Fuel Economy, Hypermiling, EcoModding News and Forum - EcoModder.com - View Single Post - Are the normies noticing rising gas prices yet? Gas is at a multi-year high price.

redpoint5 · 06-06-2018, 12:55 PM

Here's an interesting (to me) related discussion on the Chevy Bolt forum. The comment text is from my economist friend.

This is my position in a nutshell: Most new car consumers don't think like I (we) do. They follow a different drummer. For the time being, while the economy is ostensibly good, most consumers could care less about price (as indicated in the data I posted earlier)...be it the price of a car or the gas and maintenance expense that goes with it. But that exuberance is, as we speak, in the process of going downhill fast. Not 6 Months ago, a person with sub 500FICO credit could buy (finance) a $50,000 vehicle over a 96-Month term. Today, not so much. The Subprime auto financing bubble is bursting right now around us. 30% of ALL new cars sold in the past couple of years have been financed with subprime paper. The true subprime auto finance default rate is about 11% right now. I don't know the specifics, but this jives with what I have heard. I think the change might be less sudden than he is making it out to be though.

Why is this important? The auto industry has, like the housing market of 12 years ago, been artificially propped up with easy credit. This is true, but it should be known that this has been going on for a long time. Basically once subprime mortgages stopped happening, banks shifted pretty quickly to cars (there is more going on here as well, especially with how car manufacturers were doing around the collapse). Also, subprime lending doesn't necessarily mean a collapse.

We all may remember the subprime housing bubble collapse. At the time, subprime housing financing represented somewhere in the neighborhood of $500B - $700B in suspect paper. That was one of the many linchpins that took the economy down. Today, Subprime auto loans represent $280B in suspect paper...today. Probably a lot more. And unlike real estate that is a traditionally appreciating asset, vehicles are the exact opposite. The Gub'ment could buy all the bad mortgage paper (at taxpayer expense), sit on it, and sell years later near a break-even. Impossible with subprime auto finance paper. So here is where he starts to lose me a bit. Yes there was a ton of 'suspect paper' in the subprime mortgage industry. However, that isn't that big of a problem. Sure people could have defaulted and that would have led to a minor recession (probably) but what made this such a massive meltdown wasn't the subprime mortgages. It was banks betting on the subprime mortgages at a incomprehensibly massive scale. Not only that, but these were bad bets that were based on risk models that assumed that these subprime mortgages are uncorrelated (i.e. losses in one section of the country would not be related to another section - except that they were because a good portion of them were based on Adjustable Rate Mortgages and would go into default at approximately the same time, which is how the Big Short people were able to predict the timing). This is what led to the banks collapsing, and these banks were so interconnected in our economy that they basically had to be saved (yay for moral hazard!).

So while there certainly is subprime auto lending I am not sure why he believes it is going to imminently collapse but, more importantly, I know of little evidence that the banks are making outrageous bets on these cars. Rather, while mortgage backed securities have been around since the 80s and became a massive share of banks portfolios, auto lending has never been a sizable portion of either banks or households portfolios (https://www.frbsf.org/economic-resea...ie-of-old-age/)

Obviously, an Auto industry melt down will trigger huuuuge negative consequences. But other economic risk factors are at play as well: At full employment (that's where we are), the folks driving a car financed with subprime paper - need their cars to get to work. 20% of the population are in subprime financed cars. They will stop paying their high interest revolving credit cards before getting their whips repo'd. This will cascade negatively to other financial markets, causing all lending to become more expensive. Small & Medium Businesses, who also are in a quasi subprime operations financing bubble will need to cut cost to service their already massive debt. This is already seen in the US Bond Yield curve flattening and other historic indicators. And lest no one speak the taboo $1.4T student loan bubble. I think he is significantly overplaying the magnitude of this shock. Plus is the Federal Reserve just going to do nothing while this is happening? Most of this could probably be offset by monetary expansion if auto lending became such a huge concern.

