"Fully Self-Driving Cars Are Here" - Waymo To Begin Testing Driver-Free Autonomous Taxis In Phoenix

From here on out, if you see a car without a driver meandering around suburban Phoenix, don’t be alarmed: It’s just Google"s Waymo division testing its new driverless taxis - the first of their kind to be tested on US roads without the supervision of a “safety driver."

Wayno has revealed that - effective immediately - it will begin testing the driverless taxis - referred to in technologist parlance as a “level 5” driverless vehicle - in Chandler, Arizona. Thew news represents an important milestone that establishes Waymo as the leader in automated driving technology. Waymo CEO John Krafcik made the announcement Tuesday during in a speech at a web summit in Lisbon, Portugal.

“We want the experience of traveling with Waymo to be routine, so you want to use our driver for your everyday needs,” John Krafcik, Waymo’s chief executive officer, said at the Web Summit conference in Portugal. “Fully self-driving cars are here."

According to Ars Technica, for the last year, Waymo has offered free taxi rides to ordinary people who live near the Phoenix suburb of Chandler. Until recently, the company"s modified Chrysler Pacifica minivans had a Waymo employee in the driver"s seat ready to take control if the car malfunctioned.

One reason the company is so confident in its techonology, as Bloomberg points out, is the Alphabet subsidiary has racked up more autonomous test miles on roads than others developing the tech, including Ford Motor Co., General Motors’ Cruise Automation unit and Uber. However, Google’s rivals have certain advantages that may ultimately help them beat Waymo to market. For example, Uber has a massive customer network that depends on its drivers for rides. And Ford and GM have the manufacturing capabilities to crank out new units with very little delay.

And by the looks of it, Waymo is gearing up to challenge Uber by using its service to begin offering rides. Krafcik, a former Ford executive, said that an on-demand service would be the first commercial use case for Waymo. During his appearance at the summit in Lisbon, he also discussed how the vehicles may replace personal car ownership, a nightmare scenario for OEMs like Ford and GM.

“Because you’re accessing vehicles rather than owning, in the future, you could choose from an entire fleet of vehicle options that are tailored to each trip you want to make,” Krafcik said, according to a transcript of his remarks. People could claim the cars for a day, a week “or even longer,” he said. He ticked off the ways driverless cars could be redesigned if the vehicle didn’t need space for a driver: to ferry groceries, as a “personal dining room” or for naps.

Waymo began testing its taxi service in Phoenix back in April. It’s progress shows how Google has played to its strengths by building the best technology available. However, the question of scalability still remains.

As the New York Times points out, driverless cars are regulated by a patchwork of state laws. Arizona, like many states, has no restrictions against operating an autonomous vehicle without a person in the driver’s seat. On the other hand, California, where Waymo is headquartered, requires any self-driving car to have a safety driver sitting in the front.

However, just because Waymo can legally test these cars, doesn’t necessarily mean they’ve been optimized for safety. In December, Waymo published a report for California’s Department of Motor Vehicles about how frequently its driverless cars “disengaged” because of a system failure or safety risk and forcing a human driver to take over. In the report, Waymo said this happened once every 5,000 miles the cars drove in 2016, compared with once every 1,250 miles in 2015. While that’s certainly an improvement, these types of incidents are hardly rare.

So, the question is, how will Waymo handle these situations when they inevitably start cropping up (indeed, if they haven’t already)? We imagine given all the publicity around several high profile cases of deadly car accidents involving Tesla’s autopilot software, that the company has planned for these risks - or at least, we hope they have.

And we’re not the only ones. Consumer Watchdog, a frequent critic of Alphabet, said that data demonstrated that the cars are not ready to drive without any human intervention and that Waymo was following the Silicon Valley model of “beta testing” a new technology on the public - to a potentially dangerous end.

“It’s the wrong approach when you’re dealing with self-driving cars,” said John M. Simpson, a director at Consumer Watchdog. “When things go wrong with a robot car, you kill people."

To be sure, researchers believe self-driving cars can be safer than cars operated by human drivers because they are programmed to adhere strictly to traffic laws, they don’t get distracted, and they don’t take unnecessary risks.

But that reality is a long way off.

Then again, who are we - the public - to stand in the way of progress? The tech gods of Silicon Valley have spoken, and they’ve said we will have autonomous vehicles commercially available by 2025 - which is ludicrously soon, considering where the technology is right now. Because the reality is this technology needs to function flawlessly by the time it’s put in the hands of the consumer.

Of course, regardless of the cost in lives and damage, once the technology is ready, the world will understand that it was all worth it.

In a bit about driverless cars, Stephen Colbert once joked that they’re “a high tech alternative to dropping a brick on the gas peddle and jumping in the back seat.”

Given Waymo’s safety record. That bit might prove eerily prescient.
 

A Frustrated David Einhorn Asks "Will The Market Cycle Never Turn?"

Just days after Third Point"s Dan Loeb took a victory lap in his latest letter to investors, boasting a 14.5% YTD performance, outperforming the S&P and virtually all of his peers, a decidedly more downcast letter was released today by Greenlight"s David Einhorn, who also had a good quarter, generating 6.2% in Q3, which brought his YTD return to 3.3% after a subpar first half. Yet despite the solid Q3 performance, Einhorn admits that "the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, “it will turn when it turns.”

Such an open-ended answer, however, is a problem for a fund which famously opened a basket of "internet shorts" several years prior, and which have continued to rip ever higher, detracting from Greenlight"s overall performance.

This, in turn, has prompted Einhorn to consider the unthinkable alternative: "Might the cycle never turn?" In other words, is the market now permanently broken.

Einhorn goes on to explain that his strategy "relies on the assumption that the equity value of a company equals the market’s best assessment of the current and future profits discounted at the company’s cost of capital. Our ability to outperform often comes from our skill in finding opportunities where the market has misestimated current or future profitability or miscalculated the cost of capital by over- or underestimating the risks."

It is here than an unexpectedly exasperated Einhorn emerges:

Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.

Ah yes, the Fed-funded "deflation trade" which lowers prices for goods and services courtesy of ravenous investors who will throw money at any "growth" idea, without considerations for return or profit, because - well - more such investors will emerge tomorrow.  After all, in this day and age of ZIRP, what else will they do with their money.

Here Einhorn took aim at his favorite "bubble" shorts: Amazon, Tesla and Netflix. This is what he said:

When we consider the business performance of our three most well-known “bubble” shorts, we wonder if this alternative paradigm is in play. Last quarter, we noted Amazon.com’s (AMZN) earnings estimates had fallen over the prior few quarters. This quarter, AMZN revealed a much lower level of long-term structural profitability, causing consensus estimates for the next five years to drop by 40%, 22%, 18%, 14% and 8%, respectively. Ordinarily, stocks trading at nosebleed multiples fall sharply when such a dramatic reassessment happens. Instead, AMZN fell less than 1% during the quarter. Our view is that just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.

