Coyote Blog

Yes, I know.  A meltdown in subprime auto loans has been predicted almost every year of the past decade.   I am not an economist or stock analyst, so take all this with a shaker of salt, but here is the new factor that I don't think is being discussed much in the context of subprime auto loans:  the end of student loan forgiveness:

The U.S. Department of Education announced it will restart interest accrual for student-loan borrowers in the Saving on Valuable Education (SAVE) plan, starting from Aug. 1, according to a July 9 Education Department (ED) statement....

According to the ED, 42.7 million borrowers currently owe $1.6 trillion in student debt.

“Only 38 percent of borrowers are in repayment and current on their student loans,” the ED said in April.

“Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment. A small percentage of borrowers are in a six-month grace period or in-school.”

The SAVE plan only includes 7.7 million of these borrowers, about 1/3 of delinquent borrowers, but its termination demonstrates this Administration's commitment to end forbearance for delinquent borrowers.  Over the last 6 months many other student loan borrowers have been taken off of variouis deferral agreements and asked to pay what they owe.

The reason this is relevant to auto loans is this:  there is a large overlap between households with student loans, particularly those with non-performing student loans, and those with sub-prime auto loans.  Borrowers delinquent to both a bank for auto loans and to the US government for their student loans will quickly learn that only one of these lenders has the legal power to force their debt to the top of the debt repayment stack.

I am not a financial analyst so I am not sure who would be most hurt by this -- certainly I would not want to be long the equity tranches of securitized auto loans.  There are banks such as Ally Financial that have a large percentage of their income in auto loans, including sub-prime,  And there are situations like Carvana, which is complicated right now.  On the positive side Carvana** stock is way up, likely in anticipation of rising used car sales and prices due to Trump tariffs.  On the negative side they are a huge sub-prime auto lender (short-sellers argue that their car sales business is just a loss-leader for their auto lending business).

**Postscript:  Carvana is one of those battlefield stocks where super-bulls and super-bears (the later now including Hindenburg Research and Chanos) duke it out constantly.  I will mostly stay away as I have already been sucked for years and years into the mother of all battlefield stocks (Tesla).  But I will say on Carvana that there may be an interesting pattern emerging.  Several years ago the founding family the Garcias sold billions in stock at the top, right before it crashed 99%.  Now that the stock has climbed back to those old highs again, the Garcias are selling billions more.  It is normal for founders to sell more than they buy to diversify their holdings, but their timing as historically been spectacular.

I lost a fair bit of money shorting Tesla ($TSLA) stock until I realized that its stock price was absolutely untethered to reality.  And we see this today as the stock is currently up 4% following yesterday's miserable earning report.  The "growth" stock with a P/E ratio of 111 reported its 9th straight quarter of flat revenues and 12th straight quarter of essentially flat to down profits (source CNBC).

There is a nice Cramer cameo in the movie Ironman where he screams "that's a weapons company that doesn't make weapons."  Tesla is the growth company that doesn't grow.  So of course, without growth, the Tesla stock fans are driving up that triple digit PE even higher

The only explanation seems to be statements from Elon at the earnings unboxing session yesterday:

Musk has been telling investors in recent quarters to focus less on the core business as it exists today and more on a future of autonomy and robotics.

In October, Tesla drummed up excitement among fans by showing off an early prototype version of a Cybercab at its “We, Robot” event. However, Tesla still does not produce robotaxis. Instead, the company sells a premium version of its partially automated driving system called FSD, short for Full Self-Driving (Supervised)....

While Tesla did not give specific guidance for this year, the company said, “we expect the vehicle business to return to growth in 2025.” It also reiterated plans to “unlock an unsupervised FSD option” eventually and said it expects to “begin launching” its driverless ride-hailing business “later this year in parts of the U.S.”

Wow, every CEO should try this after bad results.  "Focus less on the business as it is today and more on a vague, unspecified vision of how it might be better in the future."  This is the same sort of Musk handwaving we have seen for years.  The full-self-driving promise dates well back pre-COVID.   Honestly, having seen the state of FSD on Teslas, I fear for the residents of Austin where Musk claims there will be robotaxis in action later this year**.   I found this to be the most interesting piece of hopium:

The company’s stock price has rallied sharply since Trump’s victory in November as investors bet that Musk’s influence would lead to both favorable policies and less oversight of his companies.

Seriously?  In his first executive orders Trump has killed most of the mandates and subsidies on which the company has relied.

** Footnote:  You know where there are lots of robotaxis in action and have been for years?  Phoenix.  Waymo has become a fixture of the Phoenix and Scottsdale streets.   Everyone here loves them.  Yesterday I tried to get a picture but I was too late, but near my home there were three waymo's side by side going up the boulevard.  Go to any fancy club that attracts a lot of young people, like the bar on the roof of the new Global Ambassador Hotel, and you will see one Waymo after another dropping (mostly) young women off.   Women love these things because they feel safer without the driver.  I love them because they are about the only thing I see every day that looks like what I was promised about the future when I was a kid.   Musk has a long way to go to prove his camera-only sensing approach can match the LIDAR-rich Waymo strategy.

Postscript:  I know this will seem crazy, but it is possible to have mixed feelings about an individual:  people are not all Mother Theresa or all Hitler.  Musk's management of Tesla really irritates me and some things, like his fake Saudi tender offer or the SolarCity buyout, strike me as straight-up fraudulent (how many solar roofs were sold last quarter, Tesla?)  But I love everything that SpaceX is doing and I think Musk has done great work shining the light on certain issues from government waste to grooming gang coverup in the UK.