Vehicle loans threatened: ARK Invest boss Cathie Wood warns of falling car prices

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• Fed raises interest rates again
• Cathie Wood sees flaws in monetary policy

• Increasing demand for taxi alternatives

ARK boss Cathie Wood criticizes rate hikes

Only recently did the US Federal Reserve continue its fight against high inflation rates and raised the key interest rate again. Since the 0.75 percentage point rise, interest rates are now in the 3.0 to 3.25 percent range. While monetary authorities believe tight monetary policy is necessary to curb rising prices, many market participants fear that the central bank will plunge the economy into a deep recession. Cathie Wood, founder and head of investment company ARK Invest, also recently criticized the actions of Fed Chair Jerome Powell and his staff. In a series of posts on the short message service Twitter, the star investor recently took action against the latest interest rate hikes in the USA. For example, Wood cautioned against comparing the current market environment to that of the late 1970s and early 1980s, when high consumer prices were also a source of uncertainty and then-Fed President Paul Volcker was bringing high inflation under control.

Not ’til Volcker took charge in 1979, 15 years after the Vietnam War and Great Society began, did the Fed attack inflation decisively. In contrast, faced with a two year supply-related inflation shock, Powell is using Volcker’s sledgehammer and, I believe, making a mistake.

– Cathie Wood (@CathieDWood) September 7, 2022

“It wasn’t until Volcker took over in 1979, 15 years after the start of the Vietnam War and the Great Society, that the Fed attacked inflation with determination,” wrote Wood, referring to Powell’s speech at the Jackson Hole Fed Conference in late August. “On the other hand, faced with a two-year supply-side inflation shock, Powell is grabbing Volcker’s sledgehammer and I think he’s making a mistake.”

Falling car prices as a warning signal

With Powell’s central bank policy, the danger of a development from inflation to increases deflation, according to Wood. According to the size of the market, the general decline in price levels is already reflected in car prices. While the prices for new and used cars rose significantly during the corona pandemic, there are now signs of relaxation on the used car market. According to data from the world’s largest seller of used cars Manheim Auctions, available to the news agency “Bloomberg”, prices in the industry fell by four percent in August 2022. While consumers may welcome this development, it could be a sign that policymakers are taking too hard action on inflation. The faulty policy of the central bank thus represents a new risk for investors, according to Wood. For example, robo-taxis could reduce transport costs, which would allow inflation to go down on its own. Instead, there is a possibility that the Fed will slow down the economy unnecessarily, increasing the pressure on US budgets.

Taxi alternatives are becoming increasingly popular

According to the ARK boss, the Fed could create new problems, especially with regard to loans used to buy vehicles. “If car residual values ​​deteriorate accordingly, the more than $1 trillion in US auto debt is at risk,” Wood tweeted. “Thanks to ride-hailing and soon cheaper autonomous taxis, individuals are unlikely to prioritize car debt over mortgage payments this time, which could overturn backward-looking quant models.”

This time around, thanks to ride-hailing – and soon less expensive autonomous taxis – individuals are unlikely to prioritize auto debt payments over mortgage payments, which could turn backward-looking quant models upside down.

– Cathie Wood (@CathieDWood) September 12, 2022

During the financial crisis of 2008-2009, consumers still prioritized repaying their car loans despite numerous challenges. As the market portal “Barron’s” reports, there are currently outstanding debts for cars in the amount of 1.5 trillion US dollars. Incorrect residual values, i.e. the prices at which a car can still be sold after the lease expires or a buyback option has expired, usually mean large losses for lenders.

Tesla could ignore Uber and Lyft

Although the ride-hailing services Uber and Lyft, to which Wood alludes, have repeatedly been criticized by the investment company in the past, the shares of the e-car pioneer Tesla should also benefit from the trend towards alternative taxis count the favorites in Woods ETFs. For example, ARK analyst Tasha Keeney wrote in 2020 that Uber and Lyft’s market share would decrease if Tesla introduced its planned robo-taxis. At the same time, it could be worthwhile for the Musk group to set up a competitive model for Uber and Lyft before the start of the full self-driving fleet, as this would result in lower operating costs, financing and insurance would be more efficient, higher trade-in or residual values ​​possible and one could benefit from higher prices.

Car manufacturers and sellers benefit from high prices

Manufacturers like Tesla and Ford, but also dealers like AutoNation and Lithia Motors, have been able to improve their profit margins due to the high car prices of the last few years, which were also due to delays in the supply chains due to the pandemic and thus a lower supply, according to Barron’s. And the vehicle financing business has recently boomed. In general, the majority of car sales in the USA are linked to installment payments. The finance department of General Motors has made an average profit of around one billion US dollars in the quarter since the beginning of the Corona crisis. In previous years, quarterly share was typically just under $500 million.

But according to the portal, the positive consequences of falling car prices should not be neglected either. The fall in prices could also stimulate demand on the passenger car market and thus still benefit the manufacturers.

Editorial office finanzen.net

Image sources: Krom1975 / Shutterstock.com, Cindy Ord/Getty Images for Bloomberg Businessweek