The Absolute State of the Car Market...

The car market has long been the canary in the coal mine for the direction of the overall economy. For a growing number of people who have been permanently priced out of the housing market, a car will be the most expensive purchase they ever make. And the way they are making those purchases is revealing a lot about the direction of our economy. Big debt, big defaults, and big shakeups have become commonplace. And a unique combination of circumstances have pushed the entire industry between a rock and a hard place.

People's finances are clearly being stretched. A record number of loans are now delinquent and a lot of people simply can't squeeze their finances to get into a new car. Even with all of the borderline predatory financing options that have become available, car companies have responded to this clear trend by offering even more expensive cars packed with features that a lot of customers are actually trying to avoid. The absolute state of the car market would almost be comical if it wasn't such an alarming indication of other problems under the proverbial hood.

A two-e shutdown at the Stellantis assembly plant in Windsor, Ontario begins today. >> Volkswagen is planning to close at least three plants in the country and cut tens of thousands of jobs in the process. >> We are in a global competition with China. And it's not just EVs. And if we lose this, we do not have a future Ford. >> Keller is selling 100 cars a month, whereas he used to sell about 185. Car repossessions are at their highest level since the Great Recession, with millions of Americans losing their vehicles. >> Many people are putting car payments lower on their priority list. >>

Over the last two decades, very few major markets have seen changes quite as widespread and expensive as the car industry. A push towards electrification, new major competitors from China and South Korea, self-driving technology, tighter regulations, and hundreds of billions of dollars in investor money has made it extremely difficult for companies to adapt to every single last change while also delivering a product that's not dozens of companies are betting their entire future on the next 5 years. But that's happening as a lot of people are still underwater on their last car, so they're not in a rush to buy their next. Technology is changing so quickly that cutting edge cars today might be completely redundant in a few years time. Meaning the right thing to do for most drivers is to sit back and wait. The investors on the other hand are realizing that if you invest billions of dollars to disrupt a market, you shouldn't be surprised when the market gets disrupted. >> Congratulations. >> Tesla CEO Elon Musk unveiling the taxi of the notsodistant future, the Cyber Cab, at an exclusive event tonight. >> It's now moving towards electric vehicles. So Jaguar came up with a bright plan, a complete rebrand, except for cars. This time they're selling vibes. >> Everyone knows the minute you drive a new car off the lot, its value depreciates. But for electric vehicles, the drop is dramatic. >> Calling a million hybrid vehicles because they may catch fire. But Prius, Prius plug-in hybrid, and the CHR SUV model are all needing electrical system repairs.

A few months ago, the British car company Jaguar announced that it would cease producing cars until it could totally rethink its entire product lineup. The prestigious automaker was once a British alternative to German luxury brands like Mercedes, Audi, and BMW, even though the company was technically Indian. In recent years, though, the company has released cars that were plagued with reliability issues, lapses in quality, and were generally much worse value for money than even the premium brands they were trying to compete with. The company's Ipace compact SUV was supposed to be their mass market product of the future, but it had worse range in tech than most other small electric SUVs, all at a significantly higher price point. The only thing really selling the cars was their premium brand image, but that can only last so long. Last year, in an interview, the company's own chief creative officer admitted that the company had no brand equity left whatsoever. The only thing keeping the company alive was its shared ownership with Land Rover, but eventually it was just taking up space on dealership lots that could be filled with cars that actually sell. In response to sales numbers that were circling the drain, the company has stopped selling cars with the plan to entirely relaunch the brand. The first phase of this plan was launched last week with a brand new logo and marketing video that drew mixed reviews. Advertising a new and improved car company without actually showing any cars is a bold strategy. Now, a British car company making horribly unreliable cars and then going bankrupt is not worth making a video about. That's just what they do. But this is just a sign of a much wider issue that is affecting the whole industry. And that is simply nobody knows what the is going on.

Back in the good old days of 2021, Ford and Volvo were amongst the first traditional car companies that made a pledge to transition their entire fleet to electric vehicles in certain global markets. At the time, demand for EVs was outpacing crippled supply chains and credits made them quite affordable. Last month, the companies had quietly walked back their ambitions because the market for electric vehicles changed in three big ways. The first was that electric vehicles specifically have been the target of major sanctions across the world, primarily targeting cheap cars coming out of China. Despite all of its Swedish branding, Volvo is actually owned by Giley, a Chinese conglomerate holding company and a lot of its EVs are made in China because the battery supply chain is far more mature there. This means that their fully electric fleet would be uncompetitive in markets like the USA. Unless they move production there exclusively, which would be hard for a lot of their vehicles. The second reason is at the same time tariffs are going up, subsidies for EVs are coming down. The price premium of an electric car in many places was offset largely by tax credits that would cover a significant share of the purchase price. These have become less popular as people are seeing them as their tax dollars going to subsidize some tech bros model 3. And the third simplest reason is that people just don't want to buy EVs. Early adopters are a relatively small market, especially for such a valuable purchase. Even those customers who are happy to put up with a little bit of inconvenience or a higher price point to do their part for the environment or just to signal how forward-thinking they are are not going back to EVs. A survey conducted earlier this year by the McKenzie Center for Future Mobility found that 46% of current EV owners would shift back to an internal combustion engine car for their next purchase, citing issues with charging infrastructure as their primary concern. Now, people rolling coal in their lifted F350s are probably never going to switch to an electric vehicle unless there is literally no other option apart from something completely unthinkable like public transport. But even the group that was already won over and made the big purchase are switching back, making car companies across the industry reconsider going allin on EV.

