The European Clunker - European car sales, a clear indicator of deflation

Clunker definition: "A thing that is totally unsuccessful."

1. A decrepit machine, especially an old car; a rattletrap.
2. A failure; a flop.

While we recently we focused on Shipping as a leading deflationary indicator, we thought this time around we would focus our attention on European car sales. We will look at the impact various "cash for clunkers" plans in Europe have had on European car sales and their recent evolution, pointing towards more evidence of a serious bout of deflation in the European space. In addition to reviewing the evolution of car sales in various European countries, it is important, we think, to look at the age segmentation of the European car markets by countries and demographic trends as well.

We will start by the recent evolution of European Car Sales in various European countries.

PASSENGER CARS: registrations down 7.7% in first quarter 2012- source ACEA

Brussels, 17/04/2012 - "In March, demand for new cars in the EU* was negative for the sixth consecutive month, with a decline of 7.0% compared to March last year. While retaining their importance in terms of volumes (1,453,407 new cars), March registrations have not been at this level since 1998. Over the first quarter, the EU market shrank by 7.7%, compared to the same period a year ago, with a total of 3,312,657 new registrations.

Results in March were diverse across the EU* as Italy (-26.7%), France (-23.2%) and Spain (-4.5%) saw their markets contract whereas the UK (+1.8%) and Germany (+3.4%) performed better than they did in the same month a year earlier."

Whereas the drop in car sales were much more severe in Portugal and Greece, respectively by: -49.2%) and -42.6%.

Meanwhile, in Iceland, car sales were up by + 101.1 % March. Re-Iceland, we rest our case...(Iceland - The Great Debt Escape).
For the complete breakdown, by countries for March please check:

Car Sales Statistics.

Evolution of Car sales in Spain from 1995 onwards - source Bloomberg/OECD:

Falling of the proverbial cliff back to...1995 levels.

Evolution of Car sales in Italy from 1995 onwards - source Bloomberg/OECD:

Below 1995 levels...

Evolution of Car sales in Portugal from 1995 onwards - source Bloomberg/OECD:

Evolution of Car sales in Ireland from 1995 onwards - source Bloomberg/OECD:

Again back to 1995 levels...

Evolution of Car sales in Greece, we could only go back to 1999 onwards - source Bloomberg/OECD:

A bottomless pit?

We previously mentioned the uptick in car sales in Iceland for March (+101%).
Evolution of Car sales in Iceland from 1995 onwards - source Bloomberg/OECD:

Again back to 1995 levels but you can clearly notice the upward trend in car sales from the abysmal bottom reached early 2009 at 110K but, still a long way to go to move back to the average of 1136K from 1995 to 2012.

Evolution of Car sales in France from 1995 onwards - source Bloomberg/OECD:

The noticeable spike in car sales in the 2009 and 2010 period in France but as well noticeable in additional countries can be attributed to the various "cash for clunkers" programs implemented in various countries:
Austria, Cyprus, France, Germany, Italy, Luxembourg, Portugal, Romania, Slovakia, Spain.
The summary of the various "cash for clunkers" programs by countries can be found here:
Cash for Clunkers, Here and There - Bill Chameides, April 24th 2009.

In relation to France, the former French minister of Economic Affairs, Christine Lagarde, announced in September 2009 that the country's cash-for-clunkers scheme, called "prime à la casse", would be extended for two additional years at the time. The initial plan was to end the program by the end of 2009, but the government believed at the time that the car market would likely crash if the stimulus Euros were withdrawn. Of course it would have crashed; it was only delaying the inevitable. Particularly because of the "sensitivity" of French car manufacturers to European car sales in peripheral countries.

Renault and PSA Peugeot Citroën car sales have dropped by 20% in the first quarter, whereas GM, Ford and Toyota Europe dropped by respectively 10%, 7.6% and 2.1% on the same period.

Therefore it isn't really a surprise, looking at the performance of the Peugeot stock price, to see the share back to 1991 levels... - source Bloomberg:

On a Credit level, Moody's downgraded Peugeot's credit rating to junk status with a negative outlook, citing "severe deterioration" of its finances, General Motors recently bought more than 335 million dollars worth of shares of PSA Peugeot Citroen giving them a 7% stake in the French company. 10 years ago, GM did a similar deal with FIAT which eventually cost GM 2 billion dollars to get out of the tie up but that's another story...

