By on February 11, 2013

Automakers look with worry at the tanking European market, but have great hopes for an advancing American. Not so fast, says Mike Jackson, CEO of AutoNation Inc. He sees a day of reckoning follow a few years of good auto sales.

“There is a day of reckoning coming for the U.S. economy and for America,” Jackson said at a J.D. Power conference in Orlando, with Reuters taking notes.

From 2004 to 2007, Jackson warned that automakers must stop producing too many cars, sold with generous consumer incentives and easy credit. In 2009, the U.S. auto market dropped to 28-year low after more than 10 years of sales that had averaged nearly 17 million. Now, he is warning of carpocalypse II.

Jackson said the federal monetary policies of low-interest rates and sharp increases in the balance sheet of the U.S. Federal Reserve are two major stimulus efforts that may come back to haunt American consumers.

Lacey Plache, chief economist for Edmunds.com, agreed with Jackson’s assessment, but like Jackson said it was difficult to peg the timing of the hit to the U.S. economy.

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30 Comments on “AutoNation’s Car Cassandra Warns Of Big Market Crash...”


  • avatar
    jjster6

    Also in the news, after a few sunny days we might get some rain. I can’t believe this is making news. Hasn’t the new car market always gone through a cycle of up and downs. Wait until the market is down… he’ll predict it will go back up again. What a genius!!!

    I also predict that this July will be very hot, soon followed by a much colder December.

    • 0 avatar

      Thank you for reminding me that I wanted to ban you for the “sand in the vagina” remark. Nearly forgot.

      The ban also is an act of professional courtesy to General Motors. A diversity-oriented company like GM won’t like it that “sandy vagina” are made on a public forum while using their facilities in Arlington, Texas.

      Note to all: As per TTAC’s commenting rules, nobody gets banned for what one writes on TTAC. How one writes it definitely can get one on the not-invited-back list. A little manners go a long way. It wasn’t what jjster said here that got him banned. The sand comment did it.

  • avatar
    mikey

    @jjster…I was among 25 or so guys hired at GM on same day in 1972. I remeber them sitting us down,and telling us. This buisness goes up,and it goes down. You may be here for 6 months,or 6 weeks. We went all out, full O.T for three years. 1975 was a whole different story. 4000 guys went out the door. In early 76 everybody was back.and GM went on hiring drive. 1980,81,82 we were told to start looking for another job. By 1985 GM was hiring again, only to scale back in 91-92.

    The next boom was 14 years long! Everbody forgot the lessons from the past. “Hey this gonna go on forever” was the common cry,amongst the younger crowd. Big houses,big trucks,lots of husband, and wife teams working,on different shifts. Cottages boats,exotic vacations. Matching ATVs? No problem. 300 grand in the hole? Thats F.A. with a combined income of 190K. No money in bank? W.T.F. you need that for? You need money? Work a Sunday. Wifey can work Saturday.

    Reality hit somewhere around 2006. Oh this just a little dip. GM will be hiring by 07……Yeah.

    I guess the rest of the story is well known.

    • 0 avatar
      Secret Hi5

      In other words, nobody really knows. But one may, after the fact, go back and cherry pick the monkeys who typed the correct combination of letters.

      • 0 avatar
        Lorenzo

        That’s not quite what Mikey is pointing out. The business is cyclical and Mikey is saying everybody knew that until a new generation lived through an abnormally long up-period and had to learn that the down periods come with regularity. He saw it from an employee standpoint, but analysts need to remember the past too, and realize the next dip is not necessarily carmageddon.

    • 0 avatar
      Carl Kolchak

      I have been in the mortgage industry for a while. With previous employers, I would get UAW workers making 85K a year and you couldn’t lend them a penny, with huge debt and jacked up credit. No industry is immune to cycles, as I well know considering what I do.

  • avatar
    Lynn E.

    Making predictions is difficult because a few black swans usually show up to ruin our assumptions, timing, and predictions but I do appreciate seeing another side.

    What does, “sharp increases in the balance sheet of the U.S. Federal Reserve” mean? The predictor (Jackson) used that phrase and I don’t understand what it means or how sharp increases help or hinder car sales.

  • avatar
    mikey

    I know nothing of higher economics. I’m confident of this prediction,though. If we had a blip, say 2 percent hike in interest rates, here in Canada “the fit would hit the shan”. Now throw in oil dropping 20 bucks a barrel?

    The new car/truck market would be the first casuality,up here in personal debt riddled, Canuckistan.

  • avatar
    Speed3

    Of course there will be a big market crash…eventually. There is no current evidence that the auto industry in the US is going to crash. The housing market is picking back up and construction is ramping up in many parts of the country–this bodes well for auto sales.

    Barring an economic melt down or a significant shock from abroad, the industry will continue to grow for quite sometime. Of course this growth will be weak but I don’t buy his arguemnt…because interest rates are low and the high government debt? Please add the causal logic between the two! Or for all the amateur macro economists, give it your best shot.

  • avatar
    Felix Hoenikker

    I agree with Mr. Jackson’s statements. Consider these facts.

