A Lump Under the Rug

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The other day, GM announced it would no longer report monthly sales figures. Instead, it would hold on to those numbers internally and only reveal them publicly at the end of each quarter.

A GM spokesman says that “thirty days is not enough time to separate real sales trends from short-term fluctuations in the market.”

Possibly.

But 90 days  – a quarter is three months – is just as arguably too long to give shareholders an opportunity to act before they potentially lose their shirts. The obvious example here being the economic implosion of 2007. If you’d waited three months to dump your GM stock back then, you’d have lost a lot of money.

Granted, other corporations also report quarterly. But the car business is much more of a barometer of the overall health of the economy than, say, Boeing – whose profits depend largely on a relative handful of big-ticket buys by other large corporations (and the government) rather than hundreds of thousands of small ones by private individuals.

Now, here’s where things get interesting – in the Chinese proverb sense.

The change in reporting coincides with another change in the car business.

There hasn’t been much reporting of it, but loan-issuing standards have all of a sudden been tightening up. Interest rates are going up. Free loans – i.e., zero percent financing – are going away. The average rate on a new car loan is up to 5.7 percent now – the highest since 2009.

That means higher monthly payments. But that’s a problem when people can only afford so much per month. It’s been free (or very low cost) loans which have kept sales of new cars propped up for years.

That and extending loans.

Six, seven – even eight years.

But they can’t be extended much farther. Seven, maybe eight years is probably the limit or very close to it – because by seven or eight years very few cars are worth even half what they sold for new.

Some are worth considerably less than half.

But the monthly payment at seven years is still the same as it was that very first monthly payment – when the car was still worth making payments on. By seven years, it’s probably no longer worth it. People stop paying. The car gets repossessed – and re-sold. But for small potatoes now.

The balance of the loan value gets written off.

The banks are well aware of this – which is why they won’t be writing nine or ten year new car loans. Bankers are usually pretty good at covering their own asses.

Meanwhile – and perhaps not just coincidentally with the decision to change the way sales numbers are reported – there is very likely going to be a sharp uptick in the price of the average new car.

Because there has to be.

Because there is no such thing as a free lunch.

Trump may have announced a dialing back of the federal fuel economy (not “emissions”) fatwa – and deserves kudos for it – but even so, the damage has already been done – and the car companies are betting on more to come because Trump may be gone three years from now and his successor could simply reimpose the fatwa.

They are product-planning accordingly.

What that means, in car industry jargon, is that they’re designing cars to deal with the prospect of a federal regulation requiring that each new car average at least 50-plus MPG and that there will be new regs classifying the harmless, inert gas carbon dioxide an “exhaust emission” subject to EPA regulation.

This is why so many new cars have small, turbocharged engines – even big trucks and SUVs like the 2018 Ford Expedition (a huge SUV) I recently reviewed. And that obnoxious “auto-stop/start” system, which shuts off the engine every time you hit a red light. And transmissions with twice as many gears as was normal just a few years ago.

And more to come.

It’s all there because of the current federal fuel economy fatwa. More such will be there if a fatwa decreeing C02 to be an “exhaust emission” is issued.

And these additional parts – and more complicated parts – aren’t free. Their cost has been hidden by free loans (zero interest financing) and also by factoring the higher cost of the vehicle over a longer period of time – the six, seven and even eight-year loan.

But you can only sweep so much under the rug. Eventually, a lump begins to show.

GM, perhaps, is anticipating this. Watch for the other car companies to follow suit.

What comes to mind are the Five Year Plans of the old Soviet Union. Stalin decreed impossible-to-meet production quotas and in Soviet Russia, if you didn’t make your quota it was off to the Gulag – or worse.

So, the managers fudged the numbers. Hid them, changed them. Outright lied about them – figuring that they might as well, since to tell the truth would expose them to the full hurricane force of Stalin’s fury.

Today, no one’s going to the Gulag. Well, not yet.

But there is incentive to glaucoma-ize what’s going on. No one seems willing to talk about the untenability of the federal fatwas, least of all the car companies. The managers, for their own cynical reasons, want to Play Ball – because they are short-timers receiving Big Pay while they’re there and once they’re not – well, who cares? Off to another gig – or a very comfortable retirement.

But car buyers can’t play ball. They can only buy what they can afford and when they no longer can, it’s Game Over.

 . . .

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23 COMMENTS

  1. A few years ago (maybe even a decade ago), Chrysler started the trend by deciding they would no longer report 10-day sales numbers. Soon enough, the others followed suit. There was slight protesting when it happened, but most people didn’t notice, as Chrysler was small potatoes as a manufacturer then.

    However, Government Motors is a much bigger fish in the pond. For them to change their reporting is a major issue.

    I expect the same pattern will repeat here. After summer, hardly anyone else will notice.

  2. …and the FREE TRADE BULlSHIT has made cars SOOOOOO Inexpensive ..right? More then HALF the parts of cars are made $1.75 hr labors in china and Mexico and Central America and well you know the rest. And the workers here are not paid anything that great. Those days of Great Union Jobs are all but gone. New Hires have no pension, can be fired at any time, and their pay/health benefits are OK. So you can’t blame those DAM UNIONS like everyone use to. But the Cars and Trucks are still a outrageous. A NEW FORD F-150 4 door are close to 50,000 dollar!!!!!!

