If the Trump plan stalls, he may have to blame cars rather than the media

As we approach President Trump’s first State of the Nation speech (28 February) it is intriguing to see British bookmaker Ladbrokes offer odds on America’s forty-fifth elected leader leaving office before his first term is due to end.

This column would never equate gambling with investing and nor would it take the bookies’ odds at entirely face value, as their skilled traders are well versed in offering odds which best suit their own book.

But it is intriguing that someone is going just 10-11 (wager £11 to win £10 and get your initial stake back) that the President could go early, after a difficult month, that has seen his visa ban frustrated by the courts, his national security adviser depart in acrimonious circumstances and Trump take an apparently emollient line in his first talks with President Xi Jinping of China.

From this side of the Atlantic, admittedly a good distance away, the President’s relations with the US media also seem fractious, but if his plan to reinvigorate the US economy comes unstuck it is unlikely to be the fault of America’s scribblers, or possibly even Trump himself.

As we await details of his plans to overhaul America’s tax system, stoke infrastructure spending and cut back on regulation, the President could still bump up against his country’s mammoth debts.

Rising bond yields (in anticipation of further growth) could short-circuit the Trump trade, especially as certain areas of the US economy are already feeling the strain after just two interest rate rises of 0.25% each and an increase in benchmark bond yields to what remain historically low levels.

US interest rates and 10-year Treasury yields have barely moved relative to historic levels

Source: Thomson Reuters Datastream

And if debt is to undermine the Trump programme, exerting a Japanese-style deflationary grip on America, then the auto industry may be the best place to look as a test case.

Advisers and clients with direct exposure to US equity funds or indirect exposure via funds that are crammed with say dollar-earners quoted in the UK or other countries should keep an eye on whether the US auto market can keep firing on all cylinders or not.

Engine of growth

Car and light truck volumes in the USA have zoomed higher to around 18 million on a seasonally adjusted annual rate (SAAR) basis, compared to the nine million low of 2009.

However, volume sales have begun to stall. Sales in January dropped to 17.5 million on a SAAR basis, the lowest figure since May and the eighth time in 11 months that volumes have fallen year-on-year.

US auto volume sales look to be stalling

Source: FRED, St. Louis Federal Reserve database.

… albeit at what are historically very high levels

Source: FRED, St. Louis Federal Reserve database.

This is in itself some concern, as growth in auto and auto parts output has gone a long way to support the broader increase in US durable goods and industrial production.

Since the summer 2009 lows, US industrial output is up by 20% but auto-related activity is up 110% (which does make you wonder why Trump is so agitated about imports of cars in the first place).

US car industry has contributed hugely to the recovery in overall industrial output

Source: FRED, St. Louis Federal Reserve database. 2012 = 100. Seasonally adjusted.

A slowdown would therefore be unhelpful, even allowing for the President’s plans to get more car makers to onshore production and manufacture in the USA, rather than Mexico or elsewhere.

A cough and a splutter

The reasons behind the deceleration in car demand are difficult to discern, especially as the slowdown sits oddly alongside resurgence in US consumer confidence.

But one possible explanation may be debt.

Auto loan issuance has soared to an all-time high of $1.2 trillion and 90-day delinquencies on those loans have crept up to their highest level since early 2013.

US auto demand has been heavily dependent on debt where payment problems are rising

Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit

The good news is delinquency rates are still well below their 2009-10 peaks. But only minor increases in interest rates have triggered this unwelcome trend, which logically could start to hit the loan providers, including banks, finance specialists and also those car makers who themselves provide the credit.

It could also lead to tighter credit for would be car buyers, further damping demand.

In addition, research from Edmonds shows that leasing now covers 29% of auto transactions in the US, up from 12% in 2009.

The US used car market is starting to see price declines as three-year leasing and financing programmes come to an end and are not renewed, as Americans hand back the keys rather than take on another deal and another vehicle.

US second-hand car prices are ebbing

Source: Manheim

Any supply surge caused by off-lease volumes or demand weakness could further hit US (second-hand) car prices.

This is not to suggest subprime auto will damage the economy in the way subprime housing did – the debt figures involved are some 75% smaller, car defaults do not affect the value of other cars and car repossessions happen more quickly.

Debt mountain

But it is a potential example of the deflationary forces that can be exerted by debt, at a time when America’s total liabilities are at record levels.

This, rather than automation or currency manipulation or overseas competition, may be the biggest threat to President Trump’s reform programme.

Trump is currently attracting many (favourable) comparisons with Ronald Reagan’s tax cuts and deregulatory reform programme of 1981-84, which helped US GDP growth rocket to 8%. But the table below shows that Trump has less room for manoeuvre.

America’s debts have mushroomed since the Reagan Presidency

*Excludes pension obligations.
Source: FRED, St. Louis Federal Reserve database, Federal Reserve Bank of New York.

Other datapoints also suggest Trump may have his work cut out to make quite the difference financial markets currently expect – especially when the US stock market (according to Professor Robert Shiller’s cyclically adjusted price earnings or CAPE ratio now has US stocks on nearly 29 times earnings compared to barely 10 times when Reagan assumed office).

Trump is inheriting a less promising position than Reagan did

*Excludes pension obligations.
Source: FRED, St. Louis Federal Reserve database, Federal Reserve Bank of New York.

None of this is to say Trump cannot make a difference. He can. But a lot is already factored in by valuations, despite the formidable obstacle presented by America’s debts and perhaps the auto market will be a key test case of whether the President’s plans really can get the US economy firing on all cylinders at once.

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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