Now Is the Time to Sell Your 'Lightly Used' Car
When used cars cost more than new cars... Now is the time to sell your 'lightly used' car... More about 'transitory' inflation... The Fed doesn't care about car prices... When do they pull the rug out?... History is on the bulls' side...
One piece of conventional personal-finance wisdom is currently being proven wrong...
It's the advice that says it's better to buy a slightly used car than a brand-new version of the same model...
Typically, the value of a new car drops significantly as soon as you drive it off the lot... and the slightly older model is really just as good.
But these, of course, aren't typical times...
Today, some "slightly used" cars, one or two years old, are going for more than brand-new models...
According to data analyzed by the industry research publication iSeeCars.com, 16 in-demand cars today actually cost more used than new...
For example, the 2019 and 2020 versions of the Kia Telluride SUV are generally selling for more than $3,500 – or 8% – higher on average than a new 2021 version...
Same story with the GMC Sierra 1500 pick-up truck... and four of Toyota's most popular models that are all selling for at least 3% higher than their zero-mile versions.
The value shift holds true across the industry as a whole... According to iSeeCars.com's data, in the first half of June, the average "lightly used" car cost only 3.1% less than its new version, compared with the first half of November 2020, when the used version cost 10.8% less.
As I (Corey McLaughlin) will explain, this unusual twist in today's car market says a lot about the state of the economy today... what the Federal Reserve plans to do about it, if anything... and what its decisions might mean for your stock portfolio.
Why the twist in car pricing? In short, it's life in the 'pandemic economy'...
Specifically, the microchip shortage has limited the supply of new cars. And it's simple supply and demand: If people want the car, and the new version is not available, willing buyers will pay more for the used versions.
Our colleague Dr. David "Doc" Eifrig highlighted this trend on Monday in his Advanced Options service...
Used-car prices have absolutely skyrocketed as chip shortages have made it harder to find new cars.
We've seen reports about outrageous car prices in cities all over the country, and it's the same story in the United Kingdom and Japan. Lou Vitantonio, president of the Greater Cleveland Automobile Dealers Association, told a local media outlet...
New vehicles' limited inventory because of the chip shortage is really what the focus has been on. Cars are coming in, but they're either sold, presold, or if it's there, it's not there very long.
It has gotten to the point that, in some cases, your 2019 or 2020 car could be worth more today than what you paid for it... If you're looking to turn a quick profit, it might be a good time to test the market.
Conversely, if you're looking to buy a car – used or new – you're going to pay a premium until the supply-and-demand dynamics return to some kind of "typical" balance. Nobody knows for sure when that'll happen, though. In Vitantonio's estimation...
It'll probably run until the end of the year before we start to see larger inventories at dealerships. The cars are coming. They're coming faster than they have before. They're also still going out at a good rate.
Such is life in our 'transitory' world...
Let's talk about what this wacky world of used cars costing more than new ones means for the macro picture – and for stocks...
If you've been with us for long, you know what we're referring to when we say "transitory."
"Transitory" is the word that the Federal Reserve uses to describe price inflation these days – the type we're seeing in cars... and everything from soda to toilet paper – and a definition we've taken umbrage with before.
Simply put, something that's considered "transitory" may go away at some point or it may not – but either way it's affecting us right now. That's inflation today...
In any case, parsing definitions matters...
Fed Chair Jerome Powell has repeatedly used the "transitory" argument to argue why the Fed hasn't made major policy changes since March 2020, when it cut rates to near zero, and went on to introduce major asset purchases that continue today.
These policies, for one thing, help make car loans super cheap, while not changing the fact that there is a supply crunch and no let up on demand.
Let's zoom out for a moment to set the scene...
The Fed's mission, generally speaking, is to ensure "stable prices" and "maximum sustainable employment" in the United States, as mandated by Congress...
Neither is happening right now... Used cars costing more than new ones does not equate to stable prices... Employment numbers are getting stronger, but even the Fed admits, there is room for improvement...
Yesterday, the Bureau of Labor Statistics ("BLS") latest Consumer Price Index ("CPI") data for June showed accelerating inflation gains – again. As Stansberry NewsWire editor C. Scott Garliss reported...
On a year-over-year ("YOY") basis, the core data remained well above the Federal Reserve's 2% target. In fact, the momentum increased. The reading saw a 5.4% gain versus the expectation for a 4.9% jump and the prior month's 5% increase.
Used-car-and-truck prices in the U.S. accounted for about one-third of that number...
The average used car price reached $26,500 in June, up 27% year-over-year, according to Edmunds. In the meantime, the average new car transaction price is $41,000, up just 5% over the same period.
On one hand, you can argue that one industry is having an outsized influence on the inflation data... and that, no doubt, is true.
On the other hand, it's still a big deal – since about 40% of U.S. households make a car purchase of some kind every year.
As we've said before, inflation is tricky to measure...