Moving back to our "European clunker" story, it is important to look at the age segmentation of the European car markets by countries as a follow up on European car sales. Every year French consumer credit company CETELEM publishes a report relating to the trends in driving habits of youths. While the 2012 is not yet available, the 2011 makes some very interesting points:

"Beyond the economic context, the list of facts and societal trends limiting the potential growth of the automobile trade is long. A sluggish demography in conjunction with a saturation of car rates ownership condemn the expansion of the car market. Economic growth will limit the speed of the renewal of European car parks and therefore car sales. Also, in this already unfavourable context for the automotive industry, car usage continues to decline in European countries. The number of kilometers traveled each year has been steadily declining over the last ten years."

Evolution of average kilometers per year since 2000 in selected European countries, (index basis 100 in 2000) - source BIPE, Enerdata, Insee:

Clearly the high level of youth unemployment in Europe is a BIG negative for the European car industry given, on average, according to CETELEM, the average age of a buyer of a "new car" is...50 years old.
Average age of a buyer of a new car in Europe in 2009 by countries - source BIPE

51.5 years on average in France...

According to CETELEM, 29% of buyers of a new car in Europe had more than 60 years old in 2009 whereas 11% were below 30 years old. The secondary market is the main source for youths to access the car market in Europe.

Here is the structure of the European market in 2009 per age brackets - source BIPE:

More interestingly in the CETELEM market survey, in countries such as Spain and Italy, the proportion of buyers of new cars below 30 years of age has been higher than in France or Germany in percentage terms - source BIPE:

CETELEM indicating in their report that 63% of below 30 years old by second hand cars, 18% more than above 50 years old. It is in Spain that young Spanish have displayed the biggest attraction to "new cars". Two thirds of young Spanish have indicated in their 2009 survey they had purchased a new car, followed closely by young Italians and Belgians.

With unemployment in Spain closing on 25% and youth unemployment above 50% in 2012, new car sales will undoubtedly fall even more in the near future...

The car market in Europe is saturated. In the US you can find 800 light vehicles for 1000 inhabitants whereas in Europe it is below 700 in the eight countries studied by CETELEM according to their report. The European market will never reach the American level. The European car market is not only saturated but matured, hence the growing reliance of car manufacturers on emerging markets. In addition to this, the rising prices in gas prices, is weighting even more on the industry as a whole.

Add to the mix demographic trends in Europe, the future for the European car market is bleak to say the least:

Part of below 30 years old of age in the total population by European countries in percentage terms - source BIPE-Eurostat:

Youths in Europe are in the front line in relation to repaying the massive debt accumulated by the previous generation as well as maintaining the pension system. We have indeed an interesting toxic cocktail mix, which not only doesn't bode well for the car industry (with a saturated market), but doesn't bode well either for the "relations" between generations and trigger a "generational conflict" with the increasing worrying trend in youth unemployment. The evolution of the economic situation in Europe, could well lead to a European "Fall", in the footsteps of the Arab "Spring"...we might be rambling again...

"Events are called inevitable only after they have occurred."

Mason Cooley

Stay tuned!

It is all playing nicely as expected in my post from the 10th of April...

Sovereign debt is now High Yield and Emerging Market is Investment Grade.

I had a thought today following S&P cutting the Greek debt from BBB+ to junk, BB+.

I had a discussion on ratings and perception today:
"GM had S&P's highest investment-grade rating, AAA, from 1954 to 1981. S&P rated Ford AAA from 1971 to 1980."
I remember watching Toyata's rating increase to AAA (although they recently lost it...)while GM moved from AAA to junk.

Same thing is happening now. Sovereigns debt in some Western countries are getting hammered while you can expect ratings from emerging markets to improve in the next couple of years.

In my previous article I was highlighting the upcoming rise of the VIX:

http://macronomy.blogspot.com/2010/04/run-up-to-second-leg-downand-no-this.html

Today Bloomberg is indicating the following:

VIX Jumps Most Since January on Greece Downgrade; VStoxx Gains

"The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged 21 percent to 21.19 at 12:40 p.m. New York time. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which tumbled 1.9 percent. Europe’s VStoxx Index, a gauge of options on the Dow Jones Euro Stoxx 50 Index, climbed 17 percent to 28.56."

