Venezuela Officially Declared In Default

Today at 11am, the ISDA Determinations Committee sits down to decide whether an event of default has occurred due to the delayed principal payment on the Petroleos de Venezuela SA, or PDVSA, bond that matured Nov. 2, in the process triggering PDVSA (and perhaps Venezuela) CDS, and officially declaring Venezuela in default.

We won"t have to wait that long: moments ago, Wilmington Trust, the Trustee of the 8.5% bonds due 2018, issued by Corpoelec, Venezuela"s electricity company, declared that the missed interest payment originally due October 10, and whose 30 day grace period expired on November 9, and for which no pament was sent or received, officially constitutes an event of default.

From Bloomberg:

From the statement:

Wilmington Trust, National Association is communicating the following to you in its capacity as successor trustee (the “Trustee”) to The Bank of New York, as trustee, under the Indenture dated as of April 10, 2008 (the “Indenture”) for the $650,000,000 8.50% Senior Notes due 2018 (the “Notes”) of C.A. La Electricidad de Caracas (the “Issuer”). In a letter to the Trustee and various other parties dated November 30, 2012, National Electricity Corporation, S.A. (CORPOELEC) advised that it is the successor by merger to the Issuer. Capitalized terms used herein but not defined herein shall have the respective meanings set forth in the Indenture.

 

Please be advised that the Paying Agent with respect to the Notes has advised the Trustee that the payment of interest on the Notes that was due on October 10, 2017 was not received by the Paying Agent. The Issuer’s failure to pay interest on the Notes when due on October 10, 2017 constitutes a Default under the Indenture. The Paying Agent has further notified the Trustee that the interest payment was not received by November 9, 2017.

 

The Issuer’s failure to pay the overdue interest on the Notes on or before November 9, 2017 constitutes an Event of Default under Section 5.1(ii) of the Indenture. Pursuant to Section 5.1(b) of the Indenture, if an Event of Default shall occur and be continuing and has not been waived, the Holders of at least 25% in principal amount of Outstanding Notes may declare the principal of, and premium, if any, accrued interest and Additional Amounts, if any, on all the Notes to be due and payable by notice in writing to the Issuer and the Trustee specifying the Event of Default and that such notice is a “notice of acceleration”, and the same shall become immediately due and payable.

It is unclear if this formal default declaration makes today"s ISDA determinations committee decision moot, however it now looks quite certain that Monday"s meeting between creditors and the country"s vice president and chief debt negotiatior, who also happens to be a US-sanctioned drug kingpin, will no longer be necessary.

Today"s news will not come as a surprise to CDS holders, who had already priced in a 99.99% probability of default in 5 years.

The full statement is below:

Rental Nation: Unique "Solution" Emerges To Address Flood Of Off-Lease Vehicles...Lease Them Again

We"ve written frequently of late about the coming wave of off-lease vehicles that threatens to flood the used car market with excess supply, crush used car prices and simultaneously wreak havoc on the new car market as well. 

As we recently noted (see: "Flood Of Off-Lease Vehicles" Set To Wreak Havoc On New Car Sales), the percentage of new car "sales" moving off dealer lots via leases has nearly tripled since late 2009 when they hit a low of just over 10%.  Over the past 6 years, new leases, as a percent of overall car sales, has soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a "good deal"...even though leasing a new vehicle is pretty much the worst "deal" you can possibly find for a rapidly depreciating brand new asset like a car...but we digress.

Of course, what goes up must eventually come down.  And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory.  By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.

So, what do you do when you"re industry is being threatened with a massive oversupply situation that could wipe out all pricing power for years to come?  Well, since reducing production is simply not tenable, one group of used car dealers in Wisconsin has an alternative solution...delay the problem for as long as possible by starting up a new used car leasing program. Per Ward"s Auto:

In a pioneering move, the 10-store Van Horn Group now leases used cars.

 

The 10-store dealership group in Plymouth, WI, began doing it to serve more customers and expand its pre-owned vehicle inventory, says Mark Watson, vice president-variable operations.

