Macro Trends/Forecasts

Jeff Miller

"The Man Who Called Dow 20,000" --CNBC

Auto Loans: An Example of Misleading with Charts

One important element of my work at FATrader will be Practical Investment Economics (PIE). [Sorry. The site founders told me to do that!] Gaining a significant investment advantage often requires knowing just a bit more than most others.  I will help you become a better investor by testing and honing your critical thinking, with a focus on economic indicators and issues.  If this sounds too much like a class, keep an open mind. I plan for us to have some fun with these topics.

The Appeal of Charts

Charts are inherently attractive because everyone thinks they understand them.  Rather than a difficult and careful explanation of some concept, it is easier and often more persuasive to present your position in a chart.

What do you think of this one?

The author’s point is emphasized with the red text and upward arrow.  But are loans a bad thing?

Too many loans can be bad if more people are unable to pay.  The author concludes the argument with two points:

  1. This constitutes a “bubble” in auto loans
  2. Increasing interest rates will burst the bubble.

Whether this is bad for the auto industry or the overall economy is left to your imagination.  While I have selected one interesting article for our study, this factoid (one item in a report from the NY Fed) was extremely popular.  Many thought leaders on Twitter picked it up, with likes and retweets mounting into thousands.  Let’s take a closer look.

Causality

What other reasons might there be for these facts? More cars? More loans? Bigger loans?

Is the chart trend a real problem for the auto industry?  Dealers – new and used – are less stringent than other consumer lenders because they can repossess a car.  Sometimes they can even “turn it off” with factory settings.

In fact, all of these possibilities are accurate.  The chart below is much more meaningful and tells quite a different story.

Test assertions by flipping the argument

One useful and entertaining test for a chart-based argument is to see if reversing it makes sense.  Here the strong growth in auto sales supposedly is a bubble and signals an economic problem.  Does this mean that flat or declining auto sales would represent economic health?  That makes no sense.

Which came first – the indicator or the viewpoint?

The large number of economic indicators makes it easy to find something to support a pre-conceived position.  Those on a mission have plenty of data and research tools to mine for something that is superficially persuasive.

As investors we can be informed contrarians when we spot such nonsense.

Jeff Miller provides Economic Analysis as well as Market Forecasts as one of the original contributing analysts at FATRADER. A quantitative modeling expert and former university professor who is the #1 Economics contributor at Seeking Alpha, Jeff is regarded as an expert on economics, market reaction to news events, and computer-based trading.
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