Carvana, Ally Financial, And Collapsing Consumer Lending? (Impact On Economy)

Summary

Chit Chat Stocks Episode Summary Episode Title: Carvana, Ally Financial, And Collapsing Consumer Lending? (Impact On Economy)
Release Date: August 6, 2025
Hosts: Ryan Henderson & Brett Schaefer
Guest: Lax from Unicus Research

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Introduction

In this episode of Chit Chat Stocks, hosts Ryan Henderson and Brett Schaefer welcome Lax, the founder of Unicus Research, to delve into the intricacies of the car lending market and its broader implications on the American economy. Unicus Research specializes in identifying timely short investment opportunities, having previously analyzed companies like Peloton, Opendoor, and Carvana.

Understanding Unicus Research

Brett Schaefer (00:32):

"Unicus focuses on short ideas and provides detailed research on them. We avoid cult stocks and those at 52-week highs, preferring not to chase rallies."

Lax (01:21):

"We conduct primary research before making recommendations. For example, with SolarEdge, we spoke with hundreds of installers and distributors to assess product efficacy and market demand."

The Car Lending Market Overview

Lax outlines the tightly knit structure of the car market, involving dealers, wholesalers, auction houses, repo companies, and banks. He emphasizes the interconnectedness of these entities and the potential for systemic issues.

Lax (04:07):

"The car market is a tightly knit community where all players are interdependent. During the stimulus period in 2021, consumers splurged on depreciating assets like cars, leading to overproduction and compromised quality control."

Ally Financial's Position and Risks

The discussion shifts to Ally Financial, exploring the company's loan origination practices and the hidden risks not immediately apparent in their financial statements.

Brett Schaefer (08:18):

"Ally claims their credit metrics are improving with stable charge-offs and delinquencies. However, Lax points out inconsistencies in their reporting."

Lax (08:26):

"Ally's provisions for credit losses aren't increasing as expected, and their loan origination practices may be extending beyond traditional prime borrowers, masking underlying risks."

Asset-Backed Securities (ABS) Explained

To understand the financial mechanics, Lax explains the role of Asset-Backed Securities in the car lending market.

Lax (15:44):

"ABS involves bundling loans and selling them to investors, paying them a coupon rate that reflects the risk. This allows companies like Ally to keep problematic loans off their balance sheets, masking financial strain."

Future Implications for Ally Financial

Lax discusses the potential future impact on Ally's earnings and the broader financial landscape.

Lax (22:24):

"We've triangulated that Ally's earnings per share could take a significant hit starting in late 2025, based on the depletion of over-collateralization and reserve buffers in their ABS."

Carvana's Role and Risks

Carvana is examined as a battleground stock with polarized views from investors. The connection between Carvana and Ally Financial is highlighted through loan origination and ABS.

Brett Schaefer (28:45):

"Carvana has seen its stock price soar and plummet dramatically. How does this volatility connect to the overall lending market?"

Lax (33:11):

"Carvana sells loans to Ally, packaging them into ABS. This relationship ties their financial health directly to Ally's performance and the underlying loan quality."

Student Loans and Consumer Financial Health

The conversation transitions to the resurgence of student loan repayments and their impact on consumer spending and credit scores.

Brett Schaefer (39:30):

"With student loan payments resuming, how significant is their impact on consumer expenses and overall financial health?"

Lax (39:30):

"Nearly 10 million student loan borrowers are in default. The resumption of payments is drastically lowering credit scores, thereby restricting consumer spending."

Buy Now, Pay Later (BNPL) Concerns

BNPL services are scrutinized for their role in consumer debt and data tracking, raising concerns about financial privacy and credit accessibility.

Brett Schaefer (44:48):

"What are the loss rates for BNPL loans, and how are these services affecting consumer credit?"

Lax (44:48):

"BNPL companies are evolving into data-tracking entities, monitoring consumer behavior closely. For instance, Klarna's net losses have doubled, with 41% of users missing payments in the past year."

Broader Economic Impacts

Lax articulates a grim outlook on consumer financial health, linking it to potential downturns in various economic sectors.

Lax (35:09):

"The car industry is in worse shape than publicly perceived. Repossessions are being suppressed, leading to future spikes in defaults that will eventually impact financial statements and the broader economy."

Brett Schaefer (48:32):

"Consumers are financially stretched with high mortgage rates, student loans, and BNPL obligations, which could severely impact sectors like retail and manufacturing."

Potential Silver Linings and Future Outlook

When prompted about possible improvements, Lax emphasizes the challenges ahead but acknowledges that only essential consumer spending might stabilize under severe deflationary conditions.

Brett Schaefer (55:26):

"What could prevent the worsening of consumer financial health over the next five years?"

Lax (55:30):

"For consumer spending to increase, we would need a severe deflationary environment, which typically accompanies high unemployment and economic distress. In such scenarios, only essential spending on necessities would persist, while discretionary spending would continue to decline."

