Ominous Outlook for Autos & the Economy (w/ Danielle DiMartino-Booth & Daniel Ruiz)

Ominous Outlook for Autos & the Economy (w/ Danielle DiMartino-Booth & Daniel Ruiz)


DANIEL RUIZ: We’ve had
sequential declines in retail sales. Incentives aren’t budging. We know that
production is falling. I’m trying to wrap my head
around what happens next. DANIELLE DIMARTINO
BOOTH: The irony of casting a light on
General Motors to the extent that President Trump did is that
it actually made things worse. ASH BENNINGTON: Welcome
to The Exchange. I’m Ash Bennington. Today, we’re here with Danielle
DiMartino Booth and Daniel Ruiz. We’re going to talk
autos and employment. Why don’t you get a start? Tell us the story of how we
got to where we are right now. DANIEL RUIZ: I’m
very excited to be sitting here next to Danielle. She’s very much in tune with the
job market, the macroeconomics. And one of the things that
she, just out of the blue, sent to me one day was
the Challenger Job Cut, Automotive Job Cuts Report. So I asked for historical
data on the Challenger Report. And I started charting, going
back as far as I possibly could, see if there was any
correlation, if I can somehow tie the thesis behind increasing
automotive job cuts leading the overall unemployment rate. Sure enough, there was
very hard evidence. And ever since then,
we’ve just kind of been in constant communication. We’ve collaborated
several times. And like I said, I’m
super excited to be here. ASH BENNINGTON: This is a really
interesting conversation– DANIELLE DIMARTINO BOOTH:
It’s all mutual, yes. ASH BENNINGTON:
Because we have we have Danielle, who does
top down global macro. We have Daniel, who does
bottom up US domestic analytics in a particular sector. So this a really
interesting conversation. Danielle, what was
it that you’ve– DANIELLE DIMARTINO
BOOTH: Well, so you know, I looked at Daniel’s
research as being the best on the domestic
automobile industry. And it kind of flashed
onto my radar eight, nine months ago,
that all of a sudden, we are starting to see
weakness in Chinese car sales. And then one month
became two, became three. Now we’re at 10. So you know, I said, well,
given Daniel’s evidence and data on growing inventories here,
and what’s happening in China, what does this imply
for the global economy? So I did a deep dive. And what I found was
just beyond eye opening. The global automobile
sector has been in an expansion for two decades
now, if you can imagine. The growth has been largely
attributable to the growth of registered drivers in China. They have doubled in
the space of six years to 350 million drivers. There will be 400 million
registered Chinese drivers by the end of this
year, which equates to the populations of the United
States and Germany combined. Now the Chinese
government has done a ton. They’ve had two solid years. Can imagine Cash for
Clunkers for two years? That’s what they’ve had
in China, literally. They’ve pulled such
magnificent amounts of demand forward, that they’re now
suffering the backlash of that. And it was watching
Germany melt down that really planted
the seed for me. I said, what is going on here. And then you look and
you see that the ties between the German
manufacturing monster– they produce twice as many
cars as the United States, third largest exporting nation
in the world. $270 billion of auto exports every year. And an economy that is deeply
reliant on its 800,000 directly employed autoworkers. And then everything
that’s related to them. And they’re all producing
internal combustion engine cars. So you know, it’s interesting
that the cover of Bloomberg Businessweek talks about
what the implications are of the shift to
electric vehicles. The Chinese government has
basically laid the law down and said, you will
buy EV cars, period. And you’ll be penalized for
buying internal combustion engines. And we see that Germany is
effectively in recession. I mean, their ISM, their
manufacturing survey came out at 44.7 in March. That’s not– that’s
not borderline with 50, which denotes the
difference between expansion and contraction. It’s deep in
contractionary territory. And all of this has to do with
the manufacturing of cars. So when you put it
all together, if there is a slowdown in the United
States domestic market on top of Germany going into
recession, on top of China being incapable, despite
pumping $800 billion of stimulus into their economy in this
year’s first quarter– that’s an extraordinary number. But that’s the small
and medium enterprises. Their Cash for Clunkers
is running out of gas, so to speak. So if the US car
industry does go into a slump, which is
why I’m relying so much more on Daniel’s
research of late, you’re talking about a turn
in a secular expansion that’s going to come to a screeching
halt after 20 years. ASH BENNINGTON: So that tees it
up perfectly for you, Daniel. Daniel paints a very grim
macro framework picture. You have the Chinese stealing