 

Tesla (TSLA) had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse. So much went wrong for TSLA in the quarter that it is hard to only provide a brief summary. The main near-term problems are poor demand for its legacy vehicles and manufacturing challenges for the new Model 3. Notably, TSLA dramatically reduced its gross margin assumption for the September quarter and publicly blamed ramp-up costs for the new Model 3 sedan. More quietly, the company used the lower gross margin hurdle to offer incentives and to lower the cost of options on the Model S and Model X vehicles, and even offered significant markdowns on showroom models. Given the depth of the price cuts, we were surprised that demand for the Model S and Model X only improved modestly.

 

Meanwhile, it is becoming clear that scale manufacturing is actually a skill. While the CEO makes bold claims about TSLA’s superior prowess, continued production shortfalls, defects and product recalls disprove him. TSLA faces competition from established OEMs that have decades of scale manufacturing experience. Some of TSLA’s presumed market lead in areas like autonomous driving may more likely reflect TSLA’s willingness to put inadequately  tested and dangerous products on the road rather than a true technological advantage.

 

Finally, there is Netflix (NFLX), where the quarterly results beat expectations and the shares advanced 21%. Competition is heating up and media companies such as Disney will be removing their content from NFLX to compete directly (bulls used to believe that Disney would pull a Time Warner/AOL and pay-up for the highly promoted but profitless business). NFLX continues to accelerate its cash burn as it desperately tries to compensate for its inability to rely longer-term on licensed content. On the second quarter conference call, the CEO stated, “In some senses the negative free cash flow will be an indicator of enormous success.” To us, all it indicates is that NFLX is capable of dramatically changing the economics of stand-up comedy in favor of the comedians. Perhaps, there really is a new paradigm for valuing equities and the joke is on us. Time will tell.

Einhorn also highlights the biggest winners and losers in the quarter including CONSOL Energy (CNX), General Motors (GM) and Uniper (Germany: UN01) which were the largest contributors, while Caterpillar (CAT) short and Mylan (MYL) were detractors.

Some more details: Greenlight added long positions in Hewlett Packard Enterprise, Micron and Tempur Sealy; exited a short position on Best Buy and a long position on PVH. The fund"s largest disclosed long positions at quarter end were unchanged from the end of 2Q: AerCap, Bayer, Consol Energy, General Motors and gold. The parternships had an average exposure of 118% long and 73% short.

The full letter is below:

Inventory Levels Of These GM Plants Still In "Danger Zone" Even After 2 Hurricanes And 6,000 Job Cuts

Over the past two months, General Motors" stock has rallied nearly 30% on the notion that hurricanes in Texas and Florida solved the company"s nagging inventory problem.  But, even after two of the most devastating hurricanes in U.S. history wiped out hundreds of thousands of vehicles and GM"s preemptive elimination of some 6,000 jobs, Automotive News says the company still has a ways to go at certain plants if they want to bring system-wide inventories down to healthy levels. 

Even after cutting more than 6,000 jobs this year, General Motors might need to further shrink its manufacturing operations to address bloated inventories of some vehicles amid plateauing U.S. sales and pressure from Wall Street to avoid overproduction.

 

The majority of GM"s U.S. assembly plants, including some where a shift already has been eliminated, produce vehicles that on average have at least an 80-day supply, 33 percent more than what the industry generally considers healthy, according to estimates from the Automotive News Data Center.

 

"The danger zone is definitely consistently staying in that 80 to 100 days," said Joe Langley, a senior analyst at economic forecasting and data company IHS Markit. "The ultimate red flag is when volume is at that 120 days or more consistently and incentives aren"t moving the needle."

 

GM has at least seven U.S. assembly plants that on average produced vehicles with greater than an 80-day supply entering October, including four that have more than 100 days, according to the estimates. That does not include GM"s two U.S. plants for the Chevrolet Silverado and GMC Sierra, because pickups commonly have higher inventories to meet demand for a variety of trim and feature configurations.

Making matter worse, it"s not just small passenger cars where GM is currently oversupplied as the company is sitting on 125 days worth of GMC Canyons and roughly 80 days worth of other "popular" pickup truck models.

Inventory numbers point to the potential for a cutback in Wentzville, which has run around the clock since spring 2015. It makes the Chevrolet Express and GMC Savana full-size vans and the Chevy Colorado and GMC Canyon midsize pickups. Slowing sales have left GM with an estimated 84-day supply of those vehicles as of Oct. 1, including 81 days" worth of Colorados and 125 days" worth of Canyons.

 

"The Colorado and Canyon have sold far better than they thought they would," said Ron Harbour, a consultant with Oliver Wyman. "At this point, they"re trying to figure out if this is a long-term trend or not."

 

Langley, the IHS analyst, said he thinks GM would need to cut a shift in Wentzville by next summer if inventories remain elevated.

 

"That"s the one big plant on the truck side that concerns me for getting a shift reduction," Langley said. "That plant is running at a level it was never designed for either. That"s been the story for a lot of these factories."

Of course, no matter how bad the company"s persistent inventory problem looks on paper, there is one group that simply couldn"t care less: GM shareholders.

Tesla Reportedly Preparing To Open Factory In Shanghai

As Tesla falls further and further behind in its quest to produce 10,000 Model 3 sedans a week by the end of next year, WSJ reported Sunday that, after months of talks with local government officials, Tesla has finally received permission to open a factory in Shanghai, one of China’s designated “free trade zones.”

If accurate, the report would signal a major shift in China’s policy toward foreign automakers. Until now, US carmakers like GM hoping to sell cars in China’s domestic market have been forced to work (and more importantly share profits and technology) with a local partner.

But more surprising than the news itself is the timing, as Tesla continues to struggle with major production delays at its Fremont Calif factory, a problem that will no doubt be exacerbated by the company’s decision to lay off hundreds of workers and replace them with cheaper contract labor in what has been characterized as a blatant attempt to suppress unionization efforts. WSJ says cars produced at the Shanghai factory would primarily supply local markets while allowing Tesla to sale cars across the region. Meanwhile, any cars shipped to the US from the Shanghai factory would face a 25% tariff.

The scoop comes from WSJ’s Tim Higgins, who has broke a handful of big Tesla stories in recent months, including a report earlier this month about workers at Tesla’s Fremont factory being forced to assemble Model 3s by hand because the factory"s production line hadn"t yet been completed.

“Electric-car maker Tesla Inc. has reached an agreement to set up its own manufacturing facility in Shanghai, according to people briefed on the plan, a move that could help it gain traction in China’s fast-growing EV market.

 

The deal with Shanghai’s government will allow the Silicon Valley auto maker to build a wholly owned factory in the city’s free-trade zone, these people said. This arrangement, the first of its kind for a foreign auto maker, could enable Tesla to slash production costs, but it would still likely incur China’s 25% import tariff.

 

Tesla is currently working with the Shanghai government about details of the deal’s announcement, such as timing, one of these people said. The effort comes as President Donald Trump, who has been critical of China’s trade policies, prepares to visit Beijing early next month.

 

A Tesla spokesman didn’t have a comment beyond reiterating the company’s previous statement in June that it planned to “clearly define” production plans in China by year’s end. The Shanghai government didn’t reply to a request for comment."

While the news isn’t exactly a surprise - Tesla has seemingly been in talks to open a factory in China for ages and has hinted that a factory might be opening soon - given the timing, one can’t help but question whether the reporting is accurate.