Even Tesla, the undisputed king of EV sales in America, is starting to hit a plateau in new deliveries. The first quarter of this year marked the first time since the launch of the Model S that they delivered less cars in the same quarter of the year before. Other new EV companies like Rivian and Lucid Motors, which were hopeful competitors with Tesla, are still losing tens of thousands or even hundreds of thousands of dollars on every car they sell because they have had to offer extremely competitive cars to market to tempt buyers to take a chance on a relatively unknown company. The cars they are making are some of the best engineered machines on the road. But they are now only being kept alive by multi-billion dollar financing rounds from foreign governments or incumbent automakers who are probably more interested in their technology than their actual cars. To keep up, every other car maker has to also compete with a company that is losing money on every car they sell, which is putting even very well-established automakers in a tight spot. To tempt new buyers, car companies have to spend billions to keep on offering something new that makes their old model seem irrelevant by comparison. But just as many people are put off because next year there will be something even better. So there is no harm in waiting, especially when things can go so badly wrong. Fisker was another new EV competitor that offered alternatives to the Tesla lineup, which has already gone out of business. Their cars were cost competitive, but they are now effectively worthless because their afterale service no longer exists and highly technical proprietary EVs can't be worked on by independent third-party mechanics. Move fast and break things might work for a technology where cost overheads to the end user are zero, but the average new car costs almost $50,000 at the same time that most people are struggling to keep up with the cost of living. What people really want is a car that will move at all and won't break the bank. So, it's time to learn how money works to find out why car companies are struggling to provide that. This video is sponsored by Monarch Money, and I wanted to show you a different way it's been fitting into my routine lately. Monarch is private and adfree and it syncs with more than 13,000 banks, credit cards, and investing accounts. You're the customer, not the product, and everything shows up in one clean dashboard. I have been using Monarch's flexible budgeting setup a lot. It separates fixed and flexible spending, and rules keep categories organized without feeling strict, and I can see spending, debt payoff progress, and all of my recurring bills in one place. It also catches subscription creep automatically, which has already saved me from a couple sneaky price bumps. Recently, I set up a goal of paying off my car, and having it linked to the actual loan inside Monarch has made it so much easier to track without micromanaging. The progress bar updates every time a payment clears, so I get a clear sense of where I'm at without digging around in multiple apps. If you share money with a partner, the shared view makes it simple to stay aligned on goals and recurring bills without any surprise charges. If you want to try it yourself, scan the QR code on screen and use code HMWU50 to get started.

Now, it's not just EVs that are struggling to adapt to changing market dynamics. As the newest product offering in the market, they are being upgraded the fastest, especially since a lot of automakers have scaled back research and development into internal combustion engines. But old-fashioned cars have created their own problems, too. Cars are simultaneously lasting longer and shorter at the same time. A study by the auto market data firm CAP HBI in the mid-2010s found that the life cycle of new cars is now significantly shorter than it was in past decades with the average new model only taking 2 years before an upgraded model comes along. A lot of models receive a refresh every single year where manufacturers will make small changes to styling, infotainment, and make small drivetrain tweaks to differentiate between model years. more frequent regulation changes around emissions and safety has made these equally more frequent updates necessary. But obviously, I don't need to tell you that if brands can make last year's model look obsolete with some styling changes, they will do it. The number of different car models available in the market has also increased by over 50% in the last 20 years, fueled by both the introduction of new EV models, but also car brands trying to cover more of the market. 20 years ago, a Bentley, Aston Martin, or Ferrari SUV would have been a laughable idea. But now, it's their best-selling car. This is happening across the industry as automakers try to cash in on their brand value to produce more mass market cars. If you consider a half million dollar V12 Ferrari commuter car mass market, even at a regular price point, manufacturers are making a range of vehicle sizes, especially for SUVs where it's not unusual for a single brand to have four or five different model offerings from compact to full-size SUVs with several different trim and drivetrain options for each including full internal combustion hybrids and EVs within the same model. The end result is that across all price points, car manufacturers are making more cars, which are being updated more often while having to adhere to more regulations across more markets with more competition from more startups with more funding than they really should have. Brands are having to allocate a lot of money to R&D to stay relevant. And if they can't keep up, even big global brands like Nissan have quickly lost market share.

Now, not every car company has the luxury of selling their cars at a loss. So, this growing business expense is being passed along to customers. The inconvenient truth about new technology is that sometimes it's kind of crap. Toyota has become the world's bestselling car brand largely thanks to their legendary reputation for reliability. Generally, Toyota develops cars very slowly, which means that models have long production runs, and even if something is a bit outdated, they will keep it around as long as it's reliable. The combination of reliability and the very fact that their cars don't normally look that different year-to-year has also helped them maintain very strong secondhand prices, which doesn't directly help the company, but it does mean that it has a diehard customer base that won't drive anything else. But even legendary Toyota has not been immune from this disruption sweeping the car market. They have had to move with the times and phase out a lot of their big, lazy, inefficient, but extremely reliable engines and replace them with smaller, more highly strong alternatives. This change has caused several extremely high-profile engine failures, which have tarnished the brand's invincible reputation. Now, by the numbers, Toyota's reliability is still class leading. But a viral video of someone's new $30,000 Corolla burning down on the side of the highway sticks with the average consumer more than the numbers do.

Now, apart from the people that are happy to lease the newest car every 2 years, this market is not great for anybody. Most car buyers just want a simple, reliable car to get them around. Most companies want to provide it to them. Even the investors are playing a billion-dollar game of last man standing. And it's all because some industries just don't need to be disrupted.

