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Has the Auto Bubble Popped? GM Announces Plant Closures and Layoffs

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Last week, we reported that it looks like the air is coming out of housing bubble 2.0. Now it appears the auto bubble may have also popped.

Yesterday, GM announced plant closures and layoffs due to sluggish sales. The big automaker said it plans to shutter five North American factories and slash around 14,000 jobs. 

The move follows on the heels of an announcement by Ford in October that it will cut an unspecified number of salaried employees. Morgan Stanley speculated Ford may pare more than 20,000 jobs from its global workforce.

According to the New York Times, slowing sales served as a prime driver in GM’s decision to slash its operations.

Part of the retrenchment is a response to a slowdown in new-car sales that has prompted automakers to slim their operations and shed jobs.”

The NYT also cited the impact of tariffs on the auto industry as a factor, particularly the increased cost of steel. And the auto industry faces another problem — the same problem confronting the housing industry.

Rising interest rates are also generating headwinds.”

Real estate and autos are the two sectors in the economy most sensitive to rising interest rates. Most Americans have to borrow money to buy a home or a vehicle. As the cost of borrowing rises, sales will naturally fall.

For nearly a decade, the Federal Reserve held interest rates artificially low. This helped blow up bubbles in both sectors. Easy money did exactly what was intended – it stimulated buying. Now that the Fed is attempting to reverse its policy and “normalize” interest rates, the air has started leaking out of these bubbles.

We saw this coming last spring when we reported that the air was already leaking out of the subprime auto loan bubble. In April, auto loan delinquency rates had already hit levels not seen since 2010 — the height of the Great Recession. At the time, we reported:

The common denominator here: rising interest rates. Easy money pumped up both the housing and auto loan bubble. When the Fed takes away the punchbowl, bubbles burst … In another bad sign for the auto market, subprime borrowers have gone missing from auto showrooms. According to Bloomberg, rising interest rates and rapidly increasing vehicle prices are squeezing consumers with shaky credit and tight budgets out of the market. Even the most creditworthy consumers aren’t showing up to dealerships”

It should come as no shock that seven months later, we’re seeing big auto manufacturers shuttering factories and laying off workers.

The housing and auto industries serve as the proverbial canaries in the coal mine for economies built on credit. The recent downturn in these sectors may well foreshadow an impending recession. We’re seeing rumblings in the stock markets as well. Peter Schiff has been saying we’ve already entered into a bear market.  While most of the mainstream pundits continue to view what’s going on as a healthy correction. Peter said there is nothing healthy about what’s going on.

This is a bubble deflating. This is exactly how it started in 2008, only this is a bigger bubble and it’s going to produce a bigger crisis.”

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
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