Subprime Bubble Cracking

The blockbuster sales figures from American automakers are coming to a halt as the Government cracks down on lending standards that have created a bubble similar to that of subprime home lending that led to the last financial crisis. Automakers are facing the worst start to a year since 2010 with Ford seeing auto sales contract 2.00% versus expected expansion of 5.80%. The resurgence in this form of lending to risky borrowers threatens to pop as the Government investigates loan underwriting while meanwhile loan defaults are on the rise. Coupled with student lending, these bubbles exceed $1 trillion in loans with any crack likely to impact other parts of the economy. The recent acquisition of Citigroup’s subprime lending unit by AIG also highlights that resurgent popularity of the lending mechanism despite the contagion risks.

With US inventories pushing highs not seen in over 80 years and production steadily increasing, the downward pressure on oil prices is likely to resume despite a lower build in inventories. Libya which has been plagued with violence since the fall of Ghaddafi, has seen production expand despite low prices, no supplying 400,000 barrels per day versus 325,000 in January. This reflects the improving security situation, but nevertheless emphasizes the efforts of national governments dependent on oil revenues to support regional economies and social programming. Oversupply will continue to be a factor even as US producers deal new well projects in anticipation of higher oil prices in the future. Yesterday’s API crude stock data expanded a smaller than forecast 2.9 million barrels with traders preparing for today’s EIA crude oil inventories figure due later this afternoon. Oil prices are trending back above $50 per barrel, but any larger than expected inventory gains in the EIA data could send prices back lower.