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Is Volkswagen About To Unleash The Next Deflationary Wave?

With the new car bubble peaking, and the world's automakers having ramped up production across the globe after seeing Fed-driven signals that all is well and all is going to get better...

 

...the slowdown in China already has many hitting the panic button (with production plunging, capacity utilization tumbling, and workweeks tumbling).

 

With this week's 'exogenous' diesel-defect 'event', the inventory-problem that US automakers are facing...

 

...is nothing compared to the potentially catacylysmic wave of deflationary pricing (and deflationary lack of demand for raw materials) that VW faces with its record inventory.

 

Inventories of Finished Goods...

Charts: Bloomberg

The last time inventories spiked on this scale... right into an 'exogenous' event... it ended very very badly!

Think we are exaggerating, think again... (via Reuters)

The Volkswagen emissions scandal has rocked Germany's business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe's largest economy.

 

Volkswagen is the biggest of Germany's car makers and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

 

Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned on Wednesday and economists are now assessing its impact on a previously healthy economy.

 

"All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," ING chief economist Carsten Brzeski told Reuters.

 

"If Volkswagen's sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole," he added.

 

Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.

 

...

 

In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.

 

In addition, automobiles and car parts are Germany's most successful export -- the sector sold goods worth more than 200 billion euros ($225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.

 

"That's why this scandal is not a trifle. The German economy has been hit at its core," said Michael Huether, head of Germany's IW economic institute.

Some observers also see some irony in the scandal.

While the German economy defied the euro zone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.

 

"The irony of all of this is that the threat could now come from the inside, rather than from the outside," Brzeski said.

When the largest carmaker in the world faces a sudden (and extremely likely) implosion in sales at the same time as holding a record inventory having ramped at a record pace in the last two quarters, the ripple through into the German economy, European economy, and world economy is extremely deflationary... which leaves only one thing - Moar QE, or QQE, or Q€.

*  *  *

And, as we explained before, if you are relying on more easing from The PBOC... it has made absolutely no difference whatsoever in the past 10 years...

Charts: Bloomberg

And all of this on top of the fact that the subprime auto loan market is set to collapse...

To sum up...

  • The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels and increasing residuals to make the monthly nut affordable.... that cannot last.
  • China's economic collapse has crushed forecasts for the automakers.
  • Inventories of new cars are already at record highs.
  • Inventories of luxury high-quality used cars are at record highs and prices are tumbling.
  • And July saw a massive surge in producton.
  • What comes next is simple... a production slump

We're gonna need a German bailout... or more chemical plant explosions...