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Buy Steel (Not Gold)

Saturday, October 8, 2016 12:19
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Automobiles, Motorcycles and Libertarian Politics

Gold may not have the high rate of return that the casino called Wall Street offers … to insiders. But it is one way to store value – and that accounts for its popularity among people who may not get rich quick but manage to avoid becoming

Used cars are another great way to transmute depreciating paper money into a durable asset that – like gold – is portable and fungible (i.e., easily converted into other things of value).

The government has inadvertently created a bull market for them, too.

First, it decreased supply via the infamous “Cash For Clunkers” program (a “clunker” being defined not by mechanical condition, incidentally, but by the car’s gas mileage numbers). The government paid people inflated sums of other people’s money (an estimated $3 billion) to turn in perfectly roadworthy used cars in for unwarranted, early destruction … in order to “stimulate” demand for new cars.

This was like burning down every third house in a neighborhood to create a “need” for new housing.clunkers-pic

It had the effect of driving up the value of the remaining pool of used vehicles, especially pick-ups and SUVs, which were the main focus of the Cash for Clunkers program

True story: Just before the CFC program, which launched in the summer of 2009, I bought a 2002 Nissan Frontier pick-up with about 49,000 miles on the odometer for $7,200. Today, seven years after CFC (and 60,000 miles added to the odometer), the truck is worth… $6,950 (see here).

Only the government could pull a King Canute and cause the tides to ebb and flow in reverse.

Used car prices remain high – while new cars are often heavily discounted via “cash back” offers and effectively free loans at interest rates below the rate of inflation. This shouldn’t be surprising, given that the average new car now sells for more than $30,000 – while the average family’s annual income is less than $60,000.dollar-signs

If the lending criteria used to approve mortgages applied to car loans, almost no one would be approved – because only a fool would write a loan to someone for an amount equal to half their annual pre-tax income.

The new car market is as rickety as a Jenga castle and could topple at any moment. It is economically artificial, driven not by normal (healthy) demand but by heroin-like injections of too-good-to-be-true financing deals and cash-back offers that distort cost signals which – long term – cannot be sustained because you cannot indefinitely pay people to buy things, cars or otherwise.

And unlike home loans, car loans can’t be extended over decades to make the payments manageable. We are already at a financial Rubicon – loans of 6-7 years duration. Beyond that lies the point at which the typical car is worth less than what you still owe.

It cannot continue.Empty Pockets

Either the average car buyer’s income must rise to make it feasible to pay more (much more) each month. Or something else must and will happen.

The cost of new cars is rising like Hugh Hefner’s member, due in large part to government-imposed technological solutions to non-problems such as people backing their cars over small children (back-up cameras), high-pressure direct injection, turbochargers and aluminum rather than steel bodies (to squeeze out small MPG gains from cars that are now more expensive to buy and much more expensive to service) and elaborate “safety” countermeasure such as automatic braking, automatic steering correction, lane departure warning to idiot-proof the cars instead of expecting drivers to idiot-proof themselves… with more on the way.

The other part is consumer demand for “new” gadgets – large flat screens, infotainment systems, self-parking and so on. Like $600 iPhones, people buy these things on credit.

Point being, the cost of new cars is going to continue to rise – while the purchasing power of the average American (as distinct from his ability to qualify for debt) likely will not. A nexus will be reached – probably sooner rather than later – when the proverbial bubble finally

When it does, the value of used cars is going to go into full afterburner.

Because people will still need to get around.

They just won’t be able to afford new anymore.

The smart ones have already exited the lunatic asylum … before the stampede. Which is what makes them smart.

There is still time – though probably not much. If you burrow into the data – the real data, which means not the stuff the government cherry picks but the real data as compiled by honest economists (like Paul Craig Roberts, see here, for instance) you will find more structural rot than the floorpans of a rusted-out Pinto. Something like 23 percent of the potential workforce is unemployed – with about 12 percent of them (not included in the “official” stats) no longer even looking for work.evil-uncle

They cannot afford a $800 monthly payment on a new turbo-Ecoboosted (and aluminum-bodied) Ford pick-up. Which explains, probably, why sales of the new turbo-Ecoboosted and aluminum bodied F-150 are down by 8-10 percent and why Ford has had to resort to dangling thousands of dollars in “incentives” to entice dubious (and increasingly cash-strapped) buyers.

But they can afford a $7,000 used truck – or a $5,000 used car.

Which is why – very soon – the price of such rides is going to increase in a big way, just as they did post Cash for Clunkers.

Only this time, the supply will be even smaller.

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