America is currently going through a bit of a car repossession boom. Delinquent auto debt over 60 days past due is at the highest level it has ever been, including during the global financial crisis. More repossessions than ever have taken place within the last quarter. And even if you don't personally have a car loan, this could still become a systemic issue that impacts you because auto debt as a whole is higher than it has ever been before. This record debt has also combined with record levels of depreciation to result in massive negative equity for more borrowers, making it harder than ever to back out of these deals, especially on certain classes of vehicles. Now, that sounds pretty bad just on the surface, but it gets worse. Several reports have found that we have slowly made auto lending so complicated and fragmented that between leases, lending, buy here, pay here, cross- collateralized loans, and every other type of way to finance a car, it's become next to impossible to track down how much we really owe and how much is actually being paid back. Even the regulators themselves have basically admitted that they don't really know how bad the problem is and how much this could all hurt regular consumers. Now, I know this all sounds like yet another symptom of people's personal finances being squeezed, which is by itself not exactly that shocking anymore. However, the current repossession boom is, for now at least, a specifically American problem. A problem that is saying a lot of bad things about the unique ways that we borrow, consume, and go broke. >> And I don't know, I just feel like a $500 plus car note is absurd. Record number of Americans are falling behind on their car payment. >> I have $60,000 worth of car debt. >> Those loans coming with higher interest rates for buyers with limited income or credit scores. >> The more concerning part, the interest rate being 37% nearly. >> Well, the repo man is in high demand. They're working overtime. >> It is draining us. It is taking things away from my children.

According to the recovery database network, car repossessions hit a 14-year high in 2024, only slightly behind their peak in 2009. We have already passed that peak this year, and we still have a few months to go. This is especially concerning because consumer protection laws around repossessions have generally gotten stronger since the global financial crisis, which means the same number of repossessions is an indication that borrowers are in an even worse financial situation. Today, repossessions have become such a large industry that it's even attracted the tech bros to skirt around regulations. Some of the old tricks like impersonating a target with their utility providers to get their address have been specifically outlawed. So, today repo men take a different approach. Companies like Resolvon and DRN have emerged to fill that gap by creating their own lists. Their business works by driving around camera cars that indiscriminately photograph every license plate they can, including those in private parking lots, and then assigning GPS coordinates to them to build out a database. What this does is let repo men access this database for a fee so that they can get a list of known locations for a specific registration number. Now, not to go too much down this specific rabbit hole, but some of these companies now work off a gig economy model, because of course they do. They onboard affiliate drivers who attach their camera packs to their own cars and then pay them a commission for every repossession that comes from the data they collect. For a lot of people, this is either an alternative or a supplemental revenue source to driving for Uber that happens a lot more passively in the background. Now, this kind of involuntary databaseization would be bad enough by itself. But you might think, unless you've been skipping your car payments, you don't really have anything to worry about, right? Well, a report by Wired found that these cameras were also collecting and cross- refferencing information like politically affiliating lawn signs, bumper stickers, and t-shirts. This let them highlight areas and even individuals with stronger support for certain ideas than others. Now, the companies have claimed that this is just another way for them to earn revenue. It's information that they are collecting from public spaces, and it's not their fault if they are just better at arranging it into databases that can be sold off to political campaigns or marketing agencies. Anyway, with that tangent out of the way, what is really funding this data collection right now, though, is car repossessions, and business is booming for three simple reasons.

The first is the hangover from the price boom of 2021. During this time, new and used car prices both hit their highest levels ever. Supply chains were disrupted and people had a lot of extra spending power thanks to government stimulus and also because other expenditures like vacations and eating out were cancelled. Interest rates were also very low, which all made it easy to get a big loan and pay $30,000 over sticker price for a used Toyota Tacoma. Today, record loan sizes have mixed with record rates of depreciation to give some all too predictable results. According to Edmonds, the average amount of negative equity in cars and trucks climbed to an all-time high last quarter. Now, so far, the one saving grace has been that prices are still higher than they were before 2020. But that has all resulted in fewer people trading in their cars because they are being forced to hold on to it longer. Now, on a personal finance level, this can actually be a good thing. You don't need to buy a new car every 3 years. But let's be honest with each other here. People aren't holding on to their cars because they have suddenly become more conscious consumers. They are holding on to them because they can't get out of them. This is even more apparent on EVs that were attracting huge premiums 4 years ago, but are nowhere near as popular as people are seeing problems with long-term battery performance and opting to purchase plug-in hybrids instead. For a lot of people, it's not worth it to make budgetary sacrifices for a car that they are underwater on. So, they are just ignoring the problem and accepting that one day their car will be repossessed.

Now, the good news is that we are just in the find out stage of a very unusual pricing shock in the car market. If that was all there was to it, then as the loans were taken out more than 5 years ago, start to end, things should start getting better, right? Okay. Sinking car prices shouldn't represent a crisis by itself. Outside of a very small handful of exceptions, it is the expectation that cars depreciate rapidly over time. Like most consumer durables, the retailer, in this case, the dealers have their own markups, which is why a new car normally loses so much value at the moment it's driven off a lot. The funny business that happened around CO was very much the exception to this rule. What really allowed a small little price spike to turn into an economywide problem is the increasingly complex ways that we are financing car purchases. In the past, it was pretty straightforward. You would pay for a car in cash or you would make a down payment and pay back the rest over a set term. This was almost always 5 years. Today, the variety of car financing options has grown significantly. And almost all of them are designed to let people get into a slightly more expensive car than they otherwise would have been able to afford. According to Experian, over 80% of new vehicle sales are financed. But because the industry is so fragmented and underregulated, some thirdparty estimates put that number as high as 85%. Outdated ideas like having money to use as a down payment have also become a thing of the past over the last two decades. This has slowly been replaced by people using the equity they have built up in their previous car to use as the down payment on their next car, reextending the loan term and principal. Sometimes even that is too much. The rate of trade-ins where the previous car has more owing on it than it's worth has hit its highest level ever with one in four cars being traded underwater. Dealer financing is still pushing through these sales though. Even if they have to get creative with car values because of the biggest broken incentive of all. Dealerships aren't really in the business of selling cars. They are in the business of writing loans. The cars are just something that get borrowers in the door. Now, while this fact alone might not be that surprising to you anymore, it has encouraged continuously pushing the bounds of what is normal in car loans. The financing manager at a dealership obviously has commission incentives of their own. But they are also colleagues with the sales staff who will depend on them to get a deal done if they want everybody to get paid and avoid awkward silences in the breakroom. There is a real incentive to write a loan by any means necessary. This actual peer pressure is at least part of the reason why delinquencies on dealer loans are more than double that of loans from other sources. According to data from the Consumer Credit Panel of the New York Fed.