Conclusion

The episode wraps up with a reinforcement of the dire state of consumer financial health and its cascading effects on the economy. Lax highlights the importance of monitoring asset-backed securities and consumer credit indicators to anticipate future economic challenges.

Brett Schaefer (58:08):

"Thank you, Lax, for your invaluable insights. For listeners interested in further details, links to Unicus Research's Twitter and newsletter are available in the show notes."

Key Takeaways

• Car Lending Market Risks: Overproduction and compromised quality control have led to increased defaults and financial strain on lenders like Ally Financial.
• Asset-Backed Securities (ABS): ABS practices obscure the true financial health of companies by offloading risky loans, delaying the realization of financial distress.
• Consumer Financial Health: Rising student loan repayments, BNPL debt, and reduced credit accessibility are severely impacting consumer spending and overall economic stability.
• Economic Impact: Sectors reliant on consumer spending, such as retail and manufacturing, may face significant downturns as consumer financial health deteriorates.
• Future Monitoring: Tracking ABS data, credit score changes, and delinquency rates are crucial for anticipating economic shifts and investment risks.

For more detailed analysis and updates, listeners are encouraged to follow Unicus Research on Twitter and subscribe to their newsletter.

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Disclaimer: The information presented in this summary is based on the podcast transcript and is intended for informational purposes only. It does not constitute financial advice or recommendations.

Transcript

[Brett Schaefer]

Foreign.

[Lax]

Welcome to Chitchat Stocks. On this show, host Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.

[Brett Schaefer]

Welcome into another edition of the Chit Chat Stocks podcast. My name is Brett Schaefer and today we have a new guest to the show, Lax from Unicus Research. The founder of Unicus Research, an investment analyst team focused on timely short ideas that has covered the likes of Peloton, Opendoor and Carvana with much success in the last four, five years. Today we're going to be focused on the car lending market. We're going to be focused on student loans, buy now, pay later and the broader consumer spending and the American economy. So first, Lax, welcome to the show. What is Unicus Research? What do you focus on and what sort of short research do you guys target?

[Lax]

Thank you Brett. Thanks for having me. And Unicus is just focuses on short ideas and we provide detailed research on them. So the way we choose them is I'll start by saying what we don't do is we don't do cult stocks. And I have repeatedly said this on many podcast as no cult stocks, no stocks that are 52 week high because I would rather leave something on the table than chase them when it's rallying. And the stocks we choose, we first try to do our primary research, so to speak, before we recommend them. SolarEdge is one of the classic examples that we did was we spoke with more than hundreds of installers, distributors nationwide and tried to get the pulse of what the product is and whether the product works. And those are the, you know, you can do whatever you want, the company can do whatever you want, whatever they want and the fundamentals and how they laid out and beat the earnings. But if their product does not work, then that's, that's the catalyst. So we gathered the information that way and then we did the fundamental research and analysis and presented to our clients when the Stock was at 2329 and that's when everyone I could, if I have a penny for every single analyst on the sell writing a research that this is the future. And we are saying to our clients short any stocks you could borrow, any shares you could borrow. So that is the level of research we have been doing. We researched electric vehicles when SPACs were the next big thing.

[Brett Schaefer]

So yeah, yeah, well, clean energy, solar, there's Been a lot of opportunities let's say in the last five years in that sector. But today we're going to be focusing on first at least the used car lending market. If anyone follows which they should follows the Unicus research account on Twitter. For any of the listeners we will include the link to the Twitter and the newsletter to subscribe to their newsletter in the show notes we're going to be talking and you guys have talked a lot about the car lending market specifically connections between Ally Carvana, some risks out there. I think I just want to start with a broad question and we can go into any follow ups that I might have. What have you guys been researching and what risks are you seeing within used car lending or car lending in general?

[Lax]

Car market is very, I'm looking for a appropriate word that won't get me in trouble. But car market is kind of tightly knit community so to speak. And so you have the dealers, you have wholesalers, you have auction houses, you have repo companies, you have and. And the banks, they all are in this together. I would not on the record say whether they are colluding but they're all in this together. Right. So when we started looking at car market it was around 2021 when everybody was getting stimulus checks and that's when you can see people buying cars. So when you get a stimulus check you see certain amount of population started to pay down their debt, pay off their debt and this boosted their credit score and then the other people started to save and that is a very small fraction of people. But most of them splurged on house, splurged on cars, splurged on things that they are very depreciating. So then you have OEMs like Stellantis of the world started to manufacture cars. They wanted to meet the demand. So now all of a sudden you have this demand and the car companies overestimated the demand, if that's the right way to say it and manufactured a lot of cars. And what happens when you manufacture something in run in a rush to meet the demand is you lose focus on simple things like quality check and you ended up seeing cars in the flooding the market. And dealers, dealerships with cars that have problems, multiple problems, we are not going to get into that. But the quality control, the quality aspect of the cars that have been coming into the market is not up to the par, shall we say. And that's when we started looking into the consumer credit and we started to see buy here, pay here. That's the car version of buy now pay later. We started seeing a lot of predatory type of interest rates that is being applied to the consumers started tracking negative equity is. Negative equity is pretty much you buy a car for $50,000 in paying down the debt, the value of the car goes down and when you try to go back to trade in the car, the car value has already reduced and that is still the amount you owe to the bank. So we started seeing this over the past from 2021, 2022.