 

Used-car leasing is something of a rarity. But more and more dealers – such as George Glassman of the Southfield, MI-based Glassman Automotive Group – say it’s a good idea whose time has come and manufacturers should get behind it to help remarket waves of vehicles coming off-lease. That number is approaching 4 million a year.

 

“We are trying to create with used vehicles a unique position, one that allows us to put the client into more vehicle at a lower payment through a lease,” he says.

 

“Used car leases are an additional revenue opportunity and keep relationships strong with the bank,” says Tonya Stahl, Wisconsin Consumer Credit’s vice president-operations. “It helps us exceed customer expectations by providing flexible finance options for a successful and continual business relationship.”

Of course, while Van Horn"s used car leases provide a great opportunity for him to "double-dip" by effectively selling his used car inventory twice, it does very little to address the underlying problem of oversupply aside from marginally expanding the pool of potential buyers by lowering monthly payments.

Moreover, as Wards notes, used car leasing is not necessarily a new phenomenon as it has historically popped up during previous economic cycles when the auto industry faced similar problems.  That said, in past cycles at least, the concept was quickly scrapped after banks realized it"s nearly impossible to accurately underwrite the risk on a used vehicle when you have absolutely no idea how badly the car may or may not have been abused by it"s first owner.

Used-car leasing is not a new idea, although in the past it has been promoted sporadically, at best.  Could used-car leasing now become more mainstream, with a combination of the right new technology and, to put it bluntly, the renewed motivation to forestall a residual-value crisis?

 

Back when I was in auto retail, some banks did used-car leasing, as some captives do now, and some retailers did well with it, but it was not sustained by financial institutions.

 

Used-car lease retailers were hard to find, and not that well promoted. Worse, if trying to calculate a new-car lease back then was difficult (we are talking 1980s and 1990s), cyphering a used-car lease was pretty much impossible.

 

Unlike a new car, every used vehicle is unique, with a unique payment and residual (and forecasting wasn’t as sophisticated back then). Of course, we didn’t have automated vehicle-history reports (so some finance institutions were the victims of fraud on occasion, which no doubt led to the demise of used-vehicle leasing programs.

In the end, of course, this just moves most Americans one step closer to eternal financial hardship as profits are increasingly consolidated into the hands of monopolistic financial institutions who are all too happy to make you think that lower monthly payments are a "great deal" for you when in fact they only serve to insure that you never build any wealth and you never actually own any assets.

Someone Just Made An "Unprecedented" Bet On An Imminent Surge In Bond Volatility

Step aside "50 cent", there is a new mystery vol trader on the block, one who is certain that a vol quake is about to strike US Treasurys.

According to Bloomberg, which first spotted the trade, someone just bet that bond volatility is about to soar. The unknown trader bought $10 million in out-of-the-money puts and calls on 10Y Treasury futs (a strangle). The outsized trade was spotted as it involved huge block sizes of about 63,500 on either side: "a strangle of that magnitude is rare, and possibly unprecedented" according to several rates traders who spoke to Bloomberg.

But just as notable as the size is the timing: the strangle expires July 21, giving the trade a shelf life of under 10 days before it expires worthless. Which means that the trader is confident enough about not only the size of the upcoming price swing to bet $10 million on it, but also when it will strike.  According to Bloomberg calculations, the theta on the trade is so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon.

Once the 10Y moves beyond 10bps, gains are unlimited, and the trader "stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields."

Briefly this morning, the trade seemed like slam dunk when Yellen"s "dovish flip" sent the 10Y tumbling 6 bps before it stabilized around 2.32%.

But it"s not over yet: as Bloomberg observes there are enough potential catalysts in the coming week to send the 10Y surging... or tumbling:

The calendar over the next several days presents ample opportunities to rekindle volatility. In the U.S., political drama aside, the Labor Department releases consumer price index data Friday, which could influence the Fed’s timing for rate hikes and balance-sheet reduction. Retail sales data come out the same day. And, the day before the position expires, the European Central Bank announces a policy decision.