To this point, the Wall Street Journal has a rule - common among legacy media organizations - whereby if a company’s communications department is the source of leaked information in a story, the paper won’t report that the company refused to comment or declined to comment - because it wouldn’t be true. Tesla’s comms department was named in the story, so therefor the information either came from sources close to the Shanghai government, or some other third party (or, of course, a combination).

As WSJ points out, Tesla is still working out the details of the agreement. Presumably, breaking ground remains a long way off. Perhaps there’s still time for the deal - assuming one is in fact being negotiated - to fall through.

Of course, being allowed to operate in the country without a local partner would be an unprecedented step for China’s free-trade zones. The Chinese government wouldn’t set such a precedent without careful consideration, though it did circulate a proposal on possibly allowing foreign EV makers to circumvent the partner rule if they build their operations in the country’s free trade zones.

Until now, foreign auto makers have built cars in China through joint ventures with local manufacturers. That allows them to avoid the 25% tariff on autos, but also forces them to split profits, and potentially share technology, with the local partner—something that has tripped up Tesla’s previous efforts to expand there.

 

Under current rules, the cars Tesla builds in the free-trade zone would still count as imports and incur the tariff. Auto analysts in Shanghai doubt the Chinese government has any incentive to give Tesla special treatment.

 

“Government regulators examine every deal and try not to set a precedent,” said Bill Russo, chief executive of Automobility, a Shanghai-based consultancy, and a former Chrysler executive. “Whatever deal Tesla gets, others will want it too."

Of course, the logic of competing for a foothold in China’s domestic market - despite the myriad obstacles that remain for foreign companies, not the least of which are the PBOC’s stringent capital controls, which make it difficult for foreign corporations to repatriate profits - is unimpeachable. According to a study published by the China Association of Automobile Manufacturers this week, Chinese buyers are expected to have purchased 700,000 electric vehicles by the year’s end.

Sales have contineud to climb even as the Chinese government, which has spent billions on EV subsidies, this year pared back financial incentives for EVs by 20%. Of course, the increase is probably because the government has embraced other more coercive methods to push customers toward electric vehicles as it tries to combat a worsening air pollution problem in its cities. For example, the local government has dramatically increased the share of license plates awarded to EV owners to incentivize purchases.

Elon Musk wouldn’t be the first American to try to compete in China’s EV market. Chinese electric car company BYD, which is backed by Warren Buffett, was the best-selling electric carmaker last year and sells seven models in the country.

In August, General Motors said it would start selling the Baojun E100, a tiny electric car costing about $5,300 after national and local electric vehicle incentives, CNNMoney reported.

China’s EV market, already the world’s largest, is expected to experience rapid growth over the coming decade, as the Chinese government pushes a plan to eliminate fossil fuel-burning vehicles entirely over the coming decades. The Chinese government is targeting 7 million EV sales a year by 2025, up from 351,000 last year, and in September it ordered all auto makers already operating in China to start producing EVs by 2019. Officials have also said they are working on a plan to ban gasoline cars.

Tesla won’t report third quarter earnings until next month, but the company reported record cash burn in the second quarter (though it did have about $3 billion of cash on hand)…

...meaning it will likely need to issue more debt to finance the construction of the factory. In August, Tesla announced a $1.5 billion bond offering purportedly to ramp up production on the Model 3.

But regardless of the cost, China is an essential market for Tesla. And as Elon Musk scrambles to justify the company’s obscene valuation as its recent production difficulties have forced it to cede the mantle of most valuable domestic automaker to GM.

However, there is plenty of skepticism as to whether this is Muskian "fake news"...

How’s the Buffalo Gigafactory coming along? Or even the first Gigafactory, for that matter. Must be near the 3Q reporting date. $TSLA https://t.co/lmCe6fhkPm

— Diogenes (@WallStCynic) October 22, 2017

This Secretive Japanese Company Is Driving The Global Boom In Industrial Automation

As we’ve reported in the past, skyrocketing wages in mainland China have caused the adoption of robot workers by the country’s manufacturers to accelerate rapidly in recent years, cementing the country’s position as a world leader in industrial automation.

But while that trend has been widely cited and is widely known, particularly as the US plays catch up with one of its most prominent economic rivals despite President Donald Trump’s promises to bring back manufacturing jobs, what many don’t know is the worldwide boom in industrial automation has largely been driven by one press-shy Japanese company called Fanuc.

Fanuc, as Bloomberg Businessweek reports, manufacturers robots that can perform all manner of functions. From constructing complex motors to making injection-molded parts and electrical components. At pharmaceutical companies, Fanuc’s sorting robots categorize and package pills. At food-packaging facilities, they slice, squirt, and wrap edibles.

Sales of industrial robots in the US soared during the first quarter of 2017 as manufacturers spent more than half a billion dollars on new products bound for auto manufacturing centers in Indiana, Michigan and Ohio - and the overwhelming majority of these robots are being manufactured by Fanuc.

In the first quarter of 2017, North American manufacturers spent $516 million on industrial robots, a 32 percent jump from the same period a year earlier. A study published by the Brookings Institution shows many of them are ending up in steel and auto manufacturing centers such as Indiana, Michigan, and Ohio. According to the report, there are about nine industrial robots for every 1,000 workers in Toledo and Detroit—three times the figure for 2010. Many of these robots are Fanuc’s. Its machines are also in Tesla Inc.’s Gigafactory, in Nevada, lifting heavy chassis and delicately assembling battery trays, among other tasks. Its sorting robots, meanwhile, are ubiquitous at Amazon.com Inc.’s massive warehousing and shipping facilities.

But US sales are dwarfed by sales in China—which purchased some 90,000 units, almost a third of the world’s total industrial robot orders last year. Sales to China amounted to about 55 percent of the $5 billion that Fanuc’s automation unit generated in the fiscal year ended March 2017.

The International Federation of Robotics estimates that, by 2019, China’s annual industrial robot orders will rise to 160,000 units, suggesting Fanuc  will be insulated from any slowdown in the world’s second-largest economy. Yoshiharu told investors at his most recent Q&A session in April that the company expects demand in China to outstrip supply even after Fanuc opens a factory next August in Japan’s Ibaraki prefecture. The facility will be dedicated solely to keeping up with Chinese demand.

Fanuc, whose robots are painted in the company’s signature bright yellow, was founded in the 1950s by Seiuemon Inaba, a Japanese engineer. His son, Yoshiharu, now serves as CEO.

But of the many models of machines produced by Fanuc, none are more representative of the company’s dominance than the Robodrill - a machine used by Apple Inc. suppliers to make the metal casings that have been a feature of every iPhone since the iPhone four.

Analysts even cited Robodrill sales to discount rumors that the Apple 8 and Apple X wouldn’t feature the metal casing.

King of them all is the Robodrill, which plays first violin in one of the great symphonies of modern production: machining the metal casing for Apple Inc.’s iPhones. In the fiscal year surrounding the 2010 introduction of the iPhone 4, the first to use an all-metal casing, Robodrill sales more than doubled.