Now, if lowering lending standards and down payments wasn't enough, the biggest lever that the industry has been pulling is extending loan terms. 5-year loans have gone from being the industry standard to now being less common than 7-year loans. According to market data compiled by Bloomberg, a growing number of lenders are now offering terms of 144 months for loans up to 120% of the car's value. In plain English, what this means you could do is trade in a car that you are $10,000 underwater on, put no cash down, and take out a $60,000 loan to buy another $50,000 car, which you will be paying off over the next 12 years. Now, the interest rates and fees on these loans are usually nothing short of catastrophic. But spreading the loan out over that long does minimize monthly repayments. And since most of these borrowers are going to trade in their car again before paying down the loan, that's all they really care about. As people are increasingly taking out 6, seven, or even 12-year loans on cars that they are on average replacing every 3 and 1/2 years, they are making very little progress on the principle of these loans and therefore extending the period in which they could suffer serious financial difficulties. The Consumer Financial Protection Bureau, while they still exist, highlighted this as one of the most damaging financial practices in the economy today and highlighted it as one of the leading causes of loan delinquencies. So lenders shouldn't exactly be shocked Pikachu that the repossession rates are skyrocketing. But they are going to keep going on, not just because it makes them money, but because it makes money in the right kind of way. As terms have gotten longer, loan sizes have also increased, which has also allowed us to buy more expensive cars. I mean, who knew extending loan terms and equity requirements would just drive up prices on underlying assets? But anyway, the bigger issue is that these loans have become a valuable asset class of their own. When a dealer writes a car loan, they are usually using a third party credit provider to actually pay out the money. As part of that deal, those providers will pay the dealer a commission for the business they are bringing them. And the longer the loan term, the bigger that commission is. Most of these loans then get securitized and sold off to other investors so that neither the lender or the dealer needed to use any cash of their own. Now, the paperwork involved in doing all of this costs a bit of money, but that is a fixed cost. It takes just as many manhour to put together a 3-year loan as it does a 12-ear loan. But the lifetime interest on the ladder is almost six times higher, making it far more profitable for these middlemen. Now, if you think that's bad, don't worry. It gets worse. Turning people's transportation into a recurring revenue stream still has challenges because of silly little things like regulations and lending standards. They might be on the floor, but they are still there. Fortunately, a new model of car subscriptions is becoming increasingly popular. So, um, yeah, can't see that going badly.

The final change pushing the repossession boom is that all of this is starting to catch up with higher income earners as well. When we think of people getting their cars repossessed, we naturally think of people with bad credit, unstable employment, and poor financial literacy. Now, subprime customers like this do still make up a majority of loan delinquencies and subsequent repossessions, but that is more or less a constant. Amongst this group of borrowers, there was a brief improvement in their loans around 2020 thanks to stimulus, lowered interest rates, and deferments on other debt. Today, however, the delinquency rates on their borrowing is more or less back to where it was before the pandemic. It's not good, but it's predictably not good. The assumption that a lot of these loans will not be repaid in a timely manner is why subprime auto loans have much higher interest rates. The real difference right now is an increase in delinquencies coming from people with average or even above average credit. Late payments amongst these groups have roughly doubled since before the pandemic. And even though the rate of their delinquencies is lower, they are a much larger group overall. So the total volume of bad debt is really starting to creep up. We have mentioned it in almost every video this year, but the top 10% of households now account for over 50% of all consumption spending. Now, this statistic normally highlights the growing K-shaped economy. But it doesn't necessarily mean that everybody in the top 10% is thriving either. A report by Goldman Sachs found that 40% of studied households earning more than $500,000 a year were living paycheck to paycheck. The top highlighted reasons were lifestyle inflation, living in expensive cities, and cars. Ironically, the households earning only $200 to $300,000 a year were doing considerably better because they were less likely to be surrounded by people who think half a million dollar weekend cars and vacation homes are a reasonable expense. Now, we are actually going to make an entire video about how the 1% is bankrupting themselves later this month. So, make sure to subscribe if you're interested in that. Of course, there is more to it than just cars, but generally all of the financial shenanigans that have evolved over the last decade have been directed towards people with higher incomes. They are generally trusted with far more dangerous financial tools. And if they lose their high-paying jobs, which a lot of people are at the moment, they are every bit as likely to end up in the same financial trouble.

Americans are the best consumers on the planet. And it's really not even close. The runner up is China, and they spend less than a third of what we do in any given year, even though they have almost five times as many people. It might not always feel like it, but by global standards, we are incredibly rich. We love buying. And we aren't afraid of going into debt to keep doing it. More of our economy depends on the consumption of goods and services than basically any other major country in the world. But this has to have a limit, right? As a direct result of our own insatiable desire to consume or household savings rates are now the lowest they have ever been. And high-risisk highinterest consumer lending has surpassed a trillion dollar. That doesn't include things like car loans, home loans, student loans, medical loans, or informal lending like buy now pay later, which are also approaching all-time highs. So, what is going to happen to the best consumers on the planet if they can't afford to consume anymore? And more importantly, could we solve all of our problems by just buying less? The ocean of debt is getting deeper, but there are indications that some are doing a better job treading water. >> Americans taking on more auto loan debt than ever before. It's probably cuz they're just rejoicing at the fact that they can get a car again. >> Holy jeez. I don't know if I can do this, but I need the car. >> Amazon, Target, and Walmart are already offering discounts to consumers. Don't make enough money to meet the minimum cost of living in New York City, and nearly 80% of households are considered housing burden, which means more than 30% of household income is going towards rent.