    In the US, there are 4 million fewer jobs than in 2007, but there are 11 million more people in the working age population. Not a good omen for big ticket sales.

    While housing sales are up, it’s just existing homes being resold which mainly benefits a few random real estate agents. New housing starts are at their lowest level since the Federal government started tracking them in 1972. New home construction, not churn of existing homes, is what drives the economy through job creation.

    The historic low interest rates driving the modest sales increases of cars and homes has nowhere to go but up as each round of stimulus is less effective than the last one.

    • 0 avatar
      hreardon

      The moment interest rates start creeping back up is the moment the economic “recovery” comes to a complete standstill. Mortgages, new homes and existing homes sales will crater once rates rise and when/if mortgage programs disappear (fat chance of that happening). With auto loans at 0%-3%, home loans at 3.5%-4.5% and other 0% interest offers on everything from credit cards to furniture, it’s nearly impossible to say no to using other peoples’ money.

      What’s interesting is if you look at revolving lines of credit, specifically credit cards. The total amounts outstanding have been slowly declining since 2007 – the first time in 35 years. The scary number is the student loan number, up some 110% since 2007, with defaults skyrocketing in the past six months.

      • 0 avatar
        DeadWeight

        “What’s interesting is if you look at revolving lines of credit, specifically credit cards. The total amounts outstanding have been slowly declining since 2007 – the first time in 35 years. The scary number is the student loan number, up some 110% since 2007, with defaults skyrocketing in the past six months.”

        The “great consumer deleveraging” of the last 4 years is a busted myth.

        Consumer borrowing hit a new record of 2.78 trillion USD in December. That’s new record as “highest in history.”

        http://www.cbsnews.com/8301-505145_162-57568254/u.s-consumer-debt-rises-on-student-auto-loans/

        The largest categories of consumer debt were student loans and….yep, auto loans.

        It would appear that many people are again borrowing a ton of money (a record amount, in fact) to keep up with the equally indebted Joneses.

        All’s well that ends well.

  • avatar
    Landcrusher

    It’s a sound theory. Gotta remember lots of other things can happen that improve or decrease sales. I think the effect he is describing will be in the mix for sure though.

  • avatar
    sideshowtom98

    What Mr. Jackson predicts is a near certainty, given the mismanagement of the Federal Reserve, and the economy by the current administration. The longer the economy depends on quantitative easing to stimulate demand, the bigger the hangover is going to be. Low interst rates could soon herald deflation. We have sewn the seeds for many years of economic contraction. Years of deficit spending, giving the illusion of prosperity, will be offset by many more years of deflation, resulting in very hard economic times.

    Economists have been warning of a hard landing for years. People have opted instead to vote for more spending. Vote for politicians that neither understand the truth, and would not tell it even if they did. We got the government, and the consequences the majority voted for, and deserve. Let the good times roll, until the walls come crashing down around us.

    • 0 avatar
      gslippy

      Agreed. Carmageddon II will be small potatoes compared to the other economic calamities coming to an economy near you.

    • 0 avatar
      chaparral

      Wait a second, wasn’t the problem with “loose-money” policies supposed to be inflation? Now it’s deflation we have to worry about? It’s not like you can have both at the same time.

      Meanwhile, down in Texas we’ve got an oil and gas boom, and a wind boom if the gas prices ever go up enough to show off how cheap wind’s gotten.

  • avatar
    suspekt

    If any of you have the time, this article from New Yorker magazine on Ray Dalio (Bridgewater Associates) is a great read and ties into this very topic of QE by the Fed. Enjoy.

    http://m.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy

  • avatar
    TW4

    Personally, I think he is over-emphasizing monetary policy and macro economics, and under-emphasizing economic restructuring in the auto industry and the US. Auto manufacturers are restructuring costs by increasing platform-sharing and improving modularity for both platforms and engines. The US economy is restructuring petroleum trade. The Japanese and Germans are cutting costs by shifting production to NAFTA countries. The manufacturers already have several vehicles that are compliant with CAFE 2025 regulations so it’s not like mandatory development spending is going to eliminate their margins. As new fleet fuel economy rises, Americans actually get more cash in their pockets.

    I see the possibility of flagging manufacturer profits, but not a collapse in SAAR.

  • avatar
    TomHend

    Warren Buffett thinks this guy is smart, he bought his stock at one time.

  • avatar
    RobertRyan

    The problem as I see it the US Automobile industry relies very heavily on Pickup sales. If there is a severe downturn in housing or related activities then this driver of the Automobile industry and the US economy could be severley affected.

  • avatar
    oldyak

    The Car buyer is in a real pinch right now.He/she has been diligently paying off credit cards and trying to put money into savings and then,looks for a car to replace the one that would have been replaced 5 years ago…OUCH!
    Right back into the massive debt hole we go!!!
    Hard to win in this situation.

  • avatar
    Big Al from Oz

    @Pch101
    Quantitative easing will eventually cause high inflationary pressures.

