Economics, Info-Graphs

Auto Sales, Mortgage Credit and Credit Spreads

Economic news continues to remain positive. Employment rose more in Dec 2016 as Light Vehicle Sales recorded a record high for the current economic cycle of 18.4mil SAAR (Seasonally Adjusted Annual Rate). Since the election there has been more than just an improvement in optimism, we have seen a decided improvement in credit availability as noted by the sharp rise in the MCAI. On can see a correlation in the record Auto/Lt Truck Sales pace for December and the rise in MCAI. All good for continued economic expansion and higher equity markets.

Two features in Auto/Lt Truck Sales history are worth highlighting in support of a longer term investment perspective. These are the ‘Cash for Clunker’s’ congressional stimulus program in 2009 and the impact of the 2011 tsunami on global auto production. The first was a misperceived attempt by government stimulate vehicle sales and improve environmental emissions by offering tax benefits in trading in used for new vehicles. There were many instances of fraud when junked vehicles were traded in as used vehicles which resulted in a spike in reported new vehicle sales. Overall, employment continued to decline without impact from this ill conceived program and vehicle sales shortly after the end of the program fell below the trend in place at the time. The pace of vehicle sales eventually resumed based on economic recovery in the months following the program. The Japanese tsunami was a considerably larger event and shows how tightly vehicle production is globally connected. The tsunami wiped out the supposed only manufacturing facility of pigment for black vehicle coatings. It also impacted a major manufacturer of auto dashboard instrumentation. Black is the most popular vehicle color. Without pigment, vehicle sales stalled sharply. Recovery occurred a few months later as individuals acted to rebuild pigment mfg capacity.

The lesson to learn is that events such as these are minor in a Free Market. Free Market economics are larger and more robust than most investors can conceive. Free Markets generally ignore most government directed programs and self-adjust to unexpected events to progress more or less smoothly through economic cycles if permitted. What most of us do not see is that Free Markets adjust daily to ebbs and flows of consumer needs. Economic activity is human activity purposely seeking higher standards of living. This type of activity never stops. It cycles! The current cycle will continue to expand till the MCAI peaks and then turns lower. Credit expansion and availability is based on the T-Bill/10yr Treasury rate spread. Credit expansion essentially stops when T-Bill/10yr Treasury rate spread falls to 0.0%.

At the moment, the T-Bill/10yr Treasury rate spread is widening. This is a simple formula for easier credit access, economic expansion and generally higher equity prices.