[Brett Schaefer]

Okay, I want to talk Ally first I think and then we can maybe spread out from there. I followed the company for the last few years. It's been an interesting story. The I think let me maybe frame it what the management team there would say and then you can say whether you disagree. They would say that 2021 there was a reduction in inventory because of the supply chain issues. Used car prices rose and they over earned during that time. And then in 2022 they made some slightly bad loans which they then shored up and have made better loans lately in 2023 and 2024. And the numbers they show on their investor presentations seem to indicate that their credit metrics are improving and they're still earning good. Good amount of numbers are good. Good amount of net interest income when write ups aren't that bad. All the numbers that anyone might care about. Where are you seeing the concern that Ally might not be posting in their quarterly results?

[Lax]

You're really putting this question in such a way that I might get trouble with Ally. But no, I, I, I see your point. So the it's not just Ally. I'm going to be very clear and to take a step back. You initially said about Carvana, we recommended Carvana as a short back in 2022, first quarter when the stock was around 83 and we wrote a cover when the stock was around $4 in December 2022. After that we have been staying on the sidelines. I wanted to address this because I don' assumptions. So we have been staying on the sidelines for two reasons. One, it's a cult. Two, I have we have been getting a lot of questions saying but yeah, it's a fraud. Short selling is, you know, it's challenging. You know it's hard to pick the top, it's hard to pick the bottom. But one thing is there are few golden rule that we have internally and we live and die by it, so to speak. Otherwise minds will get burned. We will get burned. And it's hard because fraudulent companies can survive longer than investors can stay solvent. And this has been proven right over and over and over again. GameStop and Carvana. So we have been staying on the sidelines since 2022, December and up until now, people ask me, but it's a fraud. Yes, but no one cares. The market keeps, the stock keeps going up. As long as they keep the fraud running, the stock will keep going up. Investors thumping that it's a fraud right in front of the stock is not going to do anything. There is no regulations, there is no enforcement of regulations. So saying it's a fraud is not going to make the stock go down. So. But as we have been focusing on Ally for the past two, three years, taking a step back is that we started to see things in the equity side. No provision for credit losses. Provisions for credit losses are not increasing. Charge offs are flat, not, it's negligible and there is not a huge impact that would say, oh my God, Ally is going to go down. The originations are good. They have been claiming that they are only focusing on prime borrowers and there are a lot to unpack. So I'm going to start with the credit score. Credit score is something that lost its reputation for being a better gauge for providing credit to the consumers for two reasons. One is very backward oriented, it's not forward oriented. There are a lot of language models coming up in banks and proprietary models that tracks everything that in your bank account, if you're overdrawing, if you're overdrawn for the past two weeks back to back, you're not going to get credit. Banks track them. If you have a huge withdrawal of cash, maybe for your personal reasons, the artificial intelligence tracks it and say, oh, you're withdrawing too much money. Maybe I shouldn't, should not be giving you credit. So your availability of credit is tracked by artificial intelligence. Not much from FICO these days. Having said that, in 2021, all the stimulus money consumers are paying down debt, then it boosts their credit scores. Then they have then the subprime consumers, consumers who are, for lack of better words, fiscally not responsible. They are getting more credit because they have paid down the debt, which means that they are doing better. So they get more credit, they spend more. Right. So you have subprime being a prime. So when Ally is saying we have been giving loans to prime, I kind of find it hard to believe because the prime might technically not be a prime. So Ally started to do that and you won't see any of that in the balance sheet. So over the past three weeks we started creating a credit and funding Market analysis pretty much a black box where we are tracking Ally accounts receivable trust in the asset backed securities market from 2022 up until 2025. Trust by trust, month by month, tracking every single loan that's issued. And we've been running this for Ally, we have been running this for Corona because this data, Brett, is not available anywhere. It's not available on Bloomberg, it's not available anywhere. And we started creating this for our clients to see if we can triangulate when Ally will be forced. Not by regulators, not by consumers in case of Carvana, not by investors who are saying it's a fraud. It very well might be, but by the credit data that's available on the asset backed securities. Companies like Ally and Carvana are filing with SEC on a monthly basis. The repos for their loans, the charge off for their loans and whether there was any modifications which is kicking the can down the road. Right. So it's all available in the asset backed security now credit side of the market and the equity side of the market. I mean I might be wrong but they have usually functioned in a, in their own path. When you overlay the credit side of the market onto the corresponding equity side of the market, you can actually see the real problem. That's when we started to poke into the Carvana, you know, and started to go into Ally.