    Interest rates will rise, but the economy will not achieve significant growth to combat inflation, you will still have high unemployment which will keep wages growth down.

    Not good.

    The action that should have been taken was to remove the dead wood from the economy. This hasn’t occurred. The US’s tax as a product of GDP is 27% and government spending as a product of GDP is 38%.

    The US and Euro/Japanese markets need to restructure. Fiddling and kicking the can along will not achieve anything other than prolong the inevitable.

    The Tea Party on the right want to reduce social welfare and the left want to increase taxation. What needs to occur first is a wind down of subsidisation across all industries and start implementing a user pays system and gradually increase taxation.

    The 3 significant economic blocks US/Euro/Japanese have in effect devalued currenies already attempting to export themselves out of debt. You might not see this because you live in the middle of it.

    Who are they going to export to? The three major consumer market are broke or living on borrowed money. The other global markets export to those 3 markets and are creating much larger inter-country trade between themselves.

    The US over produces significantly in most industries and companies are forced to sell products at a reduced profit. This affects the bottom line. Just look at the Chev pickups of late.

    One of the reasons why we pay more for cars in Australia is we don’t have over a similar over production problem as the US.

    Maybe the people of the US/Euro/Japan are paying to little for their expected lifestyle. Like I stated a reduction in the standard of living is coming your way within several years.

    Another issue will arise over the next 2 decades is the commodities will no longer be traded in USD. The trade in USD for commodities, this has in the past created a more stable market.

    Interesting times ahead for the US/Eurozone/Japanese.

    • 0 avatar
      TW4

      First, unemployment and inflation have an inverse relationship. As inflation rises, unemployment tends to fall, and inflation addresses the problems with sticky wages. As Bernanke has said himself, the US does not have sufficient inflationary pressures from the expansion of the money supply. As unemployment falls, the QE taps will be automatically turned off as entitlements fall and tax revenues rise, which will dampen inflation. We’ve already been through stagflation once, I doubt we will overheat our currency again, but you never know.

      Second, the US is not trying to export its way out of debt. We have the opposite problem. We’ve been the benevolent/wasteful importer of mountainous piles of superfluous junk, routinely racking up trade deficits in excess of 5% of GDP during the 2006-2008 pre-collapse. We will be eliminating imports, starting with petroleum, which contributes as sizable $300B chunk of our $700B-$750B trade deficit. We will increase coal exports to Japan and the EU, but it’s a drop in the bucket.

      If we are reducing our trade deficit and converting imports into domestic energy and manufacturing growth, our currency will appreciate. The EU and Japan base their economies on a strong dollar. They are in an austerity holding pattern, waiting for a rising US dollar (relative to other currencies) to increase EU and Japanese exports and reduce the total trade deficit with China. I’m not sure about the last part, but I’ve heard that the US-Chinese trade channel is stuffed, and strengthening the dollar will drive down the deficit, rather than open it. Dangerous game, but we’ve been living dangerously for over a decade regarding US-China economic policy.

  • avatar
    Big Al from Oz

    @TW4
    Normally, rising inflation will reduce unemployment. But not in this case. The amount of money that has been pumped into the US economy is staggering. Historical.

    The reason why is the US economy is facing a “third world style” collapse, large currency devaluation and high inflationary pressure.

    The changes required is about 9%-10% of GDP. This means an increase of taxation or a reduction in spending. This kind of change causes civil unrest. If the US can manage this rate of change it will tread water and not pay down any of its existing debt, so more is required.

    The problem is similar to Greece, for every 1% reduction in government spending the economy (GDP and growth) will shrink by a far greater amount. The exact amount I couldn’t tell you, but I would imagine several percent. So the required 9%-10% reduction in spending will reduce economic output by 25%-35%.

    When this occurs unemployment will rise to levels comparable to the Great Depression or worst.

    If taxation is raised to meet expenditure, no gain will be made other than reducing money available to spend in the economy. Hence, a similar outcome will occur as the reduction in government spending.

    To expand the economy, more debt is required. But the gain will not create enough government revenues to relieve debt. The US will be unable create enough expansion in its economy to offset its borrowings. What I’m saying in effect is the US urgently needs to restructure all aspect of economy.

    The “export” comment is not totally true, but this is an outcome of the policies by the US/Euro/Japanese central banks. To improve these economies export is required.

    When in debt there are only two possible outcomes, pay down or go broke.

    Like any business or household to pay down debt requires sacrifice. From what I can gather not one country is making the required sacrifices.

    Look at the percentage changes the Spanish and Greeks have made. These changes are small in comparison to what is required.

    Borrowing, “printing money”, smoke and mirros will not create sustainable growth, once the government reduces its any form of stimulation the proverbial wil hit the fan.

    It isn’t sustainable for much longer.

  • avatar
    Big Al from Oz

    @TW4
    Here is an interesting and sobering article written by an Australian Businees site.

    http://www.businessspectator.com.au/bs.nsf/Article/Western-economies-fiscal-debt-GDP-pd20130212-4U57E?OpenDocument&src=sph&src=rot


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