Buy Steel (Not Gold)

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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 driven, in part, by 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.

Thanks to Uncle. depends on you to keep the wheels turning! Clovers hate us!

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  1. I do have two relatively old cars, each with over 200,000 miles, not so much as an investment but in case one of them dies. 🙂 That’s about all I have room to park conveniently. Gold is a lot more compact.

    I see red with any reminder of that asinine Cash for Clunkers program, Bastiat’s broken window, 2009 style. The government doing what it does best: destroying things and calling it progress.

  2. i m not a pickup guy.but in 2002 when dodge came out with the hemi and it was available in their ram truck.i lived in florida and the dealers there were running ads for a ram 1500 small cab with 20” in chromes .hemi, air automatic, radio.vinyl seat.for 19, you cannot even get their cheapest truck for less than 30,000 .i didn t get it as i was a car guy .big mistake!!

    • You just need to own a Dodge truck to fully appreciate what lousy quality they are. Speaking to a woman last week about computers and wired and BT connections led me to speak of BT on vehicles these days, no wires. Then I spoke about all the hell the company I worked for had with Dodge trucks, the newer the worse they were. She said her grandmother had a Dodge diesel and another family member did also(2006 models)and both were on their second engine with few miles on the original. She was miffed that her grandmothers Dodge never pulled anything, never had a load of any real sort in it, just used it as a car and it cratered like the other one they owned.

      Last year I was running a 90 mile section of I-20 for months and nearly every day I’d see a brand new Dodge, some even with dealer plates, stopped on the shoulder, dead in the water so to speak. It was fascinating to say the least. From what I could tell passing them at highway speed they were almost always gasoline models. But we had a few of he 24 valve diesels just drop the bottom end all of a sudden. Their drive by wireless throttle leaves a lot to be desired too. I nearly got me and a crew run over pulling a trailer one day trying to cross a really busy highway. I hit the throttle hard when I got a chance to go and it went to idle right in the middle of the road. I had on a heavy trailer so it stopped like I’d hit the brakes. We sat there with oncoming traffic nearly running over us for what seemed an eternity before I used the Dodge trick of cycling the ignition 5 times to reset it. We had several trucks that would do that. The mechanic and I were going home one day with him driving. We turned a corner and he got back into the throttle and it continued to idle. He looked at me and said WTF? I said They do it all the time, cycle it 5 times and reset it. He looks at me like I’m crazy(I thought he’d know this)and cycles it 5 times at which point it fired up and operated as it should have.

      5 of us in one and we’re headed 25 miles to a cafe from a site we were working on and the ’04 decided it wouldn’t do anything but idle. It took quite some time idling around and turning it off and on before somebody remembered the old cycling trick. It didn’t work this time. We went in a guy’s private Duramax with no fanfare, only triple digit speed.

  3. Many of the cashiered cars under Cash for Clunkers were nicer than most anything I drive. It hurt to see them deliberately destroyed. The local auto parts store owner was furious as well at the program. I think it cut into his parts sales.

  4. I like the refreshed look, subtle changes but noticed.

    I’m constantly amazed at people’s ability to take on credit. In my youth I did the usual stupid kid thing and racked up a hefty credit card balance. I hit rock bottom when my dog got sick and I took him to the vet, who couldn’t figure out what was wrong without a lot of expensive tests. When I couldn’t afford the vet bill and all my cards were rejected it was a real wake up call. Nothing like watching your best friend suffer and die due to your own stupidity to get you to man up. It took years to get out of that hole, only after ignoring all the “expert advice” on paying off credit cards and just getting it done.

    But once they were all paid off and accounts closed something amazing happened. I had cash on hand. In fact, I had more cash available than everyone else I knew. I didn’t change my lifestyle other than quitting smoking (itself a habit every bit as destructive to the bank account as credit cards), yet because I was used to living like a college student (in the traditional sense -drinking cheap beer and living on macaroni and cheese) I was able to quickly save thousands of dollars a year. Now I try to take on as little debt as possible, and the irony of that is that I have more credit available to me than most. I do have a weakness for gadgets, but even that’s getting to the point where owning the newest/latest/greatest isn’t as interesting to me it used to be, because the devices and markets are maturing and improving incrementally.

    My friends and coworkers have lots of toys: RV’s, motorcycles, new trucks… I can’t figure out why they want to have all that stuff. Just yesterday a buddy of mine told me he was thinking about selling his bike because he only got out 3 times this summer but has to make monthly payments all year. I ride a bicycle and camp in a tent. I’d love to have all that other stuff, but cash on hand beats all that other stuff every time, in my book. Not to mention I don’t have to pay Uncle for the privilege of owning a bicycle or tent.

    One final thought: Why do people like making “low” monthly payments all the time?

    “As an act of revenge, Zeus hid fire from mankind, leaving them cold and shivering at night. Prometheus, however, out of pity stole it for them shortly after, incurring the further wrath of Zeus. Prometheus’s punishment was to be chained to a rock and have an eagle pick out his liver every day for eons, until Heracles slew the eagle, releasing Prometheus from his affliction.”

    Don’t know what I did to infuriate the gods, and I’m pretty sure took care of Heracles in 2012.

    • “I do have a weakness for gadgets, but even that’s getting to the point where owning the newest/latest/greatest isn’t as interesting to me it used to be, because the devices and markets are maturing and improving incrementally.”

      Excellent point. I can only add too many of the newest additions and “upgrades” are not “improvements” but actually detrimental to the purchasers.