 

Since then, this relationship has become so chummy that, based solely on strong first-quarter Robodrill sales, analysts discounted early rumors the iPhone 8 would eschew metal casing for front-and-back glass panels. Instead, the recent iPhone 8 release and coming iPhone X launch spurred higher Robodrill sales to Apple’s manufacturers in China, some of which are building new factories to assemble the company’s phones. New iPhones also mean more demand for Robodrills from Chinese smartphone makers such as Xiaomi, Vivo, Oppo Electronics, and Huawei Technologies, which often present their own more affordable models in the wake of each fresh offering from Apple.

Indeed, Fanuc’s machines are directly responsible for the return of offshore manufacturing jobs to North America, as companies realize they can achieve more efficient streamlining and less costly economies of scale with “lights out” factories stocked with robots.

The Robodrill

Of course, this trend, as Bloomberg notes, won’t save American manufacturing jobs - if anything it will only slow the decline. Companies are spending more money than ever before on robots. And as academics and even investors like Bill Gross speak up about the potential for automation to reshape the global labor market in fundamental ways, there’s a strong argument that Fanuc is the most important manufacturing company in the world right now.

That this status is held by a Japanese company is hardly surprising. The country’s looming demographic crisis, driven by the lowest birth rate in the developed world, has bolstered domestic demand for machines that can augment or replace human workers.

And as China goes, so goes the rest of the industrial world. Multinationals that are reshoring operations from East Asia to North America and Europe are doing so in part because automation promises sophisticated production methods and labor savings; they, and companies who stayed out of China in the first place, are spending more than ever on industrial robots. The overarching pattern is less a reversal of the 20th century’s offshore manufacturing boom than an unraveling, with jobs vanishing from developing and developed nations alike.

 

Amid the tumult, there’s one clear winner: the $50 billion company that controls most of the world’s market for factory automation and industrial robotics. In fact, Fanuc might just be the single most important manufacturing company in the world right now, because everything Fanuc does is designed to make it part of what every other manufacturing company is doing.

Fanuc reached an important milestone in its conquest of the US market in the early 1980s when the CEO of GM purchased the first Fanuc robots to work on GM assembly lines.

The resulting press coverage caught the attention of Roger Smith, who had recently become president and CEO of General Motors Corp. Smith had joined GM’s accounting division 30 years earlier, after spending the final two years of World War II in the U.S. Navy. He’d risen through the corporate ranks slowly, gaining prominence as GM deftly navigated the gasoline crisis of the 1970s to become America’s top automaker.

 

When Smith took over, GM held 46 percent of the U.S. auto market, but the industry was in decline, and most companies were looking to cut costs and improve efficiency to compete with Japanese automakers. GM was in the enviable position of being flush with cash, and Smith had ideas, most of which sought to restore the company’s focus on technological innovation. Like Fanuc, GM had pioneered early developments in numerical control, including the use of a storage system to record the movements of a human machinist, then mimic them on demand. Such experiments had led Smith to imagine what he called a “lights-out factory of the future,” which would so limit reliance on assembly workers at GM plants that lights and air-conditioning would be unnecessary. The company failed to advance very far in that direction, though, choosing to focus instead on the traditional manufacturing methods that were helping it dominate the U.S. auto market.

 

Fanuc’s robots were unlike anything Smith had seen outside his own dreams, and he soon decided he’d found the way forward for GM. A year after he became CEO, on a humid June afternoon in Troy, Mich., a yellow robot bowed first to Smith and then Inaba before swinging its arm to cut the ribbon for a joint venture called GMFanuc Robotics Corp.

As advances in automation and machine learning continue to accrue, human workers in all but the most-skilled professions will slowly see their jobs lost to an army of robots. But as Bloomberg points out, while an optimist might hope the consequences of automation might be limited to workers enjoying more meaningful pursuits with their free time, whether automation will lead to a higher standard of living for all - or rather further imbalance already lopsided economic inequality remains to be seen.

Despite Spike In Accidents, California Allows GM To Expand Self-Driving Car Fleet

California regulators have largely acquiesced to General Motors’ requests to expand its fleet of self-driving robot cars. But that doesn’t mean there haven’t been a few, uh, bumps in the road for GM’s Cruise Automation division.

Reuters reported Thursday that the number of accidents involving GM’s self-driving cars has continued to climb, even as California and one powerful Senate committee have done everything in their power to hasten advances in the technology by allowing companies broad remit to increase the size of their fleets, while simultaneously green lighting a bill that would allow automakers to expand testing programs across the US.

To wit, GM’s self-driving cars were involved in 6 accidents during the month of September – a month where the company finished expanding its fleet of self-driving cars from around 30 or 40 cars to more than 100.

As the company increases the size of its test fleet, it has also reported more run-ins between its self-driving cars and human-operated vehicles and bicycles, telling California regulators its vehicles were involved in six minor crashes in the state in September.

“All our incidents this year were caused by the other vehicle,” said Rebecca Mark, spokeswoman for GM Cruise.

We’re not certain the unsuspecting cyclists, drivers and pedestrians who comprised the other party in many of these incidents would agree with GM"s characterization of events.

The company has been testing the automated cars on busy San Francisco streets as part of its effort to develop software capable of navigating congested and often chaotic urban environments, an effort that one might expect to be fraught with complications given that the slightest error on the car’s part can be easily amplified given the volume of traffic.

Ford and GM have been richly rewarded by investors for their pioneering efforts in the world of self-driving car technology (Wired, the tech bible, even published a story proclaiming that “Detroit Is Stomping Silicon Valley in the Self-Driving Car Race”). GM shares are up 17% this year.

However, California’s permissiveness has raised hackles with some vehicle safety groups, who claim the state is giving too much latitude to automakers.

In filings to California regulators, Cruise said the six accidents in the state last month involved other cars and a bicyclist hitting its test cars.

The accidents did not result in injuries or serious damage, according to the GM reports. In total, GM Cruise vehicles have been involved in 13 collisions reported to California regulators in 2017, while Alphabet Inc’s (GOOGL.O) Waymo vehicles have been involved in three crashes.

Last year, a Tesla owner died in a fatal crash while the company’s autopilot feature was engaged. Excuse us for being morbid, but much longer until a car with no driver is involved in a deadly crash?

And what will happen to GM’s share price when that happens?
 

Cryptocurrency Concentration - Just 4% Own Over 95% Of Bitcoin

Bitcoin has been making a lot of news lately. The cryptocurrency shot up in value by over 200% in 2017, making many people fear that the market is in a bubble. Last week, China decided to close its bitcoin exchanges, which caused investors around the world to panic about the currency’s long-term viability. But HowMuch.net asks, how many people own bitcoin, and how is the currency distributed around the world? Check out our new visualization.

Source: HowMuch.net

Our graph represents the entire bitcoin market, which has a value of around $60 billion. For comparison, that’s bigger than several well-known companies, like Fed-Ex and General Motors. We then divided the value of the bitcoin market by address. As you can see, over 95% of all bitcoins in circulation are owned by about 4% of the market. In fact, 1% of the addresses control half the entire market. 

There are a couple limitations in our data. Most importantly, each address can represent more than one individual person. An obvious example would be a bitcoin exchange or wallet, which hold the currency for a lot of different people. Another limitation has to do with anonymity. If you want to remain completely anonymous, you can use something called CoinJoin, a process that allows users to group similar transactions together. This makes it seem like two people are using the same address, when in reality they are not. 