Look, we all know that an economic recession is inevitable. And we are past due (squuze the pun), the only question is when. My 'feeling' is in 16 Months, perhaps a bit longer, the inevitable will be a stark reality. These downturns have an affect on consumers perceptions. When we think things are great, and our future financial prospects seem boundless, we tend to purchase what we want (on credit). But in the upcoming dark days, we will be compelled to examine our personal finances closely. All of a sudden, nobody cares about comfortable leather seats...consumers will care more about how they can minimize their transportation cost. People will be far more sensitive to TCO and receptive to non-traditional alternatives. Expansions don't die of old age (https://www.frbsf.org/economic-resea...ie-of-old-age/). They die because of bad behavior and policy mistakes. I do believe long expansions lead to bad behavior like he suggests in his fifth sentence, but recessions don't become statistically more likely after time passes so it is a fallacy to say we are 'due' (https://www.economist.com/economics-...minskys-moment).

This is where I say EV's will answer the call. EV's are perfectly positioned to scale battery manufacturing - using the investment capital of today, earned from...the subprime auto finance bubble. And as we all know, once a consumer goes Electric, they (likely will) never go back. Well I don't know that? I wouldn't mind some evidence of this. There are less than 600k electric cars on the road in the entire U.S. The Ford F-series trucks sold roughly 850k last year alone. Not sure we can make blanket statements about Ev's yet

So it's not $4/gal gas or $5/gal gas. It's It's bearing witness to ones friends and family being out of work and facing harsh challenges that will affect mass EV adoption. At least I think so. To hit a different note: there will be no mass EV adoption unless firms can produce them a lot faster. Which is happening but isn't going to be overnight. Most estimates don't have EVs being a sizable portion of the U.S. fleet for a long time.