future demand with stimulus. You’ve got a secular shift
from a policy perspective, from internal combustion
engines to electric vehicles. You’ve got one of the
major exporting nations potentially dipping into
a significant recession. How does that square with
what you’re seeing bottom up in the US automotive sector? DANIEL RUIZ: So first of all,
I don’t disagree with anything that Danielle said. I think her macro
research is outstanding. I think she paints it perfectly. The thing that I would imagine
viewers are thinking right now is, why are stocks not
reflecting the dire situation that’s just been painted. And I think part
of the reason is because when you look at the
financials of these companies, particularly the ones in the
US that sell cars worldwide, the bulk of their earnings
are here in the US. So if the US is
perceived to be healthy, then we can brush off
overseas weakness. But it’s not healthy. And just to go back for
one quick second to really, really point out just
how important the US is– Danielle and I
had a conversation about this a couple days ago– 109% of Ford’s total company
EBIT came from North America last year. 86% of General Motors’
total company EBIT– this includes the Finco– North America. FCA, 86% of total company
EBIT, North America. So that would explain the reason
why everyone’s kind of the– heartbeats aren’t
raised, so sort of speak. But when you take a really,
really deep look at what’s happening and you look
beyond the headline numbers, you know, the SAR– DANIELLE DIMARTINO BOOTH: The
seasonal adjustment factors. DANIEL RUIZ: Exactly. That a lot of folks are
pointing towards in March, the bottom line is we’re down
133,000 vehicles this year. If you run that through for
the next three quarters, that’s a little north of
a half a million cars. ASH BENNINGTON:
And where is that relative to aggregate
production numbers? DANIEL RUIZ: So that’s
a really great question. And this is where the analysis
gets very tricky, too. There is no margin for error. OK? And that’s where
investing in autos gets really, really detailed,
and it can really, really trick investors. As long as inventory
levels are OK, a manufacturer can miss
sales by small percentages for months on end. All that happens is
inventory starts increasing, doesn’t show up on
the earnings report, because their
production is steady. It’s when it gets to
the critical level where they can no
longer miss sales. Where the sales no longer
supports the production rate that production
gets cut and that’s when it hits the bottom line. And that’s where we’re at. ASH BENNINGTON: So
your view has always been that these inventory
numbers are critical, because it’s a number that’s
not really fungible, right? It’s a way that you
actually see what’s happening with financial
health, and terminal demand simultaneously. DANIEL RUIZ: Yeah. That’s a great point, too. So if you look at
inventory alone, that’s a very one
dimensional data point. Because as long as a
sales rate supports the amount of inventory,
the inventory can rise. That’s not an issue. It’s when the sales
rate no longer supports the amount of inventory
that you have a problem. Then you have to cut back. ASH BENNINGTON: So that’s why
you look at it on a day count basis, right? DANIEL RUIZ: Exactly. Yeah, and I use a
rolling 12 month preferably to take
the seasonality out of it completely, and
really get a good feel for what’s happening and
if inventory levels are appropriate. DANIELLE DIMARTINO BOOTH:
You know, it’s interesting, because when Daniel brought
these inventory levels that were ticking up
to my attention– this is probably six
weeks ago or so– I said, well, why is the Chicago
PMI, the Chicago manufacturing survey, so, so strong
if there’s this build up going on in the background? And it was shortly thereafter
that Wards announced that there had been
a 4.2% production cut in the month of February. And I started to notice that
jobless claims were ticking up in the Big 10 auto
manufacturing states. And lo and behold, the Chicago
PMI came out for March. And the future
inventories number– I was blowing up your
phone that morning. The future inventories number
swung from positive to negative to the greatest extent in the
history of the survey that goes back to 1946. These are inventories as
confidence in future demand, basically. And what we saw this last week
with initial jobless claims dropping to 196,000,
the lowest in 50 years– before I was even born, and
that’s saying something, I’m no spring chicken– but one state flipped. And that was the
state of Michigan. Up 16% over last
year jobless claims. So to Daniel’s
point, when change happens, when these critical
thresholds that he’s describing occur, change happens fast. DANIEL RUIZ: Very fast. And it’s been building up. And in typical fashion, I
brought a couple of charts. The one that I’ll touch
on first is the 12 month rolling day supply
of total vehicles, and then just trucks alone. Just the truck segment alone. And as you can see in