So it’s a complex situation. but let’s try to break bitcoin down as simple as possible. Bitcoin is just a type of money, like dollars and euros. The main difference is that there isn’t a sovereign government backing the currency, and it instead lives online. This is possible thanks to something called the blockchain. Banks and companies must keep detailed records of where they send money, marking it possible to detect fraud and criminal activity. The blockchain works differently because it breaks each transaction into tiny components, routes the pieces through a computer network, and directs them to a recipient who can then re-assemble the code together. If you don’t have the right key, you can’t own a bitcoin. And if you aren’t at the right digital address (think your home network’s IP address), then you can’t receive bitcoin.

The technology is hard to understand, and it presents challenges for companies and people who want to use it. That’s why folks typically turn to a vendor like Coinbase to handle their transactions. You know how you carry physical money in your personal wallet? Think of Coinbase as a digital wallet. You use it to buy stuff and pay for services. But be careful—people can steal your digital wallet, and the thieves can be untraceable. And that’s the issue. There’s only a very limited number of bitcoin wallet providers out there. It’s not like you can just go to your local bank and buy some bitcoin.

The big takeaway from all this is that if you are considering purchasing some bitcoin, you have very limited options. There are only a few key players in the game where you can park your investment. And if you do make that purchase, understand that it is highly speculative and unregulated, so prepare for a bumpy ride.

Carmageddon Continues - Dealers "Wildly Overweight" SUVs As Sales Slow

Authored by Mike Shedlock via MishTalk.com,

The auto boom, one of the key components propping up consumer spending, has come to an end.

Dealers are wildly overweight SUVs just as the market turned.

As auto-industry growth stalls and family sedans go the way of the flip phone, one silver lining had been the trusty “crossover” SUV. Sales in the category boomed amid lower gasoline prices and higher demand for spacious wagons with all-wheel drive.

But more clouds seem to be gathering as the summer car-selling season comes to an end. Incentives on SUVs are skyrocketing amid rising inventories, a trend that promises to dent the fat profits the segment has long returned.

Auto makers report sales on Friday, and August volume is expected to rise 2% compared with the same month in 2016, but only because dealers have an extra selling day this year. On an adjusted basis, the rate of retail sales—stripping out deliveries to fleet buyers—will hit the lowest point of 2017, according to J.D. Power, despite hefty sales incentives and new model offerings.

The U.S. auto market’s slowdown isn’t a new story, as analysts widely expected a seven-year growth streak to end and for sales to plateau at roughly 17 million a year for the foreseeable future. Red flags for the crossover market, however, represent a whole new set of headaches, particularly for companies like General Motors Co.

“The industry is wildly overweight on crossovers,” John Murphy, an auto analyst for Bank of America Merrill Lynch, said in a recent presentation. The number of crossover models sold in U.S. dealerships is expected to rise to 110 nameplates by late 2020, up from 78 today, he estimated.

Auto makers like GM—long dominant in the SUV market—have relied on bigger or heavier vehicles with higher price tags to drive profits, and offset the losses that result from sales of family sedans or compact cars. But in the first half of 2017, incentives for SUVs shot up 33%, according to research website Edmunds.com, with the average discount or rebate in the segment reaching $3,200.

Ford Motor Co. is currently offering a $3,500 cash rebate on the Ford Escape, along with 0% financing for 72 months. A Ford spokesman said the SUV market is “increasingly competitive,” noting average transaction prices last month fell $400 compared to a year earlier.

Economists Expect Plateau

At every peak, economists expect a “plateau”, be it the stock market, the housing market, or cars.

Reasons to Expect a Crash

• Self-driving features are on the way and many people will wait for them


• Lots of retiring boomers purchased their last car


• Anyone who bought with long-term financing in the past few years is deeply underwater, making trade-ins difficult


• Auto sales are increasingly subprime


• After years of record sales, who needs a newer car away?

Vehicles account for 20% of retail spending. A crash or even a significant slowdown will impact retail sales and thus GDP.

Uber CEO's Texts With Engineer Revealed: "Let's Start @faketesla...About Stupid Shit Elon Says"

If nothing else comes of Google suing their former autonomous driving engineer Anthony Levandowski (refresher: he"s the guy that split with 14,000 proprietary Google documents, used them to start a new self-driving tech company called Otto and then promptly sold it to Uber for $700 million), the following text messages exchanged between Levandowski and former Uber CEO Travis Kalanick, disclosed as part of the discovery process, will have been well worth the millions in legal fees. 

In one text from September 2016, Levandowski texted Kalanick to suggest that they should setup a fake twitter handle called "@faketesla" specifically to "give physics lessons about stupid shit Elon says..."  Per Recode:

"Yo! I"m back at 80%, super pumped... we"ve got to start calling Elon on his shit. I"m not on social media but let"s start "faketesla" and start give physics lessons about stupid shit Elon says like this: "we do not anticipate using lidar. Just to make it clear, lidar essentially is active photon generator in the visible spectrum – radar is active photon generation in essentially the radio spectrum. But lidar doesn’t penetrate intrusions so it does not penetrate rain, fog, dust and snow, whereas a radar does. Radar also bounces and lidar doesn’t bounce very well. You can’t do the “look in front of the car in front of you” thing. So I think the obvious thing is to use radar and not use lidar."

"The photons stop acting like photons at 77Ghz we at least need the geeks on our side and start calling the BS out. Any objections?"

Clearly Levandowski doesn"t subscribe to society"s widely observed texting guidelines which clearly mandate extreme brevity be utilized at all times...

But it didn"t end there.  In a series of text messages that clearly demonstrate an extreme obsession with Musk, Levandowski and Kalanick contemplate calling out Tesla on its safety record...

Watch first 45seconds... Tesla crash in January which implies Elon is lying about millions of miles without incident. We should have LDP on tesla just to catch all the crashes that are going on. Got this from ford who"s debating call him out on his shit

...and also seemingly sought out spies from within Musk"s management team...

“I"m still with the tesla guys and will try to get more info,” Levandowski texted Kalanick.

(Levandowski was at a dinner with 80 or so industry representatives and regulators, including Tesla’s former head of Autopilot, Sterling Anderson. Other attendees included Paul Hemmersbaugh from General Motors; Stefan Heck, CEO of auto tech startup Nauto; and James Kuffner of the Toyota Research Institute.)

Of course, Levandowski and Kalanick also kept close tabs on Google"s progress in the self-driving car space and at one point even discussed a meeting between Kalanick and the head of Google"s self-driving arm, Waymo.

Separately, Kalanick and Levandowski talked about someone they refer to as “JK.” Kalanick said JK agreed to meet him and Levandowski said to ask him about Waze and self-driving cars. Uber could not provide clarity on who JK is, but based on context, it appears they are referring to John Krafcik, the CEO of Alphabet’s self-driving arm Waymo.

The conversation occurred a few months before Uber announced it was acquiring Otto in August 2016, but three months after Levandowski left Alphabet and founded Otto.

With that, tune in next week for an all new episode of Silicon Valley...

