President Trump: The NEW one and only politics thread

What you are saying about consumer tastes is true. But that is not a new story in the industry, and the macro story here is not a shift in demand. It's a drop off in demand, with a likely plunge in demand on the horizon.

1) Car sales have been falling for the first time in years.

2) Since 2010, on the back of the Federal Reserve going bonkers, US auto loans have increased by close to half a trillion dollars. A more than 60 percent increase. ... as near zero percent interest rates gave incentive to lend to even the riskiest people and entities out there. We now have more than $1.1 trillion in American auto loans (with record levels of it subprime) thanks to the Fed buying more than$4.5 trillion of US treasury and agency security debt to destroy the credit markets and suppress rates. ... on top of ZIRP (zero interest rate policy). They created a massive credit bubble by flooding the economy with mispriced credit and they called it stimulus. Real interest rates were negative. You were being paid to borrow in real terms and being punished if you wanted to save. That comes with consequences and a huge price. This isn't the early 2000s, in which similar Fed idiocy on a smaller scale (the bubble they reflated in the aftermath and have tried to keep from popping since) created a credit crisis that first cracked in the consumer loan area. That is because the lesson taken from 2008 has limited mortgage lending. But not most other types of lending. We have a small auto loan mess now -- more than a trillion dollars worth. A student loan mess, as well -- more than a trillion dollars there.

3) The Fed has been trying to extricate itself from their decade-long scheme. But there is no way out without paying the price -- so many things are overleveraged and drowning in debt. They think by doing it slowly they can ease their way out. Rather than reinvesting in new US treasury and agency security debt, they are very slowly letting bonds mature and roll off the massive balance sheet they built up by buying everything in sight. It has the effect of taking a forced buyer out of the debt markets, which is the same as decreasing demand. At the same time, we are running bigger deficits, which means the treasury has to sell more bonds. More supply, less demand, means lower prices. Which means higher yields (or interest payments). That, combined with the little 25 basis point hikes in their overnight rate, has had interest rates staring to rise. We are still way below where the neutral rate would be if a free market could determine interest rate levels without it being price-fixed by some administrators (what an idea!). But the debt levels have blown up so much thanks to their stupidity, that even a small increase off the zero bound has caused cracks to start to show. We are way overleveraged in myriad areas. That is what the automakers are just starting to deal with. The mispriced loans are drying up and people can't afford their interest payments with rates rising even just a little and creating higher payments for people. That means fewer auto sales. ... off an environment in which sales were setting records (it was manufactured phoniness on interest rate manipulation).

4) GM just announced a restructuring plan that will cost $3.8 billion. It is going to have to borrow that money. The cost of borrowing is going up. GM is already more than $100 billion in debt. It has a problem if rates cost them more in interest payments at a time that their business is struggling. But it's worse than that, because GM has been borrowing like crazy over the last several years in particular. ... and a major area where the Fed's stupidity really created misallocations of capital has been in the area of corporate credit. GM is perfect to illustrate that. Over the last four years alone, almost $14 billion of its borrowed money. ... has been used to buy back stock. Not to invest in plant or equipment or worker training or the restructuring that GM is going to have to borrow even more money now to embark on. The cost of borrowing was negative in real terms, thanks to the Fed, so companies borrowed trillions of dollars with little in lending standards in their way. ... and tried to financially engineer higher stock prices with it by buying their own stock to drive up the price (creating a stock market bubble, but that is yet a separate issue). In the case of GM, it hasn't had the juicing effect it has had in many stocks that ran up to insane multiples and took the stock market into crazy territory on the back of the artificial liquidity. GM's stock price is down 10 percent over that 4 year period. Which means that GM spent 4 years overpaying to buy back its own stock (basically wasting money and now facing rising interest payments on the debt that left behind). And now it has to borrow even more more to restructure because of the tens of billions it squandered. It's really obscene. But those are the kinds of incentives the Federal Reserve has created.

5) The tariffs? Yeah. They don't help. They make the cost of inputs go up, which drives up the price of cars. And that certainly hits demand. Tariffs are taxes on consumers. But amazingly, that is really a relatively small factor in what is going on right now. If this was 2012, say, and the Fed was still doing its bond buying (what they called quantitative easing) and still had their overnight rate rate pinned at zero, the higher car prices would be being absorbed by all of the mispriced credit. You had people with little in earnings able to secure loans to buy $30,000 cars. They'd be buying $32,000 cars instead. The only thing that might extend (but not prevent the price from ultimately being paid) the cycle of credit financing stupidity is the Fed finding a way to reinflate the bubble with even more radical action to drive rates back down to negative in real terms. The problem is that we have been in this destructive cycle since the late 1980s, under Alan Greenspan, with each popping of their bubbles requiring more radical action (because the debt levels are higher each time), and it has required even more authoritarian action on their part to take over the credit markets and prevent the risk from being priced correctly.