Who’s Going To Stop The Madness?

Every month consumer debt in aggregate hits a new record. Auto loans and student loans have been hitting monthly record highs for quite some time. In November credit card debt hit a record high in total and increased a record monthly amount for any one month. Mathematically this can’t go on forever. In fact, there are signs – indicators not reported widely by the financial media and, predictably, completely disregarded by Wall Street – that indicate the debt party is coming to an end. Events that follow the end of the party will be less than pleasant for the majority of U.S. households.

Every week in the Short Seller’s Journal I present data which reflects the deteriorating condition of middle class America. For definitional purposes, “middle class” is defined as any household that is unable to afford their own politician, which means 99.5% of all households.

As an example, buried in Wells Fargo’s Q4 earnings presentation was data that showed charge-offs in WFC’s credit card loan portfolio in Q4 soared 21% vs. Q3. The charge-off rate as a percent of average loans outstanding increased to 3.66% in Q4 from 3.08% in Q3. This is a 19% increase in the charge-off rate. While this might seem like a low number outright, not only is it headed in the wrong direction, it’s not too far below the nationwide bank credit card charge-off rate in 2007 of 4.15%. Again, this fits my thesis that the financial condition of the average household is deteriorating.

In addition, the dollar volume of auto loan originations at WFC declined 33% and home mortgage originations fell 26%. in Q4 2017 vs 2016. WFC’s mortgage applications in Q4 dropped 16% in dollar volume from Q4 2016. And its application pipeline (applications submitted and waiting for the purchase to close) declined 23% for the quarter vs Q4 2016.

WFC is the second largest mortgage originator after Quicken Loans. It is also a major player in auto loan underwriting. If auto and mortgage loan origination statistics are declining at a double-digit rate at WFC, it’s a good bet that this is a secular trend across the industry. Simply put, middle America – the 99.5%’ers – are running out of capacity to assume even more debt. This in turn will translate into a unexpectedly precipitous drop in consumer spending, especially on large-ticket items like cars, furniture and homes.

I stumbled on a blog a couple weeks ago called  A Cold War Relic. The proprietor works at an auto dealership and presents valuable insight on the factors that will drive auto sales into the ground and send auto loan defaults soaring. His latest post, “What’s Going To Stop Me,” is well worth reading:

This dark momentum could strangle the industry, but everyone refuses to stop it. Every time a customer accepts a $500 monthly payment on another overpriced compact crossover, they are feeding that momentum. When dealers structure deals for far more than the car is worth, they are feeding that momentum. The problem is: who is going to actually tell anybody “no?” Customers want their cars and refuse [do not have the funds] to put money down to get them. A large number of dealerships are fighting to attain sales numbers the market can’t currently support.

I get cursed out every month when our store misses the targets set for us by the manufacturer, even though I’m fighting against larger stores offering deeper discounts on new cars. On top of that, it’s not just your credit criminal customer that isn’t reading what they’ve signed anymore. When you have consumers with 700+ FICO scores rolling over portions of debt they already couldn’t handle on top of new debt and financing the whole thing over increasingly long terms at interest rates they arguably no longer deserve. The problem is that prime credit customers are slowly becoming credit criminals.

You can read the rest of this here (highly recommended):   Auto Loan Crack-Up Boom Coming

In the latest issue of the Short Seller’s Journal, I present a no-brainer homebuilder short idea plus I illustrate the mechanics of shorting a stock for those who only use put options.  In addition I review the Company’s fundamentals.  This is probably the only homebuilder for which unit sales are dropping – in this case falling at a double-digit percentage rate. I believe shorting this stock is good – at the very least – for a 30% ROR by the end of the year, if not sooner. You can find out more details about the Short Seller’s Journal here: Subscription Information.

11 thoughts on “Who’s Going To Stop The Madness?

  1. Great article Dave. I have to agree, I live in Southern California and I am driving a 15 year old Honda and continue to look to my left and to my right and see very few cars that are older than 5 years. My car runs great and gets me where I need to go and I have not had a car payment in 12 years. But, it would be easy to get caught up in the “keeping up the with Jones” as seems to be the case here.

    1. I’m sure it’s the same there as here: I’ve seen a huge influx of giant pick-up trucks, brand new, $60-70k, 12 mph – statistically most either leased or in-debted with $600+/mo payments. I bet 30-40% of those eventually get repo’d

  2. If a person, company or country borrows unpayable millions, billions or trillions, knowing they will never be able to pay those debts, they’re scoundrels.
    If a person, company or country borrows unpayable millions, billions or trillions, unaware that their borrowings will end badly for them, they’re stupid. And you just can’t fix stupid. I’m not sure what you can you about fixing scoundrels
    My one hope is that enough ignorant people and enough scoundrels borrow enough money from Well Fargo that the defaults will destroy this monumental edifice of corruption and greed forever.
    If a bank willingly, and with malice aforethought in their haste to satiate their greed, loans money to stupid people and scoundrels they deserve to be destroyed. And the gravestone of this failed bank serves as a lesson to others who would follow in their path.
    I do take issue with the statement from the car dealer calling his customers credit criminals. If anyone is the criminal it’s the scumbag dealer selling a car to someone who cannot possible afford it. They are as bad as a drug dealer. The customer is just one more in a 10 million long line of people who want their car fix and will do anything to get it. That’s stupid, not criminal.
    WFB and the auto paper pimps are the criminals.
    Warren Edward Buffett (WEB) and and Wells Fargo Bank (WFB) Birds of a feather

    1. when the bank fails, unlike in past scenarios, anyone with money in the bank will be wiped out, their money will be ‘bailed-in’, there will be no more tax payer bailouts

  3. Hi Dave,

    I don’t know if you are aware of this, but Rothschild said in 1988 that the dollar will end sometime between 2016 and 2018. Since they run the show for most of the western world and much of the eastern world, it’s something to take notice of and not ignore. They do have a habit of informing their plans in places most will not venture for truth. At this moment, it appears the ducks are getting lined up. As for silver and gold, they both got crunched in December, but look at them now. A nice “V” pattern. Pattern change maybe?

    Your articles all “most excellent” and I save them all. Thank you for all you do.

    1. Thanks for the feedback Guy – I appreciate it. I was aware of the Rothschild. I met with someone last week who is friends Bernard de Rothschild. He said the “conspiracy theories” connected to the family are largely true.

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