Manheim Steamroller
April 26, 2021·16 comments·In Brief
Used car prices have spiked so violently that they've broken the dealership business model. Traders who understand inflation's direction can still face collapse when volatility accelerates faster than their systems can adapt. This reveals a hidden cost embedded in every inflationary narrative about which assets will win.
- The gap between wholesale and retail has vanished. Trade-in values now approach new car prices because used inventory is so scarce and expensive. Dealerships that take these trades at market rates can't turn them fast enough to maintain margins.
- Being right about the macro trend doesn't protect you from the micro volatility. Every business identified as an inflation beneficiary faces the same pressure. Those leveraged into inventory acquisition at peak prices face real risk if the environment shifts.
- The cost isn't just about timing the revert. Dealerships have spent decades expecting a couple thousand dollar spread on trades. Now they're being asked to price terrifyingly close to new inventory to approach that margin. The uncertainty about duration compounds the math problem.
- The winners aren't the ones who predicted inflation. They're the ones positioned to absorb or navigate volatility that even directionally correct positions can't handle. There's a gap between understanding price direction and surviving price swings.
- This pattern will repeat across every asset class identified as an inflation winner. Some will get the trade right and still lose money. What determines survival isn't whether you called the direction correctly, but whether your business model can handle the volatility that gets you there.
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Comments
Looking forward to seeing how the BLS will twist these shockingly high increases in car prices into a 1-2% impact on the CPI reports
Rusty, I feel your pain. We looked for 4 months for a vehicle – ANY vehicle: car, SUV, truck, whatever. Only through the grace of Midwestern small-towns and dumb luck did we manage to find something suitable at an decent price. An experience I would wish only on a few, specific worst enemies.
Hedonic pain.
I think the last calc had a 8-9% change in this category, but at the weighting it gets it didn’t do a fraction of that.
Absolutely, Steve! Although I’d already resigned myself to paying pretty close to sticker, TBH. But the $5,000 gap between what two dealerships were willing to offer on a pretty basic pickup was the really wild part.
It seems like the perfect time to sell your car in a private transaction…
From my Twitter feed this morning, and yes base effects are at play. But still.
SentimenTrader has a good stat on inflation. For the first time since 1971, over half of commodities within a broad commodity basket have registered gains of over 50% YoY
Congrats Rusty!
I must just be an absolute sociopath because I love shopping for a new car. I’m already tormenting my poor family with my discussions of the new Mustang Mach E and I don’t need to look for a car for another six months.
My friend that is general manager/minority owner in a Chevrolet dealership in Houston said he thought inventory of new and used would be better by now, getting to a critical point where he will not be able to deliver on current demand if things don’t improve pretty quickly. He ordered a bunch of Chevrolet volt’s to fill spaces on the lot, thought that might be a good transition. He needs to sell 6 per month to breakeven, has sold 2 in April. He has said time and time again for about 2 years, he just cannot compete with publicly traded companies like Carvana’s for used cars because he can’t lose money and they can.
It’s embarrassing in 2021 to admit this, but I listened to the last earnings conference call for Carvana, Vroom, and AutoNation. I know, I know, don’t laugh at me for being a dinosaur and listening to a conference call. :-) The themes on all 3 calls were pretty much the same: tight inventory, higher prices at auction and trade-in, and demand durability related to stimulus. They all also said, they expected higher prices for some time in the future and would manage their way through it. I swear the guy from Carvana could take Powell’s place, he said everything but the word…TRANSITORY.
There is this wildcard theme that keeps getting mentioned, analyst keep asking about “talks” with all the new car companies/brands i.e. Canoo, Lucid, Fisker, etc and if there are distribution agreements coming? It’s the biggest load of crap, but it’s just enough of a prospect to keep up with bizarro land valuations in 2021.
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