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCJspbfhsNlQ&pos=5

Looks like I was right and I am sure people who bought ATM call option on the VIX had a very good day today.

Also I highlighted previously about the Greek tragedy and the high correlation between the country's ratings and the fate of its banks, given that banks are a leveraged play on the economy, it is no suprise that Banks stocks have taken a beating today.

Alpha Bank ADR is down 9.30% today.
Given most of them are privately owned, it is difficult to gauge how they have impacted by today's market move, but given their rating correlation to the country's rating, they will also be seriously downgraded to junk status.

The cost of insuring Greece's sovereign debt against default for five years rose 87 basis points to an all time high of 798 basis points today as per CMA DataVision.
The annual cost of insuring 10 million USD of Greek sovereign debt for 5 years has risen by 87,000 USD to 798,000 USD from Monday's closing level.

Please find the link to the very useful CMA DataVision website which enables you to track CDS levels for sovereign. CDS are a very good indicator for risk monitoring as well as VIX.

http://www.cmavision.com/market-data

Greece 5 year in Euros is currently at around 787.36 bps and the Cumulative probability of Default stands at 46.01 %. The yield on two-year Greek bonds bungee jumped to 15.35% from 13.16% on Monday...

Portugal is already targeted in the contagion list following the Greek troubles...with the current CDS 5 year at 335 bps.

As per Bloomberg:

"While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data."

http://www.bloomberg.com/apps/news?pid=20601109&sid=akQrIx8SPMHo&pos=10

So much for the V recovery expected by the equities market...

Once again Credit Markets are indicating trouble ahead, as they did back in 2007, following the beginning of the subprime debacle.

As per David Rosenberg's latest review on current economic troubles:

"But Mr. Market at some point will have to confront the future. The time gap between recessions is shortening now — we went 10 years from 1990 to 2000, then 5 years from 2002 to 2007 and the next recession, following this pattern, is likely going to occur within the next 2-3 years. And, unlike the start of the last recession when the government had so many arrows in its quiver, there are none today to help lift the economy again."

https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_042710.pdf

To reiterate what David Rosenberg, David Goldman pointed out on various occasions (please see shortcuts to their research on this blog), which I agree with, there will be no real recovery until small businesses start creating jobs and given current credit constraints in the market, it doesn't seem to be happening at the moment.

Blue pill or Red Pill?

Morpheus: This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes.

The Matrix movie - 1999

There we are year end coming fast and everyone is expecting the recovery in 2010, following the surge in the many green shots seen in the economy.

Too many people have taken the blue pill.

The facts unfortunately doesn't support the idea of a strong recovery.

In my last post Greece Sovereign CDS was trading around 230 bps for 5year. Another downgrade from S&P came along and there we are with Credit-default swaps linked to Greek debt rising another 30 basis points to 260, according to CMA DataVision, the highest since March.

Everyone is expecting Greece to do the right thing, cutting on spending and reducing their abyssmal budget deficit before it is too late. Will a Greek socialist government be as aggressive as the Irish in tackling their issues?
The answer is definitely no.

Standard Bank has definitely turned negative on both Ireland and Greece:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3SIOdqSGOtE&pos=5

As per my previous post, there is a probability that Greece could at some point exit the Euro.

Prime Minister George Papandreou announced he was taxing greek bankers at the rate of90% of their bonus and a the same time he announced that civil servants making less than 2,000 euros a month would get pay rises above inflation.

How does the Prime Minister of Greece expect to fund the salary of his public servants? By issuing bonds that no one will want?

http://www.ft.com/cms/s/0/b0d436c0-ea90-11de-a9f5-00144feab49a.html

Get ready for another bumpy ride in 2010...

Also in the news, one of Austria's largest bank (ranked 6th) had to be rescued by the Austrian Government:

http://www.ft.com/cms/s/0/ebfa6b22-e890-11de-9c1f-00144feab49a.html

Hypo Group Alpe Adria hit the wall. Another one bites the dust.