the chart, total vehicles are now at the same
day supply level that they were back
in December of 2008. So in the heart
of the recession, truck day supply is the
highest since June of 2008. This is incredibly
important because our nation has completely shifted
demand towards trucks, right? ASH BENNINGTON: That’s the
highest margin segment. DANIEL RUIZ: Absolutely. DANIELLE DIMARTINO BOOTH:
Trucks equals profit. DANIEL RUIZ: Absolutely. ASH BENNINGTON:
So what does this tell us about what’s actually
happening in the underlying state of the economy? This is a message that
most of our viewers aren’t getting anywhere
else, this notion that– DANIELLE DIMARTINO
BOOTH: Well, and that’s I think where Daniel’s
work really shines. Is because he looks past
the fleet sales that flatter the data, and
he’s like, no, Danielle, you have to focus on
retail sales, which were down 4% in March, and 4%
for the quarter as a whole, and 1% for last year as a whole. DANIEL RUIZ: Yep. I like to call it you
know, torturing data. I’m sure that’s been
you know used before. But these seasonal adjustments
can throw people off. Basically, all they
said is that if there was one additional
day in March, then we would have sold more cars
when in fact, we were down 3%. But Danielle and I
chuckled about this too, because the fact of the matter
is, they don’t count Sunday as a selling days. And the reason why is
because there’s 12 states– DANIELLE DIMARTINO
BOOTH: 12 states that are absolute blue laws. You may never open on a Sunday. And then there is another six,
where you can only– in Texas, you can only open
every other Sunday. You’re talking about
18 states out of– hello? Ridiculous. DANIEL RUIZ: Right. But the rule applies to all. And I’ve worked in both markets. I’ve worked in blue law markets,
and non-blue law markets. And let me tell you
what the fact is. When you’re closed on
Sunday, all that means is you’re going to be busier on
Saturday and busier on Monday. ASH BENNINGTON: Right. DANIEL RUIZ: That is it. We have to focus on the year to
date numbers, we have to focus, as Danielle said,
on retail numbers, because we’re focusing
on the consumer. The funny thing about fleet that
a lot of folks don’t talk about is that it is incredibly,
incredibly dependent on used car values, which I
think are in danger this year. Longer story. The moment used car values drop,
fleet sales drop off a cliff. If you look at fleet sales
prior to the recession– I mean, they got cut
in half year over year when things got really bad. So we can’t rely on that. We need to focus
on the consumer. We need to focus on what’s
happening in the retail market. DANIELLE DIMARTINO
BOOTH: And what was the weakest single aspect in
the inflation data this month? Used car prices crashed. I mean, just remarkable
just in the data that we’ve got now here
in the last few days on the CPI and the BPI. They’re both being
dragged down by used cars. ASH BENNINGTON:
So this is what’s so interesting, is the synthesis
of these varying data points, and different ways of
approaching the world. So you essentially are
seeing kind of distortion in some of the data that’s
being officially reported, and attempting to cut
through that by looking at a truer reflection of
what underlying demand is. DANIEL RUIZ: Right. ASH BENNINGTON: And
conversely, of Danielle, looking at the numbers through
actually, in the tables, deconstructing them,
and seeing things that are actually relatively
similar, almost identical. DANIELLE DIMARTINO
BOOTH: Because I like to sit on government websites. It’s fun. I need to get out more. DANIEL RUIZ: You might refer
to me as like, ultra micro, you know? DANIELLE DIMARTINO
BOOTH: Granular is not granular enough. DANIEL RUIZ: And
the reason why is because my thought process,
my research process is literally
eliminating all noise, and finding out what
the silver bullet is. What is holding it all up. And then I focus on that. And the second chart I
brought was a little bit of a deeper dive into
what specific vehicles are most important in the US market
and to the US automakers. So the first is the Ford F-150. The truck represents 37%
affords total production in North America, OK? Their day supply is at 84. If you look at the three
years back to back, doesn’t look that bad. But remember, I put
2017 there for a reason. And it’s because that’s
the year that manufacturers cut production. In 2018, nothing
in the 80s is good. 60 to 70 is ideal. There was a supply
fire, which helped with Ford F-150 inventories. So we shouldn’t
assume that the number in at the beginning of April
is a healthy number in 2018. But as we move on to
the others, they really start jumping off the page. So Silverado has a day supply. Now of 128 days, right? Sierra has a day
supply of 109 days. Those two trucks alone
represent 24% of General Motors production in 2018. So volume and profit. And very very important. ASH BENNINGTON: Probably
a greater percentage of the profits based
