The Battle to Be the Fed's Greatest Fool


 "Big Three" U.S. automaker General Motors (GM) is finally admitting the obvious…   The boom in auto sales is peaking. As news service Reuters reported following the company's conference call on Monday…  

"The market is definitely slowing… it's something we are going to monitor month to month," [GM] Chief Financial Officer Chuck Stevens told analysts… "Pricing is more challenging."   U.S. new vehicle sales hit a record of 17.55 million units in 2016 after a boom that began in 2010. A glut of nearly new used vehicles is expected to undermine sales this year. Major automakers have reported sales declines for the past three months.

Unfortunately, while the company admits that sales are slowing, its outlook remains relatively rosy. More from the report…  

General Motors now expects U.S. new vehicle sales in 2017 will be in the "low-17 million" unit range, reflecting a widespread expectation that the industry is headed for a moderate downturn…   GM had previously announced it expected 2017 new vehicle sales in the "mid-17 million" unit range. Stevens told analysts that sales could fall by 200,000 to 300,000 units this year but that the automaker had "somewhat insulated" itself from a downturn by reducing fleet sales, which lower vehicles' residual values.   "We are going to remain disciplined from a go-to market perspective," Stevens said.

In other words, GM believes this "moderate downturn" will cause prices to plummet to levels not seen since… 2015, when new-vehicle sales totaled a little more than 17 million.    We believe GM is far too optimistic…   During the last big downturn, sales peaked near 17 million in 2005… and ultimately plunged to just 10 million by 2009. Given the size of the recent boom, we wouldn't be surprised to see sales fall to less than 10 million this time around.   GM apparently also has a different definition of "disciplined" than we do…   According to Stevens himself, the company has an incredible 110 days of supply sitting on dealer lots today. This compares with an average of just 65 days of supply among major U.S. automakers since 1960, according to data from WardsAuto. Stevens did say the company hopes to bring this figure down to 70 days of supply by the end of the year.   We're skeptical of this claim as well… Automakers have been using huge discounts and incentives to entice new buyers. But this trend is unsustainable. And we're seeing signs that it's peaking, too. As the Wall Street Journal noted this week…  

Incentives have moderated recently, a sign that carmakers aren't willing to cut into profitability to maintain market share as demand cools…   Industry sales in each month so far this year have fallen from a year earlier. In a note to investors Monday, Barclays analyst Brian Johnson said he expects the seasonally adjusted sales rate to ease to 16.5 million in June. That would mark the fourth straight month that the pace of sales fell below 17 million, the slowest stretch since mid-2014.   But Mr. Johnson agrees that automakers "may be drawing the line" on big discounts that have helped fuel sales over much of the past year. He said incentives in June were at the lowest levels in about a year.

 Meanwhile, the "legacy" of former Federal Reserve Chairman Ben Bernanke appears to be in trouble…   Today, Bernanke is probably best known as the man who "saved" the U.S. economy from the 2008 financial crisis.   Of course, we believe Bernanke's bailouts and easy-money policies merely delayed the inevitable… and ensured the next crisis will be far bigger. In the end, we suspect history may remember Bernanke as the greatest fool to ever run the Fed.   For example, in 2005, near the top of the biggest housing bubble the world had ever seen, it was Bernanke who said…  

We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit…   House prices have risen by nearly 25% over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

In 2007, after the housing market had clearly rolled over, it was Bernanke who assured the public time and again that the problems in subprime mortgages were "contained"…  

Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low…   The effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

And in mid-2008, just days before subprime "contagion" caused the collapse of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), you-know-who swore the following before Congress…  

[Fannie and Freddie] are adequately capitalized. They are in no danger of failing.

We could go on, but you get the point…    But Bernanke could now have some competition for this "title"…   His successor – current Fed Chair Janet Yellen – is suddenly in the running, too…   During a question-and-answer event on Tuesday, Yellen was asked about the likelihood of another financial crisis. And you may not believe her response. As financial-news network CNBC reported (emphasis added)…  

Speaking during an exchange in London with British Academy President Lord Nicholas Stern, the central bank chief said the Fed has learned lessons from the financial crisis and has brought stability to the banking system…   She also made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely "in our lifetime." The crisis, which erupted in September 2008 with the implosion of Lehman Brothers but had been stewing for years, would have been "worse than the Great Depression" without the Fed's intervention, Yellen said.   Yellen added that the Fed learned lessons from the financial crisis and is being more vigilant to find risks to the system. "I think the system is much safer and much sounder," she said.

We suspect she'll regret those words…   Central banks have created the largest speculative boom in history.   Unlike the last, this bubble isn't concentrated in a single area like U.S. housing. It has spread to nearly every corner of the developed world. Consumers… corporations… and even governments have loaded up on record amounts of debt.   Another crisis is inevitable.    In the meantime, our colleague Steve Sjuggerud believes stocks can still go much higher before it arrives…   As regular readers know, Steve has long predicted that a "Melt Up" will push stocks to explosive new highs before the bull market finally ends.   But Steve says it's no longer a "what if" scenario. He believes the Melt Up has already started… And on Thursday, he hosted a free event with Stansberry Research founder Porter Stansberry to share an important update on this situation…   In short, Steve said we're closer to the end of this bull market than he initially believed. He and Porter now agree it could be just a matter of months before it peaks… and the way you position your money in the days and weeks ahead could dramatically change your financial future. Steve even shared the name and ticker symbol of his favorite way to profit as the Melt Up continues.   If you couldn't make it to this week's event, you're in luck. You can still access a full replay and hear Steve's urgent update for yourself. Click here to see it now.   Regards,   Justin Brill Editor's note: Steve's latest recommendations are the absolute best ways to take advantage of the final innings of this historic bull market. And right now, he's making an incredible offer to DailyWealth readers. You can gain access to our best Melt Up research at a 78% discount to the normal subscription cost. But don't delay… This offer expires soon. Learn more here.