Chevy Forced To Extend Shutdown Of Bolt Plant After Realizing That Literally No One Wants A Bolt

General Motors launched it"s much-hyped, all electric Chevy Bolt at the end of 2016.  The Bolt was expected to make a splash as it was the first electric car in the U.S. market to offer 200 miles of driving range at an affordable price starting around $35,000.  The only problem is that pretty much no one seems to want one.

Unfortunately, that lack of demand is about to earn a bunch of UAW workers at GM"s Orion, Michigan plant an extended summer vacation.

As AOL Finance points out today, GM has managed to sell just over 7,500 Chevy Bolts through the first six months of 2017.  Moreover, since dealers are sitting on about 111 days worth of inventory, we"re going to go out on a limb and say the Bolt launch slightly underperformed expectations.  All of which has resulted in GM"s decision to extend the shutdown currently in effect at it"s Orion plant for just a little while longer.

General Motors Co has extended a shutdown at the Michigan factory that builds the new Chevrolet Bolt electric car as part of a broader effort to get control of bulging inventories of unsold vehicles in the United States.

"Shutdown periods vary by plant based on launch timing of new or refreshed models across the portfolio and our ongoing efforts to align production with market demand," GM said in a statement.

But it"s not just the Chevy Bolt that GM is having a hard time selling.  Overall, the company is battling a massive inventory glut, some 126 days of supplies, in passenger cars.  As such, the company has extended summer vacation shutdowns at three other North American assembly plants. The assembly plant at Lordstown, Ohio, that makes the Chevrolet Cruze and a plant near Kansas City, Missouri, that produces the Malibu sedan both have three additional weeks of downtime. An assembly plant in Oshawa, Ontario, will be idled for two extra weeks to reduce inventories of the Chevrolet Impala large sedan.

Of course, this shouldn"t be much of a surprise for our readers as we recently pointed out that GM"s "channel stuffing" hit a new all time high for the restructured company in June 2017, with the number of GM vehicles parked at dealer lots and patiently waiting for a buyer rising to the highest since the summer before recession officially began, when GM was still pre-bankruptcy GM, with far greater (if ultimately superfluous and in need of restructuring) production.

All of which kind of makes you wonder just how well that other, highly-anticipated, mass-produced, affordable, all-electric vehicle will perform when/if it officially starts to ship later this year.

First Production Model 3 pic.twitter.com/TCa2NSUNI3

— Elon Musk (@elonmusk) July 9, 2017

Auto Defaults Soar On The Back Of "Hasty Loans And, At Times, Outright Fraud"

In the years after its 2009 bankruptcy, Chrysler looked for a dedicated lender to help customers "finance their cars quickly"...which was code for a lender who could help the struggling OEM expand their market share by making extremely risky loans to subprime borrowers all while laying off the credit risk to unsuspecting pension funds.  As such, Chrysler ultimately picked Santander due to its expertise in “automated decisioning”...which was code for the ability to advance credit without actually performing income verification tests on borrowers.

For a time, Chrysler and Santander enjoyed a perfect symbiotic relationship as it offered Santander an opportunity to aggressively expand in the U.S. subprime loan market, and Chrysler, the perennial third wheel among the “Big Three,” was able to target customers that were previously deemed untouchable by lenders.  Of course, as Bloomberg points out today, the problems surfaced almost from the start.

Many of them, detailed in the settlement between Santander and authorities in Delaware and Massachusetts, recall some of the excesses of the subprime housing era.

Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors.

State authorities also said an internal Santander review in 2013 found that 10 out of 11 loan applications from a Massachusetts dealer contained inflated or unverifiable incomes. (It’s not clear whether this particular case involved a Chrysler dealer.)

Santander kept originating the dealer’s loans anyway, even as they continued to default “at a high rate,” the authorities said.

Some dealerships even asked Santander to double-check customers’ incomes because they didn’t trust their own employees, the authorities said. They also said the lender didn’t always oblige because that would put it at a “competitive disadvantage.” At the time of the settlement, Santander said it was “totally committed to treating its customers fairly.”

All of which at least partially explains why auto defaults are soaring to post-crisis highs even as equity markets continue to shrug off bad data.

Of course, it wasn"t just a few dealers in Delaware and Massachusetts that caused auto defaults to soar.  As we pointed out back in May, the problems at Santander were pervasive with the lender apparently only verifying income on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off pension and insurance companies. 

Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into bonds, according to Moody’s Investors Service.

The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.

Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.

Of course, Wall Street’s voracious appetite for high-yield investments has kept the loans - and the subprime ABS bonds - coming.  You can"t possibly expect those overpaid, ivy league-educated financial analysts to be discerning when it comes to credit risk.

In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.

For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.

“Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management.

But, just like with the subprime mortgage bubble, we suspect the extra 50 bps of yield garnered from moving down the credit quality curve will ultimately prove to be slightly less than sufficient compensation.  Luckily, much of the losses will reside with America"s already bankrupt pension funds which means that taxpayer will get the opportunity to step in and fix everything.

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.

Stockman: "We're On The Fast Track To 'Carmageddon'"

Authored by David Stockman via The Daily Reckoning,

Back in the 1950s when GM had 50% of the auto market they always said that, “As General Motors goes, so goes the nation.”

That was obviously a tribute to GM’s economic muscle and its role as the driver of growth and rising living standards in post-war America’s booming economy. Those days are long gone for both GM and the nation. GM’s drastically reduced 20% market share of U.S. light vehicle sales in June was still an economic harbinger, albeit of a different sort.

GM offered a record $4,361 of cash incentives during June. That was up 7% from last year and represented 12% of its average selling price of $35,650 per vehicle, also a record. But what it had to show for this muscular marketing effort was a 5% decline in year-over-year sales and soaring inventories. The latter was up 46% from last June.

My purpose is not to lament GM’s ragged estate, but to note that it — along with the entire auto industry — has become a ward of the Fed’s debt-fueled false prosperity. The June auto sales reports make that absolutely clear.

In a word, consumers spent the month “renting” new rides on more favorable terms than ever before. But that couldn’t stop the slide of vehicle “sales” from its 2016 peak.

In fact, June represented the 6th straight month of year-over-year decline. And the fall-off was nearly universal — with FiatChrysler down 7.4%, Ford and GM off about 5% and Hyundai down by 19.3%.

The evident rollover of U.S. auto sales is a very big deal because the exuberant auto rebound from the Great Recession lows during the last six years has been a major contributor to the weak recovery of overall GDP.

In fact, overall industrial production is actually no higher today than it was in the fall of 2007. That means there has been zero growth in the aggregate industrial economy for a full decade.

Real production in most sectors of the U.S. economy has actually shrunk considerably, but has been partially offset by a 15% gain in auto production from the prior peak, and a 130% gain from the early 2010 bottom.

By comparison, the index for consumer goods excluding autos is still 7% below its late 2007 level.

So if the so-called “recovery” loses its automotive turbo-charger, where will the growth come from?

These industrial production figures powerfully underscore the extent to which the weak expansion of real sales and GDP over the past seven years has been artificially supported by an energetic but unsustainable snapback in the auto sector. The soft June auto sales report further underscores that this happy booster shot is now over. Its opposite — Carmageddon — is metastasizing rapidly.