Backtesting the trade does not give high odds of success: not only has MOVE (the Tsy vol index) plunged alongside VIX, suppressing price swings but the 10Y yield has risen or dropped by more than 10 basis points just four times this year on a weekly basis, compared with 10 times in the same period of 2016 according to Bloomberg calculations. Then again, lightning may be about to strike twice: at last check, the MOVE was trading at levels just before the 2013 Taper Tantrum. We all know what happened to bond volatility after.

What about the mysterious trader"s counterparty - are they, inversely, betting that vol remains subdued for the next 10 days? This time the market maker appears to not be convinced that the prevailing lack of volatility will persist, and as Bloomberg concludes, "the total volumes traded in the two options Tuesday exceeded the open interest change" suggesting that the other side of the trade was likely hedged.

Finally, what is perhaps also notable is that while the trader has a very high conviction on a surge in rates vol, there was no comparable bet on exploding vol in any other asset classes, which may be an option for anyone wishing to piggyback on the trade, as such a sharp move in US Treasurys will certainly reverberate not only in US equities but in bonds around the globe.

Auto OEMs And Auction Houses Are Colluding To Prop Up Used Car Prices; It Won't Work

We"ve written frequently about the pending collapse in used car prices that will inevitably be brought on by a surge in leases over the past 5 years.  With wages stagnant and car prices rising, the only way Americans could "afford" those brand new BMWs and Mercedes was to lease them.

Of course, the math behind how we got here is fairly obvious.  The majority of Americans buy cars based on one factor: monthly payment.  And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go.  Per the Bank Rate calculator below, buying a $30,000 car comes with a monthly payment of around $600 while leasing the same vehicle might only cost $420 per month. 

Of course, why buy a $30,000 Ford for a $600 monthly payment when you could lease a $40,000 BMW for $560?  You can afford it so long as you can cover the monthly payment, right?

Of course, the problem is that leased vehicles get returned to their originating lenders every 3 years for brand new leases...we wouldn"t want anyone driving around in a 5-year-old clunker now would we?  But, as we all know, vehicles have useful lives well in excess of 10 years.  Therefore, it doesn"t take too many excessive lease cycles to flood the market with used supply and bring the whole ponzi crashing down. 

Which is precisely why American auto OEMs are panicked about the coming wave of lease returns and why they"re colluding with auction houses to help keep used prices higher for longer.  According to Reuters, efforts to prop up used car prices include transporting cars around the country to markets where they"ll get the best pricing and basically sitting on inventory to restrict supply. 

So major carmakers, including General Motors Co (GM.N) and Ford Motor Co (F.N), are aligning with auto auction houses with aggressive moves to make sure they are getting the best prices for their vehicles. Such maneuvers include transporting the automobiles to where the greater demand is based on real-time pricing data, spending more to spruce up used cars and slowing the pace which leased cars get moved to used car lots or auction houses.

Auto auction houses such as Manheim in southeastern Michigan are where the romance of new car marketing goes to die. The dominant player in the U.S. auction market along with rival KAR Auction Services Inc (KAR.N), Manheim treats vehicles like commodities, grading them on a fine-tuned scale from one (poor) to five (excellent) that provides dealers with certainty and transparency.

Increasingly, the auction houses and automakers are collaborating to try to raise the scores, and the prices, of vehicles running through auctions. Auction houses have offered add-on reconditioning services on used vehicles for decades, but after the lean years following the Great Recession, demand is rising for those higher-margin services.

Of course, putting a rapidly depreciating asset in a storage lot, exposed to the elements, while waiting for prices to recover sounds like a "great" idea.

Meanwhile, a temporary re-balancing of inventory around the country could yield short-term benefits.  That said, we do wonder, if there was so much money to be made from selling used vehicles in different markets, why the OEMs just chose to forego those incremental profits until now.  Perhaps they were just making too much money?  Yeah, that must be it. 

For example, the national price for a 2015 Chevrolet Malibu with average mileage the week of June 11 was $15,514, according to data compiled for Reuters by car-shopping website CarGurus.