06-06-2018, 12:55 PM	#240 (permalink)
redpoint5 Human Environmentalist Join Date: Aug 2010 Location: Oregon Posts: 12,765 Acura TSX - '06 Acura TSX 90 day: 24.19 mpg (US) Lafawnda - CBR600 - '01 Honda CBR600 F4i 90 day: 47.32 mpg (US) Big Yeller - Dodge/Cummins - '98 Dodge Ram 2500 base 90 day: 21.82 mpg (US) Chevy ZR-2 - '03 Chevrolet S10 ZR2 90 day: 17.14 mpg (US) Model Y - '24 Tesla Y LR AWD Pacifica Hybrid - '21 Chrysler Pacifica Hybrid 90 day: 57.45 mpg (US) Thanks: 4,320 Thanked 4,473 Times in 3,438 Posts	Here's an interesting (to me) related discussion on the Chevy Bolt forum. The comment text is from my economist friend. This is my position in a nutshell: Most new car consumers don't think like I (we) do. They follow a different drummer. For the time being, while the economy is ostensibly good, most consumers could care less about price (as indicated in the data I posted earlier)...be it the price of a car or the gas and maintenance expense that goes with it. But that exuberance is, as we speak, in the process of going downhill fast. Not 6 Months ago, a person with sub 500FICO credit could buy (finance) a $50,000 vehicle over a 96-Month term. Today, not so much. The Subprime auto financing bubble is bursting right now around us. 30% of ALL new cars sold in the past couple of years have been financed with subprime paper. The true subprime auto finance default rate is about 11% right now. I don't know the specifics, but this jives with what I have heard. I think the change might be less sudden than he is making it out to be though. Why is this important? The auto industry has, like the housing market of 12 years ago, been artificially propped up with easy credit. This is true, but it should be known that this has been going on for a long time. Basically once subprime mortgages stopped happening, banks shifted pretty quickly to cars (there is more going on here as well, especially with how car manufacturers were doing around the collapse). Also, subprime lending doesn't necessarily mean a collapse. We all may remember the subprime housing bubble collapse. At the time, subprime housing financing represented somewhere in the neighborhood of $500B - $700B in suspect paper. That was one of the many linchpins that took the economy down. Today, Subprime auto loans represent $280B in suspect paper...today. Probably a lot more. And unlike real estate that is a traditionally appreciating asset, vehicles are the exact opposite. The Gub'ment could buy all the bad mortgage paper (at taxpayer expense), sit on it, and sell years later near a break-even. Impossible with subprime auto finance paper. So here is where he starts to lose me a bit. Yes there was a ton of 'suspect paper' in the subprime mortgage industry. However, that isn't that big of a problem. Sure people could have defaulted and that would have led to a minor recession (probably) but what made this such a massive meltdown wasn't the subprime mortgages. It was banks betting on the subprime mortgages at a incomprehensibly massive scale. Not only that, but these were bad bets that were based on risk models that assumed that these subprime mortgages are uncorrelated (i.e. losses in one section of the country would not be related to another section - except that they were because a good portion of them were based on Adjustable Rate Mortgages and would go into default at approximately the same time, which is how the Big Short people were able to predict the timing). This is what led to the banks collapsing, and these banks were so interconnected in our economy that they basically had to be saved (yay for moral hazard!). So while there certainly is subprime auto lending I am not sure why he believes it is going to imminently collapse but, more importantly, I know of little evidence that the banks are making outrageous bets on these cars. Rather, while mortgage backed securities have been around since the 80s and became a massive share of banks portfolios, auto lending has never been a sizable portion of either banks or households portfolios (https://www.frbsf.org/economic-resea...ie-of-old-age/) Obviously, an Auto industry melt down will trigger huuuuge negative consequences. But other economic risk factors are at play as well: At full employment (that's where we are), the folks driving a car financed with subprime paper - need their cars to get to work. 20% of the population are in subprime financed cars. They will stop paying their high interest revolving credit cards before getting their whips repo'd. This will cascade negatively to other financial markets, causing all lending to become more expensive. Small & Medium Businesses, who also are in a quasi subprime operations financing bubble will need to cut cost to service their already massive debt. This is already seen in the US Bond Yield curve flattening and other historic indicators. And lest no one speak the taboo $1.4T student loan bubble. I think he is significantly overplaying the magnitude of this shock. Plus is the Federal Reserve just going to do nothing while this is happening? Most of this could probably be offset by monetary expansion if auto lending became such a huge concern. Look, we all know that an economic recession is inevitable. And we are past due (squuze the pun), the only question is when. My 'feeling' is in 16 Months, perhaps a bit longer, the inevitable will be a stark reality. These downturns have an affect on consumers perceptions. When we think things are great, and our future financial prospects seem boundless, we tend to purchase what we want (on credit). But in the upcoming dark days, we will be compelled to examine our personal finances closely. All of a sudden, nobody cares about comfortable leather seats...consumers will care more about how they can minimize their transportation cost. People will be far more sensitive to TCO and receptive to non-traditional alternatives. Expansions don't die of old age (https://www.frbsf.org/economic-resea...ie-of-old-age/). They die because of bad behavior and policy mistakes. I do believe long expansions lead to bad behavior like he suggests in his fifth sentence, but recessions don't become statistically more likely after time passes so it is a fallacy to say we are 'due' (https://www.economist.com/economics-...minskys-moment). This is where I say EV's will answer the call. EV's are perfectly positioned to scale battery manufacturing - using the investment capital of today, earned from...the subprime auto finance bubble. And as we all know, once a consumer goes Electric, they (likely will) never go back. Well I don't know that? I wouldn't mind some evidence of this. There are less than 600k electric cars on the road in the entire U.S. The Ford F-series trucks sold roughly 850k last year alone. Not sure we can make blanket statements about Ev's yet So it's not $4/gal gas or $5/gal gas. It's It's bearing witness to ones friends and family being out of work and facing harsh challenges that will affect mass EV adoption. At least I think so. To hit a different note: there will be no mass EV adoption unless firms can produce them a lot faster. Which is happening but isn't going to be overnight. Most estimates don't have EVs being a sizable portion of the U.S. fleet for a long time. __________________ Gas and Electric Vehicle Cost of Ownership Calculator Give me absolute safety, or give me death!