It seems that the auto loan bubble has already peaked. What does it mean
for the U.S. economy and the gold market?
In 2015, over 17 million new vehicles were sold in the U.S., the highest
number in history. However, on a monthly basis, sales peaked in October.
Seasonally-adjusted sales in December dropped by nearly 1 million (see the
chart below). Production has also been declining since October.
Chart 1: Total vehicle sales from 1976 to 2015 (in millions of units).
As we have already explained, the auto loan bubble is a replay of the
housing bubble. The Fed’s easy-money policy and lax credit have enticed
people to buy more (luxurious) vehicles. Low interest rates have also
prompted investors to seek a yield and engage in more risky investments, such
as bonds backed by subprime auto loans. In consequence, the volume of auto
loans has increased (as well as their duration). In the third quarter of
2015, auto originations reached a ten-year high, with a notable share of
subprime loans.
Assuming that November and December were not temporary swings, what does
the automotive bust imply for the U.S. economy and the gold market? We all
know the consequences of the burst of the housing bubble. The mechanism may
be similar now: falling prices, surge in delinquencies on car loans and
foreclosures. However, it does not necessarily mean that the automotive bust
will push the U.S. into the next Great Recession.
The borrowers will feel the pain from an imploding subprime auto loan
market, and there will be pressure on securities backed by subprime auto
loans, this is sure. However, the effects for the broader economy should be
softer than in the case of the housing bubble. Why? First, the size of the
subprime auto loan market is a tiny fraction of what the subprime mortgage
market was at its peak. Second, cars are much cheaper and easier to recover
and resell in case of default than real estate. Third, the worth and the
duration of car loans are lower than mortgages.
To sum up, it seems that the auto loan bubble has already peaked. The
implosion of the subprime auto loan market should be positive for the price
of gold, as the bursting of the housing bubble was. However, the negative
effects for the broader economy – and for the gold market – would appear
gradually and would be less significant than in 2007-2009.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
Gold News Monitor
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