According to data from the World Bank, America is responsible for about a third of all consumer spending worldwide. even though we only represent 4% of the global population. According to the same report, consumer spending is now 69% of our total economy. For comparison, in the second largest consumer market in the world, China, consumption only accounts for 38% of their GDP. Now, that might be a bit of an unfair comparison. Outside of its major cities, China still has a lot of people who are very poor and don't buy things beyond the bare essentials. The European Union is a more comparable peer, but when counted as a single group, only 51% of their GDP is tied up in consumer spending. And as time goes on, they are spending less and less while we are spending more. By basically any metric, Americans are the best consumers on the planet. And this wasn't by accident. After the Second World War, America had a problem. The industrial juggernaut we had built up to fight the war in Europe and the Pacific no longer needed to make planes, tanks, ships, and munitions for the war effort. After the Great Depression, the government really didn't want to let these factories go idle. So, it continued policies first pushed by the New Deal to encourage consumer spending to give those factories and their workers something to feed. The problem suddenly became that the market was saturated with goods and services and there was presumably a limit to what people would buy. It was at this point that modern madmen style advertising became a thing where companies now needed to create demand rather than just catering to the demand that already existed. A not so fun fact is that a lot of the men that honed their craft creating propaganda for the first and second world war pivoted to advertising where they could use their skills to sell products instead of selling the nation's war efforts. The historian Kenneth Jackson noted in his book Crabgrass Frontier that the year after the war ended, there were only eight self-contained shopping centers in America. Most purchases were still done at local standalone stores that catered to the essentials for everyday life. Just 14 years later though, at the start of the 1960s, there were over 4,000 shopping centers across the country, all vying for their sweet, sweet consumer dollars. At this time, most of the other major economies around the world had the more immediate problem of rebuilding their factories and infrastructure that were destroyed during the war. Only after that did they have to start worrying about what to do with their extra industrial output. This gave America a head start in consumerism that has been hard to catch up to. So that's the incredibly brief story about how we got here. But what does this actually mean for us today? Apart from creating a general culture of consumerism, the undermining of personal financial stability, corporate consolidation, resource depletion, and waste generation, there are three less obvious but more immediate problems that consumer first economic policies have created. And two very important reasons why we can't really afford to get off the treadmill of consumption.

The first problem we slowly created for ourselves is that consumerism made luxury, convenience, and experience cheap, but everyday life expensive. The optimization of industry combined with globalized trade, finance, and shared expertise has made consumer goods incredibly cheap by historical standards. Adjusted for inflation in the 1960s, an airline ticket from New York to Europe would cost $6,000. A fridge $4,000. A massive 21-in color TV was almost $9,000. A home microwave oven produced by Rathon was $5,000. And even modest home furnishings were worth the equivalent of tens of thousands of dollars today. Added together, these consumer goods and services that probably seem pretty basic to you were collectively worth as much as a house. That's because back then, consumer goods were luxuries, but housing was a pretty basic purchase. Today, global industry has made consumer goods extremely cheap, but constrained resources like land very expensive. You could go on an extended European vacation, buy the latest array of electronics and home appliances, and probably spend less than a few months rent. All of these goods combined wouldn't add up to a down payment on a home in most cities, let alone an outright purchase. Now, hot take alert, but a lot of this stuff is actually pretty great. Fridges, washing machines, and modern computers do make our lives better and easier. Even modern services like, well, you know, YouTube can be great if consumed in moderation. And I am not just saying that because I am a dirty, stinking, hypocritical creator. Modern conveniences have improved our lives. And if consumerism stopped there, we could probably have found a happy balance between cheap, modern amenities without the trade-offs that came with it. But the problem was, it was almost impossible to stop it there. Building an economy on consumers meant we had to keep on consuming. It's the easy and trendy thing to write off consumerism as just a generically bad thing. So, as much as I would love to make an easy video about how consuming modern goods and services is everything wrong with the world, there is a little bit more to it than that. A lot of things we consume genuinely increase our standard of living and quality of life. Somewhere between you leaving society behind to live off the land and taking out a buy now pay later loan for a teu order is some happy medium of spending on consumer goods and services. Economists call the simple idea the law of diminishing marginal utility where as consumption increases the additional satisfaction or utility gained from each additional unit consumed falls. Normal humans just call it not overdoing things. And the strongest evidence to support the idea that we are overdoing things is that consumption is actually surprisingly equitable. According to data prepared by the US Bureau of Labor Statistics, the lowest quintile household spent approximately $1.37 trillion on personal consumption in 2022. The top 20% of households, on the other hand, spent just over $6 trillion. This still means that the wealthiest households are spending more than four times as much on consumer goods and services as the poorest households. But that's still relatively equal considering that the top 20% of households earn more than 14 times as much. So, what does this tell us? It shows that for most people, there is a basic level of consumption that is needed to live a normal life. And especially here in America, there are certain expenses that are really hard to avoid. According to the report, the biggest cost for most people was unsurprisingly housing. Housing can't be mass-produced in a factory on the other side of the world like most consumer goods. So, it's become really expensive. We have already covered that problem. Transport was the other major cost for most households as in most parts of the country, you need a car to get around and for lowincome households, that is a serious financial commitment. This can also be traced back to the consumer boom of post-war America as lobbying from the automobile industry to build car- friendly cities and the mass adoption of remote single family suburban developments meant that most of America was built around the car. The few East Coast cities that are either walkable or have reliable public transportation are unrealistically expensive for low-income households in other ways. So without a lot of sacrifices, most people are forced into owning a car. Personal spending on healthcare is also a uniquely American budget item that pushes up our numbers without really delivering results any different from those godless freedomhating Europeans. Either way, it's easy to blame consumerism on consumers. But a lot of these expenses are extremely hard to avoid, even if people don't have the money to pay for it. According to the same report, this consumption of the bare essentials meant that the bottom 20% of households were spending $727 more than they made after tax every year. Now, you might be wondering, how can a household spend more money than it makes every single year? The answer is debt, of course, but also the people in the bottom 20% change every year. If someone loses their job and it takes them a while to get work again, they may end up in the bottom 20% temporarily until they find a new job and jump back up to whatever income bracket they were in before. This means that they will go through their savings or rack up debt to keep themselves functioning, but they should be able to recover once they are back on their feet. An inconvenient side effect of this consumer-driven debt is that people in debt also make for better, more motivated workers because they need to work or else. Studies by the National Institute of Health found that workers with high levels of debt were less likely to change jobs, more likely to work on paid overtime, and less likely to make demands for better pay and benefits.

