Juggling Dynamite

If monthly sales reports won’t help goose up share prices, then we aren’t going to release them anymore.  That was the executive decision announced from GM today.

Government bailouts in December 2008, followed by a string of tax-subsidized incentive programs like ‘cash for clunkers’, years of ultra-low rates and lax lending on recklessly long lease terms, all enabled 7 years of unsustainable auto ‘sales’ to 2017.  For an excellent summary of how extreme and long-term destructive programs have aided and abetted an antiquated auto business over the past decade+ see Auto Industry bailout: GM, Chrysler and Ford.

The average auto lease in Canada grew to 75 months in 2017 versus 60 months in 2007, and nearly a third of owners had negative equity, owing an average of $6,983 at lease end (JD Power). This makes it harder for owners to trade in their vehicles and buy new ones just as the world is awash in a record auto inventory and heading into a secular downturn in demand thanks to the rise of auto sharing and transportation as a service.

At some point, even zero down, zero interest rates, and payments quoted weekly, aren’t enough to get cash-strapped borrowers behind new wheels.  The disappointing auto sales and their hit-to-GDP part of the cycle has returned.  See GM Throws wrench in US auto sales by deserting monthly reports:

General Motors Co. will end a 25-year-long practice of disclosing monthly vehicle-sales results and shift to quarterly reporting, complicating investors’ efforts to gauge the health of the U.S. auto market.

“Thirty days is not enough time to separate real sales trends from short-term fluctuations in a very dynamic, highly competitive market,” Kurt McNeil, U.S. vice president of sales operations, said in a statement Tuesday. GM stopped holding a monthly conference call with analysts and media in January 2014 and discontinued releases of monthly production figures months earlier.

It’s not just in Canada’s most expensive markets that home sales are tumbling in 2018.  A report today shows that from luxury condos to the least expensive co-ops in Manhattan, sales fell 25% year over year in Q1 2018 for the biggest annual decline since NYC’s property market froze during the 2009 financial crisis.  Similar secular forces are at work in both countries: debt-maxed consumers, tighter lending standards, recent foreign speculation impediments, higher interest rates, aging owners looking to downsize expenses, and a lower US limit for mortgage interest deduction, are all working to slow sales volumes.  Declines in sales typically precede price by a few months.  See:  Manhattan home sales tumble most since 2009, as buyer’s push back:

The median price of all sales that closed in the quarter was $1.095 million, down 5.2 percent from a year earlier, brokerage Town Residential said in its own report. Three-bedroom apartments saw the biggest drop, with a decline of 7 percent to a median of $3.82 million, the firm said.

Neither new developments nor resales were spared from buyer apathy. Purchases of newly constructed condos, which continue to proliferate on the market, plummeted 54 percent in the quarter to 259, Miller Samuel and Douglas Elliman said. Sales of previously owned apartments dropped 18 percent to 1,921.

The plunge in transactions is actually a good thing, in that it may serve as a wake-up call for more sellers to scale back their price expectations.

Similar global trends connect in the abuse of debt-centric financial policies over the past decade as covered this month by the UK’s Financial Times, in the article “How the financial crash made our cities unaffordable”:

“Over the past 10 years, the life-cycles of global cities such as London New York and Sydney [as well as   the most populous Canadian cities] start to look very similar.  They begin with central banks cutting rates; then foreign buyers are welcomed in, prices go up, high-end homes are built, capital appreciation drops and then cities are left with a lot of stock which is too expensive to sell.”

A sobering in realty markets is well overdue as buying ability becomes increasingly tethered by income and cash flow rather than increasing debt. The factors that enabled prices to soar well above long term averages the past decade are now due for a potentially multi-year mean reversion.

Some good cyclical observations in this clip from Monday.  A caveat though:  while it’s true the US dollar has weakened year to date against the Euro, Pound and Yen, it has gained on commodity exporters like Canada and Australia as the global growth picture weakens.

Steen Jakobsen, from Saxo Bank, cited several factors including growing credit loans, a widening fiscal deficit in the U.S., doubts over infrastructure spending plans and a potential trade war. “I think overall we have been pricing in for Goldilocks and we are closer to Frankenstein to be honest,” he said. He added that in a scenario of a potential sudden economic recession, he sees a possible market correction of between 25 and 30 percent.

Here is a direct video link.

Markets are pricing for Goldilocks but closer to Frankenstein, says economist from CNBC.

And about that 5%+ Q1 growth fantasy bulls were talking up in January.  Not looking good.