on the margins on the– DANIEL RUIZ: Exactly. DANIELLE DIMARTINO BOOTH:
I think the average truck is what, $47, $48,000? DANIEL RUIZ: Exactly. These vehicles are critically
important, and more so than any of the other
models that they carry in their lineup. FCA, which is a
huge focus for me right now, because I think
they’re the first ones– I think they will paint
the picture for what’s to come for the others
very, very well. ASH BENNINGTON: Why is that? Why is you see FCA as leading? DANIEL RUIZ: Because they’re
in the most critical situation, in my opinion. My wholesale estimates have
them down in production by double digits in Q1. But double digits
in the vehicles that hurt, meaning trucks. There is no favorable mix there. It is trucks. They are down double
digits in trucks. And that’s a wake up call. That’s a wake up call
for FCA investors. And again, going
back to the chart, I’ve just told you that
they’re down double digits in manufacturing
and production. Truck production specifically. Their Ram pickup truck has
134 days worth of supply. And their Wrangler has
112 days worth of supply. Those two vehicles combined are
33% of their total production volume in 2018. DANIELLE DIMARTINO
BOOTH: So we’re going to see more production
cuts is your bottom line. DANIEL RUIZ: Yeah. Not only production
cuts, but production cuts where they hurt. DANIELLE DIMARTINO BOOTH: Right. You know, it was really
interesting in the latest payroll report that we saw
auto manufacturing hours worked decline. And if you look over
the last three months, you’ve kind of gone from a
rate of 2.5% to the last three months on an annualized
basis, you’re running 14% decline
in auto workers. And if that doesn’t work,
if cutting their hours doesn’t work, then you
write the pink slips. ASH BENNINGTON: Right. And there are feed
throughs on that, right? DANIELLE DIMARTINO
BOOTH: Of course. ASH BENNINGTON: The knock
on effects that come from– because they’re
high paying jobs. DANIELLE DIMARTINO
BOOTH: Exactly. These are high paying
manufacturing jobs. And if you look at the
Challenger data that come out monthly, after
retail, which we know is a beleaguered sector,
and industrials in general, we’re hearing that trucking
is weakening very quickly. The third biggest category
of job cuts thus far in 2019 is the auto sector. ASH BENNINGTON: And what
sort of next order effects do you foresee
coming off of that if we continue to see the
declines that Daniel’s data suggests? DANIELLE DIMARTINO
BOOTH: Well, what you need is a bounce back in sales. You need kind of a Cash
for Clunkers or something. And I don’t even say
that tongue in cheek. Because if you’re
talking about a bounce back in sales– because we
typically have consumption come roaring back in the second
quarter based on tax refunds. And what we know
thus far this year is that tax refunds
are down 4% over 2018. And it’s not so much that
people necessarily net have less money
in their pockets– households. It’s that– HR Block
did a survey that showed that 80% of Americans
didn’t alter their withholding when they should have. Meaning 80% got a
big old surprise when they went to
go file their taxes. And instead of saying, push
the button, I want my refund, you’re looking across
somebody at Jackson Hewitt or wherever, they’re like,
no, no you owe taxes. And they’re like, what,
don’t push the button. So UBS came out with
a port a few days ago that said versus their
initial estimates, they have had to
take down what they anticipate households receiving
in tax refunds by $25 billion. In addition to that, you’ve seen
gas prices go up by about $0.50 a gallon. That’s another 65 or
so billion dollars out of households pockets. And then you have the
third insult to injury, and that’s come tax day, that
so many Americans are going to be having to pay taxes when
they weren’t receiving refunds last year. So I’ll give you
one quick anecdote. February and March
are seasonally always the best,
strongest months out of the year
for households who maybe have fallen delinquent
on their mortgages catching up. This was the 1st
February in 12 years that they saw mortgage
delinquencies rise, because the money that they were
expecting in the refunds just wasn’t there. I’ve been chatting
with in your home state, a CPA in New Jersey,
who works with high earning couples. $200,000 let’s say
of total income. And he said, basically, if you
compare last year to this year, it’s a $5,000 swing. Last year, they would have
gotten a $2,000 refund. This year, they’re
paying $3,000 in taxes. We’re a consumption
driven economy. People are not buying
more cars if they’re having to pay taxes that
they never anticipated having to pay out of their savings. ASH BENNINGTON: And is
that reflective of changes in the way that the structure
of withholding, and not anticipating about planning? DANIELLE DIMARTINO BOOTH: It’s
all part of the tax bill no. I mean, there are a lot of
corners of the media that have had just– this is so much–
