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Subprime Makes a Comeback; Auto Loan Crisis is Here

"A great calamity is as old as the trilobites an hour after it has happened." ~ Oliver Wendell Holmes

Greed and recklessness continue to govern the markets; nothing was learned from the 2008 financial crisis. Hence, history is destined to repeat itself, and this might occur a lot faster than most anticipate. Fitch states that Subprime Auto bond delinquencies are at a 20 year high.

Take a look at this chart; it shows you great things are (us being sarcastic)

Auto Loan Originations by Credit Score

The number of individuals who are more than 60 days late on their auto payments surged 11.6% year over year; this brings the current delinquency rate to 5.16%. During the financial crisis of 2008, the delinquency rate peaked off at 5.04% according to Fitch. This fully validates the argument we have made over the years stating that this recovery is nothing but an illusion. This illusion is maintained by hot money, and this was done by keeping rates so low that it would force any sane person or business to speculate to earn a higher yield.


This chart further illustrates the deteriorating picture

Subprie Delinquency Index

This is why the Fed is hell bent on lowering rates; it has pushed central bankers Worldwide into a corner forcing them to embrace negative rates. Lower rates mean more hot money will flow into the markets as companies borrow even larger sums to buy back their shares, to further enhance the illusion that all is well. By buying back their shares, they can raise the EPS without actually improving efficiency or selling more products.

"Our concern isn't necessarily individual transaction performance, but how a group of mid-sized and smaller issuers could be exposed to funding risk at the same time, and which results in unanticipated consequences for investors," Duignan said. "You could see a vicious cycle" where investors stop buying from smaller companies, which would then be forced to cut back on their servicing costs, resulting in even more loan losses, he said.

In General, investors expect some sort of trouble, and they understand the risk is high, and that is why they gravitate towards these investments because of the higher yield. However, the outlook changes when you actually have to take a loss. It is one thing to anticipate one and quite a different issue to having to deal with one. If delinquencies start to surge, investors could suddenly head for the exits leaving this market with no buyers.As they say, it's always quiet before the storm. If you have invested in this sector, now might be time to hedge your positions by purchasing some puts; in other words, short the auto loan sector.

We live in an era where the illusion of an economic recovery is maintained via massive injections of hot money and in such an atmosphere, the end is clear. We will witness another financial crisis and as such it is always a good idea to have some Gold bullion. You should view this as a hedge against the next financial crisis.

 

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