In Memphis, that Malibu cost nearly 9 percent above the national average fair price, but in Miami it would sell for more than 9 percent below that price, representing a difference of $2,700.

Manheim"s Matt Trapp, whose territory includes the U.S. northeast, says around 40 percent of vehicles coming off leases are returned to dealers within around five hours" drive of New York City. Many are now being shipped to other regions.

In New Jersey, for instance, one in three off-lease vehicles now leaves the state, Trapp says.

In the end, however, basic math and those pesky supply/demand models tend to work.  So, try as they might to delay the inevitable, we suspect used car prices will eventually succumb to the flood of inventory that"s about to hit the market.

State Department Issues Clarifications As Travel Ban Set To Take Effect, Lawyers Stand Ready

Now that the Supreme Court has approved a “narrower” version of President Donald Trump’s travel ban, the measure is set to go into effect for the first time since late January, when it sparked chaos and protests at airports across the country.

The revised ban, which the court ruled must allow the admittance of individuals who have a "credible claim of bona fide relationship" in the country, will take affect at 8 p.m. Eastern on Thursday, according to the Hill. Under the court’s new standard, an individual must have a close US family relationship or formal ties to a US entity like an employer or academic institution to be admitted to the United States under guidance distributed by the US State Department on Wednesday, according to the Hill.

Otherwise, they are temporarily banned for 90 days or 120 days if they"re a refugee coming from any country in the world. In preparation for the ban to take effect, the State Department issued a cable adding a few clarifications to the Supreme Court ruling, advising that close family "does not include grandparents, grandchildren, aunts, uncles, nieces, nephews, cousins, brothers-laws and sisters-in-law, fiancés, and any other "extended" family members,” according to Reuters.

The cable also specified that any relationship with a US entity "must be formal, documented, and formed in the ordinary course, rather than for the purpose of evading the E.O.," a reference to U President Donald Trump"s March 6 executive order barring most US travel by citizens of the six nations for 90 days.

It also provided a narrower definition of what constitutes a “bona fide” relations, explaining that visiting lecturers and student-visa applications would be welcome, but individuals who had simply made a hotel room reservation would not. However, many important issues - like whether the State Department"s own dealings with refugees constitutes a "bona fide" relationship - remain unresolved. And there"s also the question of whether courts could issue their own guidance that would supersede the State Department"s.

Here’s Reuters:

The cable provides advice to US consular officers on how to interpret Monday"s Supreme Court ruling that allowed parts of the executive order, which had been blocked by the courts, to be implemented while the highest U.S. court considers the matter.

The countries covered by order include Iran, Libya, Somalia, Sudan, Syria, and Yemen, after the administration removed Iraq from the list in its updated ban.

The cable"s language closely mirrored the Supreme Court"s order on the travel ban, though it appeared to interpret it in a narrow manner, notably in its definition of close family.

It was unclear on Wednesday evening whether the State Department"s interpretation of the court"s order would spark further legal action by opponents of the ban.

The guidance gave several examples of what might constitute a bona fide relationship with a U.S. entity, and said broad categories would be exempt from the travel ban, such as those eligible for student visas, "as their bona fide relationship to a person or entity is inherent in the visa classification."

Similarly, those eligible for family or employment based immigrant visa applications are exempt from the travel ban, the cable said.

The State Department guidance was unclear on what U.S. refugee agencies regard as a key question: whether their own dealings with refugees applying to come to the United States constituted a bona fide relationship.

The cable said that consulates should continue to interview applicants for so-called diversity visas, which are granted to individuals from countries that typically do not send many immigrants to the United States. In 2015, around 10,500 citizens from the six banned countries were selected for the diversity visa lottery, according to State Department figures.

The cable said "a worker who accepted an offer of employment from a company in the United States or a lecturer invited to address an audience in the United States would be exempt" from the travel ban, but someone who simply made a hotel reservation would not count as someone with a bona fide relationship.

The travel ban will likely bar such visas for citizens of the six countries, the cable acknowledged, stating that "we anticipate that very few DV applicants are likely to be exempt from the E.O.’s suspension of entry or to qualify for a waiver."

