravy train”

In 1880, Melbourne Australia was the richest city in the world, until it had a property crash in 1891, halving home prices and launching the nation into an economic depression that was longer and deeper than the Great Depression of the 1930’s.  According to Macro Business, it took 70 years for the housing market to recover its 1890’s price peak.

In the most recent credit-fuelled-consumption supercycle, Australia repeated many of the same mistakes. Canada (and other commodity-centric countries) too.

As shown in the chart below, Australia’s big four banks who issue 80+% of residential mortgages in the country, are more exposed as a percentage of their loan book than any other banks in the world–making up over 60%–double that of the US, triple that of the UK and quadruple that of Hong Kong (the least affordable place in the world for real estate).  Canada’s big 5 bank concentration in residential mortgages is fourth largest in the world at 38%.  Not surprisingly, the big bank CEO’s and analysts in both Canada and Australia assure all who listen that housing prices today are “justified by fundamentals”

Different countries, but many of the same themes and behaviors have driven the debt disease now plaguing households.  Must read  Australia’s House of Cards (long version with great charts), or a condensed version was published here. A few highlights:

“Already at the time of the GFC [great 2008 financial crisis], Australian households were at 190 per cent debt to net disposable income, 50 per cent more indebted than American households, but then things really went crazy.

The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval…

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation — Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

Foreign buying driving up housing prices has been a major factor in Australian housing affordability, or rather unaffordability.

At the end of July 2017, according to Domain Group the median house price to household income ratio for Sydney was 13x, more than 2.6x the threshold 5.1% considered by urban planners as ‘severely unaffordable’.

This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years — but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.

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