there’s #taxscam, because there’s this
backlash movement against the administration,
because all of these people are getting rude awakenings. And it’s not so much–
again, their paychecks were marginally higher
throughout 2018, and there was a feel
good effect there. And we know that wage inflation
finally kicked in last year. But by the same
token, we’re beginning to see a reversal of that. We’ve seen wage inflation slip
on a three month annualized basis from 3.6%
in October to 3%. We’ve seen the number of
high paying jobs in October, I think there were 177,000,
it slipped down 103,000 in the most recent jobs report. So my point is a lot
of the elements that boosted auto sales
to where they were only down 1% on the
retail side in 2018, as in larger paychecks,
lower gas prices– a lot of these elements
have simply disappeared. With wage growth slowing. So where are you going to
get the bump in Q2 auto sales to prevent further
production cuts? DANIEL RUIZ: And I’d love to
follow up on that if I may. Because this is the kind of
stuff that matters, you know? It’s what fueled as a
consumer have to consume. And down payment. Down payment, that’s part of it. The other part is last year, we
had a tremendously strong used vehicle value performance. Abnormally strong. We haven’t actually had a
normal depreciating curve as far as used car values
are concerned– three year in particular and
one that I follow most closely– in two years. If you think about it, 2017,
we had an abnormal bump in September because
of the hurricanes. DANIELLE DIMARTINO
BOOTH: Harvey. DANIEL RUIZ: 2018, we had
an abnormal bump mid-year, because new car
manufacturers, as I predicted, cut incentives for the
first time in 54 months, so that created a gravitational
pull on used car values. And this year, I just sent
Danielle this a couple of days ago, that the depreciation
curve for three year old cars, although the data was
very good in March, and it’s still
improving in April– it’s underperforming
the previous five years. ASH BENNINGTON:
So for people who don’t follow the space as
closely as you do, what’s the significance of that data? Why is it used car
valuation matters so much? DANIEL RUIZ: It’s
critically important. And the reason why is because
the majority of new vehicle transactions include a trade in. So the more your vehicle is
worth, the more buying power you have. It’s really that simple. It’s part of the transaction. The new vehicle market is
fueled by replacement demand. I got this old one,
I want your new one. The more my old one is worth,
the more new I can buy. Or more frequently
I can buy, too. DANIELLE DIMARTINO BOOTH:
Just a personal anecdote. I knew from studying the data
that luxury sedan values were really going to take a hit. So knowing that, I was like,
you know what, I think it’s time to trade this car in like, now. I expedited my decision to buy a
new car, my first new car in 20 years– I expedited my
decision, and rushed to trade the Audi in, because
I knew that the used car– I knew that I would get less
for trade and if I waited. ASH BENNINGTON: Right. So there are all these
linkages effectively. DANIELLE DIMARTINO
BOOTH: Of course. DANIEL RUIZ: And the other,
which I discussed on the very first interview– not
the first, the second– the first one was
a few years back– this time it’s equity. Well, used car values
are performing well. But again, when you
look at these things as just one piece of the puzzle,
it becomes one dimensional. Despite the fact that used car
values are performing better in March and April, time
to equity is now 34 months. So past the peak in 2017– and it’s purely because
the cohort of folks that I follow for this year to
fuel the demand, paid a higher interest rate when they bought
vehicles three years ago. And they took out
longer loan terms. Which just means that
if used car values are on par with last
year, it’s going to take them longer to get to
equity because it takes longer for the used car value to
meet the principal balance. To get to the break even point,
when you pay a higher interest rate, and you take
out a longer loan. So we have that as a
headwind this year as well. ASH BENNINGTON:
So now that we’ve set the framework from
a macro perspective, from the micro perspective,
looking at these data points really closely, what’s
the significance of it? What does it mean for
people who aren’t following the automotive
sector or macro data as closely as you guys are? What is the significance? What does it mean going forward? What are we likely to see
in the next 12 to 24 months? DANIELLE DIMARTINO
BOOTH: Well, so I think from a
macro perspective, I think that there is a lot
of hope on the $800 billion of stimulus that was
deployed in China. That alone, along with
the Federal Reserve pivoting, and becoming
much more dovish on policy, that the combination of
these two sources of stimulus would pull the global
economy out of this tailspin that it was in. And indeed, we saw