Still, booming economic growth is exactly what is priced into the still soaring stock market averages. But the Carmageddon story is evidence of the rot which lies beneath today’s mutant economy and lunatic financial bubbles.

It turns out that during June 2017, the average selling price for a light vehicle was $31,720. That’s up 75% from the average selling price recorded 20 years ago in 1997. Yet during that same interval, median household income grew by just 52% (from $37k to $56k).

So how did U.S. households afford to buy their new rides when their incomes have lagged the purchase price of a new car by nearly one-third over the last two decades? They didn’t. Financing for the average new vehicle during June amounted to $30,945 or 97.6% of the average purchase price.

That’s up 29% from the great recession lows and shows quite dramatically how the Fed’s Bubble Finance actually works. Namely, it has permitted the U.S. economy to borrow its way into an auto boom based on the rising collateral value of autos, not a commensurate gain in earned income and sustainable purchasing power of U.S. households.

In fact, since about 85% of new cars are financed, means households are taking out cash to finance transaction fees, pay-off underwater loans on trade-ins or take a joy-trip in their new ride.

Needless to say, borrowing more than the price tag of a new car and financing it over a record 69.3 months amounts to still another version of Ponzi finance. That’s especially true in this instance because unlike homes during the subprime mortgage mania, it is evident even now — before the real car loan bust — that autos depreciate rapidly, and far more rapidly than debt is reduced under current typical loans.

So the repo man will be immensely busy in the years ahead, and that will have its own harmful economic effects. And it also needs be pointed out that auto loans are essentially supported by the collateral value of the vehicle rather than the income and credit worthiness of the borrower.

As the tide of soured auto loans rises, there will be more and more horror stories about wages being garnished and other court-imposed extractions from the hard-pressed households which were sucked into the auto finance Ponzi, and at length defaulted.

Not surprisingly, auto debt per capita is now at an all-time high of $4,200 and is up 40% from the post-crisis low of $3,000 in 2010.

So the Fed may crow about a recovery that has been the weakest in modern history, but it is only a statistical paint-by-the-numbers upturn. It was purchased at the cost of burying U.S. households in levels of auto debt that were heretofore inconceivable, and which, in any event, are surely unsustainable.

The truth of the matter is that the Fed has just caused the pea to be shuffled under a different shell. Thus, Yellen and her posse continue to dismiss the threat of bad debt based on the purported success of “prudential regulation” and the improvement of bank balance sheets and the home mortgage market.

In fact, household debt has just been shoved into the auto file. At the peak of the mortgage boom in 2008 there were 98 million mortgage loans (including second mortgages and home equity lines) outstanding compared to 88 million auto loans.

The latter has now soared to 108 million car loans — an off-the-charts record level that now exceeds the number of mortgage loans outstanding by 35%.

It goes without saying that to generate 108 million auto loans, any consumer who could fog a rearview mirror had to be admitted into the auto finance game. Accordingly, subprime auto debt is now at an all-time high — notwithstanding the overwhelming evidence from the financial crisis that much of this debt will become delinquent or default when either payroll checks falter or used car prices tumble — leaving car loans hopelessly underwater.

The latter point is crucial and underscores why this time the auto debt contraction cycle will be far worse than 2008-2009. That’s because nearly one-third of vehicle trade-ins are now carrying negative equity.

This means, in turn, that prospective new-car buyers are having to stump-up increasing amounts of cash to pay off old loans, thereby pressuring volume-hungry lenders and dealers to extend loan-to-value ratios to even more absurd heights than the 120% level now prevalent.

That’s kicking the metal down the road with a vengeance!

At the end of the day, the precarious nature of the debt pyramid that underlies the auto market cannot be gainsaid. It belies the illusory debt-fueled prosperity of the auto sector, and, instead, underscores how consumers are being led even deeper into the Fed’s colossal debt trap.

That’s why GM’s June results were truly a harbinger. Even the Fed’s own surveys show that the household sector is tapped out on the auto credit front, and that auto loan demand has turned negative for the first time since the 2008-2009 collapse.

Current paychecks are still barely keeping up with inflation — especially as reflected in the cost of food, energy, medical and housing. Needless to say, if employment growth falters during the inexorable recession just ahead, the Fed’s debt-o-topia will come full circle.

After rebounding during the past two years at a rate between 5% and 6.8% year-over-year, even credit cards are again tapped out.

With balances now exceeding $1 trillion, they are back to the unsustainable level of May 2008 just before they blew up during the Great Recession.

So why are the casino gamblers still buying the dips?

Because that’s “what’s working”… until it doesn’t.

DeSoto To DeLorean - 14 Defunct Car Brands (& How They Failed)

Automobile enthusiasts around the world know brands like Studebaker, Plymouth and Packard, but you’d be hard-pressed to find any of these on the roads today. Former powerhouses in the American auto market, as Visual Capitalists"s Chris Matei notes, they have since become beloved by collectors, but lost to the general public.

Today’s infographic comes from TitleMax and it looks at 14 now-defunct car brands and the circumstances that took them from highways to bygones.

These are only a selection of a much longer list of car brands that have not survived to see the present day. What accounts for the churn rate of these brands?

BOLD EXPERIMENTS, BOONDOGGLES, AND BURNOUTS

Some car brands, like Tucker and Saturn, introduced new ideas that the market simply didn’t care for, didn’t perform as well as the competition, or were too ambitious for the industry climate.

Others, like Edsel and DeLorean, met swift ends as they hemorrhaged money far faster than their owners anticipated. Even more brands were simply folded into the ever-expanding portfolios of either Ford or General Motors, the two biggest auto conglomerates ever to rule the roads.

BAD TIMING, OR WORSE ECONOMY?

Car sales rise and fall with broader economic trends because they are tied into so many different variables: raw materials, production costs, labor costs, oil prices, and interest rates among others.

We can look at two time periods in which the combination of these conditions caused many of the brands on this list to fail.

Post-war Doldrums (1950-1958)

Based on the timeline above, we can see that 1950s were a terrible time for the smaller players in the auto industry. The explanation as to why so many brands declined over this decade has to do with the highly competitive, oligopolistic business practices of market leaders Ford and General Motors. Both of these market titans were locked in a battle to lower prices by taking advantage of economies of scale, while wooing customers who were feeling the economic pressures of a postwar recession.

Smaller volume manufacturers like Packard and Studebaker could not keep up, even when they attempted to merge. As a result, these and many other smaller brands were forced out, or absorbed into the portfolios of one of the “big two.”

Same Car, Different Name (1998-2008)

A similar stretch of declining sales plagued the late 1990s and early 2000s, as the trend of “badge engineering” caught up with manufacturers.

Rather than designing new models at high cost, conglomerates like GM simply engineered new brand “badges” and marketed the same basic models under a variety of names like Pontiac, Plymouth, Mercury, or Oldsmobile. The same tactic was later used to take mid-market designs, such as the Ford Fusion, and style them for a luxury audience as a new model – in this case, the Lincoln Mk. Z.

Badge engineering curbed the appeal of a number of American brands under the GM and Ford portfolios. The nail in many of their coffins was the major auto industry downturn in 2008. That year, GM restructured as it underwent Chapter 11 bankruptcy.

As a result, GM removed the majority of its badge engineered brands, including many of those listed above, from dealerships in the following years.

