Out of the Box: Ain’t no Coupe de Ville in the Cracker Jack box
Ain’t no Coupe de Ville
You’ll never find your gold on a sandy beach
You’ll never drill for oil on a city street
I know you’re looking for a ruby
In a mountain of rocks
But there ain’t no Coupe de Ville hiding
At the bottom of a Cracker Jack box
I like this stuff. I have discovered plenty of little plastic things, as the box was emptied, but no Cadillacs, no Bentleys and not one darn Rolls Royce. I have made note of this, over the years, and I always try to watch out for situations where Coupe de Ville’s are quickly morphing into peanut sized plastic toys.
I, like all of you, remember our sub-prime mortgage disaster and the financial shock caused by them, the Great Recession of 2008/2009. It was not a fun experience. It was not one that I would like to go through again and I always keep my eyes open for eroding asset classes, where we could be heading into trouble.
I am beginning to get very uneasy about sub-prime auto loans, and their securitized debt, and I fear that we could be near the edge. JD Power now reports that automakers are offering the largest discounts on record, in November, and that the size of the discounts could increase in December. This is at a time that both Audi and Daimler AG (Mercedes Benz) are announcing severe layoffs as their business grinds down.
The average incentive is now $4,538 which is a 12% increase from last year. This is $160 more than the previous high in the fourth quarter of 2017. Because of our low rate environment, and these incentives, consumer spent $40.3 billion on new vehicles in November, JD Powers states. The rub is that auto loan delinquencies, 90 days overdue, hit an all time in the third quarter of this year at $62 billion which is going to cause, in my estimation, a substantial amount of damage to the sub-prime auto asset backed securities. The delinquency numbers have ramped up steadily, since the first quarter of 2015, and are up 52% during this time period.
If you own sub-prime auto debt, in any form, I would be considering your positions. It won’t be the FDA but there may still be a recall of the Cracker Jack boxes as hit by some infection. I also point out that the size of this market is large enough to cause a dent in the overall economy and so I caution about the collateral damage that could occur. I point specifically to the equites of the automakers and their unsecured debt. Ford was recently downgraded, and others may follow.
The top is down, it is breezy, hang on to your hats.
I also continue my caution concerning the European Union. Brexit is hard upon us and no one knows the final outcome, or scope, of what might take place, if the UK votes to exit. In the meantime, two new European Central bank members have now been nominated. They are both proponents of negative yielding debt and the amount of it could head, once again, towards $20 trillion, if the ECB decides to ramp up their bond purchases, on¼e more time.
In answers to a European Parliament questionnaire before a hearing on Tuesday, German candidate Isabel Schnabel said the stimulus “can be justified by current inflation data as well as the outlook for inflation over the medium term.” She added that the experience of negative interest rates has been positive “overall,” but that there may come a point where the impact on bank profitability hinders monetary policy.
Fabio Panetta, nominated by Italy, said September’s package of measures was “proportionate and appropriate,” but that negative rates may have “adverse effects” on household saving and consumption, bank lending and profitability.
Some people will point to the caveats expressed by both candidates, but I point to the guts of their comments. They are both supporters of negative yielding bonds and as the EU is in an economic slide, that more pressure to lower rates even further, will come from the European governments. I am just not a fan of European investments, at this point, unless you are boxed-in by some mandate.
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc. & B. Riley Wealth Management
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