[Brett Schaefer]

Okay, a couple follow ups there. One I think to bring all the listeners up to speed. Can you explain the asset backed securities market? What is ABS and how does it, just how does that process work? And then maybe some follow ups on Ally.

[Ryan Henderson]

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[Lax]

So just an overlay. Asset backed securities is where you bundle up the loan and you sell it on to people. Any Willing buyers and you to hold that loan, you pay them a coupon rate, right? So higher the risk is, the more the coupon rate will be. And you do that. And to do that Ally collects a servicing fee from the trust and asset backed securities is off balance sheet. So if you, if Ally keeps all these loans on the balance sheet, it has to. If a loan is 30 day past due, 60 day past due, 90 day past due, it automatically goes to the repo. And it all have to happen right away. And any auditor who's signing up on this will say hey, you have to write it off. Hey, you know CAR is, you can't keep this as a collateral because CAR is a depreciating asset. With asset backed securities you bundle them and take it out of your balance sheet. It becomes an off balance sheet transactions. And that's that way whatever is happening on your books is clean and your stock price is not affected. The headlines are not screaming that there is a problem in your balance sheet or your fundamentals. It's of balance sheet. And nobody is crazy enough to go through trust by trust, month by month to figure out what's going on and what's the problem. And that's why companies choose to put their loans in abs.

[Brett Schaefer]

What is the size of Ally's ABS loans? If you're able to figure that out.

[Lax]

Let me give you an example of 2022 trust. One, so it's a bundle think of as like a Santa Claus Christmas bundle. So you have 2022. Ally has I believe two or three trust. Each trust will have a certain amount of loans and it has over collateralization buffer and it has reserve buffer. What happens is. So for 2022 I don't have the data in front of me. It's all we explain it in our newsletter. You're welcome to check it out. But in 2022 I believe give or take 59,000 some odd loans of the consumers. The value of the loans total to roughly a billion point five give or take or billion and eight give or take. And this will, this started in May 2022, June 2022, July 2022 and all the way to December, sorry July 2025. The same loan get amortized in a as the consumer pays them off. As a consumer gets repoed, it goes into the repo section. So what, what's been happening? We spoke with our wholesalers and wholesalers were saying your ally is really not technically repoing the cars. I'm like what do you mean? When a consumer I don't know 2007, 2008 there were scenarios where mortgage people who can't pay mortgage come had a scenario where they came and said we can't pay this much mortgage. And there were some cases where you know, the banks would be like how much can you pay? And then extend the ltv. So the same thing with car. Well, I can't pay thousand dollars on my Porsche every month. Okay, so how much can you afford? So I can only afford like $200 a month. So you make the amount payable as 200 and then extend the terms of payments to 90 plus months or whatever the months they have. So it's kicked down the road and the consumer keeps paying $200. I'll give you an example. My husband went for a haircut and it's not a fancy place and the woman who's cutting his hair said oh I'm thinking of buying a Porsche, right? I have a dealership tell me that zero down and it's only,500 per month and I can pick it up, pay it off in like five to 10 years. That's a problem.

[Brett Schaefer]

So tell. Okay, well I'm using Ally as an example and again there's other companies as you mentioned, it's not just Ally, but I just want to, they're a prime example here and I have the numbers in front of front of me. They're claiming, let's say, okay, net charge off rates have been stable I guess and their retail auto coverage, they also say it's well within, you know, their ranges. Their delinquency rates, they are also stable. So they haven't stated any to their investors. Hey look, we're seeing a huge deterioration in the fundamentals. If you know what you exam your example there is true and there's a bunch of bad loans out there in the car market. When does this start showing up? How large will it be? Who does it impact? I guess that's kind of a tough question, but when does it show up?

[Lax]

No, it's actually tough question. We figured it out in a sense when what we did was we did all the credit side of the data, we overlaid it and did a liquidity modeling on top of the financial statements. We figured out how much this vintage loans will affect the equity part of Allies and how it's going to eventually affect and by how much. The earnings per share for ally and the 2022 vintages will be kicking in in 2025, second half, 2026 and 2027 and we break it down for our clients. We are still working on the report, but we will be publishing it this way to our clients where we can pretty much, we triangulated roughly how much of earnings per share Ally will take a hit if they do not take any actions. Because the buffers in every securitized bundle they have reached more than 50 to 55% of over collateralization amount. And when that bundle, when that OC drains out and the reserve amount drains out on the ABS alloy has to pretty much, you know, replenish it back into the ABS and you know, then you will have, the turbo payment will kick in. Which means Ally is not going to get any servicing fee for taking care of those ABS bundles. It's, it's very, it gets overly complicated and we parsed it out data by data and we can say with confidence X amount of EPS hit will happen to ally in later fourth quarter of 2025, how much in first quarter, second quarter, third quarter in 2026, so on and so forth. And remember, this is only for the loans that are in the AB side of Ally. There are still loans on the balance sheet of Ally. That's a completely different story.

