Buy Steel (Not Gold)

Gold may not have the high rate of return that the casino called Wall Street offers … to insiders. But it is one way to store value – and that accounts for its popularity among people who may not get rich quick but manage to avoid becoming poor.

Used cars are another great way to transmute depreciating paper money into a durable asset that – like gold – is portable and fungible (i.e., easily converted into other things of value).

The government has inadvertently created a bull market for them, too.

First, it decreased supply via the infamous “Cash For Clunkers” program (a “clunker” being defined not by mechanical condition, incidentally, but by the car’s gas mileage numbers). The government paid people inflated sums of other people’s money (an estimated $3 billion) to turn in perfectly roadworthy used cars in for unwarranted, early destruction … in order to “stimulate” demand for new cars.

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This was like burning down every third house in a neighborhood to create a “need” for new housing.

It had the effect of driving up the value of the remaining pool of used vehicles, especially pickups and SUVs, which were the main focus of the Cash for Clunkers program

True story: Just before the CFC program, which launched in the summer of 2009, I bought a 2002 Nissan Frontier pick-up with about 49,000 miles on the odometer for $7,200. Today, seven years after CFC (and 60,000 miles added to the odometer), the truck is worth… $6,950 (see here).

Only the government could pull a King Canute and cause the tides to ebb and flow in reverse.

Used car prices remain high – while new cars are often heavily discounted via “cash back” offers and effectively free loans at interest rates below the rate of inflation. This shouldn’t be surprising, given that the average new car now sells for more than $30,000 – while the average family’s annual income is less than $60,000.

If the lending criteria used to approve mortgages applied to car loans, almost no one would be approved – because only a fool would write a loan to someone for an amount equal to half their annual pre-tax income.

The new car market is as rickety as a Jenga castle and could topple at any moment. It is economically artificial, driven not by normal (healthy) demand but by heroin-like injections of too-good-to-be-true financing deals and cash-back offers that distort cost signals which – long term – cannot be sustained because you cannot indefinitely pay people to buy things, cars or otherwise.

And unlike home loans, car loans can’t be extended over decades to make the payments manageable. We are already at a financial Rubicon – loans of 6-7 years duration. Beyond that lies the point at which the typical car is worth less than what you still owe.

It cannot continue.

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