I had suspected there was a bubble forming in the automobile market after hearing countless advertisements saying things like “Bad Credit? No Credit? You’re Approved!” This was akin to the ads I saw amid the growth of the housing bubble. My fears would soon be confirmed.
My girlfriend @sharingeverybite and I were at the car dealership purchasing a new car. We found the perfect car for her - a tangerine-colored Toyota Prius. After negotiating a killer deal, we were finalizing the paperwork with Jim, the finance guy. A section of the paperwork mentioned GAP insurance and we got to talking about it. I made a comment saying it's unnecessary if you’re paying a few thousand dollars down.
Here’s where things got interesting:
Jim - “Yes, except most people who come in here are paying no down payment whatsoever.”
Me - “Really?! Nothing down?”
Jim - “Yes, in fact, most people have negative equity in their trade-in and are rolling over that negative equity into their new car.”
What Jim just said is paramount, so let me say reiterate this:
- Most people buying a new car at this dealership are underwater on their vehicle.
- They can’t afford, or at least aren’t paying any down payment.
- Customers are rolling over that negative equity into their new car, which also has negative equity the moment it’s driven off the lot.
This kind of lending behavior isn’t typical. And this is the majority of the dealership’s clientele? Yikes!
I don’t live in Detroit, why should I care?
- This problem isn’t contained to Detroit.
- Be prepared mentally.
- Be prepared financially.
This isn’t contained to Detroit - When this bubble pops and if General Motors sells 50% fewer cars next year than they sold this year, they’ll be forced to scale back and lay off many people. Additionally, GM has 2,700 direct material suppliers. If GM’s business decreases by 50%, their 2,700 suppliers will also suffer. Let’s assume each of GM’s suppliers has ten suppliers and the supply chain ends there (it doesn’t) - that is 27,000 businesses who are negatively affected.
Be prepared mentally. - I think it will be much easier to persevere through difficult times if you’re mentally prepared for it. Putting on rose-colored glasses, ignoring the facts, and pretending everything will be all right won’t make things easier on you in the future.
Be prepared financially. - Note: The following should not be considered investment advice. If I owned stock in any automakers, I’d sell it. If I owned stock in any other business that largely depends on the success of automakers, I’d sell it. If I worked for one of these companies, I would assess the situation and likely look for a new job.
Furthermore, when you see giant bubbles before they pop, there’s enormous profit potential. For instance, you could purchase put options on GM. A single put option gives you the right to sell 100 shares of GM at a predetermined price before a specified date, giving you tremendous leverage with limited downside risk.
I am prepared for the worst, but hope for the best.
~Benjamin Disraeli
Do you agree with my assessment? I'd love to hear your thoughts and critiques.
My name is Jordan Rusche, and I live in the gorgeous state of Arizona. If you enjoy my writing, you can follow me here. My interests include golfing, hiking, mountain biking, tennis, weightlifting, skiing, paddleboarding, and just about anything else that keeps me active. My blog will center around economics, psychology, philosophy, and Steemit.
Oh, and my dog is way cooler than me.
"Pay me 100% in Steem Power" - Yes, please!