Recently, there has been a fair bit written about the potential risk inherent in the US Automotive sector, that and Student Loans. I thought I would have a quick look at the US Auto sector to see just what the risk might be.
The first thing I wanted to look at was the level of Auto Loans Owned and Securitized to get an idea for how much growth there has been over the past number of years. And here is that chart from the Federal Reserve's own data:
Fair bit of growth since 2011 till today. It has gone from about $700 billion to $1.1 trillion. So those are auto loans outstanding and owned by various lenders as well as the loans that have been securitized.
Quick primer on what securitized securities are: You could watch/read the movie/book The Big Short, and listen to some celebrity explain it to you or you can read this blog (not as entertaining but I bet I understand it better than Selena Gomez). Basically it entails the dealer taking a huge pool of Auto Loans, splitting them up into various sub-packages (tranches), getting each tranche rated by a credit rating agency with the ones at the top having the highest ratings and the ones at the bottom (Equity) having the lowest rating. If there are defaults on the pool of Auto Loans, the Equity tranches at the bottom take the first losses and, if defaults continue, the investor losses work their way upwards across all the tranches. Sound familiar? Basically the same style of securities that blew up the global financial system (without the embedded leverage). The key thing to watch is Default Rates on the underlying loans.
Ok, so with this, all we know is that US Total Auto Loans and Securitized Loans have expanded. What about Total US Auto Sales on an Annualized basis?:
Well Total Auto Sales in the US look to have rebounded sharply but only to pre-credit crisis levels. Interesting how the Loans and Securitized Loans outstanding have grown to record highs by a long shot (comparing charts). The conclusion from this is quite simple - no one is buying cars with cash, that is for sure! They are buying autos with leverage or borrowed money. (I will give my opinion a the end as to what I think is the best way to buy/drive a car)
And finally, given the amount of Loans and Securitized Loans outstanding, and the fact that Defaults are what drive the unraveling process of these Securitized investments, I wanted to look at S+P's Auto Default Index:
As you can see from the above chart, Default Rates on Auto Loans are at multi-year lows.
Now as a warning, I am only looking at the Auto Loan and Securitized markets in general and on the whole. I have not isolated the much-riskier parts of the market, like sub-prime.
So, to conclude, although there are a ton more Auto Loans and ABS outstanding today than there have ever been, it appears that there is likely no apocalyptic blow-up coming as Default Rates sit at multi-year low levels. We would really need to see Default Rates start to rise for credit quality of the Loans and ABS to start to weaken.
If that happens, then we should start to pay attention to what celebrity Selena Gomez has to say.
And now for my personal opinion (and one I believe is based on sound investment knowledge) on how to buy/drive of a new vehicle -->