Now, even if you are responsible with your borrowing, it can be really hard to maintain modern living standards as more of what we consume transitions to being subscription-based. Even if you do save diligently for purchases, sometimes it's not even possible to pay upfront anymore. So, you need a regular income to make sure you can cover next month's round of automated deductions from your bank account. Whether it can be from American Express, Netflix, Hulu, Afterpay, your student loans, car loans, AT&T, Adobe Creative Cloud, Microsoft Game Pass, Pelaton, or if you are a true power consumer, all of them at once. If you lose your income for any reason, you don't actually own anything to tide you over. So, it's a lot easier to fall behind a lot faster. Now, the bad news is that as jobs become less secure, regular layoffs become the corporate norm, and work becomes less formal, most people are going to experience this fun little financial roller coaster at some point in their life career. Data from the Fed showed that at the height of the pandemic era stimulus, the fastest growing share of retail consumer spending came from low-income earners. This was simply because stimulus checks let them make purchases that they weren't able to afford before. Since then, growth in spending from high-income earners has more than doubled that of low-income earners. Companies have seen pandemic era wealth accumulation and gone up market on most of their items, catering to the group of consumers that still has purchasing power. So, if anybody really has the power to stop their consumption, it's high income earners. And on an individual level, that's probably a really good idea. A report by the Wall Street Journal has found that the US economy as a whole now depends more on the spending habits of the top 10% than ever before. because they are the only ones that can reliably afford high margin non-essentials. In such a consumer-centric economy, protecting those rich people who are the consumers becomes the most important objective. Even though protecting workers would be a better long-term solution because better paid and more productive workers turn into consumers anyway. An alarming amount of extremely high-income earners are living paycheck to paycheck because companies have gotten so good at making sure that there is always something to purchase. Advertising and marketing have grown in line with consumer spending. and now by themselves represent as much as 5% of GDP and the formula has been perfected over the decades. So yeah, a pullback in consumption, especially imported lowquality goods, is probably a good idea as an individual, but on a nationwide level, it could get very scary. Our status as the biggest consumer market in the world gives us a lot of advantages. The reason that America has so many of the world's largest companies is because if you can scale a business to address the entire US market, it's already big enough to be globally dominant. And yeah, as dumb as the current trade wars might seem, we do have a lot of negotiating power because everybody wants access to our consumers. The American economy has been growing much faster than most countries in Europe and even now most countries in Asia, but more of that than ever is just fueled by consumer spending of increasingly expensive goods and services. It doesn't help that a lot of the spending has been fueled by debt in some variety. Consumers are also fickle beings. Basing so much of our economy on highly indebted consumption means that if people get scared all at once about even the possibility of a recession and decide to be a little bit more careful with their money, that will cause a recession. Eventually, debt can only get us so far. And to be reliable consumers, we need reliable incomes. Unfortunately, the last real problem with this is that a growing share of this consumption is being provided by a rapidly shrinking share of suppliers, which is going to make issues like consumerism almost impossible to unravel.

So, most companies have not been having a great year so far. But none are feeling the pain quite as much as car manufacturers. Of course, Tesla has been getting most of the attention as its stock price has plummeted by more than 50% since its peak late last year. Sales across the world have plummeted as the brand has become an unintentional political statement. a political statement that doesn't really vibe with the type of people that buy electric cars. But the truth is that most other car companies are happy to let Tesla soak up the headlines because under the proverbial hood, they have a lot of problems of their own. Major brand bankruptcies are now basically inevitable. Will they? Won't they? Trade wars are crippling supply chains. New manufacturers from China are undercutting global markets. And worst of all, people just simply can't afford to buy cars right now. And in response to this simple financial reality, automakers have responded by making their cars more expensive than ever before. >> Told Honda it wants to call off merger talks. That's according to a Reuters's source on Thursday. >> Honda, Mitsubishi, and Nissan had been in talks to form a joint holding company, but ultimately they could not agree on terms. for buyers with limited income or credit scores. Jessica Cwell of Edmonds says more Americans are opting for longer repayment plans. >> And finally, Bill, for folks who are really struggling, you know, I always say this one, pick up the phone, call your lender, let them know the truth. You're struggling and you need help. >>

So, the simple reality for most people in America is they can't responsibly afford to own a car, but they also can't afford not to own a car. The Federal Aid Highway Act of 1956 built out the American interstate system and decidedly made most cities extremely car-centric. These new highways connected cities and lobbying from automobile manufacturers pushed local public transport out of the way in favor of car-friendly streets. The adoption of the car also let mostly middle-class white Americans move out of cities and into newly developed single family suburbs built around independent transportation. According to data from

The US Census and the American Public Transport Association, 92% of American households own a car, but only 55% have access to any form of public transportation. And even for those that do, it's not always reliable or practical.