[Brett Schaefer]

Tell us about that story. What, what does that look like? What did you guys uncover?

[Lax]

We just, I don't want it to, to reveal it because it's an ongoing aspect for our clients. So we, I, I just want to leave it at that. Sorry.

[Brett Schaefer]

All right, no worries, no worries. Little, little tease. Last follow up on that is who, who, who are the ABS loans getting sold to? You know, the Ally. Let's just go for, for the listeners here, the dealership originates a loan, sell it to Ally. Ally packages it in these ABS loans and sells it to who? Another bank, pension, what have you.

[Lax]

Banks, hedge funds, individual investors. I was shocked to hear that because individual investors should not be holding this bag. Individual investors should not be the exit liquidity for this crap. Forgive my language, but this ABS loans, student loans, we haven't started on bnpl, ABS market, student ABS market, auto ABS because of the risk of the loan and because of the very lucrative coupon rates. These are also held by individual investors. It's already on your pension funds, mutual funds, any, anything and everything. Individual investors are holding this and that. I, I, I have problems with that because the odds of them, the odds of the people who are selling this, explaining the risk clearly to the individual investors is very low. They are just buying it. Or if you are, if you are consulting for individual investors for retirement and what are the chances that they will clearly explain what's in this basket? Of abs that they're investing in the risk quality of it, whether it will deteriorate and how it will eventually impact and at what tranche level they are coming under. Because if it blows up, you know, a certain level of investors, there is a waterfall method. There are a certain level of investors will get paid first, whether these individual investors will be paid last or will they ever be paid. I don't know if these risks are clearly conveyed to the individual investors, Brett, and that is concerning.

[Brett Schaefer]

I, I agree, I agree. I have, I think I could ask many more questions in the ally but we got to move on. For the listeners I want to talk Carvana, you mentioned them earlier. Let's call them a battleground stock. There's some people that are extremely bullish. There are some people that are extremely bearish and make, you know, fraud accusations. They had the, the crazy stock price that you mentioned earlier. The they went down 98 and now they've recovered to I think think pretty close to or a new all time high. How does Carvana connect to the situation? I'm looking at their numbers just in the first quarter and I think maybe you're about to explain this. They are a huge funnel, it seems like for the loan market they had 2.66 billion in origination of finance receivables and then they sold off about the same amount to investors. So how does Carvana connect and what have you guys researched with that company?

[Ryan Henderson]

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[Lax]

We are to to be transparent. We are not looking into the equity side of Kirana at all. We are looking into the asset backed securities market. And just to clarify, there are a lot of wholesalers. At least the wholesalers that we spoke with are bullish on Carvana. And there are a lot of dealerships. Some view Carvana as the future of buying and selling and Amazon is which not many people are talking about. Amazon is in the dealership business. It's tying up with Honda, Hyundai or whatever. I haven't followed up in a while but Amazon is in that business. So Carvana, from the insider's point of view, frauds aside, you know the wholesalers and auction houses, they think Carvana has the future, right? And I we haven't looked on the equity side. When we recommended Carvana as a shot In December, in first quarter 2022, our thesis was people who were paying cash to buy cars via Carvana were now getting their title deed. So there were a lot of lawsuits back then and there were not many shots following it. So we recommended it as a short at 83 keeping the legal documents and lawsuits as core cusp of cusp of those thesis and we wrote a cover. Since then we have not looked into the equity side of Karvana I We are looking on to the ABS side of Carvana and we are trying to figure out at what point it will seep in into the equity side. We are still running our programming and we don't have the data. We will have it like later this week for our clients. But right now shorting Carvana is is risky. I know I'm getting going to get a lot of pushback from this. When you are shorting something in your thesis is strong and you have everything lined up to point that it's a fraud but the stock still goes up shorting that is going to bankrupt anybody faster that the company is going to go bankrupt. I'm not saying Carvana is going to go to the moon and I'm not saying that it's not a fraud. What I'm saying is trying to find a top in Carvana is suicidal for shorts at this moment. And that's why we are doing the work we are doing on the asset backed securities. Because we were similar to Ally that we were able to triangulate at what point this is going to impact the earnings per share on the equity side when we triangulate that for Carvana and if you call me on the show gain I can for sure say this is when the equity is going to take a dump and this is when it's going to be a problem for Carvana. But right now I don't have the data. It's still processing and I can come back and happily share them with you.

[Brett Schaefer]

What is Carvana's relationship with Ally Because I think from what I've read in the past they source a lot of loans for them. Is that.

[Lax]

Yeah, they, Carvana sells loan the asset backed securities, the loans via Ally and they have been doing that mostly subprime via Bridge Crest.

[Brett Schaefer]

Okay. Okay.