A lot of people have their own preferred measures for inflation. The Fed's preferred metric is not the CPI number that we just talked about, but the Bureau of Economic Analysis' personal consumption expenditures ("PCE") instead...
PCE tracks the price change in goods and services paid for by individuals, and as Scott Garliss also reported yesterday...
The core [PCE] reading for May showed an increase of 3.4% on a year-over-year basis, in line with the expectation for a 2.9% jump and versus the prior month's 3.1% increase.
May marked the second straight PCE reading above 2% since December 2018. A total of eight months were above 2% that year. Prior to that, we have to go back to early 2012, when the central bank first introduced its 2% inflation goal, to find PCE above the target level.
In other words, Scott says, there's a lot of work to be done before the Fed's average inflation measure runs above 2%, the point at which it says it will let up on the "whatever it takes" approach to boosting the economy.
We first talked about this new policy in an August 2020 Digest...
At the same time, the unemployment data that the Fed tracks still, for them, points to "more stimulus." In the last 20 years, it hasn't typically hiked interest rates until unemployment has neared or exceeded previous lows.
The BLS' 5.9% unemployment rate is about the same as it was in September 2014, well off the 3.5% pre-pandemic rate. Precedent would suggest the central bank "does nothing," so to speak, on that topic at least.
The short of it is this: It's hard to imagine that inflation – which the Fed can ease by raising interest rates and making dollars more "expensive" – can rise like this without serious consequences to our economy...
Inflation is already becoming a political problem for the White House...
As The Hill reported today, President Joe Biden continues to have trouble drumming up support for more bipartisan spending bills, while prices are rising...
Republicans have frequently invoked former President Carter, whose handling of a serious inflation crisis derailed his presidency, while making their case to take back the House and Senate majorities in 2022. Republicans have argued that rising food, gas, and housing prices will spiral higher if Biden cements trillions more in spending.
"Yet Biden and the Democrats still want to spend trillions of dollars more, even under these economic conditions — it's Jimmy Carter 2.0. It has to end," said Sen. Bill Hagerty (R-Tenn.) in a Tuesday statement.
The Fed is betting on inflation slowing down soon, though we don't know exactly when, and that's why it hasn't hiked interest rates or tapered asset purchases ($120 billion per month since June 2020). But Powell also said the recovery has happened quicker than officials thought it would...
Don't think that political pressure won't influence the Fed into "tightening" even if they never admit it...
One way or another, you're going to keep feeling inflation...
The real, daily effects are ongoing on Main Street, as we see in cars and so many other things we buy on a daily basis... And then there's the influence inflation can have on the prices of your portfolio assets, if the Fed ever tightens monetary policy.
As we've said before, whenever it does, that makes business, or at least profits, harder to come by for many companies, which in theory should lower the price of a company's stock in the short term. This is why market observers are obsessed with the Fed...
We're not there yet, but we should be getting closer now. As NewsWire analyst Nick Koziol reported yesterday, at least one Fed official thinks it's time to start pulling back economic support...
In an interview with the Wall Street Journal, St. Louis Fed President James Bullard said that "the time is right to start pulling back on emergency measures." He cited a strong economy and a more well-controlled pandemic situation.
As a result, Bullard said he thinks now is a good time for the central bank to begin tapering its asset purchases.
On a basic level, this makes too much sense.
We're well out of the "emergency" part of the pandemic. Now we're at the point where things are still messy, but we're getting to the other side and folks are at least reading from the same book – even if they disagree on what to do...
Not all Fed members agree...
As Nick also reported, in recent days, Richmond Fed President Thomas Barkin and New York Fed President John Williams have said that the economy isn't at the point yet where the central bank will remove support.
Nick and Scott both regard Bullard as one of the Fed's best forecasters, so they put more weight behind what he says in terms of what will actually happen. As Nick wrote...
Bullard added that if people don't think the economy is ready to be weaned off support, then it certainly will be by the end of the year. This is more in line with the estimated taper timeline from Wall Street.
Aside from asset purchases, Bullard also gave his thoughts on inflation. He said that he sees core personal consumption expenditures ("PCE") – the Fed's preferred inflation metric – coming in at 3% this year. And he sees it at 2.5% in 2022.
If inflation does meet his expectations, Bullard says he predicts the first Fed rate hike to come toward the end of 2022. Remember, he has previously said 2.5% core PCE in 2022 would indicate that the Fed had overshot 2% for long enough and achieved an average of 2%.
Scott has said for months that the Fed's annual multi-millionaire's retreat in Jackson Hole, Wyoming, in August would be a likely time to discuss – and possibly announce – an initial change in policy...
Scott has said they'll likely lower asset purchases as a first step, and then talk about raising rates... At least that's the expectation today. The markets generally like it when expectations are met.
But if inflation keeps going higher, faster – like it is now – the Fed might be led to pull the trigger sooner... before unemployment rates get to where it wants them...
Then we're simply left with a higher unemployment rate than anyone really wants, high stock valuations, and relatively less Fed support. It's not clear to me how stock prices go higher in this scenario.