Now, this has hurt the finances of a lot of households in truly unprecedented ways over the last seven decades. But it has been fantastic for business. America has had the world's most valuable car market for most of the last century. Today, we have been overtaken by China, who buys roughly twice as many cars as we do, but they also have almost five times as many people, so it's not really fair. We also on average buy much larger and more expensive cars. Even though China buys twice as many vehicles, total market revenue is roughly the same because we spend almost twice as much on every car. A lot of our most popular models are so large that they can't even be sold into other major markets. But automakers don't mind because in the past, they have been able to make so much money from the American market that these vehicles are worth making even if they can't be sold anywhere else.

Either by choice or necessity, we Americans are also far more willing to take on debt to purchase a new vehicle, often rolling equity from one vehicle into a down payment for a new vehicle with a new loan. Auto loans are now at a record $1.6 trillion, more than double what they were just a decade ago, back when rates were also a lot lower. So, yeah, America has a dangerous obsession with big cars and risky personal debt. I know what you're thinking. That's not exactly groundbreaking journalism. But a unique mix of record high debt, high interest rates, collapsing secondhand values, high sticker prices, stagnating purchasing power, and uncertain economic conditions might mean that the car market has created its own reckoning.

The price of an average new car has increased much faster than average wages. Today, the average car would set you back just under $50,000, which is only $9,000 shy of the average annual salary before taxes. Buying the car is also just step one. Insurance and maintenance on increasingly technical cars has also become more expensive over time. So, how can people afford to spend their entire income on a car? Well, of course, they can't. According to data from the Fed, over 80% of new vehicle purchases today were done through financing. And dealerships have recognized this as one of their primary profit centers. The average dealership today is more of a loan shop with an occasional side hustle of selling some cars. And over time, they have become increasingly creative with how they will finance a vehicle.

In the bad old days, people would just save up and buy a car. And then auto loans became more popular as other costs ate into average household budgets. People still had to put money down, but it was a way to make the car buying process less of an upfront commitment. Today, dealerships will use the equity in a half-paid-off car as the down payment for the next new car as long as the entire transaction goes through them. This is or was incredibly profitable because it led dealerships to make a little bit of margin from the new car sale, the used car trade-in, and the financing. But this financing treadmill has now put the whole market in a very difficult position.

Used car prices spiked during the pandemic as supply chain breakdowns caused shortages. This let people trade in their old cars at higher prices to put down payments on more expensive new cars. If you were lucky and had a popular model back then, you might have been able to get more for your 3 to 5-year-old car than you had spent on it when it was new. Now, the trade-off was that new cars were hard to buy and often came with dealership markups to account for market pricing. Now, this wasn't a problem back then, but it is a problem now as those cars try to repeat the cycle of rolling debt into new purchases. The average price of a used car has fallen considerably because supplies are no longer a major issue. And budget-conscious used car buyers don't have as much disposable income as they did 3 to four years ago with low interest rates and stimulus checks. And if things were looking bad for gas cars, it's significantly worse for EVs. But more on that soon. This means people are still underwater with the cars they have purchased with significant markups back in 2022. Some of these people can't even afford to sell their car without putting their own money down to clear their debt, let alone use the equity in their car to buy a new car.

To make matters worse, car companies noticed the markups that customers were willing to pay the dealerships and wanted some of that action for themselves. When it was difficult to get enough components to keep up with demand, car companies started prioritizing higher trim variations of the same model to maximize the revenue on higher margin units. Optional extras like driver aids, sunroofs, heated and cooled seats, better sound systems, and infotainment are all sold at a significant markup from their component costs. In some cars, these components are installed anyway, and the features are just manually disabled for customers who didn't select the optional extra. So, manufacturers really liked creating these higher-spec vehicles. This trend quickly resulted in the market today where affordable new cars even from previously economy-focused brands are all but extinct and mid-range brands are now marketing themselves as competitors in the much more lucrative luxury market.

Now this is not unique to just the car market. A lot of companies have either gone down market to focus on a growing number of cost-conscious consumers or have taken their entire brand up market. We've mentioned it before, but it's worth repeating that the wealthiest 10% of households now account for 50% of all the spending done in the economy and are responsible for all of the economic growth. But the thing with the car market, and you are going to have to trust my math on this, but the top 10% of income earners only actually makes up 10% of the population. And even then, not all high-income households are interested in buying premium vehicles. Yes, some high-income earners have car collections, but this is still a very rare minority.

As car equity dries up, interest rates have jumped, and new cars have become more expensive, it's become harder for dealerships to get deals done. Now, according to data from the Bureau of Economic Analysis, car sales have fallen, but not significantly. We are buying about 1 to 2 million fewer cars every year than we did before the pandemic. Not great, not terrible, right? Well, not exactly. All of these market conditions have combined with one unfortunate reality. Cars are just getting better. According to the S&P Global Mobility Survey, the average age of cars on the road in the US has increased by 3 years in just the last decade. It's increased by 2 years in just the past 4 years alone. This means people aren't buying new cars as often. And vehicle sales have been helped a lot by cars being sold three or four times over in their life rather than just once or twice when vehicles don't last as long. New cars might have more features on them that can go wrong, but generally the essential stuff like bodies and drivetrains are far more robust than they have ever been. And yes, I can already hear some of you typing in the comments about Nissan CVTs. There are always bad examples, but generally, it's never been a better time to be a used car buyer. The average person will happily deal with some outdated electronics or broken infotainment if they have a reliable form of transportation.

