#37 - What Happens When Bubbles Burst?
The car market has gone a little crazy of late…..but then again so have the majority of other tradable asset classes. A post pandemic frenzy of buying is taking over the globe as consumers and investors alike rejoice in their survival of COVID and the removal of the social distancing shackles which have confined us for the last 15 months.
It is hard not to get caught up in. The hole in our social media feeds once filled with Donald Trump have been plugged by Elon Musk preaching why Dogecoin and Tesla are going to the moon. Meanwhile global rates remain ludicrously low fostering rampant overleveraging as FOMO sets in and people feel the need to be buying even if valuations look like turd………smells a lot like 2007 all over again.
Maybe I’m being a little too Michel Burry without the track record but we definitely appear to be in a speculative bubble that is very close to the point of bursting. So what are the main supply/demand contributors which could further exacerbate the bubble-esque environment we find ourselves in?
New car supply (or lack of) is a massive contributor to the high levels of demand we are seeing in the used car market at present. A combination of production line delays caused by the COVID pandemic combined with the associated logistical headaches of new/inefficient border crossing procedures in the post Brexit world means it’s now harder than ever to get hold of new cars. This will likely normalise over time as factories come back online and trade deals are formalised but the timings of it all at this juncture are fairly hard to predict.
Dealers chasing inventory is another major concern. Unsurprisingly, having a forecourt or showroom empty of cars is not great for business so as it becomes harder to source stock, dealers willingness to pay up increases, thus in turn pushing retail prices higher as well. Now you would hope that supply/demand equilibrium should be achieved at some stage as the market finds a happy resting point but right now, demand is still firmly outweighing supply and pushing the market higher.
Consumer overleveraging continues to be prevalent as the cheap cost of borrowing and government subsidized loans attract more and more subprime borrowers. In many ways this is actually my biggest worry for the market given the large proportion of cars which are paid for via finance. In an economic downturn/recession these will be the first people to start defaulting and create a wave of cars coming to the market…….all at very distressed prices.
The billion dollar question then……when do we see the bubble burst? If my foresight was as good as Mr Burry’s you would likely find me on a beach in the Caribbean sipping Mojito’s and not a showroom in Woking cleaning cars but I wouldn’t be surprised if over the next couple of months we see demand begin to slow down as travel opens up, discretionary spending can be allocated elsewhere and people lives return to normal.
The severity of any automotive bubble bursting is likely to be linked to the broader macroeconomic stability of the world coming out of this pandemic…..it will follow the herd as opposed to leading it. However the Bear in me knows that if a recession does become a reality… it is going to be pretty horrific given the lack of monetary or fiscal tools available for central banks or governments to combat it.
The age old adage of living within your means has never seemed more appropriate.
Happy Motoring,
Greg