The Supreme Court has said it would issue a final judgment on the ban in October. Until then, there’s little recourse left: The ban is going to effect – end of story.

* * *

Meanwhile, CBS reports that a dozen lawyers have volunteered to set up shop near JFK"s Terminal 4 to monitor the implementation of the ban. A representative from the New York Immigration Coalition says more than 1,000 lawyers are ready to back them up if the ban"s implementation leads to the same type of chaos seen in January.

“We have an army of over 1,000 lawyers who have their back and are ready to go back out to JFK if that becomes necessary,” said Camille Mackler, Director of Legal Initiatives at the New York Immigration Coalition.

Though Mackler noted that such an outcome is unlikely because most of the travelers arriving in the states already have visas approved.

“In terms individuals arriving at the United States… they should already have visas approved, and are not subject to the ban, the injunction, the stay on the injunction  or anything like that,” Mackler said.

“For now it seems, just from the way that the second order was written and also from the Supreme Court’s pretty limited stay on the injunction, that most of those who will be impacted are actually abroad,” Mackler said.

No word yet as to whether we"ll see the same wave of protests at airports like those that occurred in January when the original travel ban went into effect.

"Flood Of Off-Lease Vehicles" Set To Wreak Havoc On New Car Sales

The percentage of new car "sales" moving off dealer lots via leases has nearly tripled since late 2009 when they hit a low of just over 10%.  Over the past 6 years, new leases, as a percent of overall car sales, has soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a "good deal"...even though leasing a new vehicle is pretty much the worst "deal" you can possibly find for a rapidly depreciating brand new asset like a car...but we digress.

Of course, what goes up must eventually come down.  And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory.  As Reuters noted, the flood of used vehicles is already starting to impact used car dealers:

Recently, though, a computer search for available used vehicles within 150 miles of Reel revealed an eye-popping figure: 668 Escapes. That"s enough to put more than 40 percent of the inhabitants of this small northeastern Ohio town, population 1,600, into the popular crossover.

A search for the Chevrolet Equinox, a comparable crossover, showed 461 available.

"The automakers have flooded the market," said Reel, owner of Reel’s Auto in Orwell, Ohio, about 40 miles east of Cleveland.

By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.

And, of course, that kind of supply is already starting to take it"s toll on used car prices...

Chief Executive Mike Jackson said rising off-lease car numbers means "a higher supply of pre-owned vehicles at a more attractive price.”

Consumers seeking great deals are in luck. Used-vehicle prices at auction fell about 3 percent last year, according to Carmel, Indiana-based KAR Auction Services Inc (KAR.N), which facilitated the sale of 5.1 million used and salvaged vehicles in 2016. Used prices should drop around 3 percent annually for the next couple of years, according to KAR"s chief economist Tom Kontos.

General Motors Co (GM.N) and Ford Motor Co (F.N) say prices for its used vehicles, which consist largely of nearly-new ones coming off lease to consumers, fell 7 percent in the first quarter versus the same period in 2016. GM says it expects a 7 percent decline for 2017 compared to last year.

...and, as Morgan Stanley recently pointed out, we"re just getting started as they see used car prices dropping by up to 50% over the next 5 years.

So what happens next?  Unstable used car prices will almost certainly reduce OEM reliance on leases as the implied 3-year depreciation (or residual values, if you prefer) will make them all but completely uneconomical...remember, Americans only care about that monthly payment.  Meanwhile, the relative value between used and new cars will tilt heavily in favor of the used market.  Thankfully Americans will still be able to buy that Mercedes they require to get back and forth from their minimum wage jobs, while maintaining a monthly payment of $500 or less, but it will just have to have 30,000 miles on it.

Of course, the OEMs of the world won"t admit that their game is over until it"s way too late.  So, they"ll keep right on producing new cars to cover a 17-18mm SAAR environment up until the point they face an outright revolt from their dealer networks.  At that point, however, dealer inventories will be so high that Detroit will be forced to shutdown for months on end while new car prices are slashed to reduce the massive inventory glut.  Tanking new car prices will put even more pressure on used car prices which will mark the beginning of the death spiral that will result in a new round of inevitable auto bankruptcies...but that"s just a hunch.