The other, more likely option is the Fed does relatively nothing to its now more than $8 trillion balance sheet, lets the "Melt Up" roll on, leaving investors wondering how long the inflation spike will go, just like they have for the last six months or so, while stocks have largely risen...
There's a case to be made for higher stock prices, in the short term...
The benchmark S&P 500 Index gained 14% through the first six months of 2021. A gain of that much in the first half of the year is rare. Historically speaking... it has only happened 13 times since 1950.
We've also warned that the number of stocks trading above their long-term averages are at historic highs. The trend can't last forever, but it can go on a little longer...
Last week in his True Wealth Systems publication, our colleague Steve Sjuggerud – who has closely tracked every twist and turn of this "Melt Up" – looked at points in market history similar to today for a clue about what might happen next...
He found that when the S&P 500 has gained double-digits in the first six months of a year, it has typically led to more big gains in the following six months (with one notable exception: 1987)...
Since 1950, we've seen 13 other rallies of the same magnitude or more to begin the year. And those extremes typically led to even higher highs in the following six months. Take a look...
More than 70 years of market data shows us that today's extreme is a good thing. Nine of the other 13 examples turned into winning trades. And five of them rallied 10% or more to finish the year.
Simply put, we want to own stocks after a move like this.
Steve, as longtime readers know, is a believer in the numbers and riding uptrends until indicators suggest otherwise.
Each of the years above had their own set of circumstances, but this data tells Steve that today's bull market isn't out of steam just yet. As he wrote last week...
Bull markets don't die of old age. That's important to remember when we are in the thick of a rally like today's.
Yes, the S&P 500 has been on a one-way trip higher since bottoming in March 2020. But that doesn't mean it has to end tomorrow.
That's why we always want to turn to the numbers to make our investment decisions. And today, history shows us the current rally likely has more room to run.
Meanwhile, the Fed hasn't pulled the rug out of the market just yet...
Just today, Powell again said easy-money policies are not going away anytime soon and if they are, the plans will be made public well in advance.
A strong move to finish the year is possible – even likely – based on history. Steve wants his subscribers to be along for the ride as long as the uptrend is in place – but, as regular readers also know, it is wise to be prepared for the "Melt Down" when the party is over...
But first things first... if you have a gently used car, it might be time to sell it.
The Link Between Digital Currency and Stagflation
In Part 2 of his conversation with editor-at-large Daniela Cambone, George Gammon of Rebel Capitalist outlines why the Federal Reserve's plans for a future digital currency will trigger stagflation...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 7/13/21): Apple (AAPL), AbbVie (ABBV), Automatic Data Processing (ADP), Asana (ASAN), Alphabet (GOOGL), Intuit (INTU), Nuveen Preferred Securities Income Fund (JPS), Microsoft (MSFT), ProShares Ultra Technology Fund (ROM), Starbucks (SBUX), and Visa (V).
In today's mailbag, Stansberry's Credit Opportunities editor Mike DiBiase answers a question stemming from his Digest yesterday about "zombie companies"... Do you have a comment or question? As always, send it to us at feedback@stansberryresearch.com.
"Mike, I'm curious to know if you have research and numbers of the potential impact on jobs (i.e., number of employees) that could be in jeopardy of being cut if (when) these zombie companies go under?" – Paid-up subscriber Larry M.
"The 14% of corporations you identify as 'zombies'... how many jobs are represented? That is, when the pin meets the balloon, how many souls will be put to the street? Seems like some significant implications for: housing, auto sales, travel and entertainment, you know – most everything." – Paid-up subscriber Howard T.
Mike DiBiase comment: Thanks for the questions...
These zombie companies employ around 2.2 million people. But not all of these employees will be looking for work if all of the zombies (around 725 in total) declare bankruptcy. That's because not all bankrupt companies go out of business. In fact, most don't. Many file for Chapter 11 bankruptcy, which is known as a reorganization. In a reorganization, a company gets a fresh start and stays in business. The company cuts as many expenses as it can, so some employees will be let go, but not all. A court oversees the bankruptcy process and decides how much debt the company can afford moving forward.
The largest creditors have to agree to the plan, but it normally results in the company's debt load getting significantly cut and creditors getting some of the equity in the newly reorganized company. The biggest losers are the former shareholders. They get completely wiped out. The next biggest losers are the creditors who owned the lower-ranking debt (unsecured bondholders).
These zombie companies owe more than $2 trillion of debt. A lot of this debt will never be repaid. That's why if you own any corporate bonds, you need to understand whether the company can afford to pay you back. It's the first question my colleague Bill McGilton and I ask before recommending any bond in Stansberry's Credit Opportunities.
What most people don't realize is that the Fed's policies, which have kept these companies alive, only hurt competition and slow our country's growth. This practice keeps people employed in dying industries. New, high-growth companies have to compete with these zombies for employees and capital. The Fed's cheap money impedes the natural clearing function of bankruptcy, which is needed for a healthy economy.
All the best,