This has also encouraged new car buyers to seek out more reliable brands because even though they might have a warranty for the entire length of their ownership, the market perception of reliability can have a big impact on resale price. Companies like Stellantis, which makes Alfa Romeo, Dodge, Jeep, Ram, and Chrysler have been hit by this from every direction. They played a lot of funny business with financing and dealer markups when they could, and their cars are consistently rated as some of the least reliable on the market. This is also a real problem for their ambitions to make their cars look like a luxury competitor. Because when people think of Jeep, they don't think of a luxury SUV. They think of their broke cousin who bought a clapped-out Wrangler off Facebook Marketplace for $2,800 bucks in a lawnmower as a uh completely random example.

Now, it might almost be satisfying to see bad manufacturers who cut costs and jacked up prices to feel some consequences, but there are some bigger factors at play here that will unfortunately most likely end up hurting regular people who just need a way to get around. Most car companies are not allowed to simply fail. They employ too many people in valuable jobs. And in a lot of countries with large auto industries, they are significant export staples. Too big to fail is not unique to the car industry. But struggling car makers are often the first sight of bad things coming as they depend on finance, global trade, consumer confidence, labor, and resource prices to all play nice in order to run a profitable car company. We are already seeing governments step in to ease these problems.

Nissan is a failing company. Their sales have slumped as their lineup has aged and brand perception is at an all-time low thanks to a series of very public problems with critical drivetrain components. The problems are also worse than the dismal sales trend alone would suggest because a lot of volume from this brand has come from extremely aggressive financing. Even when everybody else was arguably pushing car financing too far, Nissan stood out as a brand that would write a loan on a new Maxima to basically anybody. The company also made a lot of sales to rental car fleets by offering aggressive bulk purchase discounts on their economy cars. This was a nice way to boost sales at the time, but rental car companies normally only keep their vehicles for 2 to 3 years before dumping them on the used market. This caused resale prices to tank on used Nissans because so many hit the market at the same time.

Now, this wouldn't normally be Nissan's problem. However, in an effort to make sales, the company introduced a financing promotion where they would ensure the future value of their cars in certain markets around the world. So, they were on the hook to buy their cars back at above value. They got away with this for a while when used car prices were high, but it's a significant hidden liability for a company already struggling with debt. Nissan had effectively gorged itself with short-term wins, and now it's facing complete insolvency. The Japanese government had not so subtly tried to fix these problems by playing matchmaker in a proposed merger between Honda and Nissan. The deal was promoted as a merger of equals which would create one of the largest manufacturers in the world. But nobody took this seriously. Honda had better sales, better brand perception. They were in a better financial situation, better products, and had better management. It was a merciful way to save thousands of jobs in Japan and across the world. Now, this particular deal fell through, likely signifying the beginning of the end for Nissan, but similar interventions are likely going to become more common as other automakers deal with the same kind of problems.

So, yeah, dumb companies played stupid games and won stupid prices. And unfortunately, workers are going to be the ones to feel it the worst. However, hot take alert, but we all share some blame in this as well. Cars are something that you and I and everybody watching are terrible at purchasing rationally. Whether we like to admit it or not, we do see the cars that we drive as a reflection of ourselves and the image we want to present to the world. Whether it's an EV to show that your RSUs got paid out, a lifted truck to show the Walmart parking lot whose boss, or a Chrysler Pacifica to show you have given up, cars are inevitably a way to communicate what we are about with total strangers. Even those people who have already left a comment talking about their 1996 Toyota Camry and how it's never going to die have still purchased an image. Their image is pretending to be better than the people who care too much about the car they are driving.

Yes, car companies have become really good at taking advantage of human weakness. But we keep on falling for it. Their ads are almost always about how their cars are seen rather than what they do. And it's all to show potential buyers how they can be seen. But as we are exposed to more advertising and social media where everybody is showing off their best life, this is resulting in some pretty alarming trends. Multiple surveys conducted on US and global car buyers found that Gen Z, who are currently aged between 13 and 30, are the generation most likely to purchase a luxury car despite having the lowest overall net worth, lowest incomes, and highest proportional levels of debt. Tragically, a lot of people in this generation are realizing very quickly that they may never be able to achieve financial independence or even financial stability. As a way to compensate for that, they are doing the next best thing, which is buying an expensive car to at least roleplay as people who aren't getting financially from every angle.

Now, the good news is, yes, car companies can use brand perception to sell us on financially irrational purchases, but those same perceptions can come back to hurt them just as fast. So yeah, we got to talk about Tesla. From its all-time peak, the company has lost more than half a trillion dollars in market capitalization in less than 3 months. Uncertainty around trade wars, competition in global markets from highly competitive Chinese EVs, a general consumer shift to internal combustion engines, and broader market slowdowns have all hurt the world's most valuable automaker. But let's be honest, whether you love him or hate him, Elon Musk is inextricably linked with the company's brand image. He has gone from someone who could be the sole marketing strategy for the entire company to an individual that is pushing a lot of people who would consider buying an EV away from the brand.

Now, other car companies are probably really happy he is getting all of this attention because even though it's a lot slower, people are pushing back against the idea of owning a car at all. Walkable cities, public transport, shorter commutes, and car sharing have all become much more popular issues across America. And while we have a lot of work to undo seven decades of car-centric planning, having no car is becoming just as fashionable as having a fancy