for the first time in months, Chinese
manufacturing, it ticked right
above that 50 line, and boy, market as been
celebrating ever since. So it’s evidence
that the stimulus worked, blah, blah, blah. And out of left field– and you know, Germany
is like, good god, let China recover,
let China rebound. We need this market, even
though the demands is not going to be there. But out of left field then,
we get the administration threatening a tariff
war with Europe. I mean, Angela
Merkel must be like, is my time in
office over already? And Mario Draghi has got
to be like, where is Rome? So you’re kicking this economy
when it’s already on its heels. I know that there is this
tremendous groundswell of support for this
decoupling theory, but decoupling
never works forever. And if you take down
the German economy, if China doesn’t bounce back– my buddy Leland Miller
at the China Beige Book is of the opinion
that they’re going to have to come up
with more stimulus, or China’s going to slow again. The United States
economy will succumb. We cannot be decoupled from
the rest of the world forever, not one word led by
housing and autos, both of which are weakening
because US consumption is 2/3 of the economy, US consumption
is 17% of global GDP. You have to have a strong US
consumer, or all bets are off. ASH BENNINGTON: So
Daniel, what do you think? What are you seeing? What do you think that
the outlook is based on what you’re looking at now? DANIEL RUIZ: So as you
mentioned, 12, 24 months down the road, starting
with Danielle’s work and focusing on jobs,
I wish I saw something that would allow me to say
there’s going to be improvement down the road. I don’t. I don’t. With day supply figures
as high as they are, and there’s a much,
much larger theme– as a matter of fact, I wrote
a 24 page research report that will put most people to
sleep, but I’m thrilled by it– DANIELLE DIMARTINO BOOTH:
I got through about half. DANIEL RUIZ: Did you? DANIELLE DIMARTINO BOOTH:
I’m kidding, I’m kidding. DANIEL RUIZ: So there is
a very, very large theme, in which I think that the
sales mix of trucks to cars is going to mean reverts, OK? There is a lot of argument
out there right now for the strategy
of US automakers, some foreign automakers
to switch production to trucks, because of
profitability, because of margin. And they have taken
that and run with it. Here’s the funny thing– DANIELLE DIMARTINO
BOOTH: And boy, have they made friends in the White House
for doing that, haven’t they? DANIEL RUIZ: And
here’s the funny thing. So I told you that I was
very, very deep in research. And I started going
back– back, back, back. And what I found is that
there are no original thinkers at the helm right now. And I know that might
sound harsh, but it’s true. It’s happened before. We’ve been here before. In 2005, the sales mix
of trucks peaked at 59%. And at the end of the
recession, it bottomed at 40%. ASH BENNINGTON: So let’s
get sector specific. Go through some names. Tell us what your
outlook is and why. DANIEL RUIZ: So in terms
of who’s in most danger right this moment,
I think it’s FCA. And again, I think the results
that are going to be seen, particularly I think
as early as Q1, are they will provide insight
into what’s to come for others. I think they will
all be affected. But FCA, because
they ran production really, really hot in 2018, got
into day supply issues first. But I would pay very,
very close attention to that double digit
decline and production with no improvement in day
supply for what they currently have on ground. Which implies more
production cuts, bigger production cuts to
normalize inventory levels. ASH BENNINGTON: And that’s
when the feed through in price happens, right? DANIEL RUIZ: Yeah. And when these
production cuts start filtering through
the economy, it’s going to mean more job cuts. It’s going to mean these folks
that their communities rely on so heavily for their
consumption are no longer going to be consuming. You know? DANIELLE DIMARTINO
BOOTH: And that’s why manufacturing at the
margin matters when you’re at a cyclical inflection point. There’s no denying that
we’re a services economy. 80% of the US
economy is services. It doesn’t matter, though,
because manufacturing tends to drag the rest
down with it, because it’s a reflection of the
strength of the consumer. ASH BENNINGTON: Right. So you talk about cyclical
inflection points. For investors who
look to macro for cues about how to invest and
position their portfolios, what do you see based on
your big picture analysis? DANIELLE DIMARTINO
BOOTH: So there are two things I’m following
those closely right now to get a macro
feel for what’s happening in the economy. I’m watching how quickly
home prices are declining, especially on the coasts. Because what the turnaround
in the housing market is happening fairly rapidly. And I’m watching his
day supply count. Because it’s so connected
to the triggers. And the only way that
you can chase a cycle and be in front of