Spanish Courts Don't Have Any Respect For Freedom Of Contract

The Spanish banking sector is getting used to judicial setbacks. Unfortunately, they’re not the sorts of setbacks we’d like to see. This could have been an article on the elimination of the legal privileges — e.g., the existence of a state-owned central bank in charge of bailing out its (equally) irresponsible fellows — that financial businesses are nowadays granted worldwide. Eliminating those privileges would have been a setback for the banking sector, but good for everyone else. Unfortunately, that’s not what’s been happening: no liberalization of that sort whatsoever has taken place.

Rather, several recent rulings from Spanish courts have systematically encroached on the individual’s right to contract with others — and the public opinion is gleefully celebrating their decisions.

It all started back in 2013 when the Spanish Supreme Court declared the nullity of the so-called “floor clauses,” which simply constituted a minimum level set on the payment of interests on (mortgage) loans and which were included in many of such contracts during the housing bubble. These clauses were commonly accompanied by “roof clauses,” whose content was exactly the opposite (i.e., a maximum interest rate) and yet did not experience any ban by the judicial authorities.

Thus, a contract by which two freely agreeing parties, in accordance with their personal evaluations of risk, decided to put some limit to the amount of interest that could derive from the loan, was deemed void by the Justices, since it supposedly violated Spanish consumer’s protection legislation. The key element defining the “abusive character” of floor clauses was its alleged “obscurity” or “lack of transparency,” even though signed contracts would commonly refer to those conditions in terms such as: “It is hereby established that in no case the interest rate shall be lower than 3.5% or higher than 14%.”

These rulings are forcing banks alone to bear the consequences of their costumers’ decisions when it comes to legal disputes between them. It is becoming a worrying judicial habit.

For instance, just a few days ago the same malicious “abusive” feature was interpreted by the courts to exist in a whole myriad of other contracting clauses included in mortgage loans, like multi-currency calculation of its value, the responsibility of the borrower as regards the payment of a special tax on economic activities and other legal expenditures. More recently, a judge decided for the first time to allow a debtor to turn over his house as a way to extinguish the mortgage loan without having agreed on it with the creditor.

Not surprisingly, all the above-mentioned judicial resolutions have been welcomed by the citizenry with a unanimous joyful roar in celebration of the “people’s” victory over a profiteer capitalistic elite. In that sense the court’s verdicts resemble an act of ideological revenge against the banking sector, rather than the usual result of justice administration.

True, many bankers — especially those directly coming from the public sector — were involved in grand larceny rather than in financial servicing during the boom ages. True, when the Great Recession started, the bankruptcy of their companies was not due to managerial abilities of bankers, but to taxpayers’ money. True, such outrageous events should never have taken place (and they wouldn’t in a truly free market).

And yet, neither banks nor their costumers should be seen as the central victims of these ignominious occurrences, for the greatest damage has actually been inflicted to a much blurrier concept: the rule of law. This sequence of regrettable decisions will only bring about legal uncertainty and foster irresponsibility among consumers when contracting with entrepreneurs.

The last judicial pronouncements on mortgage loans, which are now cherished as an unexpected shield granted to individuals in order to defend themselves from the hordes of rent-seeking usurers, will eventually operate against them, leading to either higher prices or a reduced quality in the services offered by financial businesses.

But the legal consequences will be even worse than such plausible economic disturbances. Freedom of contract is in clear jeopardy, since its future is in the arbitrary hands of the State. Instead of analyzing the legality of floor clauses case by case and declaring them void whenever mala fide were to be appreciated, Spanish courts have decided to forbid contracting parties to negotiate on those terms and on others akin to them.

Moreover, the impartiality that should preside over any stance in the administration of justice has been completely forsaken by the judges in these particular rulings, in connivance with misguided headlines and a rampant anti-capitalistic mentality within society. Let us just hope it is not too late for liberty to strike back.

