Don’t Own Stocks? Don’t Worry, You’ve Got Your Car

In 2020, my base model 2008 Toyota Tacoma did something no vehicle I’ve owned in 60 years has done.

It rose in value.

I’m not joking. But the event may turn out to be a bad joke on all of us.

My little truck is rising in value

Here’s the story. Nearly two years ago I bought the little truck, with 64,000 miles on it, for $8,500 from a dealer in Boerne. It’s white and plain. It’s so much a base model that it has roll-up windows and a bench seat.

I wasn’t looking for luxury. I was looking for a basic dirty work truck, one that could haul manufactured home tear-out, loads of cardboard to recycle, bags of cement, soil, turkey feed and deer corn, etc. – a farm/ranch truck.

Today, 9,000 miles later, it is worth more than I paid for it. The cargurus.com website shows only 14 for sale in the entire country, most with at least double the miles and most over $10,000. A few as high as $12,000. It’s the same at autotrader.com.

The crazy thing? This isn’t unique.

It’s pretty typical.

It’s been a good year for used cars

If you own a car, it’s just had a good year.  In mid-December, for instance, the Manheim Used Vehicle Value Index was up 15.3 percent from the same period last year. That’s a bit less than the price increase of the S&P 500-stock index, 16.26 percent.  You also got to drive the car for a year, something that compares well with the 1.56 percent dividend yield of the index.

So, our cars aren’t just beaters. They’re World Beaters.

It’s been a good year for other assets, too

They equaled Emerging Markets (15.2 percent), trounced Large Cap Value (2.2 percent), crushed International Large Cap Value (9.0 percent), sacked Europe (6.5 percent) and blew away the Vanguard Total Bond Market Index (7.7 percent).

Our houses did all right, too: The S&P Global Case-Schiller home price index rose 8.3 percent in the 12 months ending in October.

And that brings us to the bad joke part of this column: asset inflation.

The CPI vs. Asset Inflation

We spend a lot of time worrying about price inflation – that’s the increase in the prices of things we consume from day to day. While no universally accepted measure exists, the official consumer price index rose 1.2 percent in the 12 months ending Nov. 31, 2020. The producer price index rose 0.8 percent in the same period.

Compared to consumer prices, wages rose nicely. Covid-19 recession notwithstanding, the Federal Reserve Bank of Atlanta indicates that median wage gains were about 3.6 percent in 2020.

That means most people now have more cash to buy more stuff, provided that the “stuff” doesn’t amount to much. And is consumed quickly.

But shift attention to assets – cars, homes, stocks – and American assets are inflating much faster than income.

Think Bubbleness

Crazy feels good if you already own assets. Giddy good.

But if you don’t, well, it feels like you weren’t invited to the Get Rich party.

The big problem here isn’t whether we feel good or bad about asset inflation. It’s the existence of asset inflation. It’s the disconnect between assets and income. It’s the “bubbleness” of it all.

Asset values rise with income.

If income sinks, asset values sink.

Kill enough income and the things we call assets become something else – scrap. Skeptics should recall the houses and condos being bulldozed after the financial crisis of 2009 and the S&L bust in the early 1990s.

The Bubble on Wheels

The poster child for disconnected, bubbly asset values is the price of Tesla stock. At $736 a share, the company is selling at an astounding 1,406 times trailing earnings. It is valued at nearly $700 billion. That, in turn, represents a market value of nearly $1.4 million for each of the not quite 500,000 cars produced in 2020.

In comparison, Amazon sells at an extraordinary 93 times earnings. Netflix, 84. Apple, 40. All three are high multiples by conventional standards.

More to the point, Volkswagen, Toyota, GM, Hyundai, Ford and Honda produced nearly 100 times as many cars. But their combined market capitalization is only $500 billion.

That’s a market value of about $10,000 each for the 48.4 million vehicles they produced.

Think about that. Can Tesla be worth $1.4 million per car produced if the rest of the industry is valued at $10,000 a car?

Not likely.

Yes, I know Tesla is a revolutionary company. It’s also possible that a lot of vehicle production is going to be lost in future years as our love of cars morphs into Transportation-as-a-Service.

But a crisis for conventional producers doesn’t justify a bubble for the new guy on the block.

      Tesla gained the combined market value of GM, Ford and Fiat-Chrysler… Last week.

As if to underline “bubbleness,” Tesla shares closed Friday at $880, making the company worth $834 billion, an increase of $134 billion from earlier this week. That $134 billion increase in less than a week is the same as the combined market value of GM, Ford and Fiat Chrysler.

The multiple of earnings also increased from an astounding 1,406 to an astronomical 1,682…

Related columns:

Scott Burns, “Fearless Forecasts: The Electric Cars in Our Future,” 12/29/2019 https://scottburns.com/fearless-forecasts-the-electric-cars-in-our-future/

Sources and References:

Manheim Used Vehicle Value Index:   https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html

Consumer Price Index:  https://www.bls.gov/cpi/latest-numbers.htm

Producer Price Index:  https://www.bls.gov/ppi/

S&P Global Case-Shiller Home Price Index:  https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index/#overview

Realtor.com: Monthly Housing Report:  https://www.realtor.com/research/november-2020-data/

Bloomberg stock price indices:  https://www.bloomberg.com/markets/stocks

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by Jarosław Miś from Pexels

(c)  Scott Burns, 2021