Hello everyone,
I have a hypothesis that we'll see the economy pull back a quite a bit prior to setting up what I believe could be one of the largest bull traps ever.
My hypothesis is based on two things: unemployment and used car sales and how these two things affect the CPI.
I personally believe that the CPI is an incredibly flawed method for calculating inflation, as I believe it does not weigh the correct categories and gives too much weight to others.
Specifically with new and used cars. To clarify, the price of new vehicles and used vehicles aged 2 to 7 years make up 9.218% of the CPI's calculation. It's split roughly down the middle, with used cars being 4.143% of the CPI.
I am outlining this because I believe that when Carvana files bankruptcy, they will flood the market with cheap used cars that will push the CPI down.
Their current TTM for cash flow is -2.04B, which is an average of -510M per quarter.
As of Q3 2022 they had about $2.58B worth of vehicles in inventory, $477M in cash and cash equivalents, and about $350M in short term investments they could potential liquidate.
Something to consider is that their inventory is calculated at current market value. Part of their bankruptcy filing will certainly require that they liquidate their inventory, and as they do so the value of those vehicles will drop in tandem. Between the cash they have on hand, their inventory, and their short term investments, they could potentially extend their tenure up to an additional 2 quarters. I believe once they start discounting vehicles they could potentially add an additional 3 quarters to that.
Something to consider is that they could also potentially get a bankruptcy loan. This would allow them to extend their life and try to reprice vehicles to their benefit again. I don't believe this will work in their favor, Carvana has become synonymous with poor management, and I believe that this would only prolong what is inevitable.
A few complicating factors for Carvana, is that discounting vehicles will force competitors to also discount their vehicles which may force Carvana to discount further and result in them selling their inventory for significantly less than what it is currently priced at. We will likely see competitors like Shift also file bankruptcy. Carmax will also likely see a huge dip in their stock price at this time.
Additionally, this is all happening during a recession, meaning that consumer spending will be incredibly low, the discounts or incentives it would take to lure customers in during a recession, especially for a product as durable as a vehicle would have be fairly significant in my opinion.
These are all things that people will be spending less money on as household incomes drop, and therefore the resulting decrease in demand will lower their prices.
All of this aggregates into a lower CPI value. I believe that the federal government and investments firms will try to use this to gas light the public's confidence in the economy. Inevitably this always seems to work. Folks will start investing and spending again and this will create a huge bull rush in the market, “..buy the dip..” and whatever other hot button words they can think of.
Then everyone realizes that just because cars are cheaper, it does not mean we are not heading deeper into a recession. The end.
tldr; I think Carvana files bankruptcy, CPI drops because of how it weighs used cars in it's calculation. People think the economy is doing better, they throw a bunch of money back into the stock market, and then people realize that the economy is still going into a recession and that we just have more affordable cars to now.
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