[Lax]

So that's, that's the, that's the relationship that they sell loans to allies their loans.

[Brett Schaefer]

Okay. And maybe let's be charitable. What are the. Because you using the word fraud, people are going to be asking why? What are the potential reasons Carvana is acting fraudulently? What is evidence that you guys have uncovered?

[Lax]

Let me be clear. I said people are saying yeah, exactly. Hindenburg came out with the report. Everybody says it's a fraud. And my point is Carvana or any stock can very well be a fraud. But if the stock keeps going up the way it's going, that clearly indicates no matter how tight your thesis is, a fraudulent company doesn't matter whether it's Carvana. XYZ can survive longer with whatever they are doing than a shot can stay solid. That's what I was trying to convey.

[Brett Schaefer]

Exactly. Understandable. So I think maybe to sum this part of the conversation up is the general idea that the you not just used car market, the entire car lending market is in much worse shape. Shape than all of these companies are telling investors.

[Lax]

Yes. How consumers can't. Sorry, go ahead.

[Brett Schaefer]

No, I was going to, I was going to say how bad, how, how bad is it? How who else can it impact? What does this flow through to the rest of the economy?

[Lax]

It's bad. The repos are getting suppressed or coming out. Right. The companies. We heard from multiple sources that Ally is repoing cars in a lot and people, some of them voluntarily surrendering their cars because they can't make the payment. So initially around 2023, Ally and other lenders were saying to consumers who wants to voluntarily repo their cars that hey, what can I do to make you not repo the car? Like surrender the car. Then the consumers apparently said, and this has been recorded for so many for a couple of years that we can make $800 a month payment. We can make $300 a payment. That's when Ally and other lenders started doing modifications. So if you see in the asset backed securities there is a huge scenario called modifications modifications where you change the term of the loan in the middle of the when the loan is going on. And this extends when the loan matures. And it also suppresses the repossessions. It also adjust. Ally and other lenders adjusted. If you're 90 day delinquent, they adjusted the terms in such a way that the 90 day delinquencies is correct. So no matter what you see, you will always see the loan current, not delinquent. So the information that's coming in the mainstream media is charge offs are low, repos are low because everything is made current. And now in 2022 when they made things current and that current situation now is 90 days late and double time defaulted and now it's going to show up in the second half of Ally Ally's financial statements. So we are surprised that they didn't increase a provision for credit losses when they reported their second quarter earnings and they haven't filed their 10Q yet. So. So yeah, the car industry is in a worse situation than anybody believes.

[Brett Schaefer]

All right, well I'll be fascinated to keep watching it. That's a lot of great insights on that. Definitely be watching Ally for the rest of this year. Let's move into two other ones. We're going to do student loans and then bnpl. I think these are at least from my perspective. I haven't known what to think about either of these markets. I've heard the last say three or four years ever since the student loan pause stuff, there's people that either come out and claim very boldly it's not a big deal when this resumes, it's only a small part of people's expenses or there's other one other people that for the last three years have been banging the drum that when the student loan payments come back it's going to deteriorate consumer spending, FICO scores, all that jazz. What I think a lot of the maybe people concerned about student loans have turned into as almost a boy who cried wolf situation where it didn't impact stuff for a time and now I'm seeing at least anecdotally I've had friends talk to me that oh hey, I have to restart paying this. Oh, you know, this is impacting some of my expenses. What is now that we're finally back normal repaying student loans, how large of an impact is that? What is the numbers? How many people are in this area or situation where they weren't paying for three years and now, okay, now I have all these monthly expenses back paying back these loans.

[Lax]

There are multiple amount of data that they are but what I can say is nearly close to 10 million of student loan borrowers are currently in default, give or take. I might be off by some numbers, but roughly 10 million and they are their income and paycheck will be garnished effective fall. I don't know whether this, when the fall comes near, whether this will be kick again down the road, but as of now, yes, but our take is that is irrelevant. The reason I'm saying that's irrelevant is around April or May there was an announcement that student loan resumption will be reported to the credit rating agencies. And that has begun. And when that started, there are consumers who are student loan defaulters losing 100 points, 150 points on their credit score. So our point is it's almost irrelevant whether they will garnish those student defaulters or not. The impact that the reporting to the credit rating agencies have on the credit score is really taking a hit on consumer spending because the credit card companies are cutting credit access to consumers. Because if you see consumers, you have mortgage or rent, you have car payment, you have insurance on top of it, then you have medical bills, then you have credit card bills, then you have BNPL bills, then you have student loan.

[Brett Schaefer]

Right now the student loan was gone or paused and now it's coming back and the money has to come from somewhere else so that that other part of the spending is going to get impacted. Go ahead, go ahead. I was going to say it's interesting how it can impact the FICO scores where someone that was supposedly a good credit risk is now going to be much, much worse. And I just wonder who, what type of sectors companies could this come back to bite?