Carmageddon Crashes into “the Recovery” Right on Schedule — EXACTLY as Predicted Here

Carmageddon, as Wolf Richter has called it, is hitting the US economy exactly as I said a year and a half ago would start to happen at the very end of 2016 or the start of 2017. Measured year-on-year, auto sales have declined every month of 2017, and are now starting to cause the financial wreckage that I said we would experience in what will become a demolition derby for US auto manufacturers.

“A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,” wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients. (Wolf Street)

Stanley now foresees a “multiyear cyclical decline,” along with a declining “willingness of financial institutions to lend as aggressively as in the past.”

After an eight-year boom, the industry appears “to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles….” not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the “diminishing returns” – when you throw gobs of money at a problem and it doesn’t have much impact. Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (“0% financing”), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south.

How many times have readers here heard me stress the economic Law of Diminishing Returns that economists and banksters and CEOs are almost universally ignoring. This exact scenario, you may recall, is what I said would happen this year, only I said it in January, 2016, year before it began:

Auto-traders are auto-traitors

I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a strong economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything.So, the biggest scare here is how blind it proves the experts are who guide the economy.

Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at no loss?

What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-year term. Now, that is the average loan length.

It’s dumbfounding to me that people are stupid enough to site auto sales as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be a trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

…Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

…Total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

It’s the same thing, but an order of magnitude greater, and anyone who is not steeped in economic denial could have and should have seen this coming. I knew it was coming and how long it would take because it is the same pattern I saw leading into the Great Recession. (I choose to learn patterns from history, but our leaders, including CEOs, do not.) As I’ve said before, we (as a nation) have learned NOTHING.

The Great “Recovery” is all about repeating the mistakes that created the Great Recession in order to recover the glory bubble days; only we are repeating those mistakes at a vastly higher magnitude because the Law of Diminishing Returns has reached the hockey-stick side of the curve. That is as true for the housing market and all of the Federal Reserve’s plans as it is for the auto industry and the consumer banks that operate in that industry.

The fallout from Carmageddon on banks and investors as well as automakers

Derivatives (remember those dangerously cloaked things?) made up of auto loans made to people with good credit have already reached their highest default rate since 2008 when automakers wound up having to be bailed out or barely escaped that kind of perverse salvation plan. JPMorgan Chase & Co. is now tightening up on any more auto loans.

And then there are the subprime junkers:

Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields. These bonds are backed by subprime auto loans that have been sliced and diced and repackaged and stamped with high credit ratings. But those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.

 

And then there are those issued in 2016. They haven’t had time to curdle.

 

The 2015 vintage that Fitch rates is now experiencing cumulative net losses projected to reach 15%, exceeding the peak loss rates during the Financial Crisis. (Wolf Street)

According to Bloomberg,

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitization … , which is higher even than for bonds in … 2007….  The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending.

Gee, who could have seen that coming? Oh, yeah, me … clear back in 2015:

Auto loans and student loans are a leaning tower of debt. Auto sales have peaked only as a result of a huge extension of looser, loser credit where loan terms are now up to seven years long, and interest is low or non-existent as are down payments. The last time we saw such desperate financing measures in the auto industry was just before the Great Recession, and we all know what happened to the auto industry then. We also know what happened to the housing industry when it peaked because of this kind of looser credit. We’ve learned nothing and have repeated the problem … on steroids. So, another crash is coming. (“Epocalypse Soon“)

And even earlier than that when I wrote …

Another support given was that “sales of autos are still rising.” Wow! Only because of SEVEN-YEAR auto loans, zero-interest loans, and the fact that auto dealers are now counting leases as sales!

 

That’s the same easy-credit bubble that was created in housing! How can people not see that it is exactly the same thing — only in cars?

…Moreover, how can people not see that this was the same nonsense that got automobile manufacturers in trouble during the last economic crash? It’s why they went down at the same time housing went down. (“Sometimes When I Read Economists My Brain Hurts“)

Because of these extended terms on a rapidly depreciating asset, as I warned way back when the practice began, negative equity now averages a little higher than $5,000, which is the worst ever, and which means banks effectively have no collateral.

As Wolf points out, that negative equity now gets rolled over into a new car loan when the old vehicle is traded in, making the new loans worse than ever. So, the cause of bad debt spreads like cancer. (We see it happening, but we still allow it because we’re dumb like that. At least, those who are bankers and regulators are because they learned nothing.) Vehicle trade-in values have reached their lowest levels since 2010. That kind of date should mean something by association.

Speaking of the Great Recession, do you remember how some housing lenders made the subprime mess as bad as it was by not checking on the credit data of those they were making loans to? Those loans got batched into the derivatives that went bad. Well, the nation’s largest sub-prime auto lender, Santander Consumer USA, has only been verifying 8% of its loans! (Again, we learned nothing!)

In other collateral damage this week, General Motors announced an extended closure of two of its car manufacturing plants. This is partly due to drivers switching to SUVs, but the increase in SUV sales is less than the decline in car sales. Multi-industry factory output across the US is down for the second time in three months, and that number, too, is driven largely by the crash in auto production.

Carmageddon has been building insidiously each month since the start of the year, but the impact of decline is now waking up banks, manufacturers and investors to the significance of this event, which I said back in January of 2016 would be just one part of a massive and slowly unfolding “Epocalypse.”

As the impact is summarized on Wolf Street (linked to above),

Over the longer term, Jonas gets outright bearish – and with good reason. He expects a slump that will last years. For 2018, he cut his previous estimate of 18.9 million down to 16.4 million, which may still be high. And for 2019 and 2020, he slashed his estimate to 15 million sales.

And how bearish for auto sales is this?

But he notes that to maintain sales even at that low level, the government would have to step in and subsidize in some way new car purchases.

There we are! We are right back to government bailouts of the auto industry in one form or another, even to maintain declining sales.

You see, the warnings given during the Great Recession were completely sure: if you bail the failures out once, you create “moral hazard,” which causes the greedy to double down on their stupid risks. They learned nothing. Forget the idea that CEOs are smart … unless by “smart” you mean smart at con games. If you cannot learn from an event as obvious and global as the Great Recession, you cannot learn from anything … not even to save your soul from its own corruption.

Why is it important that I point out that I predicted these things?

Because if someone can show these events are predictable — in how they will fall, how hard they will fall and even WHEN they will fall, then it becomes inexcusable that we went down this path all over again! The idiots who cause the problem can no longer say, “Well, we cannot be expected to have seen something like this coming.” Yes, they can be and should be expected to have seen it coming. It is inexcusable that they did not! So, let’s cut off that path of escape from responsibility for the wreckage that is coming due to their uninhibited greed and foolhardy risk taking.

It is also important because it is about destroying the economic denial that is rampant throughout this nation and that will destroy the nation entirely if it continues.

Finally, it is important because you might just stop to think that, if someone predicted the catastrophe that is unfolding right now a year before the first actual signs of failure began, then you might want to pay attention to rest of what he was predicting. And I beat that drum again and again because so few people are listening, and it is far past time that they did. It is time for this nation to wake up to its own economic stupidity.

Carmageddon was a completely foreseeable and, so, completely avoidable pile-up!