  3. Great article and insight, Eric. My truck is 14 years old now, and I have no desire, much less monetary ability to afford a new truck. The whole thing is just such a racket. Buy a new vehicle, and soon as you drive it off the lot, it loses several grand in supposed value. But in the meantime, you are stuck paying for the original amount, even though the vehicle isn’t worth that. And then, to keep paying the loan, when the vehicle has lost even more value over the years. What is wrong with this picture?

    • The government is not a corporation – it is unaccountable to its shareholders, does not have to turn a profit or meet the demands of its customers (unless the real customers are the Military Industrial Complex).

        • If that were the case, Bill, then Delaware would have ultimate control over the US government, and would itself not be subservient to it. (And the Federal government would be paying taxes to the state of Delaware).

          Why do people believe this BS, just because a couple of nut-jobs proclaim it?

          • Nunzio,
            You are of the opinion that granting a corporation grants total control?
            If that were true, since you are a corporation anytime that your name is in all capital letters, what do you control?

            • Ah, Dear Billy Boy,

              Show me ONE code or statute which establishes that one somehow becomes a corporation anytime their name is in all capitals, and I’ll shut up about this forever.

              C’mon, Bill, you’re too smart for this nonsense. I’m surprised that you’d fall for it.

              • I’m surprised that you’d act like a child, calling names, and avoiding proving your own specious premise, that granting a corporation conveys total control.

                • Who’s calling names?

                  So you don’t think that the grantor of corporate status has ultimate control over the corporation which it grants the authority to to exist?

                  If you incorporate in DE or NV or any state, you do not think that the corp which you form is governed by the laws of that state which apply to corporations?

                  And again, where is there even one shred of proof in any legal code in the United States pertaining to the name in all caps crapola?

                  It’s really a very simple thing to cite a code or a court precedent for a legal theory which someone claims exists- yet not one person I have ever asked to provide such proof on this matter has ever been able to do so (Because it does not exist!).

                  Maybe the question YOU should be asking is why YOU believe in such a thing and have apparently never asked for or never received proof of from those who espouse it.

                  It’s funny, because many such things that these airheads preach, they cite 300 documents which have long ago been superseded….but on this, they don’t cite anything, because it doesn’t exist and never has.

  4. Currently have 4 car/truck vehicles. All of them over 10 and some over 20 years old.
    Nothing changes except the new cars keep going up and up and up until no one can afford to own them.
    A good mechanic is worth his or her weight in gold.
    Even so parts are expensive as well.
    It is time to go back to the Ford factor.
    That is low cost automobiles that die in under 5 years with loans of about 3 years.
    Right now there are a lot of vehicles sitting in drive ways without the ability to move.

  5. That’s why my two vehicles are no younger than 16 years. They run great, get decent mileage, have simpler mechanicals. And best of all, no payments, low insurance cost, and someone else absorbed the depreciation.

  6. They will likely freeze their product lines for as long as Trump is in office. Then, the next administration will set some ridiculous timeline to meet new standards whatever those may be.

  7. I don’t think they will change their overall planning either, since at best Trump would be in office eight years. I think the only part they could change is to let a few aging, still popular, gas guzzler models last a few years longer. Cars like the Dodge Charger and Challenger for example. i doubt there is enough time left for developing and selling another generation. Which is too bad for Fiat-Chrysler as those are the only cars they seem to be able to sell.

  8. Interesting too: While The Orange One has thankfully reduced CAFE, in this world where corporations are now run by PC liberal snowflakes who push “diversity” and environmentalism- even to the detriment of their businesses- it wouldn’t at all surprise me if they keep right on voluntarily adhering to the former absurd CAFE standards.

    In this world where everyone from customers to CEOs have been thoroughly indoctrinated in PC socialistic BS, I could just see them advertising their continuation of the pursuit of CAFE as “environmentally responsible” and all that- and people buying it up- as such is the mindset of most fools today.

    And realistically, they probably know anyway, that once Trumps tenure is over, CAFE will return- likely in spades- so why bother retooling and redesigning for a few years hiatus- especially when the average maroon enthusiastically buys all of this expensive planned obsolescence anyway? -Just like the ones who can afford it enthusiastically purchase the ridiculous EVs.

    In short, I don’t think anything’s going to change.

    • Good points Nunzio, Yes, they’ll voluntarily keep these regulations because their lawyers wrote them to kill off the competition that can’t afford it. There is a point of diminishing returns though which they will adjust when the competition has gone belly up.

      I just sold off one of my vehicles and a trailer to a young guy who is leasing a BMW because he doesn’t want to deal with anything that could go wrong with the car. Eric has written on this in the past, but this was the first time I’d run into anyone who was doing this. It suddenly reminded me that I wouldn’t even lease a truck from any of the companies I used to drive for. I didn’t want any expenses whatsoever. I didn’t want any financial responsibilities. My personal transportation is considerably more reliable so I own them outright, but that mentality does have its allure.

      There do seem to be quite a few people who can afford to drive all this technologically “advanced” junk from China. I talked to a guy who buys vehicles at auctions and fixes them up at his garage. He said that the American auto makers are making better more reliable vehicles now, but all this technological crap from China falls apart before the warranties run out on them.

  9. Idiots on Linkedin were chiming in that this was brilliant and a better business reporting model and that it didn’t have an underlying cause for action. Like pigs to the slaughter, some were probably GM stock holders.

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