[Lax]

Retail, consumer retail, manufacturing. Because you don't have consumers who are you going to manufacture it too? This era is going to be very, very profitable for defense, for artificial intelligence and other data driven aspect of business models. Consumer spending is going to be completely collapsing. And on top of this to layer on top of student loan debt and BNPL getting reported to the credit rating agencies, on top of this you have this one big beautiful bill act. We are apolitical, we are not leaning left or right. We just don't care. We care about the facts and presenting the facts in this one big beautiful bill, there are two things that's going to impact the customer. You have the Medicaid losses, there are 11 million enrollees, a massive drop. Even as the services are needed the most. The Medicaid is going to be cut and it's going to impact the people that need that Medicaid to afford health insurance. Listen Brett, there are a lot of things going on on Twitter saying that hey, you know, so and so is missing using it. I'm not talking about them, I'm talking about the people who really, really need this. And there is another aspect of the bill is Supplemental Nutrition Program assistance. SNAP is cut by $186 billion and that is going to impact kids, that's going to impact families who rely on it. So you're cutting the food supply to a group of population that can, they cannot afford anything. People are buying groceries using bnpl.

[Brett Schaefer]

Right? Yeah, that's not, I guess, the, the best situation. Let's talk bnpl. So again, I, I, I've been fairly well, I've, I don't know exactly what to think about the BNPL players. On the one hand, there are, you know, like you just mentioned, people saying, hey, the someone's financing a fast food order with a BNPL provider. Now on the other hand, there's some people that might claim, well, this is just another form of credit. Just why is it not different than making a payment with your debit or credit card? And what, maybe what research have you guys done to look at the loss rates and how, how these loans are performing?

[Lax]

So BNPL is, I'm not going to go deep because we are not recommending any BNPL companies as a short, not as of, as of now because $15,000 billion dollars, sorry, $15 billion are in consumer BNPL debt. It might look trivial, but what it happens is a firm and other BNPL companies, it's not about BNPL anymore. It's more about how they are morphing into, they are morphing into data tracking companies. So you have BNPL companies having their own LLM model, tracking every single thing the consumers are doing in their personal finance. They are tracking their checking account, they are tracking the savings account. They are tracking where you eat, what you buy. You're buying more of X and less of Y. You are not paying, say you are not paying your student loan. And that will be tracked by the LLM model created by the buy now, pay later company Klarna, for example, example. And that will impact how they give you credit. So I, we wouldn't, we are not seeing BNPL companies as, you know, credit card companies giving credit access. We are seeing them much more than companies that are providing credit to the consumers. And that is actually scary if you look into it. These companies are tracking consumer spending, what they are, where they are buying, their shopping habits, everything. And then they are deciding, should I even give credit to this consumer? So there are a couple of stories and one of them is a guy whose on time payment paid everything on time and no default on bnpl, no default on his car no default on anything. When he went and tried to swipe the BNPL or use BNPL on checkout lane for whatever grocery store, it got denied. And the reason it gave for denial is name mismatch or address mismatch or whatever it is. But that is more than that. It's, it's, you might have gotten a parking ticket, you might have gotten something. It's tracking everything. And so I, I would suggest everybody sees BNPL as much more than just a company providing credit.

[Brett Schaefer]

Interesting, interesting. I've never, I've never heard, heard it from that perspective before. To sum up, we're talking a lot about consumer spending, consumer loans, all of that, you know, the car market, student loans, bnpl, the stuff you mentioned with the new big beautiful bill, impacts on Medicaid and SNAP is your guys's whole general, I wouldn't say thesis, but what the direction you guys are thinking of is consumer financial health, consumer balance sheets, individual balance sheets are at major risk of deteriorating over the next couple of years.

[Lax]

They have deteriorated. They are just running on fumes. Like bnpl, consumers have tapped out of their savings and if there is an emergency, most people don't have $5,000 to cover their bill or even thousand dollars. Talking about the subprime.

[Brett Schaefer]

Gotcha. Yeah, 100%. What metric? Let's say I'm a listener here, I'm an investor and I want to make sure, you know, I'm not exposed to some major risks with that. What numbers are you guys looking at to indicate that or show that consumer health is weakening or that your thesis is correct? Let's say, okay, each quarter. What, what sort of numbers, either broad or company based, are you guys tracking that are most important to show whether the thesis is right or wrong?

