Déjà Rear View or Who’s Subprime Now?

When you cover financial markets long enough you start to see the endlessly repeating cycles of boom and bust. Every time financial media insists, “This time is different,” yet nothing changes. Asset bubbles form, crash and the next bubble starts inflating almost immediately.

Part of what’s fueling the latest bubble is the cheap money policy of the Federal Reserve. When the Fed lends out massive amounts of cash to banks for next to nothing, those banks get a little crazy chasing higher returns, leading them to invest in overpriced assets. Some of these are collections of loans bundled into a securitized instrument called a CDO, or Collateralized Debt Obligation; a fancy way of saying “bundle of loans.” It was just such instruments that nearly collapsed the economic world in 2008. But if you thought we learned anything from that portfolio-shredding disaster, then you’ll want to look at what’s brewing in the subprime auto loan market.

Blowing Past a Trillion

Auto loans of all types, including subprime, passed a trillion dollars for the first time last year, more than the collective total Americans owe on their credit cards. While that’s still below 2009 levels on both the percentage of these loans that are subprime, and their delinquency rate, the numbers are far too close for comfort. Subprime loans make up roughly twenty-two percent of car loan portfolios and delinquency rates are running about ten percent—at a time when people think the economy’s in good shape. Imagine what happens to those numbers in a crisis.

Big Prices, Big Defaults

It’s not unusual to see sticker prices on new heavy duty pickup trucks running anywhere from $50,000 to $70,000. If you’re middle aged, you might remember that used to be the price of a decent house. What we’re seeing once again is cheap money inflating the price of new cars and trucks. Since most people are borrowing money on longer-term notes, manufacturers have little incentive to keep prices low. Scarily, we’re seeing the same dynamic in the housing market today, identical to the run-up in housing prices prior to 2007.

Once More into the Breach

Once again we’re hearing the refrain that this time is different. But the difference, if any, is in terms of scale, not lender practices. And while the trillion dollar car loan market is less massive than the $8.4 trillion subprime housing market in 2007, losses on subprime auto loans are rising.

Not Our Only Inflated Sector

Let’s not forget the industry that keeps our subprime cars running. Banks have also made huge loans to the energy sector, which has been in serious trouble since oil prices cratered. In fancy banker terms this is called “risk layering” and overpriced oil and gas assets, while not enough by themselves to topple banks, could become a serious problem when combined with the asset bubble in subprime auto loans. The temporary recovery of oil to $60 a barrel provided only passing relief. Oil companies are seeing red and layoffs have continued.

Can You Protect Yourself?

Even if you saw the subprime housing crisis coming in 2005/2006, it was still two years before it fully bloomed and took down the worldwide economy. Overpriced bank assets are traded between banks selling those assets both to each other and to outside investors. When it comes to pricing those assets, we, literally, have the problem dictating the solution. Wall Street is once again falling into the same bad habits, which will eventually end the same bad way.

While I’m not suggesting you pull all your money out of the stock market, this is fair warning to hedge your wealth with liquid hard assets like gold and silver. Now is the time to be skimming off winners in stocks and turning some of that free cash into tangible assets. Sell stocks, a little at a time, while they’re still worth something.