Soaring Lease Returns Set To Wreak Havoc Used Car Pricing and Auto Industry Profits

For months we"ve warned that declining used car prices could spell disaster for subprime auto securitizations (see "Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations").  While it"s always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.

As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market.  While American"s love their brand new cars, if used car prices become too soft then substitution can hurt new car sales.  Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.

A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.

“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.

This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.

Unfortunately, the volume of lease returns is only expected to grow even more in 2018 with returns expected to approach 4mm units.

As J.D. Power points out in it"s most recent "NADA Used Car Guide Industry Update," the flood of lease returns is driving used car prices lower.

Of course, how we got here is fairly obvious.  The majority of Americans buy cars based on one factor: monthly payment.  And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go.  Per the Bank Rate calculator below, buying a $30,000 car comes with a monthly payment of around $600 while leasing the same vehicle might only cost $420 per month. 

Of course, why buy a $30,000 Ford for a $600 monthly payment when you could lease a $40,000 BMW for $560?  You can afford it so long as you can cover the monthly payment, right?

Not surprisingly, these dynamics have caused lease share of U.S. vehicles to skyrocket in the wake of the "great recession" as people seek to maintain their excessive lifestyles on smaller budgets.

Of course, the problem is that leased vehicles get returned to their originating lenders every 3 years for brand new leases...we wouldn"t want anyone driving around in a 5-year-old clunker now would we?  But, as we all know, vehicles have useful lives of 15-20 years.  Therefore, it doesn"t take too many excessive lease cycles to flood the market with used supply and bring the whole ponzi crashing down. 

Vancouver Goes For Housing Bubble #2: Will Fund Home Down Payments With Interest-Free Loans

Having allowed Chinese money launderers to create a massive bubble out of the Vancouver housing market for the past several years despite loud warnings from numerous sources (this site included) until its inevitable crackdown this summer, when it imposed a tax on offshore purchases, popping the ultra high end housing bubble and sending Chinese buyers south of the border to Seattle (although after a sharp drop may be staging a quick rebound as the latest chart from the MLS shows)...

... British Columbia is now focusing on the low end of homebuyers, where the British Columbia government is repeating all the worst mistakes of the first bubble, and has offered to "help" first-time homebuyers to cover the cost of a mortgage down payment with an interest-free loan.

The B.C. Home Owner Mortgage and Equity Partnership program will provide a maximum of  $37,500,  or up to 5% of the purchase price,  with a 25-year loan that is interest-free and payment-free for the first five years. In other words, homebuyers will soon be able to once again buy homes with no money down, leading to a repeat bubble, only this time on the lower end of the price range..

"The dream of home ownership must remain in the grasp of the middle class here in British Columbia," said Premier Christy Clark cited by CBC.

While the stated intention of the program is noble, to assist people who can afford the mortgage payments on a new home but are challenged to make the down payment, based on historical precedent, with no "skin in the game", buyers will now scramble to bid up everything that is available for sale, sending the green (and red) lines in the chart above soaring.

The province will start accepting applications for the program on Jan. 16, 2017.

Furthermore, homebuyers will pay no monthly interest or principal payments over the first five years as long as the home remains their principal residence. After the first five years, homebuyers begin making monthly payments at current interest rates. Homebuyers will repay the loan over the remaining 20 years, but may make extra payments or repay it in full at any time without penalty.

Making sure that Chinese oligarchs do not take advantage of Canadian generosity, the program is capped with a maximum purchase price of a home that qualifies for the loan is $750,000.

That said, there are substantial eligibility requirements. Applicants must be permanent Canadian residents for the past five years and B.C. residents for the past year. The income or combined income of applicants must be $150,000 or less. Homebuyers needs to be pre-qualified for a high-ratio insured mortgage and can buy anywhere in B.C.

The loan support will run for three years and the province estimates about 42,000 new homebuyers will take advantage of the program.

There is even a pretty infographic for those who like these things explained with the help of cartoons.