it is to get down into the weeds, the most
granular turning point, and follow them. And I’m also following
layoffs, because layoffs are running at such a high level. And by the way, it’s not
just layoffs of worker bees out there in the economy. Challenger also keeps
track of C-Suite, movement of that revolving door. And we’ve seen over 400 CEOs
lose their jobs this year. And that tells you something
about the future of layoffs, because what are you trying
to communicate if you’re bringing in a new CEO? ASH BENNINGTON: Change. DANIELLE DIMARTINO
BOOTH: Change. Somebody is going to come in
and say, where’s the fat to cut. I’ve got an objective look
on it, I can come in here, and just clean house. ASH BENNINGTON: How does
it change year over year? Is that a significant increase
from where we’ve been? DANIELLE DIMARTINO BOOTH: Oh,
it’s a tremendous increase. No, no, no– I mean, it’s
beginning to actually make headlines, even though
it’s a teeny little report, because it’s up so
significantly over– I want to say it’s up over– maybe 20% over the prior year. But we’ve been seeing increasing
numbers of CEO turnover here for the last
six months, which precedes the turn
in the labor market, in addition to the fact that
2018 globally and in the United States, was the record year
in the history of mankind for mergers and acquisitions. Well, any well-paid consultant
or investment banker will tell you that once you
close a merger, at that point, you can extract synergies. And extracting synergies means
firing at a lot of people. And just one example right now. The German government
is being compelled to merge Deutsche
Bank and Commerzbank, presumably so they don’t blow
up the global financial system. But if those two
were to get married, that would involve over 30,000
employees being laid off. Now again, M&A was at a record
here in the United States. M&A was at a record globally. And you can be as
determined as you want as a Chinese policymaker
to try and push enough stimulus into the global economy, because
that’s effectively what you’re doing when you print money. But if there are secular
turns in the global economy, there’s nothing you can
do to slow this down. ASH BENNINGTON: And it
sounds like all the trends are watching are accelerating. DANIELLE DIMARTINO
BOOTH: They have been. DANIEL RUIZ: So I just want
your help to think through this. I am watching what’s happening
with incentives very, very closely. So we’re now in the ninth month
that incentives have fallen. And back in 2018, when I saw
they supply drop dramatically, it was literally
the easiest call I’ve ever made was to say
incentives are going to fall, and production is going
to increase, right? Both happened. Incentives cut
for the first time in 54 months, production
increased in Q3, and a lot of what people
are celebrating today is due to that. So my question now is this. We’ve had sequential
declines in retail sales. Incentives aren’t budging. We know that
production is falling. So I’m trying to wrap my head
around what happens next. Because from a
strategy standpoint, there’s no nice way to put it– they are sacrificing production
and jobs ahead of margin. There’s no way to sugarcoat it. That is exactly
what’s happening. DANIELLE DIMARTINO BOOTH:
This is unholy alliance. And this is– to
me at least, this is executive hubris
on full display. You don’t have that many
cars piling up on the lots. And every time I
write about autos, I get feedback from
subscribers, and they’re like, yeah, I was just at a dealer,
and the overfilled lot was filled next door to it. And you cannot have
that kind of a buildup, and just assume a CEO– seasonality dictates
that the consumer is going to come roaring
back in the second quarter. I’m just going to sit on
this, and protect my margins. DANIEL RUIZ: Yep. And so I have to
follow up questions. I personally think that the
process of price discovery is going to be forced, because
of the day supply figures. I think that it’s
been avoided for a couple different
reasons– what you just mentioned, protecting margins. But also, because if they
lower prices on new cars, it’s going to impact
prices on used cars. And this is not the year to
do that because there’s 4.1. 4.1 million leases maturing. DANIELLE DIMARTINO BOOTH:
I know, it’s kind of sad, isn’t it? DANIEL RUIZ: All
time high, right? So there’s a lot of
dry fire in the woods, and all it needs is a spark. And I think these guys are
aware of what’s happening. ASH BENNINGTON: And that
roll off could be the spark. DANIEL RUIZ: That roll
off will be the spark. Auto manufacturers
have been very vocal about they’re ready
for a recession. They are recession proof. The total vehicle sales can
drop down to 10 million, and they will break even. So investors, please don’t
worry, everything is fine. ASH BENNINGTON: Put
those numbers in context in terms of where
we are right now. DANIELLE DIMARTINO
BOOTH: 17.5 in fairyland. DANIEL RUIZ: We’re at 17, 17.5. DANIELLE DIMARTINO BOOTH:
