Ruggles based on a column in Wards
minor additions by Smitka
There was a lot going on in San Francisco in January. The week began with the American Financial Services Association (AFSA) conference. Following that, J. D. Power and Automotive News held conferences on the same day, while at the same time, NADA workshops were in session. There was simply no way to take it all in so I’ll only comment on the high points of sessions I attended.
AFSA:
Notably absent from the AFSA conference was the Consumer Financial Protection Bureau. I got the impression they weren’t invited and wouldn’t have come anyway. Last year, CFPB’s Patrice Ficklin addressed a packed room. Since last year’s event, AFSA commissioned a scholarly study, conducted by the highly regarded Charles River Associates, that isn’t kind to CFPB’s suspect methodology called Bayesian Improved Surname Geocoding (BISG) which CFPB uses to “prove” unintentional “disparate impact” discrimination. One gets the impression that zealots at CFPB see discrimination behind every tree and will stop at nothing to “prove” it. According to the Charles River study as summed up in an AFSA bulletin, “BISG estimates race and ethnicity based on an applicant’s name and census data. AFSA’s study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known. Among the findings:
• When the proxy uses an 80% probability that a person belongs to an African American group, the proxy correctly identified their race less than 25% of the time.
• Applying BISG on a continuous method overestimates the disparities and the amount of alleged harm and provides no ability to identify which contracts are associated with the allegedly harmed consumers.”
To say that race and ethnicity is “known” in the case of mortgage data is a HUGE stretch as mortgage applicants are asked to “self describe” their race and ethnicity without any objective standard. For example, if a person is ¼ Native American, ¼ Asian, and ½ African American, what objectively is their race? People have a variety of motivations for how they will answer such a question. And with no objective standard, the margin of error is impossible to calculate.
Yet, no lender will stand and fight CFPB in court. CFPB knows they have an immense intimidation element working in their favor, and they leverage it at every turn.
Having said this, CFPB has done a lot of good in some areas. But attempting to prove discrimination where there is none is likely to cause a huge backlash that could overwhelm any good they might do.
MTV:
A highpoint at the NADA conference was a press conference presented by MTV. The attraction for me was that they stated up front that their research debunks the conventional wisdom regarding Millennials, who we are told are taking over the world. There is good reason to be suspect of research undertaken and then repackaged by people who know nothing about auto retail. We know that there are a LOT of Millennials out there. We know they will grow up and as they do, they will become more like the generations who came before them. And their children will complain about how stodgy they are.
One of the excellent points the MTV study makes is that there is a good reason Millennials tend to get their drivers license later than earlier generations. It has more to do with more restrictions imposed these days than in days past, not that Millennials have little interest in vehicles and are reluctant to drive. The study also showed that Millennials with both a drivers license and a vehicle drive a lot, in fact more than previous generations Baby Boomers and Gen Xers. So they'll need to replace their cars more often than other generations, good news for us in the business.
There are many who think Millennials are brats. The MTV study supported this, pointing out that this generation received a trophy for just showing up. “They want what they want when they want it,” said Berj Kazanjian, the Senior Vice President for Ad Sales Research for MTV. He said the study revealed a level of idealism on the part of Millennials. “They want things to be fair. They don’t want anyone to pay more or less for the same product.” I sat there thinking that this wasn’t sounding much different than what my own parents, who were raised during the Great Depression, sounded off about Boomers. Don’t idealism and being young go hand-in-hand?
The Q&A lasted long after the presentation officially ended and eventually turned into a spirited discussion. I mentioned my own “surveys” when I asked roomfuls of Millennials if they think 10% is a fair dealer gross profit on a new car. The consensus answer is that 10% is “fair.” This coincides closely with TrueCar’s survey which shows consumers think 8% is fair. But when I ask the same room if a $3000 profit is “fair,” the tone of the room changes instantly and I hear comments about car dealers being cheats and liars. The MTV presenters thanked us for “keeping them honest.” While I think their research shows interesting results I do think they need to enlist the input of someone who understands automotive retail to frame questions in a way relevant to the industry, and thus translate what customers mean in our context as opposed to the words they utter as general principles.