[Lax]

We are tracking the repos, we are attacking the reposition of cars, we are tracking the manufacturers of cars, we are tracking the manufacturer's earnings call. We are in, we are in every single earnings call. To understand the pulse of the consumer, we have been recommending CACC on and off. That is like as payday lending as you could go. And we are tracking the recovery rates of these loans. The recovery rates are falling, which means consumers do not care that if the FCAC is going to take them to court, they just do not care. And most importantly, I wanted to share this with you. Let me get this data. The. Sorry, one second. We are seeing the bankruptcy, the personal bankruptcy going sky high. So bankruptcy is quietly spiked 11% year over year. This is personal bankruptcy, Chapter 7 liquidation surging 15% fastest pace since GFC, that's the latest number. Student loan delinquencies tripled the pre pandemic levels. BNPL is a completely shadow layer. Credit card medical bills, they have the interest rate of more than 20%. The revolving credit is high and companies like credit card companies like American Express and others are cutting the credit availability based on how the consumers are performing on their other credit cards. So because of the student loan, if your credit score drops 100 points, American Express notices it. You might have a platinum card with like $15,000 credit limit but it will cut to like $8,000. You won't have any more $15,000. So all these things are happening quietly. It's, it's not, it's your people cannot comprehend this in a way that we expect them to because it's not hitting the headlines. In headlines you're saying everything is great, credit is available, things will be fine. If the interest rate gets cut, the answer for that is it's not going to be fine because our economy, the entire economy functions on a lag. If the Federal Reserve increases the interest rates, if it cuts the interest rate, it takes six to 10 months to actually impact something. The impact does not immediate. So every action, every policies takes time to have an impact on the economy.

[Brett Schaefer]

Yeah, I'm glad you mentioned interest rates there because I know there's a lot of whenever I talk with someone or you, you read about it, people say well when the Fed lowers interest rates everything will be okay. And that doesn't necessarily mean the case. It's not some fail safe of gonna save the economy.

[Lax]

Sorry, I have the data that you're asking for, if I can. So Klarna's Cuban net losses double. 41% of the users missed a payment in the past year.

[Brett Schaefer]

Yeah, well that's pretty stark.

[Lax]

Yeah. And auto loans, 90 day delinquencies hit more than 5%. It might not look like a big number but if you just see the numbers or number of repositions, bankruptcies, personal bankruptcies, corporate bankruptcies and student loan, if you put them all together you can see there is a problem.

[Brett Schaefer]

I would be. Let's see, I'm not coming with the right word here. We didn't write anything down about pre show about talking about housing but I wanted to ask if you guys, just because that's been such, at least on our show we've talked about it. Not necessarily a hot button issue but what's happening with this on affordability stuff, do you see that at all impacting some of the consumer spending? Basically What I'm saying is the high mortgage rates, high home prices, pricing out everyone. Have you done any work on that? Does that fit into this matrix or is that an entirely different story for.

[Lax]

The mortgage for just.

[Brett Schaefer]

Basically the fact that a lot of people of people say my age are loading up with mortgages that are 40, 50% of their incomes because they want to buy a home. And if you've done any research in that regard, if not, no worries.

[Lax]

No, no, no, no. That's so our expertise is consumer credit, BNPL autos and in old asset backed security side. Melody is a perfect person for you to talk to about anything related to home.

[Brett Schaefer]

Okay. No, thought I'd just ask, but that's all right. Before we get out of here, final question, we typically when we talk to someone, you know, they might be bullish on a stock and we ask what could go wrong? Since you are very bearish on consumer spending, I thought I'd flip it around. What do you think could cause, you know, the American economy or consumer spending, consumer financial health to thrive over the next five years? Why would things not get worse from here?

[Lax]

Why would things not get worse from here?

[Brett Schaefer]

From a consumer spending perspective, I know it can be different than the economy.

[Lax]

As a whole, but yeah, consumer spending. For consumer spending to go up, we need to be in a severe deflationary environment. But it's a trap, right? You are in a deflationary environment, then you have unemployment going through the roof and then people are getting laid off in spades. So consumer spending will continue to grow on products that are essential for day to day survival, right? Consumers need to spend on gas, consumer need to spend on groceries. In all the basic necessities, you will see it go up. That's the, I mean anything that's extra, things like clothing, I, I don't see it go anywhere over the next year. Maybe after a year it will thrive, but consumer spending is going to go worse before it gets better. So say like a year after.

[Brett Schaefer]

Okay. Fascinating stuff. Thank you for joining the show. Tell listeners more about your work, unique research, give a quick elevator pitch about what you do. And again, for anyone that's listened to this whole show, the link to the website, newsletter and substack or excuse me, excuse me, Twitter account will be in the show. Notes for people to check out.

[Lax]

Well, thank you Brett for having me. I hope the information I shared, whatever I could help your listeners. There are some things we cannot touch so I could not share it. We provide actionable short investment ideas to institutional investors and accredited investors and we are also created a latest recent product as a black box model that tracks every single asset backed securities on auto or any kind of loan that you want and we overlay it with the liquidity model to pretty much triangulate how it is going to impact the equity, sorry impact the equity side of things, earnings per share and when. So that is a pretty recent product but this is what we do and if you're interested in any of this feel free to let us know.

[Brett Schaefer]

All right, beautiful. Thank you to all the listeners. Let's hit the disclosure when we get and then we'll get out of here. We're not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you Lax Books once again and we'll see everyone next time.