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Witness to Another Bubble?

June 5, 2017

U.S. auto stocks have been in a selloff of sorts after drastic sales drops were reported recently. Ford and GM stocks are both down, with Ford reacting by ousting its CEO. In fact, the entire industry is down almost 5 percent year-over-year from 2016.

And it’s not just new car sales that are down, because used car sales are lagging too. Since about 2010, auto sales have been driven by cheap gas and cheap loans. Seven years ago, 13.1 percent of all auto loans were of the subprime variety. Today, it’s up to 15.7 percent.

But the poor performance of new car sales especially hurts automakers because, along with homes, they’re usually among the largest purchases people make.

So, this downturn could be a sign that a recession is near. Or worse, it could be an auto loan bubble similar to the mortgage bubble we saw usher in the housing crisis earlier this century.

Perhaps this is telling –  Wells Fargo and JP Morgan Chase have been reducing exposure to subprime auto loans. However, at the same time, those firms packaged billions of dollars in subprime auto loans into asset-backed securities.

Are we seeing the next financial crisis form before our eyes? I hope not.

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