  5. Car paper is starting to tank, as well. The overall dollar amounts are smaller than the mortgage fiasco, but judgement day is coming. There may be some good buys on used cars yet, but only for those who can pay cash!

    • bob, I was looking for a car several years ago. The dealer has one version of NADA and another is available to you and me but then I found another NADA book, that same bluebook with prices different from the other two. I wouldn’t doubt there’s half a dozen. I believe the 3rd I found dwelt mostly on the “average trad-in value” a bullshit term in itself cause the dealer book had that “average trade-in value” that was much less. If there’s a dozen ways to spin the same deal you can be sure somebody in the car biz is using the one or two(so they can show you….in the book)they rely on.

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

    Not sure how many people really can. There’s very little financing available for such old vehicles.

    And a lot of Americans couldn’t gag up $5,000 In Cash if their lives depended on it.

    • That’s the sad reality of today’s American world. There’s no actual money, only the perpetual hot potato of inflated currency nothingness and future promises no one will keep.

    • Hi Mike,

      It’s feasible if one lives within (or below) one’s means. Not just cars – everything. But that is not easy in a society in which (as Brent aptly puts it) the cost of most things (housing especially) is “bid up” by debt-fueled consumption.

      It’s Hamilton’s Curse.

      • eric, you’re right about living below ones means but the entire system is set up to keep people who make more in an environment where it costs more to live. I know I don’t have to tell you this. We’d have few new houses in any place but the largest cities in Tx. and even then there’d be a great deal fewer if we had to pay left or right coast prices for them. Moving to Tx. for most is a hit in pay but most things for the main part cost less……except autos and there’s the rub.

        I noticed last year after the bloom on the oil rose and rotted and fallen off the number of brand new vehicles seemed to be a lot less and older vehicles seemed to be showing up more and more. I know a lot of people who hard brand new or very close to brand new pickups(not that many cars sold here)and now they are driving early 90’s GM pickups and looking at Craig’s list I can see those pickups going up in price.

        I can tell you but realize I don’t need to that $1,000/mnth pickup payment is not the easy thing now in unemployment or partial employment or working a job that pays a fraction of that job you had. Used car lots are vehicle specific. Don’t look for a card in those 2 or 3 big lots in a row since they’re all pickups. The next couple lots are all SUV’s and then there are the car only lots. Mini-vans are stuck in SUV or car lots for the most part. The problem with buying a used pickup in my case is the used ones look barely used and are barely cheaper than a new one.

        I don’t know if the dealers see it coming(surely the wiser ones do)but this is all leading up to a big-ass crash. I’ve seen a resurgence of Suzuki X 90’s in the last year. They’re great for rural people. My neighbor has one, an ex-Red Bull job with the entire rear portion made into a cooler. He uses it for fishing. But their 4WD makes them good for roads like the one to my house. It’s dirt and when it rains, mud. When it rains in the winter we hope for it to be frozen when we have to use it. It’s a bitch in a big rig when it’s mud. I wouldn’t mind the road if the county commissioners illegally voted for a new $8.2M jail with a couple people in it and land owners being on the hook for paying for it. Our taxes went up this year and will continue to go up for the next 5 years that will probably translate into the next 10 years. Many will be forced to sell their land and hope to keep their house on a few acres.

        • It’s not so much that the good paying work is in costly places but that to live below one’s means requires one stay out of the debt driven bidding wars. Things get expensive because people live at level of debt their income can support. The person who lives on a cash basis, who stays away from debt has a social appearance of income that is at best 1/3 of what it really is.

          It’s quite the manipulation of the human species. Humans want social status and to get it they have to be debt slaves. Why? Because they have to outbid each other or at the very least buy the most their income can support.

          Who wants to make a $100,000 a year and appear to be some loser driving a used car and living in some small house or less? But even a $100K isn’t enough. It has to be a couple making a $100K each. Then they buy a $700,000 house. They are up to their eyeballs in debt, but they don’t want to look like the couple than merely brings in a $100K and those that make $100K don’t want to look like those who make $30K.

          And so this how we get a country where ‘rich’ people have a negative net worth and beggars have a positive one. Where the most important thing is your credit score. They have successfully combined social status with debt.

  7. That would have been a good time to go to the junkyard and buy the cars they had on hand like you owned, pay them more than they’d get for crushed cars.

    I had this city slicker friend who traded his ’93 Chevy Ext. cab pickup. He said it was worn out being driven down a rough dirt road, the shocks were gone. I can imagine, a new set of shocks and tires and a wash and wax it would have been primo. Now they have a couple vehicles that won’t even exist as long as that pickup…..sick.

    • My neighbors cashed for clunkered a perfectly good 120K mile Ford Explorer because the tranny was ‘acting up’. It was spotless and ran great. I would have bought it in a heart tick if I’d known they were gonna do that.

      • Yeti, you probably wouldn’t have wanted to pay what they thought they were getting for it. That was the rub few people could see. They thought they got great deals but they paid more for their new cars than they normally would have, the entire reason for cash for clunkers. Back during that era I had to traverse a road with a plethora of dealers and their many lots and noticed the same vehicles sitting there week after week. They spent money just moving them around and getting them washed.

    • I remember that video when it was brand new. It was the first C4C car I saw being destroyed and yes it is painful to watch and listen to. That was the first summer I started looking for cars to buy and I watched the prices increase before my eyes. A $1500 car in May 2009 was $3000 in August 2009.


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