What Auto Loan Delinquencies Tell You About the Economy

Transcript

Ken Fisher:

I'm just going to tell you that whatever's going on all the time, there's a big piece of the world that's trying to parse out how that might be just terrible. Most of the time, those things they're trying to parse out are actually simply better not thought about. Are there things to worry about in life? Yes, of course. The recent period has seen a pickup in auto loan delinquencies and auto repossessions. And that raises the fear and the question, is that a harbinger of bad times ahead? Isn't that a harbinger of bad times ahead? Does that mean we should be scared?

Now, I'm just going to tell you, there are a lot of people—and you can look this up online, do an AI search and you'll see it—that believe that's true. I'm also going to tell you, that's nonsense. The fact is, there's a lot of ways when somebody tells you X causes Y to run statistics that are able to tell you if X has a high likelihood or not of causing Y, or even may cause it at all. And yes, there is sometimes, and enough times, that it gets people all a-titter. Causality between these things, rising automobile loan delinquencies and rising auto repossessions, and future downturns. But it is not high enough—not even close to high enough—to actually be a leading economic indicator.

Now, if you actually look at them. I mean, I'm just going to tell you really simply—the best economic indicator is the stock market falling or rising for a sustained period of time. It's singularly the best extant. You can't find a better singular one. And I'm just going to tell you—you don't get a recession, a real recession, not a freak out period of people going woo woo woo, but a real economic cycle recession—unless you've had the stock market, the broad stock market, the S&P 500 and the All-World, falling for at least three months. So, you can just kind of not get overly excited about most of these things. But if you do, again, an AI type internet search, you'll see that, for example, this thing that's asked about, rising auto loan delinquencies and rising automobile repossessions, is something that the central bank economists fret about quite a lot, and they fret about it, even though they actually should know better and probably do know better, that it's not going to be something that's going to lead the economy into something they're going to have to do something about.

Why do they worry about it? Well, you know, if you've heard me on central banks for a long time, you know I think that the people that run them and the people that work for them mostly are misguided in the way they view the world. Going back to things that I've long said and written about, going back to the days when William McChesney Martin was the longest serving head of the US Federal Reserve System and said, when you become head of the Fed, you take a little pill, and it makes you forget everything you ever knew, and it lasts just as long as you're head of the Fed. His famous statement about that, he had some other very kind of cool, famous statements, like, the role of the Fed is to take the punchbowl away from the party just when the party gets going good.

They worry about a lot of things they don't need to worry about because while the Fed, in theory, is not a political animal, it is very much a political animal, and it worries about how they will be perceived by the body politic that can appoint governors of the Federal Reserve, chairman of the Federal Reserve, how that'll play, and the auto loan delinquencies, the defaults and the car repossessions, all do play into a part of the world. The reason they're not a leading economic indicator is because they are a function of people who already are significantly impoverished, and cruel as that may seem to talk about them. The reality is, we've always had people who are impoverished and the people who are impoverished—and what I'm going to say sounds cruel, but it's just a simple fact of the way the world works—they, because they're already impoverished, already have minimal impact on the business cycle ahead. They've already, if you will, been sidelined by their impoverishment.

The economy is about the things that are moving, are working or not working, in significance. So, if we have a period where some people, forget about who they are for the moment, are becoming impoverished to the point that they can't pay for the cars they were previously buying or getting close to—that would be a delinquency versus a default— the fact is, they've already been sidelined out of the economy, while other forces in the economy may well have been growing nicely, overcoming that, allowing the economy to keep purging. Cruel that may be to these people over here, that tells you nothing about where the economy is going.

And so, auto delinquencies, and then defaults, and then repossessions, can occur because of a variety of features that play together. What happened to car prices? What happens to interest rates? What happens to changes in the loan duration periods? What happens to inflation? You can just go down the list, and they don't all play together always the same way, but they are not leading in—the fact is, I'm going to extend this to a broader level. Mortgage delinquencies—home mortgage delinquencies, different than cars, also are not a leading economic indicator. You'll also see as they rise a lot of woo, woo, woo about them. They're usually later stage indicators coincident with what's already happened. But again, not always. That's the problem, the not always part, and the not consistently part, makes these not be useful indicators for figuring out what's ahead.

And while it is regrettable that some people are always being left behind because of unfortunate circumstances that occur to them, regrettable, the world has known that existence is there as long as humanity has been around, as long as markets have been around. And so, from that, it's really, if the things that are working are working bigger than the things that aren't working, then the economy's moving forward; if the reverse, then not. Now, let me just say to my point, that if these things that people so often fret about—whether it's the central bank, other people, other economists, you, maybe, because it feels like it really should be an indicator—if these things really were what people kind of purport them to be, then they would be included in the leading Economic Index series that is aimed at being an official forecaster of the economy ahead. But the statistics are weak enough that they aren't. And that's the point that I'm wanting you to make.

So, thank you for listening to me. I hope you found this useful, I hope you found it educational, and I hope you found it somewhat reassuring. Thanks. Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.