In line with the Roubini-related post below this one, here's a highly interesting excerpt from David Rosenberg's "Toast With Dave" (courtesy Gluskin Sheff) today about the cash-for-clunkers program that this blog has panned more than once. The big picture implications are serious and feed my skepticism that Dr. Roubini et al. are correct in advocating large-scale, long-term "stimulation" of the economy. As a physician, I have had many alcoholics and other substance-abusers under my care. Including nicotine addicts, that was a very large number. There's no time to stop the addiction like the present.
Enough of me; here's Dr. Rosenberg:
Indeed, just have a look-see at what is about to happen now that the government's Cash-for-Clunkers blowout is finally over; the USA Today cites an Edmunds.com study which shows that half as many people are researching a new car purchase on its website compared to the peak levels during the cash-for-clunkers survey. Apparently, traffic is off 10% from depressed June levels, when the subsidy program was barely a concept. Will the government reinstate the program when auto sales collapse in the fourth quarter? Can it possibly justify more than the $3 billion in taxpayer money that has already been committed to supporting auto consumption? This is what Mr. Market may not see just yet — a 2002Q4 style of GDP growth relapse in the final three months of the year.
What is interesting is that a CNW Research poll found that nearly 1 in 4 Cash-for-Clunkers beneficiaries now regret making the decision to buy a new car they had no intention of purchasing just yet — because now they are faced with a huge financial bill to pay. Think about it, nearly 700,000 sales with an average amount to finance of nearly $16,000 means that the government induced the household sector to take on more than $11 billion of new debt. It was an overextended consumer that got us into this financial mess to begin with, and now Uncle Sam just induced the household sector to expand its balance sheet by $11 billion instead of doing the prudent thing, even if at the expense of auto consumption over the near-term, and providing lessons on how to live within our means. This is all rather unbelievable, and the price we will now pay for an illusory positive print on third quarter GDP will be stagnation over the next several quarters.
Remember that it is the stock that is in essence a perpetual option, and a bond that is limited in duration and therefore allows a "do-over", trading stocks without believing in long-term ownership being a negative-sum game. Elsewhere in the "Toast With Dave", he reiterates that the risk-reward for exposure to businesses is better with corporate debt than equity.
Lots to think about in the waning dog days of August . . .
After all of the hype over the last month and a half about the program starting up, then running out of money, then restarting, and about all those "lucky" people who cashed in their old cars, I'm glad that someone has finally thought to ask the new car owners about their shiny new debt. We just witnessed about 700,000 people trading a paid-off, working automobile for $10,000 or more in new debt, and likely an average of $250-300 a month in new payments.
ReplyDeleteDon't get me wrong, when I heard there was money being thrown away I looked up the info to see if I could get my piece of the action. I have an 11-year-old pickup that is paid off, has 160k miles, and gets 16-17 MPG, and I'd love to get a no-questions $4500 check for it while also picking up a newer truck that gets better gas mileage. But when I saw that the replacement had to be a brand new car, I turned away and never looked back.
Unfortunately lots of other people didn't.
Two years ago I bought a 20-year-old used car for $4,000 with 91k miles that gets 25-26 MPG. If the goal of CfC was to help the environment, then I did better because I got a 50% improvement in MPG over the pickup truck, AND I saved a used car from the scrap yard. It was also cheap enough for me to pay cash, so I didn't add more debt to the system and never risked defaulting a loan and hurting the economy. And it's no "clunker" either - it's an '87 Porsche 944, that passed its Colorado emissions test with flying colors last month.
So now we have 700,000 people who surprised themselves with a new car payment - hoping the economy is recovering, and praying they will continue to be able to make the payments.
I hope so too, I really do.
I want the economy to do better.
I want these people to pay off their new debt-mobiles.
I want all that tax money to have been well-spent.
But I'm not feeling good about all those people being put at risk, and taking the financial sector along for the ride.
If anything goes wrong, if the economy doesn't pick up as expected, if investors panic when the numbers spike & dip again following this program, and if anything happens to all those new debt-owners, will it cause another pull back? And if it does, will it be worse than what we have been through?
Unfortunately, while I'm an optimistic person, I can be a little cynical too. I want the best to happen, but I don't expect it to happen. So I have this odd feeling that in about 3-6 months the auto loan defaults will be piling up, and the repo-men will be having a very busy Christmas season.
Until then, I'll drive my 22-year-old, 25-MPG, un-clunker, or maybe the 11-year-old, 17-MPG kinda-clunker, without worrying about a single car payment.
-J