"Under the terms of the deal, Austria will take over 100 per cent of HGAA and the shareholders surrender their stakes and inject about €1bn ($1.5bn) in capital."

"Meanwhile, Austrian banks could face another €10bn in writedowns over the next two years, Austria’s central bank warned on Monday. Austrian banks have about €200bn of exposure to central and eastern Europe and have written down €15bn since the start of the crisis."

Problems have not been resolved by the governements and the deleveraging is still an ongoing process globally.

Defaults are still rising and unemployment levels are still going up.

(Bloomberg) -- Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

http://www.bloomberg.com/apps/news?pid=20603037&sid=aQED_96QBBkk


It started with subprime mortgages going sour, then the ALT-As and ARMS, now the prime and jumbo loans are getting hit hard as well.

What we can expect is that the FED will maintain the interest rates low for a long period. We cannot expect them to raise rates in 2010. By maintaining them artificially low, they are trying to ensure banks can offset somehow the tidal wave of defaults and provisions they are facing, ensuring they make some very good profits on the spread banks are borrowing at and lending at.

The recession will really be over when small businesses which are the motor of an economy will start to hire as they did last time we had a valid recovery.

Here is the Red Pill for all of you who want to see how deep is the rabbit-hole we are:

From David Goldman's excellent blog (the link is indicated in this blog as well)

"Structurally, a very large percentage of job losses during recessions reflect creative destruction: big companies who lay off workers in recessions downsize permanently. The jobs are not replaced at the same companies; the old jobs go away forever, and new jobs are created at the grass roots of the economy.

That’s why we have to look to small business for continued job growth, and why the prospects are grimmer than the market seems to believe."

http://blog.atimes.net/?p=1274

No matter how much liquidity the US administration injects, no matter how Obama would like bank to increase lending (for some who have the capacity to do so...), the recovery is not around the corner but at least a couple of years down the line.

This is the awful truth.

The governments are preventing creative destruction to take place by trying to prop up some dying parts of their economies: GM, some banks, etc.
I mean by creative destruction the emergence of a new economy based on new technology or new industries.

As Joseph Schumpeter mentioned creative destruction hurts a lot in the short term and this goes again governments and short term views for short term political gains.

Volcker, arguably the best president the FED ever had, killed stagflation in the US in the late 70s. Soon we will be entering a new phase of Stagflation and you can expect inflation to start creeping up at some point and commodities prices to reach new highs.

As per a Wikipedia article around Creative Destruction:
"Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience."

Joseph Schumpeter was a visionnary, and probably on of the first takers of the "red pill".

For those of view who would like to extend on Schumpeter's economic views which are very accurate, I recommend reading his book: Capitalism, Socialism and Democracy.

Here is a link to Wikipedia's review on this major book.
http://en.wikipedia.org/wiki/Capitalism,_Socialism_and_Democracy

So which countries to look for to invest? Follow where innovation is taking place at a fast pace, where education levels are strong and where there are plenty of skilled workers: Asia. India and China will continue to grow strong in 2010, they have the skills and the ressources to navigate these treacherous waters much better than most developped countries.
Canada as well will do well thanks to their natural ressources and their solid financial sector which was not damaged by the financial crisis.

I will conclude this post by a quote from Joseph Schumpeter:

"Capitalism’s Greatest Enemy: The Intellectual
The proper role of a healthily functioning economy is to destroy jobs and put labor to better use elsewhere. Despite this simple truth, layoffs and firings will still always sting, as if the invisible hand of free enterprise has slapped workers in the face. Unsettling by nature, capitalism’s churn gives rise to a labor movement designed to protect workers from job loss. That movement is fed emotionally by displaced workers and others who blame the capitalist system for their troubles, but it is led psychologically by a whole other type of person—the intellectual. Intellectuals—with little to do owing to the success of the capitalist economic system but with an intense desire to be seen as caretakers of society’s general well-being—anoint themselves as leaders of the labor movement. They object to capitalism on moralistic grounds and seek its destruction and replacement by another system—socialism—which places them center stage."

You could replace "intellectuals" in the quote in today's economy by politicians and you would not be far from what is currently happening in many countries today.