With seasonal adjustments. DANIEL RUIZ: So
here’s the thing. Again, I’m a student of history. I’ve gone back,
and I know what put General Motors out of business. And it was negative margins. The only way that they sell
10 million cars a year, and not shut the doors, is
if they can maintain margins. Which is interesting and
could be behind the reason why they’re not
cutting incentives. Now here’s my question,
and this is political, how do you think it goes
over in this administration if you cut production ahead
of margins and lose jobs? DANIELLE DIMARTINO
BOOTH: Oh gosh. Talk about toxicity. I mean, look, the irony of
casting a light on General Motors to the extent
that President Trump did is that it actually
made things worse. It did. You had the Halloween surprise. GM came out with this
gorgeous earnings report. It was just phenomenal. And then there was
this little asterisk at the bottom that
said, by the way, we’re going to ask a third of
our North American workforce to voluntarily leave. Several months later,
that didn’t work, they just fired them. So Trump can try to influence
how these makers operate. But when push comes
to shove, they have magnificent
pension obligations, retirement benefits that
they have to think about. These are things
nobody even talks about until you’re in recession. But it is a pile on
effect now if you see a sales decline
of the magnitude that you’re describing. DANIEL RUIZ: Right. And the math only
works in one way in and that’s a view
protect margins. And I don’t think that cutting
production ahead of margins is going to go very well. ASH BENNINGTON: So
final conclusions, behind the asterisks, behind
the seasonal adjustments, behind the data
massaging, what do you think we’re looking
at six to 12 months? DANIEL RUIZ: The
final conclusion is that I think that pricing– again, the process
of price discovery is going to be forced,
one way or the other. And when that happens, the
dominoes just keep falling. They just keep falling. I wish I could be more positive,
but it is my responsibility to my clients to the
viewers to tell them how it is, whether
it’s pretty or ugly. And there’s not a lot
of pretty right now. And we should have
been doing something about it six, seven months ago. And now we’re at
a critical point. ASH BENNINGTON: On that
optimistic note, Danielle, I have a feeling you’re not
going to cheer me up, either. DANIELLE DIMARTINO
BOOTH: Well, if you look at highways in the world,
China used to have none. Now it has millions
of miles of highway. Obviously, the United
States is the same way. 17 million cars sold in
2018, 28 million in China. But if both of these markets
hit a wall after a 20 year expansion, and an
extremely profitable lucrative global
industry, where would they turn to get that
next leg up of growth? Because I tell you what,
India may have more people. It also happens to have
743 miles of highways. That is not a typo. So there’s no global
population pool that you can look to continue
super charging global car manufacturing and all of
the well-paying jobs that are produced, even
as a society, we’re turning to electric
vehicles and ride sharing. So I see nothing to
suggest to me that after 20 glorious years of profits,
that the global auto industry is not going to now become
a drag on global growth. ASH BENNINGTON: Sounds like
unconventional monetary policy is not going to be
exited any time soon. DANIELLE DIMARTINO
BOOTH: Oh boy. No, we’re definitely
going to the zero bound. And you know, it’s
interesting you bring that up, because if housing and autos
do indeed continue to weaken, then the market is rightly
pricing in Federal Reserve rate cuts this year. And as a rule of thumb, once the
Fed hits the Go button on rate cuts, you get one a month. And if they are, as the
politicians are clamoring for, 50 basis points instead of
the 25 basis point hikes, if they reduce rates
by 50 basis points, we could be at the zero
bound in five months time, just like that, and
launching quantitative easing. Which is part of why the
stock market is so excited. ASH BENNINGTON: Cue infinity. DANIELLE DIMARTINO
BOOTH: Cue infinity. Let’s blow that
balance sheet bucket. 8 million, 9
million, 10 million. Because that’s all bond
traders talk to me about. Is, just how big do you
think it can get, Danielle? And I’m, like this
is just phenomenal, because if you prove that you
cannot shrink the Fed’s balance sheet, then you’re refuting Ben
Bernanke’s original assertion that it was going
to be temporary. And because it was temporary,
it was not a formal monetization of the debt. Guess what– it is. ASH BENNINGTON: On
that note, guys, thank you so much for coming. DANIEL RUIZ: It’s a pleasure. ASH BENNINGTON: Hopefully,
next time, we’ll have you back up more
optimistic message. DANIELLE DIMARTINO BOOTH: Yes. Well, right before
I get the new car. Yes, bring it on. ASH BENNINGTON: Daniel,
thank you, Danielle, thank you so much. DANIELLE DIMARTINO
BOOTH: Thank you.