American Consequences - January 2018

Experian does a fantastic job tracking what’s happening in auto finance. Experian statistics are one of our favorite research tools. The interesting thing is, the Experian data that accompanied Zabritski’s “remarkably stable” commentary were indeed bleak. “Deep Subprime” was the fastest-growing loan category, by a wide margin. Average terms were extending. The amounts due on monthly payments were up – even for the riskiest buyers. And payments had started to slip... In September 2015, as Experian and Equifax were reassuring the masses, we warned of “the subprime auto collapse of 2016.” Well... the numbers from 2016 made it clear... Delinquencies and defaults are up. Used-car prices are down. The latest data in 2017 were even worse. Delinquencies and defaults are rising to levels not seen since the last financial crisis. New-car sales are down. And suddenly the “sky is falling” type reaction seems a lot more realistic. Wall Street firms such as Morgan Stanley and Bank of America have recently issued warnings on auto trends. As have the Federal Reserve, debt-rating agency Fitch, and federal regulators at the Office of the Comptroller of the Currency. Steve Eisman – the investor who famously shorted the mortgage industry in the book and movie The Big Short – even warned about subprime auto debt in a Bloomberg interview. The mainstream media – including Forbes , Fortune , and Business Insider – have dutifully repeated these reports.


Longtime Stansberry’s Investment Advisory subscribers know my collegues and I were among the first to sound the alarm on the looming problems in auto debt... specifically subprime auto debt. One of our first major auto-loan-bubble warnings came in our March 2014 issue. We’ve repeatedly sounded the alarm since that issue. We pointed out that much of the boom in the auto industry following the last financial crisis was fueled by the expansion of cheap credit to subprime borrowers. Subprime borrowers are the riskiest, least creditworthy borrowers. They have the lowest credit scores, usually defined as less than 620. When we first began writing about the problems in auto lending, the experts scoffed. In 2015, for example, the economists at consumer-credit behemoth Equifax published a bold commentary that flew in the face of our thesis: “The Subprime Auto Bubble Is Fiction, Not Fact.” In February 2015, Melinda Zabritski, director of automotive finance for data aggregator Experian, reassured market followers: Whenever there is an uptick in the number of loans to sub-prime and deep-sub-prime customers, there is the potential for a “sky is falling” type of reaction. The reality is we are looking at a remarkably stable automotive-loanmarket, in part because consumers are continuing to stay on top of their payments.

So the mainstream media has finally caught on. Just about every day, we read an article warning of the dangerous

bubble in U.S. auto debt.

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