At least it seems that MTV isn’t interested in selling their advice to dealers on a consulting basis like many who conduct self serving research. They just want to sell some advertising. They may not feel it's worth their trouble to restructure their survey on our behalf, but we benefit from their not trying to spin the data to drum up our business.
Oil Economics:
It is always interesting to hear economists provide their SAAR predictions for the coming year. There was a lot of talk about oil economics and how the current low price of fuel at the pump will impact the mix of vehicles sold. It seems apparent that small vehicles will need to be heavily incentivized to keep the assembly lines running and to minimize CAFE fines. This will reduce residual values on those vehicles. There were some estimates on how long the moderate fuel prices will last, up to 24 months. As someone who was raised in the oil patch to an oil company family I have watched OPEC curtail its own production to maintain price equilibrium. In fact, they produce about the same amount of oil today as they did 40 years ago when the population of the earth was half what it is today and consumption much less than today. This is despite the fact that OPEC had 5 members then, and 12 today. However, OPEC has on occasion allowed the global market price of oil drop to drive out high cost competitors. They are the low cost producer and Saudi Arabia is sitting on around $700 billion in dollar reserves. I recall distinctly the oil glut of the mid 1980s. The economies in oil patch states took major hits. There were huge numbers laid off from various oil companies during that era. Just last week Schlumberger announced a layoff of 9000 workers.
It is hardly a surprise when a cartel acts like a cartel. Frackers, sand and shale producers, ethanol producers, EV car manufacturers, battery makers, etc. will take a hit. With the world market price of oil below the cost of production where would Keystone get the traffic it needs to pay its debt service?
The issue in the U.S. has NEVER been our dependence on foreign oil. The issue is our dependence on the global market price of oil as controlled, or at least heavily influenced, by OPEC. Does anyone think an American oil company would sell its oil to American consumers for less than the global market price? In fact we know the answer, because when we tried price caps in the 1970s, the response of the industry was to leave oil in the ground.
Oil is a fungible commodity. It makes little difference from a price standpoint if the fuel we put in our cars came from a foreign country. Yes, it is always nice to keep money at home, and with all things being equal, the transportation advantages means a lot of domestic oil stays home. But that doesn’t have a major bearing on the price.
Saudi Arabia finds itself in an interesting position. The Sunni Saudis aren’t fond of their Shiite Iranian OPEC partners. Through their policies they cooperate – though that is likely not their primary motive – with the U.S. Government in its sanctions against Iran for its nuclear program as well as its financial support of terrorist groups in the region. Their policies likewise support the Administration in its desire to curtail the oil revenue of ISIS. Their policies, intentionally or otherwise, reinforce our sanctions on Russia over its Ukrainian incursion. The low price of oil doesn’t help Venezuela either, something that might please the Administration. Low fuel prices will give the U.S. economy a real shot in the arm and it could carry through the next election cycle. The EU may avoid another recession, which also helps the U.S. At the same time, the Saudis are accomplishing what they wanted to accomplish all along, which is to force high cost producers to fall by the wayside. As production wanes, the global market price will rise on its own. It will take time for it to come back online. During previous periods of “glut, many ethanol plants went bankrupt. It may well happen again.
The Administration will have to bite its tongue as their alternative fuel initiatives will become less interesting. There will be less conservation. CAFE might have to be revisited. There are rumors of EV inventory piling up. Of course we find an emphasis on fuel efficiency in the policies of Europe, Japan and China. That leaves pressure on American producers, from Toyota to GM, to engineer and make fuel efficient, and hence often small, cars and light trucks. They would really like to add US volume to spread their cost base. So there are lots of tensions building.
My best guess is we will see moderate oil prices for 24 months or longer barring anything unforeseen.
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